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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, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-24860
PIERCING PAGODA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-1894725
(State or Other Jurisdiction of (I.R.S. Employer
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 23, 1999 was approximately $108,574,312.
The number of shares outstanding of the Registrant's common stock is
9,143,100 (as of June 23, 1999).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the
Commission in connection with its 1999 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 14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 15
Item 6. SELECTED FINANCIAL DATA 16
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 27
ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 51
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT 51
Item 11. EXECUTIVE COMPENSATION 51
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 51
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 52
<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, 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 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; (vii) the
impact of Year 2000 issues on the Company's own systems and external
parties; and (viii) 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, 1999, the Company
operated 931 stores in 44 states and Puerto Rico, including 900 kiosk
stores and 31 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 3,300 SKUs, require a low
initial investment, can be opened quickly and are easily accessible and
visible within malls. During fiscal 1999, the average price of a jewelry
item sold by the Company was approximately $25 and average annual
comparable kiosk store net sales per square foot were $1,693. The Company
believes that its low price points and focused merchandise selection
differentiate it from other mall-based jewelry retailers.
<PAGE>
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 primarily
on basic styles of lower-priced 14 karat and 10 karat gold jewelry,
comprised primarily of chains, bracelets, earrings, charms and rings,
supplemented by a selection of sterling silver, diamond and gemstone
merchandise. The Company offers an extensive selection within each
merchandise category, and its stores typically carry approximately 3,300
SKUs. The average price of a jewelry item sold by the Company in fiscal
1999 was approximately $25. Approximately 80% 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. The Company completed the necessary modifications to its existing
system in fiscal 1999 and is currently using the modified system.
Accordingly, implementation of a new inventory management system is not
expected to begin until after fiscal 2000. The Company has
<PAGE>
purchased, and is currently installing, a product planning and
analysis software package that will supplement the existing system as
well as any inventory management package the Company does upgrade to in
the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of Year 2000
issues.
Growth Strategy
Over the last four 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 675 stores the
Company has opened since the beginning of fiscal 1996, 353 were acquired
from independent third parties through 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 four
fiscal years include 67 locations acquired from Earring Tree in fiscal
1996, 93 locations acquired from Gemstone Jewelry in fiscal 1997, 43
locations acquired from Silver & Gold Connection in fiscal 1998 and 143
locations acquired through several different purchase transactions
completed in fiscal 1999.
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 many of these
acquired stores into the Company's operations. Failure to successfully
integrate new and acquired stores into the Company's operations can have
a material adverse effect on the Company's results of operations,
particularly during the Company's first, second and fourth fiscal
quarters which are seasonally lower sales periods.
During fiscal 1999, the Company opened 221 new and acquired stores,
the largest number of store openings the Company has ever completed in
one fiscal year. Included in these openings were 104 locations purchased
in July 1998 from Sedgwick Sales, Inc., a kiosk-based retailer of
primarily gold-plated jewelry operating primarily under the name Golden
Chain Gang ("GCG"). After a review of the initial sales results and
future sales potential of the locations acquired from GCG, the Company
announced on September 28, 1998 that it would close 20-30 of these
locations by March 31, 1999 and work to improve operations at the
remaining stores. The combination of significant pre-opening costs and
lower than expected sales results at these, as well as other
under-performing stores, negatively affected the Company's operating
results for fiscal 1999, particularly in the second fiscal quarter. At
March 31, 1999, the Company had closed 30 of the under-performing GCG
stores as well as another 49 under-performing stores bringing the total
stores closed in fiscal 1999 to 79. To improve the operations at the
remaining GCG locations, the Company initiated a rejuvenation program
that included new or renovated kiosks at many of the former GCG locations
and additional training for store personnel. The Company will continue to
monitor the results of the remaining GCG locations and may close
additional locations in fiscal 2000 that do not meet its performance
requirements.
Opening new stores will continue to be an important part of the
Company's growth strategy. The Company plans to open approximately 45 to
65 new stores in fiscal 2000 and 60 to 80 new stores in fiscal 2001
(excluding any acquisitions) and to close approximately 25-35 existing
stores during each 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
<PAGE>
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 as soon as
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, 1999
there were 505 stores operating in malls where the Company operated more
than one location. Annual net sales for such stores, which were open for
all of fiscal 1999, averaged $309,000. The Company believes that Piercing
Pagoda's strong national retailing reputation, along with the flexibility
of its kiosk store format, make its stores attractive to mall developers
and managers
As part of its ongoing operations, the Company continually evaluates
the performance of its stores and the malls in which they are located.
Since kiosks require a relatively low investment to open and can be moved
relatively easily, the Company's expansion strategy includes closing
kiosks when appropriate and relocating the kiosks to new locations.
During the past three fiscal years, the Company has closed 102 stores, 79
of which closed in fiscal 1999, including 30 former GCG 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, 1999, the Company operated 31 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
1999, the Company opened four in-line stores and expects to open up to
four in-line stores in fiscal 2000. 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.
The Company is currently testing a selection of lower priced diamond
and gemstone merchandise in a group of approximately 180 locations as
well as one "Diamond Isle", a kiosk location selling exclusively diamond
merchandise. Initial results through the 1998 holiday season were
encouraging and the Company intends to add diamond merchandise to another
two hundred locations in fiscal 2000. Additionally, the Company has plans
to add up to six additional Diamond Isle locations prior to the 1999
holiday shopping season.
The Company has also begun limited expansion into less traditional
retail locations such as airports and resorts. During fiscal 1999, the
Company began operations at its first airport terminal locations in the
Philadelphia International Airport and Dulles International Airport. The
Company has signed a lease agreement to open a location at Newark
International Airport and expects to open this location in fiscal 2000.
Additionally, in fiscal 1999, the Company opened a location in the
Citicorp Center in Chicago, Illinois., which houses a commuter train
station. The Company also expects to add to the number of resort
locations it operates in fiscal 2000. The Company currently operates in
two resort locations in Puerto Rico and one in Rehobeth Beach, Delaware,
a seaside resort community. The Company expects to open a second location
in Rehobeth Beach in fiscal 2000 as well as another location in a resort
area of Houston, Texas.
In appropriate situations, the Company will continue to evaluate
potential acquisitions of existing stores or store sites from third
parties.
<PAGE>
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 92% of which is gold jewelry, on basic styles at
everyday low prices. The Company believes that, by offering a broad
assortment of basic styles, it provides its customers with a wide variety
of choices while limiting merchandising risks associated with fashion
trends. The Company maintains a balance between new merchandise and
proven successful styles. Prior to introducing new items in all of its
stores, the Company usually tests the items in approximately 50 of its
highest volume stores. The Company's stores typically carry approximately
3,300 SKUs, approximately 88% of which have list prices under $80, and
during fiscal 1999 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 80%
of a typical store's merchandise is common to all stores, and the
remaining products are selected based upon the characteristics and local
preferences of the particular store's customer base.
During fiscal 1999, 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 37%
Charms and rings 25
Earrings 23
Miscellaneous items 1
-------------------------------------------------------------------
Total gold 86
Silver jewelry and other items 14
-------------------------------------------------------------------
Total net store sales 100%
-------------------------------------------------------------------
</TABLE>
(1) Excludes $983,000 of wholesale sales to the Florida Licensee.
See "Item 7. Management's Discussion and Analysis."
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
<PAGE>
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
clearanceales. The Company intends to continue to emphasize these
promotions and to 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, 931
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 1999, approximately 11% of the Company's net sales were derived
from the sale of earrings in connection with complimentary ear piercing.
Lifetime guarantee on all jewelry items. The Company will repair or
replace, at no cost, all merchandise with manufacturing defects.
Membership in the "buy-five-get-one-free" jewelry club. The Company
offers a customer incentive program pursuant to which, after five
purchases, a customer is entitled to a credit on the next purchase equal
to the average price paid for the five purchased items. During fiscal
1999, customers applied approximately $5.8 million of credits received
under the jewelry club to purchases.
Free layaway. The Company will hold items for up to 90 days, with a
deposit, for customers until the full purchase price is paid.
Piercing Pagoda relies primarily on highly visible store locations,
attractive store designs and an inviting visual presentation of
merchandise to attract prospective customers. In addition, it
occasionally utilizes fliers, brochures and other point-of-sale materials
to educate potential consumers about the features and benefits of
shopping at the Company's stores.
The Company generally does not advertise independently, but does
participate in programs sponsored by the malls in which the Company
operates, including local and regional newspaper advertising, advertising
circulars, seasonal full-color catalogues and radio and television
commercials. In almost all of the Company's locations, the Company is
obligated by the terms of its lease to contribute to the cost of the
mall's advertising. The Company also participates in national discount
coupon book programs, mall-sponsored promotions and a variety of public
relations activities.
Unlike many jewelry retailers, the Company does not extend credit to
its customers, thereby minimizing bad debt expense. Approximately 75% of
all purchases are cash transactions (including personal checks) with the
remaining purchases being credit card sales.
Stores
At March 31, 1999, the Company operated 931 stores in 44 states and
Puerto Rico, including 900 kiosk stores and 31 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
<PAGE>
lease commitment. At March 31, 1999, the Company operated stores in
653 malls, and operated more than one location in 228 of those malls. Of
the stores operated, 31 were in-line stores, most of which were acquired
from Earring Tree.
The following table sets forth the Company's store openings and
closings for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended March 31,
-----------------------------
1996 1997 1998 1999
-------------------------------------------------------------------
Number of stores:
<S> <C> <C> <C> <C>
Beginning of period 366 513 682 789
Opened/acquired:
Piercing Pagoda(1) 121 108 61 126
Plumb Gold(2) 34 66 24 11
Silver & Gold Connection(3) 0 0 38 80
Other(4) 0 2 0 4
-------------------------------------------------------------------
Total opened(5) 155 176 123 221
-------------------------------------------------------------------
Total closed(6) 8 7 16 79
-------------------------------------------------------------------
Total at end of period 513 682 789 931
-------------------------------------------------------------------
</TABLE>
(1) Includes 42 stores in fiscal 1996, 41 stores in fiscal 1997, 10 stores in
fiscal 1998 and 64 stores in fiscal 1999, 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 24 stores in fiscal 1996, 55 stores in fiscal 1997, 3 stores in
fiscal 1998 and 7 stores in fiscal 1999, 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 in fiscal 1998 and 54 stores in fiscal 1999,
respectively, that were acquired and reopened under the Silver & Gold
Connection name. Other than the acquisitions noted, stores that change
names are not included as new openings.
(4) Includes 1 store in fiscal 1999 that was acquired and reopened under the
Gemstone name.
(5) Includes 14 in-line stores in fiscal 1996, 7 in-line stores in fiscal 1997
and 4 in-line stores in fiscal 1998.
(6) Includes 1 store sold to the Florida Licensee in fiscal 1997, and 3 stores
sold in fiscal 1998. The Company acquired all of the outstanding stock of
the Florida Licensee on August 31, 1998, and now operates all the former
licensed stores as its own.
Store Operations
Store operations are divided into ten 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
<PAGE>
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, 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 1999, the Company's five largest suppliers
accounted for approximately 39% of the merchandise purchased by the
Company. One of these vendors accounted for approximately 11% of the
Company's merchandise purchases during fiscal 1999. 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.
<PAGE>
Management Information Systems
The Company currently uses a proprietary, customized
client/server-based system for its inventory management system. 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.
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 implemented the
modifications in fiscal 1999 and now currently operates on the modified
system. The Company anticipates that subsequent to fiscal 2000 it will be
necessary to upgrade its inventory management software. In fiscal 1999,
the Company purchased, and is currently installing, a separate product
planning and analysis software package that will supplement the existing
system as well as any inventory management package the Company does
upgrade to in the future. It is expected that any new inventory
management software may require modification to replicate certain custom
elements of the Company's existing system.
In fiscal 1999, the Company implemented new financial and accounting
software. 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. 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, 1999, the Company had approximately 2,248 full-time
and approximately 3,019 part-time employees. Of these, 235 were employed
full-time and 128 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 1999 peak holiday season, the
Company had 4,686 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.
<PAGE>
Trademarks
The Company believes its registered trademarks "Piercing Pagoda,"
"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 applications
pending for "Piercing Pagoda the Gold Company", "Diamond Isle" and "The
Gold Station." The Company is not otherwise dependent on any patent,
trademark, service mark or copyright.
Government Regulation
The Company's ear piercing service is not regulated by federal
statute. Currently, Oregon, Indiana and Minnesota are the only states in
which the Company operates that regulate ear-piercing activities.
Legislation in Oregon requires the Company, and any of its employees
administering ear piercing services in stores in Oregon, to be licensed
by the State. The legislation also deems ear piercing through anywhere
but the lobe of the ear to be body piercing, which is subject to
additional restrictions, including that it must be performed in a
separate room. Accordingly, the Company limits its ear piercing to the
ear lobe in Oregon. The state of Indiana has enacted legislation similar
to the Oregon legislation, but which excludes the licensing requirement
and, accordingly, the Company limits its ear piercing to the ear lobe in
27 of the 28 stores it operates in Indiana. Two municipalities, one in
Indiana and one in Minnesota have enacted legislation which 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 in each municipality affected by the regulation.
Legislation that was previously pending in Ohio has been enacted in a
revised form that regulates all body piercing practices, but specifically
excludes ear piercing. Ear piercing "standards" were enacted in place of
regulation. The Company's ear piercing procedures meet the currently
required standards. The Company is aware of approximately 15
jurisdictions in which legislation to regulate ear piercing
establishments is pending. There is legislation pending in Massachusetts
where the Company currently operates 36 stores that would direct
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.
<PAGE>
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, 1999, 222 expire before March 31, 2000.
The Company owns a 73,000 square foot building in Bethlehem,
Pennsylvania that serves as its corporate headquarters and distribution
center. To accommodate the Company's recent growth, an additional
facility was constructed on approximately five acres of vacant land the
Company owns adjacent to the Bethlehem property. This new facility, which
was completed during fiscal 1999, is approximately 71,000 square feet and
is used primarily for additional distribution and warehousing functions.
Item 3. LEGAL PROCEEDINGS
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.
On October 19, 1998, a lawsuit was filed, purportedly as a class
action, against the Company and certain of its executive officers in the
U.S. District Court of the Eastern District of Pennsylvania. The lawsuit
alleges, among other things, that the Company and certain of its officers
made materially false and misleading statements and/or failed to disclose
material information regarding the Company's business performance and
prospects. On January 4, 1999, the Company filed a motion to dismiss the
suit, after which the plaintiffs filed an amended complaint. The Company
currently has pending before the court a motion to dismiss the amended
complaint. The Company believes that the lawsuit has no merit and intends
to contest the case vigorously if its motion to dismiss is unsuccessful.
Although the ultimate outcome of the lawsuit cannot be determined,
management does not believe the outcome of the lawsuit will have a
material adverse effect on the financial position, results of operations
or cash flows of the Company. However, there can be no assurance as to
the ultimate resolution of this matter.
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, 1999.
<PAGE>
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, 1999. All executive
officers serve at the discretion of the Board of Directors of the
Company.
-------------------------------------------------------------------
Name Age Position with Company
-------------------------------------------------------------------
Richard H. Penske 56 Chairman of the Board and Chief
Executive Officer
John F. Eureyecko 50 President, Chief Operating Officer,
Secretary and Director
Barry R. Clauser 45 Senior Vice President -- Merchandise
Operations
Sharon J. Zondag 44 Senior Vice President -- Store
Operations
Brandon R. Lehman 47 Treasurer
Gilbert P. Hollander 45 Vice President of Merchandise
Purchasing
Lisa E. Sankovsky 38 Vice President - Real Estate
Richard J. McKeon 41 Director of Management Information
Systems
Christopher J. Barone 34 Corporate Controller
------------------------------------------------------------------
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.
Gilbert P. Hollander joined the Company in May of 1997 as Director
of New Business Development and was promoted to Vice President of
Merchandise Purchasing in February of 1999. Prior to joining the Company,
Mr. Hollander held various senior management positions with Silver & Gold
Connection, a kiosk based jewelry retailer and has owned and operated his
own wholesale and retail jewelry business.
<PAGE>
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
LLP from September 1989 to October 1994, most recently as Audit Manager.
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(1):
High Low
Fiscal 1998
First Quarter $18.67 $16.00
Second Quarter $21.33 $16.59
Third Quarter $20.75 $15.83
Fourth Quarter $20.83 $18.00
Fiscal 1999
First Quarter $25.67 $20.83
Second Quarter $24.30 $11.06
Third Quarter $16.13 $8.50
Fourth Quarter $11.06 $8.88
(1)Prices reflect a three-for-two stock split effected in the form
of a stock dividend payable to shareholders of record on July 31, 1998,
payable on August 13, 1998.
As of June 23, 1999, there were approximately 179 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
<PAGE>
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, 1999
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.
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands, except per share and selected
operating data)
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Net sales $ 255,147 $ 222,128 $ 166,885 $ 121,581 $ 86,076
Cost of goods sold and occupancy
expenses (excluding depreciation 1
on kiosks and store fixtures) 37,072 119,328 92,308 67,440 48,069
- -------------------------------------------------------------------------------------------------
Gross profit 118,075 102,800 74,577 54,141 38,007
Selling, general and administrative
expenses (including depreciation
on kiosks and store fixtures) 102,464 82,916 60,845 43,887 30,007
- -------------------------------------------------------------------------------------------------
Income from operations 15,611 19,884 13,732 10,254 8,000
Interest and other income 367 562 386 282 307
Interest expense 3,110 2,896 2,208 1,306 1,427
- -------------------------------------------------------------------------------------------------
Earnings before income taxes 12,868 17,550 11,910 9,230 6,880
Income taxes(1) 5,225 6,581 4,372 3,553 3,352
- -------------------------------------------------------------------------------------------------
Net income (1) $ 7,643 $ 10,969 $ 7,538 $ 5,677 $ 3,528
- -------------------------------------------------------------------------------------------------
Earnings Per Share Data:
Earnings per share:
Basic $ 0.84 $ 1.25 $ 0.96 $ 0.72
Diluted $ 0.82 $ 1.21 $ 0.93 $ 0.71
Weighted average shares
outstanding:
Basic 9,119 8,765 7,886 7,856
Diluted 9,331 9,062 8,084 7,988
Pro Forma Data:
Pro forma net income (1) $ 4,156
Pro forma diluted earnings per
share (1) (2) $ 0.61
Pro forma weighted average shares
outstanding (2) 6,837
Selected Operating Data:
Number of stores at beginning of
period 789 682 513 366 295
Stores added (net of closures and
sales) 142 107 169 147 71
- -------------------------------------------------------------------------------------------------
Stores at end of period 931 789 682 513 366
- -------------------------------------------------------------------------------------------------
Average jewelry units sold per
comparable store (rounded) (3) 11,700 11,800 12,000 11,600 10,800
Average comparable store net sales $291,000 $ 295,000 $ 303,00 $ 295,000 $ 266,000
(4)
Average comparable store
net sales per square foot (5) $1,581 $ 1,630 $1,848 $ 1,821 $ 1,652
Average comparable store square
footage (5) 184 181 164 162 161
Percentage increase in
comparable store net sales (6) 0.3% 3.0% 7.6% 12.4% 9.8%
</TABLE>
<TABLE>
<CAPTION>
March 31,
-----------------------------------------------------------
1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital $ 47,571 $ 44,302 $ 40,649 $ 15,948 $ 13,556
Inventory 53,685 53,149 43,109 25,390 15,128
Total assets 123,300 96,099 79,741 47,906 32,122
Current installments of long-term
debt and revolving line of credit 432 247 234 5,910 -
Long term debt, less current
installments 25,169 9,742 26,690 2,350 -
Stockholders' equity 74,491 66,328 37,522 29,579 23,862
- -------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(1) Prior to its initial public offering, 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.
(2) 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 1995, as
adjusted to reflect the sale of shares during June of fiscal 1994 and a
3-for-2 stock split payable to shareholders of record on July 31, 1998,
as if they had been outstanding for the entire period.
(3) Reflects average jewelry units sold per comparable store based
on 260, 283, 355, 493 and 628 comparable stores in fiscal 1995, fiscal
1996, fiscal 1997, fiscal 1998 and fiscal 1999 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.
(4) 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.
(5) 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,
181 and 184 square feet for fiscal 1995, 1996, 1997, 1998 and 1999,
respectively.
(6) 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.
<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,
until August 31, 1998, wholesale sales, primarily to a licensee operating
in the state of Florida (the "Florida Licensee"). Cost of goods sold and
occupancy expenses include the cost of merchandise, rent and other
occupancy expenses and the cost of preparing merchandise for sale.
Selling, general and administrative expenses include store and
supervisory payroll, corporate overhead and non-occupancy store expenses,
including depreciation on kiosks.
Results of Operations
The following table sets forth, for the periods indicated, certain
selected income statement data expressed as a percentage of net sales:
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31,
-------------------------------------------------------------------
1999 1998 1997
------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks) 53.7 53.7 55.3
-------------------------------------------------------------------
Gross profit 46.3 46.3 44.7
Selling, general and administrative
expenses (including
depreciation on kiosks) 40.2 37.3 36.5
-------------------------------------------------------------------
Income from operations 6.1 9.0 8.2
Interest and other income 0.1 0.2 0.2
Interest expense 1.2 1.3 1.3
-------------------------------------------------------------------
Earnings before income taxes 5.0 7.9 7.1
Income taxes 2.0 3.0 2.6
-------------------------------------------------------------------
Net income 3.0% 4.9% 4.5%
-------------------------------------------------------------------
</TABLE>
Comparison of Fiscal 1999 and Fiscal 1998
Net Sales
Net sales increased $33.0 million, or 14.9%, to $255.1 million in
fiscal 1999 from $222.1 million in fiscal 1998. This increase was due
primarily to net sales generated by new stores opened or acquired by the
Company and to a $794,000, or 0.3%, increase in comparable store net
sales. At March 31, 1999, the Company operated 931 stores compared to 789
stores at March 31, 1998, an increase of 18%. The average jewelry units
sold per comparable store were relatively unchanged at 11,700 in fiscal
1999 from 11,800 in fiscal 1998. The average price per jewelry unit sold
for all the Company's stores was also relatively unchanged at $24.54 in
fiscal 1999 from $24.53 in fiscal 1998. Included in total net sales is
approximately $982,000 of wholesale sales to the Florida Licensee,
compared to $4.3 million in fiscal 1998. On August 31, 1998, the Company
purchased all of the outstanding stock of the Florida Licensee and began
operating the former Licensee's 22 stores as its own. Accordingly,
wholesale sales ceased on that date and all subsequent sales activity of
the acquired stores is reflected as part of the Company's own net sales.
<PAGE>
Gross Profit
Gross profit increased $15.3 million, or 14.9%, to $118.1 million in
fiscal 1999 from $102.8 million in fiscal 1998 while gross profit margin
remained level at 46.3% for both periods. Gross profit margin, while
unchanged in total, reflects an increase caused by the conversion of
sales from wholesale to retail sales at the 22 stores acquired from the
former Florida Licensee, offset by a decrease in merchandise margin and
higher rent and occupancy expenses. The Company realizes a higher margin
on its own retail sales than it previously obtained on wholesale sales to
the former Florida Licensee which caused the increase in gross profit
margin. Merchandise margins declined due to greater promotional activity
in an attempt to increase sales, particularly at the Company's comparable
stores. The increase in rent and occupancy as a percentage of sales
reflects the less than expected sales performance at the Company's
comparable stores, particularly during the holiday season, as well as
lower sales at other under-performing stores and the lower initial sales
volumes at new stores opened by the Company.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $19.6
million, or 23.6%, to $102.5 million in fiscal 1999 from $82.9 million in
fiscal 1998. As a percentage of net sales, selling, general and
administrative expenses increased to 40.2% in fiscal 1999 from 37.3% in
fiscal 1998. The combined effect of non-recurring pre-opening costs,
lower than expected sales results at many of the acquired locations and
expenses recorded to close under-performing stores resulted in the
significant increase in both selling, general and administrative expenses
and their relationship to net sales. During fiscal 1999, the Company
opened 221 new and acquired stores, including 104 former GCG
locations.This represents the largest number of new stores the Company
has ever opened in a single fiscal year. After a review of the initial
sales results and future sales potential of the 104 locations acquired
from GCG, the Company announced on September 28, 1998 that it would close
30 of these locations by March 31, 1999 and work to improve operations at
the remaining stores. In addition the Company chose to close another 49
under-performing stores by year-end, bringing the total stores closed in
fiscal 1999 to 79, the largest number of stores the Company has ever
closed in one fiscal year. During fiscal 1999, the Company recognized
approximately $1.6 million of store closure costs as additional selling,
general and administrative expense of which $1.3 million is included in
accrued expenses and other current liabilities at March 31, 1999. These
costs include estimated outstanding lease obligations and kiosk disposal
costs associated with the 79 stores the Company closed in fiscal 1999 and
35 additional locations for which a closure decision had been made at
March 31, 1999, but which are scheduled to close in fiscal 2000.
Depreciation and amortization expense increased 29.6% to $7.0
million in fiscal 1999 from $5.4 million in fiscal 1998. This was due
primarily to capital expenditures for new stores and the upgrading of
kiosks in existing locations. Additionally, amortization expense for
goodwill increased due to the acquisition of 104 former GCG stores and
the 22 stores acquired from the former Florida Licensee in July 1998 and
August 1998, respectively. Approximately $13.7 million of goodwill was
recorded in connection with these two acquisitions and is being amortized
over fifteen years. Goodwill amortization expense totaled $1.3 million
and $613,000 in fiscal 1999 and 1998, respectively.
Interest Expense
Interest expense increased $214,000, or 7.4%, to $3.1 million in
fiscal 1999 from $2.9 million in fiscal 1998, and as a percentage of net
sales decreased to 1.2% from 1.3%. 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
<PAGE>
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 were partially offset by lower
average weighted interest rates on borrowings under the Company's
revolving line of credit (6.75% versus 7.03%) and lower consignment rates
charged by the Company's gold banks (1.94% versus 2.74%).
Income Tax Expense
Income tax expense decreased $1.4 million to $5.2 million in fiscal
1999 from $6.6 million in fiscal 1998. As a percentage of earnings before
income taxes, income tax expense increased to 40.6% in fiscal 1999 from
37.5% in fiscal 1998. The decrease in income tax expense is due to the
decrease in the Company's earnings before income taxes. The higher
effective income tax rate in 1999 resulted from the effect of certain
acquisition-related costs and other charges for which there were no
corresponding tax benefits and an additional $165,000 of income taxes
recognized for potential state income exposure for periods currently
under audit.
Net Income
The Company's net income decreased $3.4 million, or 30.9%, to $7.6
million in fiscal 1999 from $11.0 million in fiscal 1998. The Company
believes that the decrease resulted primarily from the factors described
above.
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.
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
<PAGE>
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.
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 during fiscal 1998. The Company had working capital of $47.6
million and $44.3 million at the end of fiscal 1999 and fiscal 1998,
respectively. See "3/4 Seasonality."
Net cash provided by operating activities was $15.0 million in
fiscal 1999 versus $14.9 million in fiscal 1998. Net cash provided by
operating activities in fiscal 1999 primarily reflects net earnings plus
depreciation and amortization, partially offset by changes in working
capital requirements. Net cash provided by operating activities in fiscal
1998 reflects net earnings plus
<PAGE>
depreciation and amortization, including increases in inventory to
support new and acquired store growth.
Net cash used in investing activities was $28.3 million and $17.0
million in fiscal 1999 and fiscal 1998, respectively. These amounts
reflect $12.6 million and $9.1 million of capital expenditures related to
new stores in fiscal 1999 and fiscal 1998, respectively. Additionally, in
fiscal 1999, the Company paid $3.0 million for the acquisition of 104
former GCG locations and $11.4 million for all of the outstanding stock
of the former Florida Licensee. In fiscal 1998, the Company paid $8.0
million for the acquisition of 47 locations.
Net cash provided by financing activities was $14.6 million in
fiscal 1999 and $721,000 in fiscal 1998. 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 1999, cash provided by financing activities
primarily reflects an increase in the Company's revolving line of credit
and additional long-term debt. These increases were used to fund store
expansion, acquisitions and the construction of an additional warehouse
and distribution center. 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 $105 million through a combination of cash advances (which
may not exceed $65 million) and letters of credit (which may not exceed
$70 million) to support the Company's gold consignment financing program.
Amounts borrowed under the facility generally accrue interest at the
higher of (i) the prime rate of the Company's primary lender minus 100
basis points (6.75% at March 31, 1999) or (ii) a rate based on overnight
federal funds transactions with Federal Reserve System members plus 50
basis points (5.625% at March 31, 1999); 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 (6.04% at March 31, 1999 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, 1999, the
Company had $41.2 million available for cash borrowings under this
revolving credit facility. Letters of credit in the amounts of
approximately $41.4 million and approximately $37.2 million were issued
at March 31, 1999 and 1998, 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
<PAGE>
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 1999 and 1998, average financing costs under the
consignment agreements were approximately 1.94% and 2.74% 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, 1999, the amount of gold
consigned was 143,443 ounces with a value of $40.1 million and 119,800
ounces with a value of $36.1 million at March 31, 1998. The consigned
gold is not included in inventory on the Company's balance sheet and,
therefore, there is no related liability recorded. If the market value of
gold increases, assuming the number of ounces consigned remain constant,
the financing costs incurred by the Company which are included in
interest expense, and the repayment obligations to the consignors under
the consignment arrangements, will increase in proportion to the increase
in the market value of gold. Additionally, the amount of the letters of
credit would need to be increased to support the increased market value
of the consigned gold, thereby reducing the amount which might otherwise
be available for cash borrowings under the Company's revolving credit
facility.
The Company anticipates capital expenditures in fiscal 2000 to total
approximately $7.1 million, of which approximately $4.0 million is
related primarily to the construction of new stores and the renovation of
existing stores. The Company currently anticipates opening approximately
40 to 65 new stores in fiscal 2000. 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.
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 26% of the Company's annual
net sales and 109% 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.
<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 1999 Fiscal 1998
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 $ 48,018 $ 49,670 $ 101,985 $ 55,474 $ 42,873 $ 42,877 $ 89,915 $ 46,463
Gross profit(1) 21,385 22,050 50,066 24,574 18,107 18,778 45,231 20,684
Selling, general and
administrative expenses(1) 20,755 24,172 32,356 25,181 17,854 18,445 26,672 19,945
Income (loss)from
operations 630 (2,122) 17,710 (607) 253 333 18,559 739
Net income (loss) 102 $ (1,764) 10,169 (864) (297) (153) 11,176 243
Diluted earnings(loss) per
share $ 0.01 $ (0.19) $ 1.10 $ (0.09) $ (0.03) $ (0.01) $ 1.20 $ 0.03
-----------------------------------------------------------------------------------------------------------------------------
Comparable Store Net Sales
Increase (Decrease) 2.8% 0.3% (3.1)% 3.6% 5.8% (1.4)% 2.9% 4.8%
As a Percentage of Net Sales:
Gross profit(1) 44.5% 44.4% 49.1% 44.3% 42.2% 43.8% 50.3% 44.5%
Selling, general and
administrative expenses(1) 43.2 48.7 31.7 45.4 41.6 43.0 29.7 42.9
Income (loss)from
operations 0.1 (4.3) 17.4 (1.1) 0.6 0.8 20.6 1.6
Net income (loss) - (3.6) 10.0 (1.6) (0.7) (0.4) 12.4 0.5
</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 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 1999 and 1998 have been adversely affected by the integration and
assimilation of 520 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.
<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 information set forth in this section is a Year 2000 Readiness
Disclosure as defined in the Year 2000 Information Readiness and
Disclosure Act.
The Company is aware of "Year 2000" issues existing in the
programming code of some information technology ("IT") and non-IT
systems. The Year 2000 issue may arise because many hardware and software
systems only use two digits to represent the year. As a result, these
systems may not be able to process dates beyond 1999, which may cause
errors or failures in IT or non-IT systems.
The Company relies significantly on both IT and non-IT systems in
its retail outlets as well as at its corporate headquarters and
distribution center. These systems include hardware and software that the
Company uses to conduct its operations, analyze business performance and
safeguard assets. The Company is currently performing a comprehensive
review of these systems in preparation for the Year 2000. The Company's
strategy for addressing Year 2000 compliance is to replace or renovate
all critical systems identified as non-compliant by a target date of July
31, 1999 followed by final testing and remediation by September 30, 1999.
The first phase of this approach involves identifying all critical IT and
non-IT systems and making an initial assessment of each as either Year
2000 compliant or non-compliant. The Company is substantially complete
with this phase of its Year 2000 review and has nearly completed the
replacement or renovation of systems which were found to be
non-compliant. The process of testing the compliance of systems initially
assessed as compliant, as well as the replaced or renovated systems, has
also begun and is progressing according to the Company's original
schedule. To date, the Company has met all costs of its Year 2000
remediation efforts with existing internal staff resources and has spent
less than $500,000 on hardware and software purchased to specifically
address Year 2000 issues. The cost of these efforts has not been
separately tracked or allocated and, accordingly, the Company cannot
precisely determine the expense incurred. The Company does not anticipate
future Year 2000 costs will be material and will continue to use internal
staff supplemented by external resources if necessary.
The Company expects its own 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
compliant. The Company is seeking confirmation from its primary vendors
that they are developing and implementing plans to become Year 2000
compliant. However, there can be no assurance that the systems of third
parties, which are not within the control of the Company, will function
properly. The failure of certain primary vendors to be Year 2000
compliant may have an adverse impact on the Company's performance. The
Company is developing contingency plans as part of its remediation
efforts and the Company expects such plans to be completed by September
30, 1999.
<PAGE>
While the Company continues to believe that the Year 2000 matters
discussed above will not have a material impact on its business,
financial condition or results of operations, it remains uncertain
whether or to what extent the Company may be affected.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999, however, the Financial Accounting
Standards Board has proposed a one year delay in implementation. The
Company does not anticipate adoption of this standard will have a
material impact on the Company's financial condition or results of
operations.
In March 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated
useful life of the software. The SOP also requires that costs related to
the preliminary stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as
incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The Company has adopted this standard effective April
1, 1998. Adoption of this standard did not have a material impact on the
Company's financial condition or results of operations for fiscal 1999.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company's primary market risk exposure is from changes in
interest rates, The Company's policy is to manage interest rate exposure
through the use of a combination of fixed and floating rate debt
instruments and, in fiscal 1999, an interest rate swap agreement.
Generally, the Company seeks to match the terms of its debt with its
purpose. The Company uses a variable rate line of credit to provide
working capital for operations and inventory build-up prior to the
holiday selling season. Construction and improvements to the Company's
headquarters and warehouse and distribution center are financed with
long-term, fixed rate notes. In fiscal 1999, the Company entered into an
interest rate swap agreement related to a new long-term note to
effectively convert it from a variable rate note to a fixed rate note. A
standard interest rate swap agreement involves the payment of a fixed
rate times a notional amount by one party in exchange for a floating rate
times the same notional from another party. The Company originated the
long-term note as a variable rate instrument in anticipation of a decline
in interest rates, then used the interest rate swap agreement to fix the
rate. The counterparty to the swap agreement is one of the Company's
primary lenders under its revolving line of credit.
The table below summarizes the Company's market risks associated
with long-term debt obligations and its interest rate swap as of March
31, 1999. For long-term debt obligations, the table presents cash flows
related to payments of principal and interest by expected year of
maturity. For the interest rate swap, the table reflects the notional
amount underlying the interest rate swap by year of maturity. The
notional amount is used to calculate contractual payments to be exchanged
and are not actually paid or received. Fair values were computed based
upon discounted cash flows using market interest rates as of the end of
the period.
<PAGE>
<TABLE>
<CAPTION>
Expected Fiscal Year of Maturity
--------------------------------------------------------------------
(000's) 2000 2001 2002 2003 2004 Thereafter Total Fair Value
Fixed Rate Debt:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term notes $ 425 $ 446 $ 470 $ 500 $ 529 $ 3,431 $ 5,801 $ 5,801
Interest expense $ 336 $ 311 $ 283 $ 254 $ 222 $ 857 $ 2,263
Average interest rate 6.02% 6.02% 6.02% 6.00% 5.97% 5.83%
Variable Rate Debt:
Revolving line of credit
- $19,800 - - - - $ 19,800 $ 19,800
Interest expense $ 1,253 $ 418 - - - - $ 1,671
Average interest rate 6.33% 6.33%
Interest Rate Swaps:
1 Swap Receive Variable
Pay Fixed $ 125 $ 120 $ 125 $ 130 $ 140 $ 1,925 $ 2,565 $ (49)
Variable Receive Rate
= 5.05%
Pay Rate = 6.23%
</TABLE>
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures
that exist at March 31, 1999, it does not consider those exposures or
positions that could arise after that date. In addition, actual cash
flows of financial instruments may differ materially from cash flows
presented in the table due to future fluctuations in interest rates and
Company debt levels.
Commodity risk
For a discussion of the commodity risk associated with the Company's
holdings of gold merchandise see Item 7. "Management's Discussion and
Analysis - Liquidity and Capital Resources".
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report 30
Consolidated Balance Sheets at March 31, 1999 and 1998 31
Consolidated Statements of Income for the Years ended
March 31, 1999, 1998 and 1997 32
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended March 31, 1999, 1998 and 1997 33
Consolidated Statements of Cash Flows for the Years ended
March 31, 1999, 1998 and 1997 34
Notes to Consolidated Financial Statements 36
<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, 1999 and 1998 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, 1999. 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, 1999 and 1998 and
the results of their operations and their cash flows for each of the
years in the three-year period ended March 31, 1999, in conformity with
generally accepted accounting principles.
KPMG LLP
Allentown, Pennsylvania
May 10, 1999
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Balance Sheets
March 31,
(In thousands, except share data)
------------------------------------------------------------------
Assets 1999 1998
------------------------------------------------------------------
Current assets:
<S> <C> <C>
Cash $ 4,068 $ 2,699
Accounts receivable 4,674 1,454
Inventory 53,685 53,149
Deposits for inventory purchases 707 546
Prepaid expenses and other current 1,337 1,058
assets
Prepaid income taxes 131 215
Deferred income taxes 2,213 1,972
------------------------------------------------------------------
Total current assets 66,815 61,093
------------------------------------------------------------------
Property, fixtures and equipment, net 34,293 27,215
Goodwill, net 20,199 6,296
Other assets, net 1,993 1,495
------------------------------------------------------------------
$ 123,300 $ 96,099
------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------------------------------------
Current liabilities:
Accounts payable $ 3,934 $ 3,232
Current installments of long-term debt
and revolving line of credit 432 247
Income taxes payable 125 889
Accrued expenses and other current 14,753 12,423
liabilities
-----------------------------------------------------------------
Total current liabilities 19,244 16,791
-----------------------------------------------------------------
Long-term debt, less current installments 25,169 9,742
Deferred income taxes 3,476 2,535
Other liabilities 920 703
------------------------------------------------------------------
Total liabilities 48,809 29,771
------------------------------------------------------------------
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 9,133,901
and 92 91
9,087,616 shares at March 31, 1999 and
1998, respectively.
Additional paid-in capital 40,906 40,387
Retained earnings 33,493 25,850
------------------------------------------------------------------
Total stockholders' equity 74,491 66,328
------------------------------------------------------------------
$ 123,300 $ 96,099
------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Income Years ended March 31, (In thousands,
except per share data)
-----------------------------------------------------------------------
1999 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 255,147 $222,128 $166,885
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks and
store fixtures) 137,072 119,328 92,308
-----------------------------------------------------------------------
Gross profit 118,075 102,800 74,577
Selling, general and administrative
expenses 102,464 82,916 60,845
(including depreciation on kiosks and
store fixtures)
-----------------------------------------------------------------------
Income from operations 15,611 19,884 13,732
Interest and other income 367 562 386
Interest expense 3,110 2,896 2,208
-----------------------------------------------------------------------
Earnings before income taxes 12,868 17,550 11,910
Income taxes 5,225 6,581 4,372
-----------------------------------------------------------------------
Net income $ 7,643 $ 10,969 $ 7,538
-----------------------------------------------------------------------
Basic earnings per share $ 0.84 $ 1.25 $ 0.96
-----------------------------------------------------------------------
Diluted earnings per share $ 0.82 $ 1.21 $ 0.93
-----------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<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, 1996 7,860,439 $ 79 $ 22,157 $ 7,343 $ 29,579
Share transactions under
employee stock plans,
including tax benefit 50,552 - 405 - 405
Net income - - - 7,538 7,538
---------------------------------- ------------ ---------- -------------- ----------- -----------
Balance - March 31, 1997 7,910,991 $ 79 $ 22,562 $ 14,881 $ 37,522
Share transactions under
employee stock plans,
including tax benefit 55,375 - 648 - 648
Secondary public offering 1,121,250 12 17,177 - 17,189
Net income - - - 10,969 10,969
---------------------------------- ------------ ---------- -------------- ----------- -----------
Balance - March 31, 1998 9,087,616 $ 91 $ 40,387 $ 25,850 $ 66,328
Share transactions under
employee stock plans,
including tax benefit 46,285 1 519 - 520
Net income - - - 7,643 7,643
---------------------------------- ------------ ---------- -------------- ----------- -----------
Balance - March 31, 1999 9,133,901 $ 92 $ 40,906 $ 33,493 $ 74,491
---------------------------------- ------------ ---------- -------------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Cash Flows
Years ended March 31,
(In thousands)
1999 1998 1997
------------------------------------------------------ --------------- ------------- -----------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 7,643 $ 10,969 $ 7,538
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 7,030 5,402 3,636
Loss on disposal of property, fixtures and
equipment 337 141 93
Other changes in other assets 76 (101) (97)
Deferred income taxes 833 732 335
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable (3,688) 779 (1,428)
Inventory 1,274 (7,673) (12,951)
Deposits for inventory purchases (161) 304 (489)
Prepaid expenses and other current
(277) (301) (289)
Prepaid income taxes 84 1,279 (514)
Accounts payable 702 (436) 1,857
Accrued expenses and other current
liabilities 2,130 2,882 2,697
Income taxes payable (671) 1,019 -
Other liabilities (283) (133) 72
------------------------------------------------------ --------------- ------------- -----------
Net cash provided by operating activities 15,029 14,863 460
------------------------------------------------------ --------------- ------------- -----------
Cash flows from investing activities:
Additions to property, fixtures and equipment (12,570) (9,066) (9,724)
Payments for purchases of businesses (15,583) (7,980) (8,010)
Proceeds from disposal of property, fixtures and
equipment - 67 22
Other changes in other assets, net (100) (25) 574
------------------------------------------------------ --------------- ------------- -----------
Net cash used in investing activities (28,253) (17,004) (17,138)
------------------------------------------------------ --------------- ------------- -----------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Cash Flows - Continued
Years ended March 31,
(In thousands)
1999 1998 1997
------------------------------------------------------ --------------- ------------- -----------
Cash flows from financing activities:
<S> <C> <C> <C>
Repayments of long-term debt (253) (235) (216)
Revolving line of credit, net 11,058 (16,700) 18,480
Proceeds from issuance of long-term debt 3,565 - 400
Debt issuance fees paid (204) (51) (39)
Proceeds from issuance of common stock, net - 17,189 -
Net proceeds from the issuance of stock under
employee share plans 427 518 308
------------------------------------------------------ --------------- ------------- -----------
Net cash provided by financing activities 14,593 721 18,933
------------------------------------------------------ --------------- ------------- -----------
------------------------------------------------------ --------------- ------------- -----------
Net increase (decrease) in cash 1,369 (1,420) 2,255
Cash at beginning of period 2,699 4,119 1,864
------------------------------------------------------ --------------- ------------- -----------
Cash at end of period $ 4,068 $ 2,699 $ 4,119
------------------------------------------------------ --------------- ------------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,053 $ 2,877 $ 2,100
Income taxes, net $ 5,072 $ 6,669 $ 4,551
------------------------------------------------------ --------------- ------------- -----------
</TABLE>
Supplemental disclosure of operating activities:
During each of the years ended March 31, 1999, 1998 and 1997, the
Company entered into noncompetition agreements for $500,000, $300,000 and
$300,000, respectively.
See accompanying notes to consolidated financial statements.
<PAGE>
PIERCING PAGODA, INC.
Notes to Consolidated Financial Statements (continued)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PIERCING PAGODA, INC.
Notes to Consolidated Financial Statements
March 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Statement of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. 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, 1999, the Company operated 931 stores, including
31 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 had licensed
operations at 22 stores and three retail cart locations in Florida until
August 31, 1998. The Company provided the licensee with merchandise and
promotional and administrative services. Income from licensee operations
was based on a percentage of the licensee's sales and earnings from the
sale of merchandise to the licensee. On August 31, 1998, the Company
acquired all of the outstanding common stock of the licensee and began
operating the stores as its retail outlets. See Note 5.
Sales
Sales consist primarily of net sales to the Company's retail
customers at its kiosk and in-line stores. Also included in sales through
August 31, 1998, 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 and merchandise credits receivable from
vendors.
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.
<PAGE>
The Company has excluded the consigned gold content of merchandise
in its possession from its inventory because it does not yet have title
to the gold which it holds under its consignment arrangements. This gold
has been manufactured into merchandise for sale and the costs associated
with this manufacturing process are included in inventory.
Cost of goods sold and occupancy expenses include the cost of
merchandise, rent and occupancy expenses and the cost of preparing
merchandise for sale. A major component of the cost of merchandise
includes the previously consigned gold after it has been repurchased by
the Company from the consignors.
In fiscal 1999 one vendor accounted for 11% of total merchandise
purchased. In 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.
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 $3,090,000, $2,508,000 and $1,890,000 in fiscal
1999, 1998, and 1997, respectively.
Maintenance and repairs are expensed as incurred. Expenditures for
renovations are capitalized. Upon the sale, replacement or retirement of
property, fixtures and equipment, the cost and accumulated depreciation
thereon are removed from the accounts. Gain or loss on sale, retirement
or other disposition of property, fixtures and equipment is reflected in
earnings.
Goodwill
Costs in excess of fair value of net assets acquired are being
amortized on a straight-line basis over periods of up to fifteen years.
The Company assesses the recoverability of goodwill by determining
whether the remaining balance can be recovered through projected
undiscounted future cash flows.
<PAGE>
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 when incurred.
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.
Net Income Per Share
Basic earnings per share calculations are determined by dividing net
income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are determined
by dividing net income by the weighted average number of shares of common
stock and dilutive common stock equivalents outstanding.
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,
--------------------------
1999 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
Basic 9,119 8,765 7,886
Dilutive effect of outstanding stock
options, using the treasury stock 212 297 198
method
-------------------------------------------------------------------
Diluted 9,331 9,062 8,084
-------------------------------------------------------------------
</TABLE>
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.
<PAGE>
Stock Option Plan
The Company has elected to continue to account for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees as
permitted by Statement of Financial Accounting Standards ("SFAS") No.
123, Accounting for Stock-Based Compensation ("SFAS No. 123").
Accordingly, compensation expense is recorded on the date of grant only
if the market price of the underlying stock exceeds its exercise price.
However, pro forma disclosure of net income and earnings per share is
required under SFAS No. 123 with compensation expense for the Company's
stock option plan determined based on the fair value method.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives), and for hedging
activities. This statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. The Company does not anticipate
adoption of this standard will have a material impact on the Company's
financial condition or results of operations.
In March 1998, the AICPA Accounting Standards Executive Committee
issued Statement of Position (SOP) 98-1, Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use. SOP 98-1
requires that certain costs related to the development or purchase of
internal-use software be capitalized and amortized over the estimated
useful life of the software. The SOP also requires that costs related to
the preliminary stage and the post-implementation/operations stage of an
internal-use computer software development project be expensed as
incurred. This statement is effective for fiscal years beginning after
December 15, 1998. The Company has adopted this standard effective April
1, 1998. Adoption of this standard did not have a material impact on the
Company's financial condition or results of operations for fiscal 1999.
Stock Split
In June 1998, the Company's Board of Directors authorized a
three-for-two stock split effected in the form of a stock dividend
payable to shareholders of record on July 31, 1998, payable on August 13,
1998. Stockholders' equity has been restated to give retroactive
recognition to the stock split for all periods presented by reclassifying
from additional paid-in capital to common stock the par value of the
additional shares arising from the split. In addition, all share and per
share amounts have been restated to reflect the stock split.
<PAGE>
(2) Common Stock Offering
On June 30, 1997, the Company completed a secondary offering of
975,000 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 146,250 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, 1999, 1998 and
1997, the Company had consigned 143,443, 119,800, and 88,300 ounces of
gold, respectively, with values of $40,085,000, $36,060,000 and
$30,749,000, respectively. The purchase price per ounce is based on the
Second London Gold Fixing. This gold was generally in the form of
merchandise for sale held by the Company at its offices or in its stores.
Consigned gold is not included in inventory, and there is no related
liability recognized.
Included in interest expense for the years ended March 31, 1999,
1998 and 1997 are consignment fees of $796,000, $912,000 and $620,000,
respectively, based on fee rates of approximately 1.94%, 2.74% and 2.45%,
respectively, of the value of consigned gold. The fee rates are adjusted
periodically by the consignors upon giving seven to thirty days advance
notice to the Company. The gold financing arrangements could be
terminated by either the Company or the lender on 30 or 45 days notice,
depending on the consignor.
(4) Property, Fixtures and Equipment
A summary of major classes of property, fixtures and equipment
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------
1999 1998
-------------------------------------------------------------------
<S> <C> <C>
Land $ 688 $ 688
Furniture and fixtures 5,043 3,881
Kiosks 30,681 24,043
Building and improvements 7,283 5,413
Computer equipment, software and other
equipment 11,622 9,326
-------------------------------------------------------------------
55,317 43,351
Less accumulated depreciation and amortization 21,024 16,136
-------------------------------------------------------------------
$34,293 $27,215
-------------------------------------------------------------------
</TABLE>
<PAGE>
(5) Goodwill and Other Assets
Goodwill and other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------
1999 1998
-------------------------------------------------------------------
<S> <C> <C>
Goodwill(net of accumulated amortization of
$1,866 and $735 at March 31, 1999 and 1998,
respectively) $ 20,199 $ 6,296
-------------------------------------------------------------------
Other Assets:
Noncompetition agreements (net of
accumulated amortization of $303 and
$125 at March 31, 1999 and 1998,
respectively) 797 475
Deferred expenses, principally long-term
maintenance agreements 455 416
Cash surrender value of officers life
insurance 487 415
Other 254 189
-------------------------------------------------------------------
$ 1,993 $ 1,495
-------------------------------------------------------------------
</TABLE>
On August 31, 1998, the Company purchased all of the outstanding
common stock of Piercing Pagoda of Florida, Inc. ("PPF"), the Company's
sole licensee and operator of 22 locations under the Company's Piercing
Pagoda and Plumb Gold trade names. The purchase agreement provides for
the payment of approximately $11.4 million, subject to certain post
closing adjustments, for all of the outstanding common stock of PPF and
the payment of $100,000 per year for five years under the terms of a
non-competition agreement with the former shareholder of PPF.
Additionally, the former shareholder of PPF entered into an employment
agreement with the Company as a corporate vice president at an annual
salary of $125,000. The cost in excess of the fair value of the net
assets acquired over their fair value of approximately $11.1 million has
been recorded as goodwill and is being amortized over 15 years. 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.
<PAGE>
The following unaudited pro forma financial information presents the
combined results of operations of the Company and PPF as if the
acquisition had occurred as of the beginning of fiscal 1998 and 1999,
after giving effect to certain adjustments, including amortization of
goodwill, increased interest expense on debt related to the acquisition
and related income tax effects. The pro forma financial information does
not necessarily reflect the results of operations that would have
occurred had the Company and PPF constituted a single entity during such
periods.
<TABLE>
<CAPTION>
Twelve months ended
March 31,
1999 1998
-----------------------------------------------------------------------
(In thousands, except per
share data)
<S> <C> <C>
Net sales $ 257,154 $ 226,219
-----------------------------------------------------------------------
Net income $ 6,926 $ 10,275
-----------------------------------------------------------------------
Diluted income per share $ 0.74 $ 1.15
-----------------------------------------------------------------------
</TABLE>
In July 1998, the Company purchased 104 of the retail outlets of
Sedgwick Sales, Inc., an independent kiosk retailer operating primarily
under the name Golden Chain Gang ("GCG"). The purchase agreement provides
for the payment of $3.0 million for these kiosk locations, leases and
store fixtures. No inventory was acquired. The cost in excess of the fair
value of the net assets acquired of approximately $2.6 million has been
recorded as goodwill and is being amortized over 15 years. After a review
of the initial sales results and future sales potential of the 104
locations acquired from GCG, management announced on September 28, 1998
that it would close 30 of these locations by March 31, 1999. See Note 6.
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.
<PAGE>
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,
---------------------
1999 1998
-------------------------------------------------------------------
<S> <C> <C>
Accrued payroll, vacation and related taxes $ 6,254 $ 5,230
Sales tax payable 719 794
Accrued rents payable 1,089 938
Liability under jewelry club program 989 1,109
Liability under lifetime guarantee program 1,321 1,411
Accrued store closure costs 1,250 -
Other accrued expenses 3,131 2,941
-------------------------------------------------------------------
$ 14,753 $ 12,423
-------------------------------------------------------------------
</TABLE>
Included in accrued expenses at March 31, 1999 is approximately $1.2
million representing the estimated closure costs for stores closed or to
be closed at March 31, 1999. These costs principally consist of estimated
outstanding lease obligations associated with the 79 stores the Company
closed in fiscal 1999 and the 35 additional locations for which a closure
decision had been made at March 31, 1999, but which are scheduled to
close in fiscal 2000.
(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,
--------------------
1999 1998
-------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $ 19,800 $ 7,500
Industrial development authority financing 5,801 2,489
-------------------------------------------------------------------
Total long-term debt 25,601 9,989
Less current installments 432 247
-------------------------------------------------------------------
$ 25,169 $ 9,742
-------------------------------------------------------------------
</TABLE>
<PAGE>
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
$105 million through a combination of cash advances (which may not exceed
$65 million) or letters of credit (which may not exceed $70 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 as its prime rate
minus 100 basis points (6.75% at March 31, 1999) and a rate based on the
rates charged on overnight federal funds transactions with Federal
Reserve System members plus 50 basis points (5.625% at March 31, 1999).
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 (6.04% at March
31, 1999 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, 1999, the Company had $41.2 million available for
cash borrowings under this revolving credit facility. Letters of credit
in the amounts of $41,387,000 and $37,213,000 were issued at March 31,
1999 and 1998, 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, 1999.
Borrowings under the revolving line of credit are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------------
1999 1998 1997
--------------------------------------------------------------------------
<S> <C> <C> <C>
Borrowings at year end $19,800 $7,500 $24,200
Interest rate on borrowings at year-end 6.33% 6.80% 7.50%
Maximum amount of borrowings
outstanding at any month end $54,000 $33,400 $28,789
Average aggregate borrowings
during the year $23,147 $20,492 $14,823
Weighted average interest rate
during the year 6.75% 7.03% 7.50%
--------------------------------------------------------------------------
</TABLE>
In February 1999, the Company obtained a $1,000,000, fifteen-year
term loan in connection with the Company's construction of a second
warehouse and distribution center. This industrial development authority
sponsored loan requires monthly payments of principal and interest of
approximately $8,000 through March 2014 at an effective annual interest
rate of 5.38%.
In April 1998, the Company obtained a $2,565,000, fifteen-year term
loan to finance the construction of a second warehouse and distribution
facility on land the Company owns adjacent to its existing facility. This
loan is collateralized by a letter of credit totaling $2,620,000 at March
31, 1999 which is supported by a lien on the newly constructed warehouse
and distribution center which has a net carrying value of $3.1 million.
The loan requires annual payments of principal at a varying rate of
interest. In July 1999, the Company entered into an interest rate swap
agreement with one of its primary lenders for a notional amount of
$2,565,000 that effectively converted the variable rate interest
obligation to a 6.23% fixed rate obligation for the full term of the
loan.
<PAGE>
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%.
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 $2,247,000 at March 31,
1999 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, 1999. The terms of the loan require semi-annual
interest payments at varying interest rates averaging 6.8% over the life
of the loan. Principal payments, in varying amounts, are required
annually.
Maturities of the term loans are as follows at March 31, 1999 (in
thousands):
<TABLE>
<CAPTION>
Amount
-------------------------------------------------------------------
<S> <C> <C>
2000 $ 425
2001 446
2002 470
2003 500
2004 529
Subsequent to 2004 3,431
-------------------------------------------------------------------
Total payments $ 5,801
-------------------------------------------------------------------
</TABLE>
(8) Leases
The Company leases space primarily in shopping malls under operating
leases expiring in various years through fiscal 2009. 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 1999. Generally, the
leases also contain provisions for contingent rental payments of
approximately 10% of gross sales in excess of specified amounts.
Minimum future rental payments as of March 31, 1999 under
non-cancelable operating leases having original terms in excess of one
year are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
-------------------------------------------------------------------
<S> <C> <C>
2000 $ 22,411
2001 15,728
2002 9,183
2003 5,203
2004 2,470
Subsequent to 2004 1,626
-------------------------------------------------------------------
Total rental payments $ 56,621
-------------------------------------------------------------------
</TABLE>
<PAGE>
A summary of minimum rent and contingent rent expense under
operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------
1999 1998 1997
-----------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 29,027 $ 23,690 $ 17,292
Contingent rentals 2,003 1,916 1,498
-----------------------------------------------------------------------
Total rental expense $ 31,030 $ 25,606 $ 18,790
-----------------------------------------------------------------------
</TABLE>
(9) Employee Benefit Plans
The Company has a defined contribution plan for Company employees
who are at least 21 years of age and have worked at least 1,000 hours in
the past year. The Plan consists of a profit sharing fund and a 401(k)
fund. Annual contributions to the profit sharing fund are determined at
the discretion of management. Total contributions to this fund were
$250,000, $500,000 and $300,000 in fiscal 1999, 1998 and 1997,
respectively.
The Company provides a matching contribution provision to the
Company's 401(k) fund. The matching rate for Company contributions is
$.50 per dollar contributed by the employee up to 4% of the employee's
income. The Company's matching contributions totaled $297,000, $212,000
and $181,000 in fiscal 1999, 1998 and 1997, respectively. These matching
contributions are 100% vested at the time they are made.
See Note 12 for a description of the Company's employee stock
purchase plan.
(10) Income Taxes
Income taxes in the consolidated statements of income consists of
the following components (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------
1999 1998 1997
-------------------------------------------------------------------
Current tax expense:
<S> <C> <C> <C>
Federal $ 3,673 $ 5,346 $ 3,703
State 719 503 334
-------------------------------------------------------------------
4,392 5,849 4,037
-------------------------------------------------------------------
Deferred tax expense
Federal 645 570 251
State 188 162 84
-------------------------------------------------------------------
833 732 335
-------------------------------------------------------------------
$ 5,225 $ 6,581 $ 4,372
-------------------------------------------------------------------
</TABLE>
<PAGE>
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,
--------------------
1999 1998
---------------------------------------------------------------------
Deferred tax liabilities:
<S> <C> <C>
Excess of tax over book depreciation ($ 3,877 ($ 2,827)
Employee benefit plans (310) (250)
---------------------------------------------------------------------
Total deferred tax liabilities (4,187) (3,077)
---------------------------------------------------------------------
Deferred tax assets:
Inventory 235 382
Accrual for lifetime guarantee costs 528 563
Accrued vacation expense 456 468
Accrual for jewelry club costs 395 443
Accrued group insurance 266 226
Accrued store closure costs 494 -
Other 550 432
---------------------------------------------------------------------
Total deferred tax assets 2,924 2,514
Less valuation allowance - -
---------------------------------------------------------------------
Net deferred tax assets 2,924 2,514
---------------------------------------------------------------------
Net deferred tax liability ($ 1,263) ($ 563)
---------------------------------------------------------------------
</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, 1999.
Income tax expense in 1999, 1998 and 1997 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,
-------------------------
1999 1998 1997
--------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rates $ 4,375 $ 5,967 $ 4,049
State income taxes, net of federal benefit 599 439 276
Non-deductible amortization of cost in
excess of net assets of acquired business 187 39 6
Other 64 136 41
--------------------------------------------------------------------
$ 5,225 $ 6,581 $ 4,372
--------------------------------------------------------------------
</TABLE>
(11) Transactions with Related Parties
The Company performs certain administrative functions for entities
owned by the Company's Chief Executive Officer and its President. The
Company charged to the entities $10,000, $13,000 and $10,000 in fiscal
1999, 1998, and 1997, respectively, representing certain direct expenses
and the estimated fair value of providing administrative services,
primarily allocations of salary and overhead.
<PAGE>
Included in accounts receivable at March 31, 1999 and 1998 are $0
and $420,000, respectively, from the sale of merchandise and other
supplies to the licensee. On August 31, 1998, the Company acquired all of
the outstanding stock of the licensee. See Note 5.
(12) Stockholders' Equity
The Company has a stock option plan that 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 900,000. 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,
-----------------------------------
1999 1998 1997
-------------------------------------------------------------------
Net income:
<S> <C> <C> <C>
As reported $ 7,643 $ 10,969 $ 7,538
Pro forma $ 6,587 $ 9,762 $ 6,728
Diluted earnings per share:
As reported $ 0.82 $ 1.21 $ 0.93
Pro forma $ 0.71 $ 1.08 $ 0.83
-------------------------------------------------------------------
</TABLE>
The per share weighted average fair value of stock options granted
during fiscal 1999, 1998 and 1997 were $12.21, $10.56 and $9.22,
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>
1999 1998 1997
-------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 58.9 42.1 49.4
Risk-free interest rate 5.3 5.7 5.4
Expected life (in years) 9.0 9.0 9.6
-------------------------------------------------------------------
</TABLE>
Pro forma net income reflects only options granted since fiscal
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.
<PAGE>
Summarized stock option data is as follows:
<TABLE>
<CAPTION>
Weighted
Average Shares
Exercise Under Option
Price
-------------------------------------------------------------------
-------------------------------------------------------------------
<S> <C> <C>
Outstanding at March 31, 1996 $ 6.06 374,400
Granted 13.86 279,000
Exercised 5.52 (38,325)
Canceled 9.05 (22,950)
-------------------------------------------------------------------
Outstanding at March 31, 1997 9.65 592,125
Granted 17.45 224,250
Exercised 7.97 (41,400)
Canceled 12.55 (24,300)
-------------------------------------------------------------------
Outstanding at March 31, 1998 11.98 750,675
Granted 17.52 71,000
Exercised 7.01 (19,825)
Canceled 18.24 (11,402)
-------------------------------------------------------------------
Outstanding at March 31, 1999 12.51 790,448
-------------------------------------------------------------------
Exercisable $ 9.70 449,148
-------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
Exercise Price
$ 5.33 - $ 9.00 - $ 14.00 -
$ 7.08 $ 12.33 $ 24.17
--------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
March 31, 1999 244,850 116,949 428,649
Weighted average remaining
contractual life (years) 5.25 7.70 8.40
Weighted average exercise
price $ 5.48 $ 11.64 $ 16.77
Options exercisable at
March 31, 1999 243,050 56,250 149,848
Weighted average exercise
price $ 5.48 $ 12.11 $ 15.64
--------------------------------------------------------------------------
</TABLE>
On October 12, 1995, the Company created an Employee Stock Purchase
Plan under which the sale of 144,000 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 1999,
1998 and 1997, 26,484, 13,976 and 12,226 shares, respectively, were
issued under this plan.
<PAGE>
(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.
On October 19, 1998, a lawsuit was filed, purportedly as a class
action, against the Company and certain of its executive officers in the
U.S. District Court of the Eastern District of Pennsylvania. The lawsuit
alleges, among other things, that the Company and certain of its officers
made materially false and misleading statements and/or failed to disclose
material information regarding the Company's business performance and
prospects. On January 4, 1999, the Company filed a motion to dismiss the
suit, after which the plaintiffs filed an amended complaint. The Company
currently has pending before the court a motion to dismiss the amended
complaint. The Company believes that the lawsuit has no merit and intends
to contest the case vigorously if its motion to dismiss is unsuccessful.
Although the ultimate outcome of the lawsuit cannot be determined,
management does not believe the outcome of the lawsuit will have a
material adverse effect on the financial position, results of operations
or cash flows of the Company. However, there can be no assurance as to
the ultimate resolution of this matter.
At March 31, 1999, the Company had commitments outstanding of
approximately $1.1 million primarily 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.
<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 1999 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 1999 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 1999 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 1999 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.
<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 30
Consolidated Balance Sheets at March 31, 1999 and 1998 31
Consolidated Statements of Income for the Years ended
March 31, 1999, 1998 and 1997 32
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended March 31, 1999, 1998 and 1997 33
Consolidated Statements of Cash Flows for the Years ended
March 31, 1999, 1998 and 1997 34
Notes to Consolidated Financial Statements 36
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).
<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).
<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, nitially
filed with the Securities and Exchange Commission on June 14, 1994).
initially filed with the Securities and Exchange Commission on June
14, 1994).
10.29 Second Amendment to Amended and Restated Consignment Agreement,
dated September 11, 1995 between the Registrant and Rhode Island
Hospital Trust National Bank (incorporated by reference to Exhibit
10.1 to the Registrant's Form 10-Q filed with the Securities and
Exchange Commission on February 14, 1996).
10.30 Third Amendment to Amended and Restated Consignment Agreement dated
July 26, 1994, dated December 26, 1996 between the Registrant and
Rhode Island Hospital Trust National Bank (incorporated by reference
to Exhibit 10.3 of the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 13, 1997).
10.31 Registrant's 1994 Stock Option Plan (incorporated by reference to
Exhibit 10.7 to the Registrant's Registration Statement on Form S-1,
File No. 33-80200, initially filed with the Securities and Exchange
Commission on June 14, 1994).**
10.32 Registrant's 1994 Restricted Stock Plan (incorporated by reference
to Exhibit 10.8 to the Registrant's Registration Statement on Form
S-1, File No. 33-80200, initially filed with the Securities and
Exchange Commission on June 14, 1994) .**
10.33 Registrant's Annual Incentive Plan (incorporated by reference to
Exhibit 10.9 to the Registrant's Registration Statement on form S-1,
File No. 33-80200, initially filed with the Securities and Exchange
Commission on June 14, 1994).**
10.34 Registrant's Retirement & Savings Plan (incorporated by reference to
Exhibit 10.14 to the Registrant's Registration Statement on Form
S-1, File No. 33-80200, initially filed with the Securities and
Exchange Commission on June 14, 1994).**
10.35 Registrant's Employee Stock Purchase Plan (incorporated by reference
to the Registrant's Registration Statement on Form S-8, File No.
33-982288, initially filed with the Securities and Exchange
Commission on October 18, 1995).**
10.36 Tax Indemnification Agreement dated June 10, 1994 (incorporated by
reference to Exhibit 10.10 to the Registrant's Registration
Statement on Form S-1, File No. 33-80200, initially filed with the
Securities and Exchange Commission on June 14, 1994).
10.37 Amendment to Tax Indemnification Agreement dated August 30, 1994
(incorporated by reference to Exhibit 10.19 to the Registrant's
Registration Statement on Form S-1, File No. 33-80200, initially
filed with the Securities and Exchange Commission on June 14, 1994).
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).
<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 (incorporated by reference to the Registrant's Form 10-K
filed with the Securities and Exchange Commission on June 22, 1998).
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.(incorporated by reference to the
Registrant's Form 10-K filed with the Securities and Exchange
Commission on June 22, 1998).
10.49 Not applicable.
10.50 Eighth Amendment and Agreement to Consignment Agreement Dated May 5,
1998, Between the Registrant and Fleet Precious Metals Inc.
(incorporated by reference to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on August 13, 1998).
10.51 Fourth Amendment To Amended And Restated Consignment Agreement Dated
May 15, 1998 Between The Registrant And Rhode Island Hospital Trust
National Bank (incorporated by reference to the Registrant's Form
10-Q filed with the Securities and Exchange Commission on August 13,
1998).
10.52 Second Amendment to Syndicated Loan Agreement Date September 2, 1998
between the Registrant and Summit Bank, First Union National Bank
and CoreStates Bank, N.A. (incorporated by reference to the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1999).
10.53 Second Revolving Replacement Note Dated September 2, 1998 between
the Registrant and Summit Bank. (incorporated by reference to the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1999).
10.54 Second Revolving Replacement Note Dated September 2, 1998 between
the Registrant and First Union National Bank (incorporated by
reference to the Registrant's Form 10-Q filed with the Securities
and Exchange Commission on February 12, 1999).
10.55 Bond Placement Agreement Dated April 29, 1998 between the Registrant
and CoreStates Securities Corp. (incorporated by reference to the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1999).
10.56 Open-end Mortgage and Security Agreement Dated April 29, 1998
between the Registrant and CoreStates Bank, N.A. (incorporated by
reference to the Registrant's Form 10-Q filed with the Securities
and Exchange Commission on February 12, 1999).
10.57 Trust Indenture Dated April 29, 1998 between the Registrant and
Dauphin Deposit Bank And Trust Company (incorporated by reference to
the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1999).
10.58 Pledge and Security Agreement Dated April 29, 1998 between the
Registrant and CoreStates Bank, N.A. (incorporated by reference to
the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1999).
10.59 Assignment of Lease Interest Dated April 29, 1998 between the
Registrant and CoreStates Bank, N.A. (incorporated by reference to
the Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1999).
10.60 Reimbursement Agreement Dated April 29, 1998 between the Registrant
and Summit Bank, First Union National Bank and CoreStates Bank, N.A.
(incorporated by reference to the Registrant's Form 10-Q filed with
the Securities and Exchange Commission on February 12, 1999).
10.61 Mortgage subordination agreement between Northampton County New Jobs
Corp, First Union National Bank ,and the Registrant dated February
18, 1999.*
10.62 Consent, Subordination and Assumption Agreement effective February
18, 1999 between the Registrant, Northampton County New Jobs Corp.
in favor of the Pennsylvania Industrial Development Authority.*
10.63 Stock Purchase Agreement by and between Piercing Pagoda, Inc. and
Richard P. Russ, dated as of August 31, 1998 . (incorporated by
reference to the Registrant's Form 8-K filed with the Securities and
Exchange Commission on September 16, 1998).
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of Registrant.*
22 Not applicable.
23 Consent of KPMG LLP, independent certified public accountants.*
24 None.
27 Financial Data Schedule. *
* Filed herewith.
** Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the last
quarter of fiscal 1999.
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 24, 1999.
PIERCING PAGODA, INC.
By: /s/ John F. Eureyecko
John F. Eureyecko
President and
Chief Operating Officer
<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
Richard H. Penske Chief Executive Officer and June 24, 1999
Chairman of the Board
(Principal Executive Officer)
/s/ John F. Eureyecko
John F. Eureyecko Director, President and June 24, 1999
Chief Operating Officer
(Principal Financial and
Accounting Officer)
/s/ Alan R. Hoefer
Alan R. Hoefer Director June 24,1999
/s/ Mark A. Randol
Mark A. Randol Director June 24, 1999
SUBSIDIARIES OF THE REGISTRANT
EARS, Inc., a Delaware corporation.
Piercing Pagoda of Florida, Inc., a Florida corporation.
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 10, 1999 relating to the consolidated balance sheets of Piercing
Pagoda, Inc. as of March 31, 1999 and 1998, 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, 1999, which report is included in the
March 31, 1999 Annual Report on Form 10-K of Piercing Pagoda, Inc.
KPMG LLP
Allentown, Pennsylvania
June 24, 1999
CJL/02-16-99 PIDA #8259
CONSENT, SUBORDINATION AND
ASSUMPTION AGREEMENT
THIS AGREEMENT is made this day of February 1998, effective as of February
18, 1999, by PIERCING PAGODA, INC., a corporation with an address at 3910 Adler
Place, P.O. Box 25007, Lehigh Valley, Pennsylvania 18002 (the "Industrial
Occupant"), and NORTHAMPTON COUNTY NEW JOBS CORP., a Pennsylvania nonprofit
corporation with an address at One S. Third Street, 7th Floor, P.O. Box 637 ,
Easton, Pennsylvania 18044 (the "Borrower"), in favor of THE PENNSYLVANIA
INDUSTRIAL DEVELOPMENT AUTHORITY, a public body corporate and politic with an
address at 480 Forum Building, Harrisburg, Pennsylvania 17120 ("PIDA").
ARTICLE I
Background
Section 1.01. The Borrower has agreed, to sell to the Industrial Occupant
certain premises situate in Northampton County, Pennsylvania, as more
particularly described on Exhibit A attached hereto and made a part hereof (the
"Premises"), subject to, and with the express assumption and agreement of the
Industrial Occupant to pay and perform any and all obligations of the Borrower
to PIDA under a certain second mortgage from Borrower to PIDA, effective as of
the same date as the effective date hereof and to be recorded in the Office of
the Recorder of Deeds of the county wherein the Premises are located (the
"Mortgage"), which Mortgage secures a loan in the amount of One Million Dollars
($1,000,000) from PIDA to the Borrower (the "Loan"), evidenced by a note from
the Borrower to PIDA dated the same date as the effective date hereof (the
"Note") and made pursuant to a Loan Agreement dated the same date as the
effective date hereof between the Borrower and PIDA (the "Loan Agreement"),
providing for the financing by PIDA of an industrial development project on the
Premises to be occupied by the Industrial Occupant.
Section 1.02. The Industrial Occupant has reviewed fully with separate
legal counsel for the Industrial Occupant the Loan Agreement, Note and Mortgage
and consents thereto and desires to assume all obligations and liabilities of
the Borrower thereunder and agrees to pay to PIDA for the account of the
Borrower the debt evidenced by the Loan Agreement and Note and secured by the
Mortgage.
<PAGE>
To induce PIDA to make the Loan and as a material and substantive
inducement to the Borrower to execute and deliver the Note, for the account of
the Industrial Occupant, to borrow proceeds of the Loan for the benefit of and
for the account of the Industrial Occupant, and to execute the Mortgage and the
Loan Agreement, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the Industrial Occupant, intending to be legally
bound, represents and warrants to PIDA and the Borrower and agrees with PIDA and
the Borrower as follows:
ARTICLE II
Representations and Warranties of the Industrial Occupant
The Industrial Occupant makes the following representations and warranties
to PIDA and the Borrower:
Section 2.01. Corporate Organization. The Industrial Occupant is a duly
organized and validly existing corporation in good standing under the laws of
State of Delaware. If incorporated in a jurisdiction other than the Commonwealth
of Pennsylvania, Industrial Occupant is duly qualified to conduct business in
the Commonwealth of Pennsylvania as a foreign corporation. The Industrial
Occupant has full corporate power and authority to own its property and assets
and to transact the business in which it is engaged or currently proposes to
engage, including without limitation the business and operations referred to in
the Application.
Section 2.02. Power and Authority. The Industrial Occupant has the
corporate power to execute and deliver, or to assume, as the case may be, and to
carry out, the terms and provisions hereof and of each of the Loan Documents to
which it is a party or the terms of which it has assumed hereunder, and to carry
on the business and operations referred to in the Application. The Industrial
Occupant has taken all necessary corporate action (including obtaining any
consent of stockholders required by law or by its Articles or Certificate of
Incorporation or bylaws) to authorize the execution and delivery, or the
assumption, as the case may be, and the performance, by the Industrial Occupant,
of this Agreement and each of the Loan Documents to which it is a party or the
terms of which the Industrial Occupant has assumed, the incurrence of the
obligations of the Industrial Occupant hereunder and thereunder, and the
carrying on of the business and operations stated in the Application. This
Agreement and each of the Loan Documents to which the Industrial Occupant is a
party or the terms of which the Industrial Occupant has assumed constitute the
duly authorized, legal and valid and binding obligations of the Industrial
Occupant, except as the enforceability thereof may be limited by bankruptcy,
insolvency or other substantially similar laws of general application relating
to or affecting the enforcement of creditors' rights or by general principles of
equity.
Section 2.03. Necessary Approvals. Except such approvals, if any, as are
listed or described in Exhibit 2.03 hereto, which have been obtained, are in
full force and effect and evidence of which has been furnished to PIDA, no
approval is required to authorize, or is otherwise required in connection with,
(i) the execution and delivery, or the assumption, as the case may be, by the
Industrial Occupant of, (ii) the performance, by the Industrial Occupant, of, or
(iii) the legality, validity,
<PAGE>
binding effect or enforceability of the obligations of the Industrial
Occupant under, this Agreement or the Loan Documents to which the Industrial
Occupant is a party or the terms of which it has assumed, including without
limitation the making of any of the payments provided for herein or therein, the
absence of which approval could have a material adverse effect on the ability of
the Industrial Occupant to make payments or perform and observe its other
material obligations hereunder or thereunder. The Industrial Occupant is not
aware of any circumstances as a result of which any approval heretofore granted
may be revoked or cancelled.
<PAGE>
Section 2.04. Loan Documents Consistent With Law and Agreements. The
Industrial Occupant is not in default under any agreement to which it is a party
or by which it is bound which default could have a material adverse effect on
the ability of the Industrial Occupant to make payments or perform and observe
its other material obligations under this Agreement or any of the Loan Documents
to which it is a party or the terms of which it has assumed or to carry on
operations at the Project as stated in the Application. The execution and
delivery, or the assumption, as the case may be, and the performance, by the
Industrial Occupant, of this Agreement and the Loan Documents to which the
Industrial Occupant is a party or the terms of which it has assumed, the
consummation of the transactions contemplated in this Agreement and the Loan
Documents, and the compliance by the Industrial Occupant with the terms and
provisions of this Agreement and the Loan Documents to which it is a party or
the terms of which it has assumed, and the carrying on of operations at the
Project as stated in the Application, do not (i) contravene any provision of
law, statute, rule or regulation to which the Industrial Occupant is subject or
any judgment, decree, franchise, order or permit applicable to the Industrial
Occupant or (ii) violate or conflict with any provision of the Articles or
Certificate of Incorporation or bylaws of the Industrial Occupant or conflict
with, or result in any breach of, any of the terms, covenants, conditions or
provisions of, or constitute a material default under, or result in the creation
or imposition of (or the obligation to create or impose) any lien upon any of
the assets or revenues of the Industrial Occupant pursuant to the terms of, any
indenture, mortgage, deed of trust, agreement or other instrument to which the
Industrial Occupant is a party or by which it is bound or to which it may be
subject.
Section 2.05. Litigation. There are no court actions, suits or
proceedings, and no proceedings before any arbitral tribunal or by or before any
governmental commission, board, bureau or other administrative agency, pending
or (to the knowledge of the Industrial Occupant) threatened against the
Industrial Occupant or any affiliate which could have a material adverse effect
on the financial condition or operations of the Industrial Occupant or the
ability of the Industrial Occupant to perform its obligations under this
Agreement or the Loan Documents to which it is a party or the terms of which it
has assumed, or to carry on operations at the Project as stated in the
Application.
Section 2.06. Project Agreements. The Industrial Occupant has furnished to
PIDA originals or true and correct copies of all material written agreements
relating to the acquisition, construction or financing of the Project (including
any amendments thereto) (collectively, the "Project Documents") or, to the
extent PIDA shall have permitted summaries of Project Documents to be furnished
in lieu of the actual documents, fair and accurate summaries of the Project
Documents.
<PAGE>
All Project Documents are in full force and effect. There are in
existence no agreements, laws, rules, regulations, orders, judgments,
injunctions, decrees, resolutions, determinations, awards or other instruments
whatsoever amending, supplementing or affecting, or affecting the rights and
obligations of the Industrial Occupant under, the Loan Documents or the Project
Documents, in a manner which could have a material adverse effect on the ability
of the Industrial Occupant to make payments or to perform and observe its other
material obligations under, this Agreement, or under the Project Documents
and/or Loan Documents to which it is a party or by which it is bound or the
terms of which it has assumed.
Section 2.07. Prepayments. The Industrial Occupant has not prepaid
any amount payable under the Premises Agreement.
<PAGE>
Section 2.08. No Default For Borrowed Money. No default with respect to
any agreement pursuant to which the Industrial Occupant has borrowed money or
(except for (i) endorsement of negotiable instruments in the ordinary course of
business or (ii) guaranties in the ordinary course of business of travel or
relocation expenses of employees in non-material amounts) guaranteed the
obligations of others has occurred and is continuing as of the date hereof.
Section 2.09. Financial Statements and Financial Condition. All financial
statements of the Industrial Occupant (including all related notes) and all
supplementary financial information delivered to PIDA fairly present what they
purport to present as of the dates and for the respective fiscal periods
presented, and were prepared in accordance with generally accepted accounting
principles consistently applied, except as disclosed in such financial
statements or in Exhibit 2.09 hereto. The Industrial Occupant has no material
liabilities, direct or indirect, fixed or contingent, as of the date of such
financial statements which are not reflected therein. Except as disclosed in
Exhibit 2.09 hereto and consented to by PIDA there has been no material adverse
change in the financial condition of the Industrial Occupant from that disclosed
in the most recent annual financial statements delivered to PIDA prior to the
initial approval of the Loan by the PIDA Board.
Section 2.10. Taxes. The Industrial Occupant has filed all tax returns and
reports required to be filed by it with the United States of America and the
Commonwealth of Pennsylvania, and, where the failure to file such returns or
reports may have a material adverse effect on the financial condition or results
of operations of the Industrial Occupant, any other jurisdiction having the
power to require filing of such returns or reports, through the date hereof and
is current in the payment of all monies due to such jurisdictions, whether as
taxes or otherwise, unless the obligation to file such return or report or pay
such tax is being contested by an appropriate administrative or judicial appeal
or proceeding being conducted diligently in good faith. With respect to any such
appeal or proceeding to which the United States of America or the Commonwealth
of Pennsylvania is a party, the Industrial Occupant has posted or caused to be
posted a bond or other security satisfactory to PIDA in an amount which is at
least equal to the sum which is the subject of the appeal or proceeding,
together with all interest, costs, and charges relating thereto.
Section 2.11. Employee Benefits.
(a) Any employee pension benefit plans and employee welfare benefit
plans, collectively referred to as employee benefit plans, within the meaning of
the Employee Retirement Income Security Act of 1974, as amended
<PAGE>
("ERISA") maintained by the Industrial Occupant or any subsidiary of
the Industrial Occupant ("Subsidiary"), comply in all material respects with the
reporting and disclosure and fiduciary responsibility provisions of Title I of
ERISA.
(b) Except as disclosed in Exhibit 2.11 hereto, no "prohibited
transaction" (as defined in either ERISA or Section 4975 of the Internal Revenue
Code (the "Code")) potentially having a material adverse effect on the
continuing operations of the Industrial Occupant, has occurred with respect to
any employee benefit plan sponsored or maintained by the Industrial Occupant or
any Subsidiary or (except with respect to any multi-employer pension or benefit
plan to which the Industrial Occupant or any Subsidiary contributes, as to which
no representation or warranty is expressed) to which the Industrial Occupant or
any Subsidiary contributes, nor is any person contractually bound to enter into
any such prohibited transaction.
<PAGE>
(c) Except as disclosed in Exhibit 2.11 hereto, the Industrial
Occupant and its Subsidiaries have filed or (except with respect to any
multi-employer pension or benefit plan to which the Industrial Occupant or any
Subsidiary contributes, as to which no representation or warranty is expressed)
caused to be filed on a timely basis all returns, reports, statements, notices,
declarations, and other documents required by any governmental agency, whether
local, state or federal (including without limitation the Internal Revenue
Service, the Department of Labor, the Pension Benefit Guaranty Corporation and
the Securities and Exchange Commission) with respect to each employee benefit
plan sponsored or maintained by the Industrial Occupant or any Subsidiary or to
which the Industrial Occupant or any Subsidiary contributes, where a failure to
file may potentially have a material adverse effect on the continuing operations
of the Industrial Occupant.
(d) Except as described in Exhibit 2.11 hereto, and except for any
multi-employer pension or benefit plan not maintained or sponsored by Industrial
Occupant or its Subsidiaries but to which Industrial Occupant or its
Subsidiaries contributes, as to which no representation or warranty is
expressed, (i) all employee pension benefit plans maintained or sponsored by the
Industrial Occupant and each Subsidiary, or to which the Industrial Occupant or
any Subsidiary contributes, meet, as of the date hereof, the minimum funding
standards of Section 302 of ERISA and Section 412 of the Code, and (ii) no
"reportable event", as defined in Section 4043 of ERISA, potentially having a
material adverse effect on the continuing operations of the Industrial Occupant,
has occurred with respect to any such plan.
(e) The foregoing representations and warranties of the Industrial
Occupant as to itself and its Subsidiaries set forth in this Section are
accurate not only with respect to the Industrial Occupant and each Subsidiary
but with respect to each other member of any "controlled group of corporations"
or any "group of trades or businesses under common control" (as such terms are
defined in Section 414 of the Code) of which the Industrial Occupant or any
Subsidiary is a member.
Section 2.12. Environmental Matters. With respect to the Premises, and
with respect to any other facility as defined in The Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, ("CERCLA") (a
"facility") where a breach of any of the representations and warranties
contained in this section could potentially have a material adverse effect on
the financial condition or operations of the Industrial Occupant:
<PAGE>
(a) Except as described in Exhibit 2.12 hereto, to the best
knowledge of Industrial Occupant after Due Inquiry, neither Industrial Occupant
nor any of its Affiliates (as defined below) is in violation of CERCLA, the
Superfund Amendments and Reauthorization Act of 1986, The Resource Conservation
and Recovery Act of 1976, as amended by the Hazardous and Solid Waste Amendments
of 1984, The Clean Water Act, The Toxic Substances Control Act, The Clean Air
Act, the Pennsylvania Hazardous Sites Cleanup Act, the Pennsylvania Solid Waste
Management Act, the Pennsylvania Storage Tank and Spill Prevention Act, the
Pennsylvania Worker and Community Right to Know Act, the Pennsylvania Clean
Streams Law, or any rule or regulation promulgated pursuant to any of the
foregoing statutes, or any other applicable law, statute, rule, regulation or
ordinance regulating the manufacture, use, possession, discharge or disposal of
substances injurious to the natural environment or to human health, whether
federal, state or local (collectively, as from time to time amended, the
"Environmental Laws");
<PAGE>
(b) Except as described in Exhibit 2.12 hereto, to the best
knowledge of Industrial Occupant after Due Inquiry, neither the Industrial
Occupant nor any Affiliate, or officer, employee, agent or independent
contractor of the Industrial Occupant has arranged, by contract, agreement or
otherwise, (i) for the disposal or treatment of, or (ii) with a transporter for
the transport for disposal or treatment of, any Hazardous Material owned, used
or possessed by the Industrial Occupant or any Affiliate, in a manner which
violates any applicable Environmental Laws;
(c) Except as described in Exhibit 2.12 hereto, to the best
knowledge of the Industrial Occupant after Due Inquiry, there are no Hazardous
Materials now present on the Premises that may require remediation under any
Environmental Laws;
(d) Except as described in Exhibit 2.12 hereto, neither (i) the
Industrial Occupant nor (ii) in connection with the operations of the Industrial
Occupant, any Affiliate of the Industrial Occupant, is an "operator" or, to the
best knowledge of Industrial Occupant after Due Inquiry, an "owner," (each as
defined in CERCLA) of a facility at which Hazardous Materials were disposed of;
(e) Except as described in Exhibit 2.12 hereto, to the best
knowledge of Industrial Occupant after Due Inquiry, neither (i) the Industrial
Occupant nor (ii) in connection with the operations of the Industrial Occupant,
any Affiliate of the Industrial Occupant, "owned" or "operated" (as defined in
CERCLA) any facility containing Hazardous Materials at the time such Hazardous
Materials were disposed of; and
(f) For purposes of this Agreement: "Affiliate" shall mean any
individual, corporation, partnership, joint venture, trust, or unincorporated
organization, or a government or any agency or political subdivision thereof
(collectively, a "Person") which directly or indirectly controls, or is
controlled by, or is under common control, with, the Industrial Occupant,
including, without limitation, any record or beneficial holder of more than 25%
of any class of the Industrial Occupant's equity securities and any executive
officer or person employed or engaged in a senior management capacity of
Industrial Occupant. "Control" shall mean the possession, directly or
indirectly, of the power to direct or cause
<PAGE>
the direction of the management or policies of a Person, whether through the
ownership of voting securities, by contract or otherwise. "Due Inquiry" shall
mean that the Industrial Occupant, consistent with good commercial or customary
practice, has caused to be made by a responsible officer or agent of the
Industrial Occupant appropriate inquiry among those directors, officers,
employees, agents, accountants and attorneys for the Industrial Occupant who
might reasonably be expected to have knowledge of the particular matter and,
when such matter includes the condition of the Premises or other facility, has
further undertaken appropriate inquiries into the present and past ownership and
uses thereof. "Hazardous Materials", shall include, without limitation, asbestos
(including asbestos in friable form), polychlorinated biphenyls, petroleum
products, flammable or explosive materials, radioactive materials, hazardous
materials, hazardous waste, hazardous or toxic substances or related materials,
each as defined under or pursuant to any Environmental Law.
<PAGE>
Section 2.13. Bankruptcy, etc. Except as disclosed in Exhibit 2.13 hereto,
neither Industrial Occupant nor any Affiliate of Industrial Occupant has within
seven (7) years prior to the date hereof (i) filed any voluntary petition for
relief under the U.S. Bankruptcy Code or any state insolvency law or any law of
similar import of any nation or political subdivision thereof (any such law, a
"Bankruptcy Law"); (ii) had any involuntary petition filed against it under any
Bankruptcy Law which was not dismissed within 60 days subsequent to the filing
thereof; (iii) was adjudicated bankrupt or insolvent under any Bankruptcy Law;
(iv) entered into any assignment or composition for the benefit of creditors;
(v) entered into any transaction voidable under the Uniform Fraudulent
Conveyance Act or any law of similar import; (vi) admitted its inability to pay
its debts as such debts come due; or (vii) sought to take advantage of any
moratorium law then in effect.
Section 2.14. Criminal Convictions. Except as disclosed in Exhibit 2.14
hereto, neither Industrial Occupant, nor to Industrial Occupant's best knowledge
after Due Inquiry, any controlling shareholder (if Industrial Occupant is a
corporation required to file periodic reports under the U.S. Securities Exchange
Act of 1934, as amended from time to time (the "Exchange Act")), or any record
or beneficial holder of more than 10% of any class of Industrial Occupant's
equity securities (if Industrial Occupant is not required to file periodic
reports under the Exchange Act), director, officer or person employed or engaged
by Industrial Occupant in a senior management capacity or as a manager or
comptroller of the Project, has been convicted by any court of any felony or any
misdemeanor involving theft, dishonesty, deception, false swearing, or the
filing or submission of any false or misleading information to any agency of
government.
Section 2.15. Occupancy Agreements. Except for the agreements listed on
Exhibit 2.15 hereto, there exist no agreements between the Industrial Occupant
and any other person, corporation or other entity regarding use or occupancy of
any portion of the Premises. The Industrial Occupant has requested the Borrower
to acquire title to the Premises and convey the Premises to Industrial Occupant
as of the date hereof by the Deed solely for the purpose of obtaining the Loan,
all benefit of which will be received by the Industrial Occupant. Such title as
the Borrower holds to the Premises is solely as security for the Loan being made
by PIDA to Borrower and for that certain loan in the principal sum of $1,980,000
given by CORESTATES BANK, N.A. to the Borrower/Industrial Occupant, dated
, exclusively for Industrial Occupant's
benefit. Borrower has not had, does not have, and will not have any right to
occupy or access to the Premises or control or right to control any of the
operations of Industrial Occupant thereon.
<PAGE>
Section 2.16. Permits. The construction of the Project as provided in the
Application, the use of the Project for the purposes stated in the Application,
and the operation of the Project, comply in all respects with, and are lawful,
permitted and conforming uses under, all applicable building, fire, safety,
subdivision, zoning, sewer, environmental, securities, health, insurance and
other laws, ordinances, rules, regulations and plan approval conditions of any
governmental, public or other body or authority having jurisdiction over the
Project except where failure to so comply will not have a material adverse
effect on operations to be carried on at the Project.
Except for (i) a permit for occupancy of the Project to be issued by
the Pennsylvania Department of Labor and Industry (where the Project is not
complete as of the date hereof) and (ii) the permits specifically identified in
Exhibit 2.16 hereto, the Industrial Occupant has received all material
administrative permits required for the operations to be carried on at the
Project, including without limitation zoning permits and permits under all
Environmental Laws. Except as specifically identified on Exhibit 2.16 hereof,
the Industrial Occupant, after Due Inquiry, has no reason to believe that any
required permits not yet obtained will not be timely issued in the ordinary
course of business of the issuing agency.
<PAGE>
Section 2.17. Necessary Technology, etc. Except as stated in Exhibit 2.17
hereto, to the best knowledge of the Industrial Occupant after Due Inquiry, the
Industrial Occupant has possession of or ready access to all resources it will
require for operations at the Project, including without limitation working
capital, raw materials, labor (possessing necessary skills), machinery,
equipment, technology, communications, patents, trademarks and other
intellectual property.
Section 2.18. No Violation. Except as disclosed in Exhibit 2.18 hereto, to
the best knowledge of the Industrial Occupant after Due Inquiry there is no
violation, nor is there notice or other record of any violation, of any zoning,
subdivision, environmental, building or other statute, ordinance, regulation,
restrictive covenant or other restriction applicable to the Project.
Section 2.19. No Liens. There exist no liens, encumbrances or other
charges against the Project (including statutory and other liens of mechanics,
workers, contractors, subcontractors, suppliers, taxing authorities and others),
except the Mortgage and the liens listed on Exhibit 2.19 hereto; and the
Industrial Occupant has not made a contract or arrangement of any kind, the
performance of which by the other party thereto could give rise to a lien on the
Project by operation of law or otherwise except such as are adequately and fully
covered by PIDA's title insurance insuring the lien of the Mortgage.
Section 2.20. Utilities and Access. All utility services necessary for
construction and operation of the Project, including water supply, storm and
sanitary sewer facilities, gas, electricity and telephone facilities are, or
prior to the projected Project completion date will be, available within the
boundaries of the Project; and all roads necessary for the full utilization of
the Project for their intended purposes either have been completed or the
necessary rights-of-way therefor have been acquired by the appropriate
governmental authority or others or have been or will, prior to the projected
date of occupancy of the Project, be dedicated to public use and accepted by
such governmental authority, and all necessary steps have been taken by the
Industrial Occupant and all such governmental authority or others to assure
complete construction and installation thereof by the projected date of
occupancy of the Project.
<PAGE>
Section 2.21. Information Furnished Accurate. To the best knowledge of
Industrial Occupant after Due Inquiry, all information supplied directly or
indirectly by the Industrial Occupant to PIDA on or prior to the date hereof,
including without limitation the Application, as of the respective dates of such
materials were, and as of the date hereof, are true and accurate in all material
respects and did not and do not contain any untrue statement of a material fact
or omit to state any material fact necessary to make the statements therein not
misleading, provided that (i) the statements therein describing documents and
agreements are summaries only and such summaries are qualified by reference to
such documents and agreements, (ii) financial statements and other statements
expressly effective as of a particular date prior to the date when furnished are
warranted only to be true and accurate or (in the case of financial statements)
fairly to present what they purport to present, in either case as of the
effective date thereof, and (iii) to the extent any such information therein
provided by the Industrial Occupant was based upon or constitutes a forecast,
projection or other data which by its nature is uncertain, the Industrial
Occupant represents only that it acted in good faith and utilized due and
careful consideration and the best information known to it after Due Inquiry in
the preparation of such information
ARTICLE III
Assumption Of Obligations
Section 3.01. Assumption of Obligations. The Industrial Occupant for
itself, its successors and assigns: (i) hereby assumes all obligations of the
Borrower to make payments and discharge all obligations, expenses, costs and
liabilities of the Borrower in accordance with the terms and conditions of the
Note, the Mortgage and the Loan Agreement, as if the Industrial Occupant itself
had executed the Note, the Mortgage, and the Loan Agreement; (ii) consents and
agrees that its liability to pay and perform in accordance with the terms of the
Note, the Mortgage and the Loan Agreement shall continue until the Loan,
together with any and all interest, penalties and costs thereon, is paid in full
and all obligations are performed; (iii) consents and agrees that PIDA may
enforce against the Industrial Occupant the obligations of the Borrower assumed
hereby without any restriction or limitation (A) arising from any provision of
the Note restricting enforcement of certain liabilities thereunder (including,
without limitation, indemnification obligations arising under Sections 4.07 or
4.20 hereof) against assets of the Borrower other than the Borrower's interest
in the Premises, or (B) arising from the Loss Sharing Agreement effective as of
June 4, 1980 between the Borrower and PIDA, under which PIDA has agreed, among
other things, to exhaust remedies against the Industrial Occupant and any
Guarantor before pursuing remedies against the assets of the Borrower other than
the Premises; and (iv) assumes and covenants to perform any and all obligations,
promises and covenants of the Borrower contained in the Note, the Mortgage and
the Loan Agreement, as if the Industrial Occupant itself had executed the Note,
the Mortgage, and the Loan Agreement, except those obligations, promises and
covenants which relate to the internal organization of the Borrower and
therefore, by their nature, can only be performed by the Borrower.
<PAGE>
Section 3.02. Subordination of Interest. The Industrial Occupant hereby
consents for itself, its successors and assigns to the Loan Agreement, Note, and
Mortgage, agrees that the terms and provisions hereof (including, without
limitation, each of the representations, warranties and covenants of Industrial
Occupant herein) shall be deemed included in the Loan Agreement, Note and
Mortgage and shall be enforceable under the Loan Agreement, Note and Mortgage as
though Industrial Occupant had executed the Loan Agreement, Note and Mortgage
and the terms and provisions hereof were expressly set forth in the Loan
Agreement, Note and Mortgage, and agrees that whatever right, title and interest
which it, its successors and assigns may have in and to the Premises under the
Agreement or otherwise shall be, and the same are hereby expressly made subject
and subordinate to the lien of the Mortgage and any other judgment, lien or
encumbrance pursuant to the Note or Loan Agreement.
ARTICLE IV
Special Covenants of the Industrial Occupant
The Industrial Occupant covenants and agrees as follows:
Section 4.01. Necessary Machines. The Industrial Occupant will
supply or cause to be supplied all machinery and/or equipment necessary for
the operation of the Project.
<PAGE>
Section 4.02. No Removal of Jobs. The establishment of the Project by the
Borrower and the Industrial Occupant at the Premises will not cause the removal
of an industrial or manufacturing plant or facility or research and development
facility or agricultural enterprise controlled directly or indirectly by the
Industrial Occupant or any Affiliate from one area of the Commonwealth of
Pennsylvania to another area of the Commonwealth, nor result in the reduction of
the number of employees at any other plant controlled by the Industrial Occupant
or any Affiliate currently located in the Commonwealth of Pennsylvania.
Section 4.03. Operations and Number of Jobs. The Industrial Occupant will
create, or retain, as the case may be, at the Premises within three years from
the date of the grant of a permit for occupancy of the Premises by the
Department of Labor and Industry, no less than the number of jobs specified to
be created or retained in the Application.
Section 4.04. Certificate re Jobs. The Industrial Occupant will annually
provide PIDA with a certificate executed by an authorized officer setting forth
the number of employees, and their respective job classifications (skilled,
semi-skilled and unskilled), employed by the Industrial Occupant or any
subsidiary during the previous year at the Project, together with such other
related information as PIDA may request.
Section 4.05. Nondiscrimination. The Industrial Occupant and its
subsidiaries will not discriminate against any employee or against any
applicant for employment because of race, religion, color, handicap,
ancestry, national origin, sex or age, in any manner, including but not
limited to the following activities: employment; upgrading, demotion or
transfer;
<PAGE>
recruitment or recruitment advertising; layoff or termination; rates of pay or
other forms of compensation; and selection for training, including
apprenticeship. The Industrial Occupant hereby accepts and agrees to be bound by
the nondiscrimination provisions set forth in Exhibit 4.05 hereto, and will
cause comparable nondiscrimination provisions to be inserted into all Project
contracts.
Section 4.06. Employee Benefit Plans. The Industrial Occupant and its
Subsidiaries shall: (i) fund all of their employee pension benefit plans, to the
extent required, in accordance with the minimum funding standards of Section 302
of ERISA and Section 412 of the Code, except where the failure to do so would
not have a material adverse effect on the continuing operations of the
Industrial Occupant; (ii) make all payments of contributions to all employee
benefit plans within the time periods established in ERISA and the Code, except
where the failure to do so would not have a material adverse effect on the
continuing operations of the Industrial Occupant; (iii) furnish PIDA, upon its
request, with copies of all reports or other statements filed with the United
States Department of Labor, the Internal Revenue Service or the Pension Benefit
Guaranty Corporation, or any other agencies, whether federal, state, or local,
with respect to all employee benefit plans; (iv) advise PIDA within ten days of
the occurrence of any "reportable event" or "prohibited transaction," within the
respective meanings of these terms in ERISA and the Code, with respect to any
employee benefit plan to which the Industrial Occupant or any Subsidiary
contributes, potentially having a material adverse effect on the continuing
operations of the Industrial Occupant; and (v) promptly advise PIDA of any audit
or investigation of any employee benefit plans by the Internal Revenue Service
or Department of Labor or any other governmental agency or any threatened or
proposed action by any such agency affecting the status of, and deductibility of
contributions to, any employee benefit plans, potentially having in any such
case a material adverse effect on the continuing operations of Industrial
Occupant.
<PAGE>
Section 4.07. Environmental Compliance.
(a) Except as described on Exhibit 2.12 hereto, the Project and the
Industrial Occupant's operations at the Premises shall comply with all
Environmental Laws in all material respects (including, without limitation, in
all respects having a significant effect on the quality of air or surface or
ground water in the vicinity of the Premises).
(b) Without limiting the generality of the foregoing, the Industrial
Occupant shall keep the Project and Premises free of Hazardous Materials except
to the extent that such Hazardous Materials are stored and/or used in compliance
with all Environmental Laws. The Industrial Occupant shall not suffer or permit
the Premises to be used to generate, manufacture, refine, transport, treat,
dispose of, transfer, produce or process Hazardous Materials in violation of any
Environmental Laws. In addition, Industrial Occupant shall not suffer or permit
any tenant, subtenant or occupant to release any Hazardous Materials onto the
Premises or onto adjacent property in violation of any Environmental Laws.
(c) The Industrial Occupant shall immediately upon obtaining
knowledge of any of the following notify the appropriate regulatory agency in
writing, with a copy to PIDA:
(i) the release of any Hazardous Material or any other
substance regulated by the Environmental Laws, from, on or about the Premises in
violation of any Environmental Law;
<PAGE>
(ii) receipt by the Industrial Occupant, or any tenant,
subtenant or occupant of the Premises, of any notice concerning the Premises of
any violation of any applicable Environmental Law;
(iii) any violation affecting the Project or the Premises
of any applicable Environmental Law; and
(iv) any claim or claims made against the Industrial Occupant
relating to the Project or the Premises relating to damage, contribution, cost
of recovery, compensation, loss or injury resulting from any Hazardous Material
or any other substance regulated by any applicable Environmental Law; provided
that notice to PIDA shall not be required pursuant to this Section 4.07 so long
as (A) the business of Industrial Occupant carried on at the Project is of a
character that, notwithstanding exercise of all possible care on the part of
Industrial Occupant, routinely produces discharges regulated under applicable
Environmental Laws, (B) such release, claim or violation relates to a discharge
of the character referred to in clause (A) hereof, and (C) such release, claim
or violation will not have a material adverse effect on the operations being
carried on at the Project or the operations or financial condition of the
Industrial Occupant.
(d) The Industrial Occupant, at its sole expense, shall conduct and
complete all investigations, studies, sampling and testing, and all removal and
other actions necessary to clean up and remove all Hazardous Materials on,
under, from or affecting the Project or the Premises if required by and in
accordance with all applicable federal, state and local laws, ordinances, rules,
regulations and policies, in accordance with the orders and directives of all
federal, state and local governmental authorities, to the reasonable
satisfaction of PIDA. The Industrial Occupant shall at all times keep the
Project and the Premises free of any lien imposed pursuant to any Environmental
Law including, without limitation, any Environmental Law relating to any
Hazardous Material.
<PAGE>
(e) The Industrial Occupant shall indemnify, defend and hold
harmless the Borrower, PIDA, and the Commonwealth of Pennsylvania and their
respective employees, agents, officers and directors, including, without
limitation, any engineer or environmental consultant retained by Borrower or
PIDA (such parties collectively, "Indemnified Parties"), from and against any
claims, demands, penalties, fines, liabilities, settlements, damages, costs or
expenses of whatever kind or nature, known or unknown, contingent or otherwise,
including without limitation reasonable attorney fees, fees of environmental
consultants and laboratory fees, arising out of or in any way related to the
following matters: (i) the presence, disposal, release or threatened release of
any Hazardous Materials, on, over, under, from or affecting the Project or the
Premises or the soil, water, vegetation, buildings, personal property, persons
or animals thereon; (ii) any personal injury (including wrongful death) or
property damage (real or personal) arising out of or related to any Hazardous
Materials on, over, under, released from or affecting the Project or the
Premises; (iii) any lawsuit brought or threatened, settlement reached or
governmental order relating to such Hazardous Materials with respect to the
Project or the Premises; (iv) any violation of laws, orders, regulations,
requirements or demand of government authorities, which are based upon or in any
way related to any Hazardous Materials on, over, under, released from or
affecting the Project or the Premises; and/or (v) the breach of any warranty,
representation or covenant of the Industrial Occupant contained in this
Agreement relating to the Environmental Laws.
<PAGE>
(f) (i) In the event PIDA shall have reasonable cause to suspect
that the Industrial Occupant has failed to comply with the terms of this
Agreement, or shall have reasonable cause to suspect that any Hazardous
Materials exist on the Premises in violation of any Environmental Laws, PIDA may
direct the Industrial Occupant to obtain, or if the Industrial Occupant shall
have failed or refused to so obtain after thirty (30) days notice from PIDA,
PIDA may obtain, an environmental audit of the Premises, at the sole expense of
the Industrial Occupant; (ii) the nature and scope of the environmental audit
shall be determined by PIDA, in its reasonable judgment; (iii) the Industrial
Occupant shall permit PIDA and PIDA's agents and employees access to the Project
and the Premises for the purpose of monitoring or conducting the environmental
audit, as the case may be, and shall otherwise reasonably cooperate and provide
such additional information as may be requested by PIDA or its agents and
employees; (iv) the Industrial Occupant shall comply with all reasonable
recommendations relating to amelioration of violation of any Environmental Laws
contained in the environmental audit, including, but not limited to, any
recommendations for additional testing or studies to detect the presence of
Hazardous Materials or contamination caused by Hazardous Materials, at the sole
cost and expense of the Industrial Occupant; (v) in the event the Industrial
Occupant fails to pay for the cost of the environmental audit or any remedial
actions or additional testing recommended thereby, relating to amelioration of
violation of any Environmental Laws, PIDA may pay for same; and (vi) each
payment made by PIDA shall become a part of the indebtedness evidenced by the
Note and secured by the Mortgage, shall be due and payable upon demand, and
shall bear interest at the default rate of interest established in the Note,
until paid in full by the Industrial Occupant.
<PAGE>
(g) The liability under this Section 4.07 shall in no way be limited
or impaired by (i) any extension of time for performance required by any of the
Loan Documents, (ii) any sale, assignment or foreclosure of the Note or any sale
or transfer of all or part of the Project or the Premises, (iii) the discharge
of the Note, (iv) any exculpatory provisions in any of the Loan Documents
limiting PIDA's recourse to any other security, (v) the accuracy or inaccuracy
of the representations and warranties made by the Industrial Occupant; (vi) the
release of the Industrial Occupant or any other person from performance or
observance of any of the agreements, covenants, terms or conditions contained in
any of the Loan Documents by operation of law, PIDA's voluntary act (other than
the execution and delivery by PIDA of an instrument of release expressly and
specifically referring to Industrial Occupant's indemnification obligations), or
otherwise, (vii) the release or substitution in whole or in part of any security
for the Note; or (viii) PIDA's failure to file any mortgage or UCC financing
statements (or PIDA's improper filing of any thereof) or to otherwise perfect,
protect, secure or insure any mortgage, security interest or lien given as
security for the Note; and, in any such case, whether with or without notice to
the Industrial Occupant and with or without consideration.
(h) The indemnity provisions contained in this Section 4.07 hereof
shall survive any judicial foreclosure, foreclosure by power of sale, deed in
lieu of foreclosure, transfer of the property by the Industrial Occupant or
PIDA, and payment of the Loan in full, provided, however, that such indemnity
provisions shall at no time accrue to, or be construed to benefit, any other
third-party entity (other than an Indemnified Party or a successor in interest
or assign of PIDA) no matter how such other third-party entity obtains title or
any interest in the Project or Premises.
<PAGE>
The liability covered by the indemnity provision shall include, but
not be limited to, losses sustained by an Indemnified Party for (i) amounts
owing under the Loan and the Loan Documents, (ii) amounts arising out of
personal injury or death claims, (iii) amounts charged to such Indemnified Party
for any environmental or Hazardous Materials clean up costs and expenses, liens,
or other such charges or impositions, (iv) payment for fees, court costs,
environmental tests and design studies, and (v) any other amounts reasonably
expended by any such Indemnified Party.
Section 4.08. Compliance with Agreements and Laws; Payment of Obligations.
The Industrial Occupant will act in accordance with all applicable agreements,
laws, rules, regulations, orders, judgments, injunctions, decrees, resolutions,
permits, franchises, determinations or awards of any administrative or
governmental authority or administrative or governmental organization,
non-compliance with which could have a material adverse effect on the ability of
the Industrial Occupant to carry on the operations at the Project contemplated
in the Application or make payments or perform and observe its other material
obligations under any of the Loan Documents.
The Industrial Occupant will pay and discharge all bills, claims and
charges relating to the Project or the Premises, including without limitation
claims for taxes and claims of laborers, mechanics and materialmen
(collectively, "Project Claims"), prior to the time the holder of any Project
Claim lawfully may cause any judgment or writ of execution to be filed or lodged
against the Premises as a result of such Project Claim.
Section 4.09. Maintenance and Operations of Project. The Industrial
Occupant will maintain and diligently operate the Project in a good and
workmanlike manner consistent with sound operating procedures, and cause all
machinery, equipment and facilities of any kind now or hereafter forming part of
the Project or necessary for the development thereof or the operation or
maintenance of the Project, to be provided and to be kept in good and efficient
operating condition, and all repairs, replacements, additions and improvements
thereto required to such end to be promptly made.
<PAGE>
The Industrial Occupant will not permit, commit or suffer any
material waste with respect to the Project, nor use or permit the use of the
Project for any unlawful purpose or any purpose other than (i) the purpose
stated in the Application or (ii) a purpose eligible, at the time of
commencement thereof, for financing by PIDA under the PIDA Act, regulations,
statements of policy, guidelines and interpretations of the PIDA Board and staff
as in effect from time to time ("PIDA-Eligible") or permit any nuisance to exist
on the Premises, and not sell, transfer, lease, mortgage, pledge, convey or
otherwise dispose of the Project or Premises or any interest therein except with
the written consent of PIDA.
The Industrial Occupant will carry on in good faith at the Premises
substantial PIDA-Eligible manufacturing, industrial or other activities.
Section 4.10. Preservation of Corporate Existence, etc. Except as
otherwise permitted in Section 4.21, the Industrial Occupant will (a) maintain
and preserve its corporate existence and the right to carry on its business with
respect to the Project, and (b) duly procure and maintain all necessary
licenses, franchises, permits and other documents necessary or appropriate in
connection therewith and all necessary renewals and extensions thereof.
<PAGE>
Section 4.11. Inspection. The Industrial Occupant will allow upon
reasonable prior written notice by PIDA to the Industrial Occupant, any
representative of PIDA to visit and inspect the Project and all or any of the
facilities or operations thereof, all at such reasonable times and as often as
PIDA or any such representative may request.
Section 4.12. Financial Statements. During the term of the Loan,
the Industrial Occupant will provide PIDA with:
(a) financial statements for the Industrial Occupant within one
hundred twenty (120) days after the close of each fiscal year including balance
sheets, statements of income and reconciliations of equity, in accordance with
generally accepted accounting principles, reviewed by an independent certified
public accountant satisfactory to PIDA, provided that if the Industrial Occupant
is a corporation subject to the reporting requirements of the Exchange Act, the
Industrial Occupant's obligation under this paragraph shall be satisfied by
delivery to PIDA of the financial statements required to be filed by the
Industrial Occupant under the Exchange Act in its annual reports;
(b) with reasonable promptness, such other information respecting
the business, operations and condition (financial or otherwise) of the
Industrial Occupant as PIDA may from time to time reasonably request, including
information relating to the Project; and
(c) with reasonable promptness, after it becomes known to the
Industrial Occupant, reasonably complete information on material adverse
developments which may reasonably be expected to threaten the completion or
continued operation of the Project.
Section 4.13. Compliance Certificates. If PIDA shall so request, the
Industrial Occupant will provide PIDA with annual Compliance Certificates
executed by officers authorized to execute and deliver the same within 120 days
of each fiscal year's end reciting compliance with representations, warranties
and covenants.
Section 4.14. Insurance. The Industrial Occupant will maintain the
insurance required by the Mortgage.
<PAGE>
Section 4.15. Assignment and Subleases. Except as expressly permitted in
writing by PIDA, the Industrial Occupant shall not assign or sublease any
portion of the Premises, and shall not lease any portion of the Premises to or
permit any portion thereof to be occupied by any person other than Industrial
Occupant, and in no event shall the portion of the Project occupied by persons
other than the Industrial Occupant exceed 30% of the leasable space of the
Project. In the event any portion of the Project is leased, subleased or
assigned to or otherwise occupied by any person other than the Industrial
Occupant, the Industrial Occupant shall pay to PIDA as a prepayment under the
Note, in addition to any other payments required thereunder, 50% of (i) the
gross rent or equivalent charges received by the Industrial Occupant relating to
such occupancy, less only (ii) the proportionate amount of taxes, insurance, and
utilities allocable to the portion of the Premises being so leased, subleased or
assigned.
Section 4.16. Direct Payment. The Industrial Occupant will make
all payments assumed by it pursuant to Section 3.01 hereof directly to PIDA,
at such address as PIDA may specify from time to time.
<PAGE>
Section 4.17. Accuracy of Information Supplied. The Industrial Occupant
will ensure that all information prepared by the Industrial Occupant and
supplied to PIDA or any third party under the provisions of this Agreement for
the purpose of any report or certificate to be furnished to PIDA in connection
with this Agreement or any of the Loan Documents will at the time it is supplied
be true and accurate in all material respects, except that (i) financial
statements and other statements expressly effective as of a particular date
prior to the date when furnished are required only to be true and accurate or
(in the case of financial statements) fairly to present what they purport to
present, in either case as of the effective date thereof, and (ii) to the extent
any such information is based upon or constitutes a forecast, projection or
other data which by its nature is uncertain, the Industrial Occupant is
committed only to act in good faith and utilize due and careful consideration
and the best information then known to it in preparing such information. With
respect to all information prepared by third parties and supplied by the
Industrial Occupant to PIDA and/or any third party under the provisions hereof
for the purpose of any report or certificate to be furnished to PIDA in
connection with this Agreement or any of the Loan Documents, the Industrial
Occupant shall deliver a written notice to PIDA as soon as possible if it
believes that such information is not complete and accurate in all material
respects, which written notice shall include the basis for such belief.
Section 4.18. Notice of Defaults. The Industrial Occupant will give prompt
notice to PIDA of the occurrence of any Event of Default under the Loan
Documents either on its part, or on the part of the Borrower of which the
Industrial Occupant becomes aware.
Section 4.19. Further Assurances. The Industrial Occupant will make,
execute or endorse, and acknowledge and deliver or file, all such vouchers,
invoices, notices and certifications and additional agreements, undertakings,
conveyances, transfers, assignments, financing statements, continuation
statements or further assurances, and take any and all such other actions, as
PIDA may reasonably deem necessary or advisable from time to time in connection
with the Loan or the Loan Documents to assure or confirm to PIDA and perfect all
or any part of the security for the Loan and any other obligations of the
Industrial Occupant.
<PAGE>
Section 4.20. Indemnification. To the extent permitted by applicable law,
the Industrial Occupant hereby indemnifies and holds harmless the Indemnified
Parties from and against any and all claims, damages, losses, liabilities, costs
or expenses (including all reasonable fees or expenses resulting from the
settlement of any claims or liabilities and reasonable attorneys' fees)
(collectively, "Indemnified Claims") whatsoever which the Indemnified Party may
incur (or which may be claimed against the Indemnified Party by any person or
entity whatsoever) by reason of or in connection with (a) the issuance of the
Loan, (b) any breach by the Industrial Occupant of any representation, warranty,
covenant, term or condition in, or the occurrence of any default under, this
Agreement or the Loan Documents, and (c) involvement of the Indemnified Party in
any legal suit, investigation, proceeding, inquiry or action as a consequence,
direct or indirect, of PIDA's issuance of the Loan, PIDA's or the Borrower's
entering into this Agreement or any of the Loan Documents or any other event or
transaction contemplated by any of the foregoing; provided, however, that (i)
the Indemnified Party shall within sixty (60) days of
<PAGE>
becoming aware of (A) its actual or potential liability for any Indemnified
Claim or (B) the formal assertion against it in writing of any Indemnified
Claim, have notified the Industrial Occupant of such Indemnified Claim and
tendered to the Industrial Occupant the defense of such claim; (ii) that no
Indemnified Claim shall be paid or compromised without the consent of the
Industrial Occupant, which shall not unreasonably be withheld and shall be
deemed given if the Industrial Occupant does not object, by a notice in writing
to the Indemnified Party, to the payment or compromise of such Indemnified Claim
within 10 calendar days after the Indemnified Party has given to the Industrial
Occupant notice of the proposed payment or compromise thereof, and (iii) the
Industrial Occupant shall not be required to indemnify an Indemnified Party
hereunder for any claims, damages, losses, liabilities, costs or expenses to the
extent, but only to the extent, caused by the gross negligence or willful
misconduct of such Indemnified Party.
The liability under this Section 4.20 shall in no way be limited or
impaired by (i) any extension of time for performance required by any of the
Loan Documents, (ii) any sale, assignment or foreclosure of the Note or any sale
or transfer of all or part of the Project or the Premises, (iii) the discharge
of the Note, (iv) any exculpatory provisions in any of the Loan Documents
limiting PIDA's recourse to any other security, (v) the accuracy or inaccuracy
of the representations and warranties made by the Industrial Occupant; (vi) the
release of the Industrial Occupant or any other person from performance or
observance of any of the agreements, covenants, terms or conditions contained in
any of the Loan Documents by operation of law, PIDA's voluntary act (other than
the execution and delivery by PIDA of an instrument of release expressly and
specifically referring to Industrial Occupant's indemnification obligations), or
otherwise, (vii) the release or substitution in whole or in part of any security
for the Note; or (viii) PIDA's failure to file any mortgage or UCC financing
statements (or PIDA's improper filing of any thereof) or to otherwise perfect,
protect, secure or insure any mortgage, security interest or lien given as
security for the Note; and, in any such case, whether with or without notice to
the Industrial Occupant and with or without consideration.
The indemnity provisions contained in this Section 4.20 hereof shall
survive any judicial foreclosure, foreclosure by power of sale, deed in lieu of
foreclosure, transfer of the property by the Industrial Occupant or PIDA, and
payment of the Loan in full, provided, however, that such indemnity provisions
shall at no time accrue to, or be construed to benefit, any other third-party
entity (other than an Indemnified Party or a successor in interest or assign of
PIDA) no matter how such other third-party entity obtains title or any interest
in the Project or Premises.
The liability covered by the indemnity provision shall include, but
not be limited to, losses sustained by an Indemnified Party for (i) amounts
owing under the Loan and the Loan Documents, (ii) amounts arising out of
personal injury or death claims, (iii) amounts charged to an Indemnified Party
for any environmental or Hazardous Materials clean up costs and expenses, liens,
or other such charges or impositions, (iv) payment for fees, court costs,
environmental tests and design studies, and (v) any other amounts reasonably
expended by an Indemnified Party.
<PAGE>
Section 4.21. Negative Covenants.
(a) Without the prior written consent of PIDA, the Industrial
Occupant shall not permit, allow or suffer to exist, any lien, judgment,
mortgage, or encumbrance to be placed against the Premises or any interest
therein, or enter into any agreement requiring, contemplating or providing for
placement of any such judgment, mortgage, lien or encumbrance, except (i)
mortgages, liens and encumbrances expressly provided for in the Application to
which PIDA shall not have objected in writing, and (ii) that the terms of this
Section 4.21(b) shall not be deemed to prohibit execution of any note or credit
instrument not providing for any specific lien against the Premises but
permitting confession of judgment against the Industrial Occupant subsequent to
an event of default thereunder so long as judgment is not confessed thereunder.
(b) The Industrial Occupant will not change its name without notice
to PIDA.
(c) Without the prior written consent of PIDA, the Industrial
Occupant shall not (i) merge, consolidate or divide, whether or not the
Industrial Occupant is the surviving corporation, (ii) sell, transfer, assign,
lease, mortgage, lien, pledge or otherwise convey or dispose of all or any
material part of its assets, except in the ordinary course of business, (iii)
effect a reorganization, recapitalization or reclassification of its capital
stock or equity securities the effect of which is materially to reduce tangible
net assets or shareholders' equity of Industrial Occupant, (iv) issue, redeem,
purchase or retire any of its capital stock or equity securities or grant or
issue any warrant, right or option pertaining thereto or other security
convertible into any of the foregoing, except pro rata among existing security
holders the effect of which is not materially to reduce tangible net assets or
shareholders' equity, or (v) permit any change in ownership of its capital stock
or equity securities from that previously disclosed to PIDA in connection with
the Loan.
ARTICLE V
Confession of Judgment
<PAGE>
Section 5.01. THE FOLLOWING PARAGRAPHS SET FORTH WARRANTS OF AUTHORITY FOR
AN ATTORNEY TO CONFESS JUDGMENT AGAINST THE INDUSTRIAL OCCUPANT. IN GRANTING
THIS WARRANT OF ATTORNEY TO CONFESS JUDGMENT AGAINST THE INDUSTRIAL OCCUPANT,
THE INDUSTRIAL OCCUPANT HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY, AND, ON
THE ADVICE OF THE SEPARATE COUNSEL OF THE INDUSTRIAL OCCUPANT, UNCONDITIONALLY
WAIVES ANY AND ALL RIGHTS THE INDUSTRIAL OCCUPANT HAS OR MAY HAVE TO PRIOR
NOTICE AND AN OPPORTUNITY FOR HEARING UNDER THE RESPECTIVE CONSTITUTIONS AND
LAWS OF THE UNITED STATES AND THE COMMONWEALTH OF PENNSYLVANIA, EXCEPT AS
EXPRESSLY SET FORTH HEREIN AND IN THE RULES OF THE PENNSYLVANIA RULES OF CIVIL
PROCEDURE PERTAINING TO CONFESSED JUDGMENTS, AS FROM TIME TO TIME IN EFFECT.
(A) (i) IF ANY REPRESENTATION OR WARRANTY MADE BY THE INDUSTRIAL
OCCUPANT HEREUNDER SHALL PROVE TO HAVE BEEN INCORRECT IN ANY MATERIAL RESPECT
WHEN
<PAGE>
MADE; (ii) IF INDUSTRIAL OCCUPANT SHALL FAIL, AFTER EXPIRATION OF ANY APPLICABLE
GRACE, NOTICE AND/OR CURE PERIODS, TIMELY TO MAKE ANY OF THE PAYMENTS OR
DISCHARGE ANY OF THE DUTIES OF BORROWER ASSUMED BY INDUSTRIAL OCCUPANT
HEREUNDER; OR (iii) IF INDUSTRIAL OCCUPANT SHALL FAIL IN ANY MATERIAL RESPECT TO
CARRY OUT ANY OF THE COVENANTS OF INDUSTRIAL OCCUPANT HEREUNDER OR UNDER ANY OF
THE LOAN DOCUMENTS EXECUTED AND DELIVERED BY, OR THE OBLIGATIONS UNDER WHICH
WERE ASSUMED BY, INDUSTRIAL OCCUPANT, THE BENEFITS OF WHICH WERE ASSIGNED TO
PIDA AS SECURITY FOR THE LOAN, AND SUCH FAILURE SHALL CONTINUE IN EFFECT, AFTER
NOTICE OF SUCH FAILURE TO INDUSTRIAL OCCUPANT HEREUNDER, FOR NOT LESS THAN
THIRTY DAYS: THEN, IN ANY SUCH EVENT (OF WHICH AN AFFIDAVIT ON BEHALF OF PIDA
SHALL BE SUFFICIENT EVIDENCE) INDUSTRIAL OCCUPANT HEREBY IRREVOCABLY AUTHORIZES
AND EMPOWERS ANY ATTORNEY OF ANY COURT OF RECORD IN THE COMMONWEALTH OF
PENNSYLVANIA, OR ELSEWHERE, TO APPEAR FOR AND TO ENTER AND CONFESS JUDGMENT
AGAINST THE INDUSTRIAL OCCUPANT, AT ANY TIME OR TIMES AND AS OF ANY TERM, FOR
ANY AND ALL SUMS DUE AND OWING TO PIDA BY VIRTUE OF INDUSTRIAL OCCUPANT'S
ASSUMPTION OF THE BORROWER'S OBLIGATIONS UNDER THE NOTE, MORTGAGE AND LOAN
AGREEMENT AND/OR INDUSTRIAL OCCUPANT'S OBLIGATIONS UNDER ANY OF THE LOAN
DOCUMENTS EXECUTED AND DELIVERED BY, OR THE OBLIGATIONS UNDER WHICH WERE ASSUMED
BY, INDUSTRIAL OCCUPANT, THE BENEFITS OF WHICH WERE ASSIGNED TO PIDA AS SECURITY
FOR THE LOAN, WITH OR WITHOUT DECLARATION, WITH INTEREST AND COSTS OF SUIT,
WITHOUT STAY OF EXECUTION, AND WITH REASONABLE ATTORNEY'S FEES. THE INDUSTRIAL
OCCUPANT AGREES THAT ANY OF ITS PROPERTY MAY BE LEVIED UPON TO COLLECT SAID
JUDGMENT AND MAY BE SOLD UPON A WRIT OF EXECUTION, AND HEREBY WAIVES AND
RELEASES ALL LAWS, NOW OR HEREAFTER IN FORCE, RELATING TO EXEMPTION,
APPRAISEMENT OR STAY OF EXECUTION. THE AUTHORITY HEREBY GRANTED TO CONFESS
JUDGMENT SHALL NOT BE EXHAUSTED BY ANY EXERCISE THEREOF, BUT SHALL CONTINUE FROM
TIME TO TIME AND AT ALL TIMES UNTIL THE INDUSTRIAL OCCUPANT HAS PAID ALL SUMS
REQUIRED TO BE PAID BY THE INDUSTRIAL OCCUPANT AND HAS PERFORMED ALL OF THE
OTHER OBLIGATIONS REQUIRED OF INDUSTRIAL OCCUPANT HEREUNDER.
(B) IN CASE OF ANY BREACH OF THE TERMS OF SUBSECTION (A) OF THIS
SECTION, (OF WHICH AN AFFIDAVIT ON BEHALF OF PIDA SHALL BE SUFFICIENT EVIDENCE),
THEN, AND IN ANY SUCH EVENT, ANY ATTORNEY OF ANY COURT OF RECORD OF PENNSYLVANIA
OR ELSEWHERE IS HEREBY AUTHORIZED AND EMPOWERED TO APPEAR FOR THE INDUSTRIAL
OCCUPANT AND ALL PERSONS CLAIMING UNDER OR THROUGH THE INDUSTRIAL OCCUPANT, AND
AS ATTORNEY FOR THE INDUSTRIAL OCCUPANT AND ALL PERSONS CLAIMING UNDER OR
THROUGH THE INDUSTRIAL OCCUPANT, TO SIGN AN AGREEMENT FOR ENTERING AN AMICABLE
ACTION OF EJECTMENT FOR
POSSESSION OF THE PREMISES OR ANY PART THEREOF AND TO CONFESS JUDGMENT THEREIN
AGAINST THE INDUSTRIAL OCCUPANT, IN FAVOR OF PIDA, WHEREUPON A WRIT OF
POSSESSION MAY IMMEDIATELY ISSUE FOR THE POSSESSION OF THE PREMISES, WITHOUT ANY
PRIOR COMPLAINT, WRIT OR PROCEEDING WHATSOEVER; AND FOR SO DOING THIS AGREEMENT,
OR A COPY HEREOF VERIFIED BY AFFIDAVIT, SHALL BE HIS SUFFICIENT WARRANT. THIS
POWER MAY BE EXERCISED AS OFTEN AS PIDA SHALL REQUIRE AND SHALL NOT BE EXHAUSTED
BY ONE OR MORE OR BY ANY IMPERFECT EXERCISE THEREOF.
IF FOR ANY REASON AFTER ANY SUCH ACTION HAS BEEN COMMENCED THE SAME
SHALL BE DISCONTINUED OR POSSESSION OF THE PREMISES SHALL REMAIN IN OR BE
RESTORED TO THE INDUSTRIAL OCCUPANT, PIDA SHALL HAVE THE RIGHT FOR THE SAME
DEFAULT OR ANY SUBSEQUENT DEFAULT TO BRING ONE OR MORE FURTHER AMICABLE ACTIONS
AS ABOVE PROVIDED TO COLLECT ALL SUMS DUE AND/OR TO RECOVER POSSESSION OF THE
PREMISES. PIDA MAY BRING ANY SUCH AMICABLE ACTION IN EJECTMENT BEFORE OR AFTER
JUDGMENT ON THE MORTGAGE OR ON THE NOTE, OR AFTER A SALE OF THE PREMISES BY THE
SHERIFF. IF AFTER EXECUTION AND RETURN OF THE WRIT OF POSSESSION, THE INDUSTRIAL
OCCUPANT SHALL REENTER INTO POSSESSION OF THE PREMISES, THE PROTHONOTARY, UPON
PRAECIPE AND AFFIDAVIT SETTING FORTH THE FACTS FILED WITHIN THREE YEARS AFTER
THE RETURN OF THE WRIT UPON WHICH EXECUTION WAS COMPLETED, SHALL ISSUE A NEW
WRIT OF POSSESSION.
<PAGE>
(C) IF INDUSTRIAL OCCUPANT WISHES TO CHALLENGE ANY JUDGMENT
CONFESSED PURSUANT TO THIS SECTION, IT SHALL DO SO ONLY BY FILING A PETITION TO
OPEN THE JUDGMENT PURSUANT TO PENNSYLVANIA RULES OF CIVIL PROCEDURE RULE 2959,
AS IN EFFECT FROM TIME TO TIME, ("RULE 2959") AND SHALL NOT OTHERWISE INTERFERE
(BY FILING ANY CIVIL ACTION BILL IN EQUITY, OR OTHERWISE) WITH THE OPERATION OF
THIS JUDGMENT GRANTED PURSUANT TO THIS SECTION. INDUSTRIAL OCCUPANT EXPRESSLY
ACKNOWLEDGES THAT THE PROCEDURE AVAILABLE TO IT THROUGH RULE 2959 WILL PROVIDE
IT WITH A FULL AND FAIR OPPORTUNITY TO BE HEARD AS TO ANY REASON WHY JUDGMENT
SHOULD NOT BE ENTERED AGAINST IT.
THE INDUSTRIAL OCCUPANT ACKNOWLEDGES THAT IT UNDERSTANDS THE MEANING
AND EFFECT OF THE CONFESSION CONTAINED IN THE FOREGOING PARAGRAPHS.
SPECIFICALLY, THE INDUSTRIAL OCCUPANT UNDERSTANDS AMONG OTHER THINGS THAT (1) IT
IS RELINQUISHING THE RIGHT TO HAVE THE BURDEN OF PROOF OF DEFAULT REST ON PIDA
PRIOR TO THE ENTRY OF JUDGMENT, (2) THE ENTRY OF JUDGMENT MAY RESULT IN A LIEN
ON ITS PROPERTY, (3) IT WILL BEAR THE BURDEN AND EXPENSE OF ATTACKING THE
JUDGMENT AND CHALLENGING EXECUTION ON THE LIEN AND SALE OF THE PROPERTY COVERED
THEREBY, AND (4) ENOUGH OF ITS PROPERTY MAY BE TAKEN TO PAY THE PRINCIPAL
AMOUNT, INTEREST COSTS AND ATTORNEY'S FEES.
ARTICLE VI
Miscellaneous
Section 6.01. Obligations Unconditional. The obligations of the Industrial
Occupant to PIDA under this Agreement and each of the Loan Documents shall be
absolute and unconditional without defense or set-off by reason of any default
by the contractors under the contracts relating to the Project or by Borrower or
by PIDA under this Agreement, any of the Loan Documents, or under any other
agreement between the Borrower and the Industrial Occupant or between the
Industrial Occupant and PIDA, or for any other reason, including without
limitation failure to complete the Project, any acts or circumstances that may
constitute failure of consideration, destruction of or damage to the Project,
commercial frustration of purpose, or failure of the Borrower or PIDA to perform
and observe any agreement, whether express or implied, or any duty, liability or
obligation arising out of or connected with the Loan, it being the intention of
the parties that the payments required by Industrial Occupant under each of the
Loan Documents will be paid in full when due without any delay or diminution
whatsoever. Payments and additional sums required to be paid by Industrial
Occupant to PIDA under any of the Loan Documents shall be received by PIDA as
net sums and the Industrial Occupant agrees to pay or cause to be paid all
charges against or which might diminish such net sums. The provisions of this
Section shall not impair the ability of the Industrial Occupant or any other
person to bring an independent action against PIDA with respect to any cause of
action which such person may have against PIDA.
Section 6.02. Provisions Complementary. The provisions of this Agreement
shall be in addition to those of any other Loan Document. All of such provisions
shall be construed as complementary to each other. Nothing contained herein
shall prevent PIDA from enforcing any and all of such provisions in accordance
with their respective terms.
<PAGE>
Section 6.03. Rights and Remedies. The terms hereof and of each of the
Loan Documents shall be liberally construed in favor of PIDA to effectuate the
purposes hereof. No delay or failure on the part of PIDA in exercising any
right, power or privilege under any of the Loan Documents shall affect such
right, power or privilege; nor shall any single or partial exercise thereof or
any abandonment, waiver, or discontinuance of steps to enforce such a right,
power or privilege preclude any other or further exercise thereof, or the
exercise of any other right, power or privilege. The rights and remedies of PIDA
under any of the Loan Documents are cumulative and concurrent and not exclusive
of any rights or remedies which it might otherwise have. PIDA shall have the
right at all times to enforce the provisions of the Loan Documents and all
related documentation in strict accordance with the terms hereof,
notwithstanding any conduct or custom on the part of PIDA in refraining from so
doing at any time or times. The failure of PIDA at any time or times to enforce
its rights under such provisions, strictly in accordance with the same, shall
not be construed as having created a custom in any way or manner contrary to
specific provisions of such Loan Document or any such documentation or as having
in any way or manner modified or waived the same. All rights and remedies of
PIDA are cumulative and concurrent and the exercise of one right or remedy shall
not be deemed a waiver or release of any other right or remedy.
<PAGE>
Section 6.04. Offset Clause. The Industrial Occupant agrees that the
Commonwealth of Pennsylvania may set off the amount of any state tax liability
or other debt of the Industrial Occupant or its respective subsidiaries that is
owed to the Commonwealth and not being contested on appeal against any payments
due the Industrial Occupant under this or any other contract with the
Commonwealth.
Section 6.05. Contractor Responsibility Provisions. Included in
and made a part of this Agreement is Exhibit 6.05, a clause pertaining to
Contractor Responsibility.
Section 6.06. Contractor Integrity. The Industrial Occupant covenants that
it presently has no interest and shall not acquire any interest, direct or
indirect, which would conflict in any manner or degree with the performance of
its obligations hereunder. Included in and made a part of this Agreement is
Exhibit 6.06, a clause pertaining to Contractor Integrity.
Section 6.07. Americans with Disabilities Act Provisions. Included
in and made a part of this Agreement is Exhibit 6.07, a clause pertaining to
compliance with the Americans with Disabilities Act.
Section 6.08. Assignment; Beneficiaries. This Agreement and each of the
Loan Documents shall inure to the benefit of, and shall be binding upon, the
respective successors and assigns of PIDA and the Industrial Occupant. Although
PIDA has no present intention to convey, pledge or otherwise assign its rights
under the Loan Documents, it may nevertheless do so in whole or in part without
notice to any person (including, without limitation, the Industrial Occupant).
The Industrial Occupant has no right to assign any of its rights or obligations
hereunder or under any of the Loan Documents without the prior written consent
of PIDA, and any such assignment without the prior written consent of PIDA shall
be void.
The Industrial Occupant and PIDA intend that no person (other than
Borrower and any Indemnified Party) shall have any claim or interest under this
Agreement or any of the Loan Documents or right of action thereunder.
Section 6.09. Amendments. This Agreement and the Loan Agreement may be
modified or amended only by a written instrument duly executed by PIDA, the
Borrower, and the Industrial Occupant. Each of the remaining Loan Documents may
be modified only by a written instrument duly executed by PIDA and the remaining
parties to the particular Loan Document.
<PAGE>
Section 6.10. Notices. Notices required hereunder, or any correspondence
concerning this Agreement shall be directed to the following addresses and shall
be deemed properly given (i) if delivered by hand, (ii) if sent by certified
mail, return receipt requested, postage prepaid, or by recognized overnight
courier service (including, without limitation, Federal Express or United Parcel
Service overnight service), charges prepaid; or (iii) if sent by facsimile, with
a copy sent by first class U.S. Mail, postage prepaid.
(a) If PIDA:
THE PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY c/o
Department of Community and Economic Development Room 480,
Forum Building Harrisburg, Pennsylvania 17120
FAX: (717) 772-2890
Attention: Administrator
(b) If Industrial Occupant:
PIERCING PAGODA, INC.
3910 Adler Place, P.O. Box 25007
Lehigh Valley, Pennsylvania 18002
(c) If Borrower:
NORTHAMPTON COUNTY NEW JOBS CORP.
One S. Third Street, 7th Floor, P.O. Box 637
Easton, Pennsylvania 18044
Notices and communications hereunder shall be deemed sufficiently given when
dispatched pursuant to the foregoing provisions. Notices and communications
delivered by hand shall be effective upon receipt; notices and communications
sent by fax, with a copy by first class U.S. Mail, shall be effective upon
dispatch; notices and communications sent by recognized overnight courier
service shall be effective on the business day following dispatch; and notices
sent by certified mail shall be effective on the third business day following
dispatch. The parties hereto may, by a notice given hereunder, designate any
further or different addresses to which any subsequent notice or communication
hereunder shall be sent.
Section 6.11. Delivery to PIDA. Any materials delivered to PIDA's
independent engineer or financial consultant shall be deemed to have been
delivered to PIDA, provided that any amendment or supplement to information
delivered shall be deemed effectively delivered only if delivered to the same
entity as received the original information.Section 6.12. Severability; Interest
Limitation. If any provision hereof or of the Loan Documents is found by a court
of competent jurisdiction to be prohibited or unenforceable in any jurisdiction,
it shall be ineffective as to such jurisdiction only to the extent of such
prohibition or unenforceability, and such prohibition or unenforceability shall
not invalidate the balance of such provision as to such jurisdiction to the
extent it is not prohibited or unenforceable, nor invalidate such provision in
any other jurisdiction, nor invalidate the other provisions hereof, all of which
shall be liberally construed in favor of PIDA in order to effect the provisions
of this Agreement. Notwithstanding anything to the contrary herein contained,
the total liability of the Industrial Occupant for payment of interest pursuant
to the Loan Documents shall not exceed the maximum amount, if any, of such
interest permitted by applicable law to be contracted for, charged or received,
and if any payments by the Industrial Occupant to PIDA include interest in
excess of such a maximum amount, PIDA shall apply such excess to the reduction
of the unpaid principal amount due pursuant hereto, or if none is due, such
excess shall be refunded to the Industrial Occupant; provided that, to the
extent permitted by applicable law, in the event the interest is not collected,
is applied to principal or is refunded pursuant to this sentence and interest
thereafter payable pursuant hereto shall be less than such maximum amount, then
such interest thereafter so payable shall be increased up to such maximum amount
to the extent necessary to recover the amount of interest, if any, theretofore
uncollected, applied to principal or refunded pursuant to this sentence. Any
such application or refund shall not cure or waive any Event of Default. In
determining whether or not any interest payable under the Loan Documents exceeds
the highest rate permitted by law, any nonprincipal payment (except payments
specifically stated to be "interest") shall be deemed, to the extent permitted
by applicable law, to be an expense, fee, premium or penalty rather than
interest.
Section 6.13. Complete Agreement. The Loan Documents constitute the entire
agreement between PIDA and the Industrial Occupant. The Loan Documents supersede
and replace all prior agreements related to the subject matter thereof
including, without limitation, the Commitment, except to the extent such prior
agreements are expressly incorporated by reference or otherwise referred to.
Section 6.14. Consent to Jurisdiction; Venue. The Industrial Occupant
hereby irrevocably (a) agrees that any suit, action or other legal proceeding
arising out of or relating to this Agreement or the Loan Documents may be
brought in any federal or state court located in or whose district includes
Harrisburg, Pennsylvania or the county wherein the Project is located and
consents to the jurisdiction of such court in any such suit, action or
proceeding, and (b) waives any objection which it may have to the laying of
venue of any such suit, action or proceeding in any such court and any claim
that any such suit, action or proceeding has been brought in an inconvenient
forum. The Industrial Occupant hereby irrevocably consents to the service of any
and all process in any such suit, action or proceeding by mailing of copies of
such process to the Industrial Occupant at its address provided under or
pursuant to Section 6.10. The Industrial Occupant agrees that a final judgment
in any such action or proceeding shall be conclusive and may be enforced in
other jurisdictions by suit on the judgment or in any other manner provided by
law. All mailings under this section shall be by certified or registered mail,
return receipt requested. Nothing in this section shall affect the right of PIDA
to serve legal process in any other manner permitted by law or affect the right
of PIDA to bring any suit, action or proceeding against the Industrial Occupant
or its property in the courts of any other jurisdiction.
Section 6.15. Governing Law. This Agreement shall be governed by,
and construed in accordance with, the laws of the Commonwealth of
Pennsylvania without reference to its principles of conflicts of law.
Section 6.16. Survival of Covenants. All covenants made or assumed by the
Industrial Occupant in any of the Loan Documents shall survive the delivery of
this Agreement and the Loan Documents and until the Loan is prepaid in full,
unless a longer term is expressly provided therein, in which event such longer
term shall apply.
Section 6.17. Accounting Terms. Each accounting term not defined herein
and each accounting term partly defined herein, to the extent not defined
herein, shall have the meaning given it under generally accepted accounting
principles as in effect from time to time in the United States of America,
consistently applied.
Section 6.18. Rules of Construction. In this Agreement, unless otherwise
indicated, (i) defined terms may be used in the singular or the plural and the
use of any gender includes all genders, (ii) the words, "hereof", "herein",
"hereto", "hereby" and "hereunder" refer to this entire Agreement and (iii) all
references to particular Articles or Sections are references to the Articles or
Sections of this Agreement.
Section 6.19. Defined Terms. All capitalized terms not defined
herein shall have the meanings ascribed to them in the Loan Agreement. The
Industrial Occupant shall be referred to as Contractor in Exhibits 4.05,
6.05, 6.06 and 6.07.
Section 6.20. Exhibits. All exhibits to this Agreement are
incorporated within this Agreement and constitute a part thereof.
Section 6.21. Descriptive Headings. Descriptive headings of the
several Articles and Sections of this Agreement are intended for convenience
only and shall not control or affect the meaning or construction of any of
the provisions hereof.
Section 6.22. Counterparts. This Agreement may be executed in any
number of counterparts, each of which shall be deemed to be an original, but
all of which together shall constitute but one and the same instrument. All
signatures need not appear on the same copy hereof.
Section 6.23. Seal. This Agreement is intended to take effect as
an instrument under seal.
IN WITNESS WHEREOF, the Industrial Occupant, intending to be legally bound
hereby, has caused this Consent, Subordination and Assumption Agreement to be
executed on its behalf by the undersigned duly authorized officers and its
corporate seal to be affixed hereto as of the day and year first above written.
ATTEST: PIERCING PAGODA, INC.
By
Secretary President
(CORPORATE SEAL)
The terms and conditions of the foregoing Consent, Subordination and Assumption
Agreement are hereby approved and agreed to, with the express understanding that
the undersigned's obligations under the Loan Agreement, Note and Mortgage are
not relieved or in any way diminished by virtue of the Industrial Occupant's
execution of this Agreement.
ATTEST: NORTHAMPTON COUNTY NEW JOBS CORP.
By
Secretary President
(CORPORATE SEAL)
EXHIBIT "A"
THE PREMISES
<PAGE>
EXHIBIT 2.03
NECESSARY APPROVALS
NONE
EXHIBIT 2.09
LIABILITIES NOT PREVIOUSLY DISCLOSED
NONE
EXHIBIT 2.11
ERISA DISCLOSURES
NONE
EXHIBIT 2.12
ENVIRONMENTAL DISCLOSURES
NONE
EXHIBIT 2.13
ACTS OF BANKRUPTCY
NONE
EXHIBIT 2.14
CRIMINAL CONVICTIONS
NONE
EXHIBIT 2.15
OCCUPANCY AGREEMENTS
NONE
EXHIBIT 2.16
NECESSARY PERMITS
NONE
<PAGE>
EXHIBIT 2.17
NECESSARY TECHNOLOGY, ETC.
NONE
EXHIBIT 2.18
VIOLATIONS
NONE
EXHIBIT 2.19
PERMITTED LIENS
A First Mortgage in the amount of $1,980,000 to the CoreStates Bank, N.A.
dated , 1998.
<PAGE>
EXHIBIT 4.05
NONDISCRIMINATION CLAUSE
During the term of this contract, Contractor agrees as follows:
1. Contractor shall not discriminate against any employee, applicant for
employment, independent contractor or any other person because of race, color,
religious creed, ancestry, national origin, age or sex. Contractor shall take
affirmative action to insure that applicants are employed, and that employees or
agents are treated during employment, without regard to their race, color,
religious creed, handicap, ancestry, national origin, age or sex. Such
affirmative action shall include, but is not limited to: employment, upgrading,
demotion or transfer, recruitment or recruitment advertising; layoff or
termination; rates of pay or other forms of compensation; and selection for
training. Contractor shall post in conspicuous places, available to employees,
agents, applicants for employment and other persons, a notice to be provided by
the contracting agency setting forth the provisions of this nondiscrimination
clause.
2. Contractor shall in advertisements or requests for employment placed by
it or on its behalf, state that all qualified applicants will receive
consideration for employment without regard to race, color, religious creed,
handicap, ancestry, national origin, age, or sex.
3. Contractor shall send each labor union or workers' representative with
which it has a collective bargaining agreement or other contract or
understanding, a notice advising said labor union or workers' representative of
its commitment to this nondiscrimination clause. Similar notice shall be sent to
every other source of recruitment regularly utilized by Contractor.
4. It shall be no defense to a finding of noncompliance with this
nondiscrimination clause that Contractor had delegated some of its employment
practices to any union, training program or other source of recruitment which
prevents it from meeting its obligations. However, if the evidence indicates
that the Contractor was not on notice of the third-party discrimination or made
a good faith effort to correct it, such factor shall be considered in mitigation
in determining appropriate sanctions.
5. Where the practices of a union or of any training program or other
source of recruitment will result in the exclusion of minority group persons, so
that Contractor will be unable to meet its obligations under this
nondiscrimination clause, Contractor shall then employ and fill vacancies
through other nondiscriminatory employment procedures.
6. Contractor shall comply with all state and federal laws prohibiting
discrimination in hiring or employment opportunities. In the event of
Contractor's noncompliance with the nondiscrimination clause of this contract or
with any such laws, this contract may be terminated or suspended, in whole or in
part, and Contractor may be declared temporarily ineligible for further
Commonwealth contracts, and other sanctions may be imposed and remedies invoked.
7. Contractor shall furnish all necessary employment documents and records
to, and permit access to its books, records and accounts by, the contracting
agency for purposes of investigation to ascertain compliance with the provisions
of this clause. If Contractor does not possess documents or records reflecting
the necessary information requested, it shall furnish such information on
reporting forms supplied by the contracting agency.
8. Contractor shall actively recruit minority subcontractors and women
subcontractors or subcontractors with substantial minority representation among
their employees.
9. Contractor shall include the provisions of this nondiscrimination
clause in every subcontract, so that such provisions will be binding upon each
subcontractor.
<PAGE>
10. Contractor obligations under this clause are limited to the
Contractor's facilities within Pennsylvania or, where the contract is for
purchase of goods manufactured outside of Pennsylvania, the facilities at which
such goods are actually produced.
<PAGE>
Revised 2/96 EXHIBIT 6.05
CONTRACTOR RESPONSIBILITY PROVISIONS
1. The Contractor certifies that it is not currently under suspension or
debarment by the Commonwealth, any other state, or the federal government, and
if the Contractor cannot so certify, then it agrees to submit along with the
bid/proposal a written explanation of why such certification cannot be made.
2. If the Contractor enters into any subcontracts or employs under this
contract any subcontractors/individuals who are currently suspended or debarred
by the Commonwealth or the federal government or who become suspended or
debarred by the Commonwealth or federal government during the term of this
contract or any extensions or renewals thereof, the Commonwealth shall have the
right to require the Contractor to terminate such subcontracts or employment.
3. The Contractor agrees to reimburse the Commonwealth for the reasonable
costs of investigation incurred by the Office of Inspector General for
investigations of the Contractor's compliance with terms of this or any other
agreement between the Contractor and the Commonwealth which result in the
suspension or debarment of the Contractor. Such costs shall include, but not be
limited to, salaries of investigators, including overtime; travel and lodging
expenses; and expert witness and documentary fees. The Contractor shall not be
responsible for investigative costs for investigations which do not result in
the Contractor's suspension or debarment.
4. The Contractor may obtain the current list of suspended and debarred
contractors by contacting the:
Department of General Services
Office of Chief Counsel
603 North Office Building
Harrisburg, PA 17125
Telephone No. (717) 783-6472
Fax No. (717) 787-9138
<PAGE>
Revised 6/96 EXHIBIT 6.06
CONTRACTOR INTEGRITY PROVISIONS
1. Definitions.
a. Confidential information means information that is not public
knowledge, or available to the public on request, disclosure of which would give
an unfair, unethical, or illegal advantage to another desiring to contract with
the Commonwealth.
b. Consent means written permission signed by a duly authorized officer or
employee of the Commonwealth, provided that where the material facts have been
disclosed, in writing, by prequalification, bid, proposal, or contractual terms,
the Commonwealth shall be deemed to have consented by virtue of execution of
this Agreement.
c. Commonwealth means the Commonwealth of Pennsylvania Acting by and
Through its Department of Community and Economic Development and any agencies
and instrumentalities of the Commonwealth of Pennsylvania for which the
Department of Community and Economic Development provides staff services
(including without limitation the Pennsylvania Industrial Development Authority,
Pennsylvania Economic Development Financing Authority, Pennsylvania Energy
Development Authority, and Pennsylvania Minority Business Development
Authority).
d. Contractor means the individual or entity that has entered into an
agreement with the Commonwealth, assumed the obligations of another to repay
moneys to the Commonwealth, or is the intended beneficiary of, and has knowingly
received benefits under, an agreement between the Commonwealth and a financial
intermediary or educational institution, including directors, officers,
partners, managers, key employees, and owners of more than a 5% interest.
e. Financial Interest means:
(1) ownership of more than a 5% interest in any business; or
(2) holding a position as an officer, director, trustee, partner,
employee, or the like, or holding any position of management.
f. Gratuity means any payment of more than nominal monetary value in the
form of cash, travel, entertainment, gifts, meals, lodging, loans,
subscriptions, advances, deposits of money, services, employment, or contracts
of any kind.
2. The Contractor shall take no action in violation of state or federal
laws, regulations, or other requirements that govern contracting with the
Commonwealth.
3. The Contractor shall not, in connection with this or any other
agreement with the Commonwealth, directly or indirectly offer, confer, or agree
to confer any pecuniary benefit on anyone as consideration for the decision,
opinion, recommendation, vote, other exercise of discretion, or violation of a
known legal duty by any officer or employee of the Commonwealth.
4. The Contractor shall not, in connection with this or any other
agreement with the Commonwealth, directly or indirectly offer, give, or agree or
promise to give to anyone any gratuity for the benefit of or at the direction or
request of any officer or employee of the Commonwealth.
5. Except with the consent of the Commonwealth, the Contractor shall not
have a financial interest in any other contractor, subcontractor, or supplier
providing services, labor, or material on this project.
<PAGE>
6. The Contractor, upon being informed that any violation of these
provisions has occurred or may occur, shall immediately notify the Commonwealth
in writing.
7. The Contractor, by execution of this Agreement and by the submission of
any bills or invoices for payment pursuant thereto, certifies and represents
that he has not violated any of these provisions.
8. The Contractor, upon the inquiry or request of the Inspector General of
the Commonwealth or any of that official's agents or representatives, shall
provide, or if appropriate, make promptly available for inspection or copying,
any information of any type or form relevant to the Contractor's compliance with
this Agreement (including without limitation these provisions relating to
Contractor integrity). Such information shall be retained by the Contractor for
a period of three years beyond the termination of the contract unless provided
by law.
9. For violation of any of the above provisions, the Commonwealth may
declare an event of default hereunder, subject to applicable notice and cure
provisions, and debar and suspend the Contractor from doing business with the
Commonwealth, including without limitation participation in its financial
assistance programs. These rights and remedies are cumulative, and the use or
nonuse of any one shall not preclude the use of all or any other. These rights
and remedies are in addition to those the Commonwealth may have under law,
statute, regulation, or otherwise.
<PAGE>
EXHIBIT 6.07
AMERICANS WITH DISABILITIES ACT PROVISIONS
During the term of this contract, the Contractor agrees as follows:
1. Pursuant to federal regulations promulgated under the authority of The
Americans With Disabilities Act, 28 C.F.R. ss. 35.101 et seq., the Contractor
understands and agrees that no individual with a disability shall, on the basis
of the disability, be excluded from participation in this contract or from
activities provided for under this contract. As a condition of accepting and
executing this contract, the Contractor agrees to comply with the "General
Prohibitions Against Discrimination," 28 C.F.R. ss. 35.130, and all other
regulations promulgated under Title II of The Americans With Disabilities Act
which are applicable to the benefits, services, programs, and activities
provided by the Commonwealth of Pennsylvania through contracts with outside
contractors.
2. The Contractor shall be responsible for and agrees to indemnify and
hold harmless the Commonwealth of Pennsylvania from all losses, damages,
expenses, claims, demands, suits, and actions brought by any party against the
Commonwealth of Pennsylvania as a result of the Contractor's failure to comply
with the provisions of paragraph 1 above.
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: SS
COUNTY OF NORTHAMPTON :
ON THIS, the day of February, 1999, before me, the undersigned officer,
personally apperared John F. Eureyecko, who acknowledged himself to be the
President of Piercing Pagoda, Inc., a corporation and the within named
Industrial Occupant, and that he as such officer being authorized to do so,
executed the foregoing instrument for the purpose therein contained by signing
the name of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Notary Public
My Commission Expires:
COMMONWEALTH OF PENNSYLVANIA :
: SS
COUNTY OF NORTHAMPTON :
ON THIS, the day of February, 1999, before me, the undersigned officer,
personally appeared Robert J. Bergren, who acknowledged himself to be the
President of Northampton County New Jobs Corp., a nonprofit corporation and the
within named Borrower, and that he as such officer being authorized to do so,
executed the foregoing instrument for the purpose therein contained by signing
the name of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Notary Public
My Commission Expires:
<PAGE>
Certificate of Residence of PIDA
I hereby certify that the precise residence and complete post office
address of The Pennsylvania Industrial Development Authority is: Room 480, Forum
Building, c/o Department of Community and Economic Development, Harrisburg,
Pennsylvania 17120.
Claude J. Lewis, Deputy Chief
Counsel
Attorney for PIDA
RECORDED in the Office for the Recording of Deeds, in and for the County of
Northampton, in Book Volume ,
page .
(Title)
CJL/02-16-99 PIDA #8259
MORTGAGE SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT, made this day of February, 1999, by and
among NORTHAMPTON COUNTY NEW JOBS CORP. (the "Borrower"), FIRST UNION NATIONAL
BANK (the "Bank"), and PIERCING PAGODA, INC. (the "Industrial Occupant") and THE
PENNSYLVANIA INDUSTRIAL DEVELOPMENT AUTHORITY ("PIDA").
WITNESSETH
WHEREAS, the Borrower is the owner of a certain tract of land situate in
Northampton County, as more particularly described on Exhibit A attached hereto
and made a part hereof (the "Premises") upon which the Borrower proposes to
establish an Industrial Development Project (the "Project") as defined in The
Pennsylvania Industrial Development Authority Act, as amended; and
WHEREAS, the Premises are subject to a Mortgage from the Industrial
Occupant to the Bank, dated April 29, 1998, and recorded in the Office of the
Recorder of Deeds for Northampton County in Mortgage Book Volume
, page (the "Bank First
Mortgage"), which mortgage is a lien upon the Premises; and WHEREAS, the Bank
Mortgage was given as security for a note in the
original principal amount of Two Million Six Hundred Ninteen Thousand Nine
Hundred Fifty Four Dollars and Twenty Five Cents ($2,619,954.25), dated from the
Industrial Occupant to the Bank (the "Bank Note"); and
WHEREAS, the Borrower has applied to PIDA for a loan in the principal
amount of One Million Dollars $1,000,000 (the "PIDA Loan") to be used
exclusively to defray a portion of the cost of establishing the Project; and
WHEREAS, the PIDA Loan, together with interest thereon, is evidenced by a
note from the Borrower to PIDA, dated of even date herewith (the "PIDA Note");
and
WHEREAS, the PIDA Note is to be secured by a mortgage dated of even date
herewith from the Borrower to PIDA, which shall constitute a second lien on the
Premises (the "Project Mortgage").
WHEREAS, PIDA has conditioned the grant of the PIDA Loan upon the
subordination of that portion of the Bank Mortgage that exceeds $1,980,000 (the
difference between $2,619,954.25 and $1,980,000) (the "Bank Third Mortgage")
which Bank Third Mortgage shall be in the original principal amount of
$639,954.25, in the manner herein set forth.
NOW, THEREFORE, to induce PIDA to make the PIDA Loan and in consideration
of the premises and mutual covenants herein contained, and intending to be
legally bound hereby, the parties hereto agree as follows:
<PAGE>
1. The lien of the Bank Mortgage to the extent that it exceeds $1,980,000
is hereby subordinated and postponed as to lien, right to insurance and
condemnation proceeds and right to possession to the lien of the Bank First
Mortgage and the Project Mortgage. The Bank agrees for itself, its successors
and assigns that PIDA, its successors and assigns shall have the rights,
benefits and priorities to which it would have been entitled had the Project
Mortgage been executed, delivered and recorded prior to the Bank Third Mortgage.
2. The Bank agrees that without notice to the Bank PIDA may (a) compromise
or release the liability of any party or parties liable for or upon the
obligations secured by the Project Mortgage from time to time in whole or in
part, or (b) exchange or release any collateral for payment of the PIDA Note,
all without affecting the priorities set forth herein.
3. Bank agrees that all payments made by the Industrial Occupant to reduce
the principal balance of the Bank Note shall be applied to reduce the principal
balance of the Bank First Mortgage and, at the Bank's sole discretion, to reduce
the principal balance of the Bank Third Mortgage.
4. From time to time, the parties hereto will execute and deliver such
additional documents as may reasonably be required to carry out the terms of
this Agreement.
5. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but all of which together shall
constitute but one and the same instrument.
6. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and assigns.
7. This Agreement shall be governed by the laws of the Commonwealth of
Pennsylvania without regard to the principles of conflicts of laws.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this instrument to be executed and their respective seals
set hereto the day and year first above written.
ATTEST: NORTHAMPTON COUNTY NEW JOBS CORP.
By
Secretary President
(CORPORATE SEAL)
ATTEST: CORESTATES BANK, N.A.
By
Title: Title:
(CORPORATE SEAL)
ATTEST: THE PENNSYLVANIA INDUSTRIAL
DEVELOPMENT AUTHORITY
By
Assistant Secretary Administrator
(CORPORATE SEAL)
<PAGE>
EXHIBIT "A"
THE PREMISES
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: SS
COUNTY OFNORTHAMPTON :
ON THIS, the day of February, 1999, before me, the undersigned officer,
personally appeared Robert J. Bergren, who acknowledged himself to be the
President of Northampton County New Jobs Corp., a nonprofit corporation
organized and existing under the laws of the Commonwealth of Pennsylvania, and
that he as such officer being authorized to do so, executed the foregoing
instrument for the purpose therein contained by signing the name of the
corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Notary Public
My Commission Expires:
COMMONWEALTH OF PENNSYLVANIA :
: SS
COUNTY OF NORTHAMPTON :
ON THIS, the day of February, 1999 , before
me, the undersigned officer, personally appeared
, who acknowledged himself to be
the of First Union National Bank, a Bank, and that he as such officer being
authorized to do so, executed the foregoing instrument for the purpose therein
contained by signing the name of the corporation by himself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Notary Public
My Commission Expires:
<PAGE>
COMMONWEALTH OF PENNSYLVANIA :
: SS
COUNTY OF DAUPHIN :
ON THIS, the day of February, 1999, before me, the undersigned officer,
personally appeared Marguerite Harris, who acknowledged herself to be the
Administrator of The Pennsylvania Industrial Development Authority, a
corporation, and that she as such officer being authorized to do so, executed
the foregoing instrument for the purpose therein contained by signing the name
of the corporation by herself as such officer.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal.
Notary Public
My Commission Expires:
Certificate of Residence of PIDA
I hereby certify that the precise residence and complete post office
address of The Pennsylvania Industrial Development Authority is: Room 480, Forum
Building, c/o Department of Community and Economic Development, Harrisburg,
Pennsylvania 17120.
Claude J. Lewis, Deputy Chief
Counsel
Attorney for PIDA
RECORDED in the Office for Recording of Deeds, in and for the County of
Northampton, Mortgage Book Volume , Page .
(Title)
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