UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-24860
PIERCING PAGODA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-1894725
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) Number)
3910 Adler Place
Bethlehem, PA 18017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 691-0437
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock is 5,254,513
(as of August 6, 1996)
<PAGE>
PIERCING PAGODA, INC.
INDEX
PAGE
NUMBER
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated balance sheets as of June 30, 1996
and March 31, 1996 3
Consolidated statements of operations for the
three months ended June 30, 1996 and 1995 4
Consolidated statements of cash flows for the
three months ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash $ 1,978 $ 1,864
Accounts receivable 788 794
Inventory 30,078 25,390
Deposits for inventory purchases 2,297 361
Prepaid expenses and other current assets 295 468
Prepaid income taxes 965 883
Deferred tax assets 693 693
------- -------
Total current assets 37,094 30,453
------- -------
Property, fixtures and equipment, net 17,570 15,806
Other assets 1,568 1,647
------- -------
$56,232 $47,906
======= =======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 7,124 $ 1,811
Current installments of long-term debt and
revolving line of credit 8,910 5,910
Accrued expenses and taxes withheld 6,249 6,784
------- -------
Total current liabilities 22,283 14,505
------- -------
Long-term debt, less current installments 2,718 2,350
Deferred tax liabilities 1,259 1,259
Unbilled rent 273 213
------- -------
Total liabilities 26,533 18,327
------- -------
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $.01 per share,
authorized 3,000,000 shares. None issued -- --
Common stock, par value $.01 per share, authorized
15,000,000 shares. Issued 5,240,293 and 5,249,813 shares at
March 31, 1996 and June 30, 1996, respectively 53 53
Additional paid-in capital 22,268 22,183
Retained earnings 7,378 7,343
------- -------
Total stockholders' equity 29,699 29,579
------- -------
$56,232 $47,906
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
1996 1995
<S> <C> <C>
Net sales $30,244 $22,375
Cost of goods sold and occupancy expenses,
(excluding depreciation on kiosks) 17,463 13,080
------- -------
Gross profit 12,781 9,295
Selling, general and administrative expenses,
(including depreciation on kiosks) 12,421 8,927
------- -------
Income from operations 360 368
Interest and other income 60 48
Interest expense 361 140
------- -------
Earnings before income taxes 59 276
Income tax expense 24 11
------- -------
Net income $ 35 $ 162
======= =======
Earnings per share $ 0.01 $ 0.03
======= =======
Weighted average common shares
and common share equivalents outstanding 5,356 5,271
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 35 $ 162
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 781 520
Loss on disposal of property, fixtures and equipment -- 5
Other changes in other assets (9) 19
Deferred income taxes -- (66)
Decrease (increase) in assets:
Accounts receivable 6 287
Inventory (4,688) (6,803)
Deposits for inventory purchases (1,936) (3,024)
Prepaid expenses and other current assets 73 201
Prepaid income taxes (82) (713)
Increase (decrease) in liabilities:
Accounts payable 5,313 2,691
Income taxes payable -- (20)
Accrued expenses and taxes withheld (535) 117
Tax indemnification payable -- (826)
Unbilled rent 60 6
------- -------
Net cash used in operating activities (882) (7,444)
------- -------
Cash flows from investing activities:
Additions to property, fixtures and equipment (2,518) (1,389)
Noncurrent deposits, net 81 (117)
------- -------
Net cash used in investing activities (2,437) (1,506)
------- -------
Cash flows from financing activities:
Revolving line of credit, net 2,970 7,625
Proceeds from issuance of long-term debt 400 --
Loan fees paid (20) --
Repayments of long-term debt (2) --
Proceeds from issuance of common stock 85 --
Cash dividends paid -- (45)
------- -------
Net cash provided by financing activities 3,433 7,580
------- -------
Net increase (decrease) in cash 114 (1,370)
Cash at beginning of period 1,864 2,320
------- -------
Cash at end of period $ 1,978 $ 950
======= =======
</TABLE>
5
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
Three months ended
June 30,
1996 1995
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $297 $152
==== ====
Income taxes, net $106 $913
==== ====
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of significant accounting policies
The accompanying consolidated financial statements of Piercing Pagoda, Inc.
and subsidiary (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements include the
results of operations for Piercing Pagoda, Inc. and its wholly owned
subsidiary, a Delaware investment holding company. All intercompany
transactions have been eliminated in consolidation. These consolidated
financial statements should be read in conjunction with the Company's
financial statements and notes thereto for the year ended March 31, 1996.
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the financial position, results of operations, and cash
flows for the interim periods.
Operating results for the three month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire
fiscal year.
Note 2 Property, Fixtures and Equipment
A summary of major classes of property, fixtures and equipment follows (in
thousands):
June 30, March 31,
1996 1996
Land $ 688 $ 688
Furniture and fixtures 2,221 2,077
Kiosks 15,577 13,908
Building and improvements 3,837 3,822
Computer equipment, software and other equipment 5,820 5,130
------- -------
28,143 25,625
Less accumulated depreciation and amortization 10,573 9,819
------- -------
$17,570 $15,806
======= =======
7
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background
The Company's consolidated net sales are comprised primarily of sales
generated by the Company's stores and, to a much lesser extent, wholesale
sales primarily to an independent store operator in Florida to which the
Company licenses the use of its store name and concept (the "Florida
Licensee"). Cost of goods sold and occupancy expenses include the cost of
merchandise, rent and occupancy and the cost of preparing merchandise for
sale. Selling, general and administrative expenses include store and
supervisory payroll, corporate overhead and non-occupancy store expenses
including depreciation of kiosks.
Results of operations
Three months ended June 30, 1996 and June 30, 1995
Consolidated net sales increased $7.8 million, or 35% from $22.4 million
for the three months ended June 30, 1995 to $30.2 million for the three
months ended June 30, 1996. This increase was primarily due to an increase
in the average number of stores open for the three months ended June 30,
1996 as compared to the three months ended June 30, 1995 and a $1.2
million, or 6%, increase in comparable store net sales. There were a total
of 535 stores open at June 30, 1996 compared to 401 at June 30, 1995, an
increase of 33%. The average jewelry units sold per store increased 9% to
2,500 for the three months ended June 30, 1996 compared to 2,300 at June
30, 1995. The average price per jewelry unit sold was relatively unchanged
at $24.52 for the three months ended June 30, 1996 compared to $24.47 for
the three months ended June 30, 1995.
Gross profit increased $3.5 million, or 38%, from $9.3 million for the
three months ended June 30, 1995 to $12.8 million for the three months
ended June 30, 1996. The Company's gross profit margin improved slightly
from 41.5% for the three months ended June 30, 1995 to 42.3% for the three
months ended June 30, 1996. The increase in gross profit dollars was
attributable primarily to the Company's increase in net sales. The increase
in the Company's gross profit margin reflects a higher gross profit on
merchandise sold, partially offset by an increase in rent and occupancy
expense as a percentage of net sales. Gross profit on merchandise increased
due to the Company's decision to maintain retail price levels despite lower
costs for merchandise from vendors. The increase in rent and occupancy as a
percentage of net sales reflects the impact of newer stores which typically
have lower net sales in their earlier years of operation compared to the
Company's mature stores. At June 30, 1996, 242, or 45%, of the Company's
535 stores had been open less than two years.
8
<PAGE>
Selling, general and administrative expenses increased $3.5 million, or
39%, from $8.9 million for the three months ended June 30, 1995 to $12.4
million for the three months ended June 30, 1996. As a percentage of net
sales, selling, general and administrative expenses increased from 39.9%
for the three months ended June 30, 1995 to 41.1% for the three months
ended June 30, 1996. The increase in dollars was attributable primarily to
the increase in the number of stores and the pre-opening costs for new
stores, as well as higher supervisory and administrative expenses to
support the current and expected growth in stores. Selling, general and
administrative expenses increased as a percentage of net sales due to
higher expenses associated with new store growth and an improved incentive
package for store personnel implemented in the third quarter of the prior
fiscal year. Depreciation and amortization expense increased 50% from
$520,000 for the three months ended June 30, 1995 to $781,000 for the three
months ended June 30, 1996 due primarily to capital expenditures for new
stores and the upgrading of kiosks in existing locations.
Interest expense increased $221,000, or 158%, from $140,000 for the three
months ended June 30, 1995 to $361,000 for the three months ended June 30,
1996, and as a percentage of net sales increased from 0.6% for the three
months ended June 30, 1995 to 1.2% for the three months ended June 30,
1996. The increase in interest expense was due primarily to higher average
balances on the Company's revolving line of credit agreement, outstanding
long-term debt of $2.5 million issued in the third-quarter of fiscal 1995
and an additional $400,000 of long-term debt issued in the current quarter
in connection with the expansion of the Company's corporate headquarters
and distribution facility in the prior fiscal year.
As a result of the foregoing, the Company's net income decreased $127,000,
or 78%, from $162,000 for the three months ended June 30, 1995 to $35,000
for the three months ended June 30, 1996.
Liquidity and capital resources
The Company's primary on-going capital requirements are to fund an increase
in inventory and to fund capital expenditures and working capital (mostly
inventory) for new stores. The Company's primary sources of liquidity are
funds provided by operations, its gold consignment program and bank
borrowings. Due to the seasonal nature of the Company's business,
outstanding borrowings under its credit facilities generally peak during
the second and third fiscal quarters as the Company finances inventory
purchases in advance of the holiday shopping season. At June 30, 1996, the
Company had outstanding borrowings of $8.7 million under its revolving line
of credit and $2.9 million of long-term debt outstanding. In addition, the
Company had consigned 56,000 ounces of gold under its gold consignment
program valued at approximately $21.4 million.
Net cash used in operating activities was $882,000 for the three months
ended June 30, 1996 compared to $7.4 million for the same period in the
prior year. Net cash used in operating activities primarily reflects
increases in inventory and deposits for merchandise purchases to support
newly opened stores and future scheduled store openings.
9
<PAGE>
Net cash used in investing activities was $2.4 million during the three
months ended June 30, 1996 compared to $1.5 million during the three months
ended June 30, 1995. Net cash used in investing activities primarily
reflects the addition of property, fixtures and equipment in connection
with the opening of new stores.
Net cash provided by financing activities was $3.4 million for the three
months ended June 30, 1996 versus $7.6 million provided by financing
activities during the three months ended June 30, 1995. Cash provided by
financing activities during the three months ended June 30, 1996 primarily
reflects an increase in borrowings under the Company's revolving line of
credit agreement to support the increased number of stores currently
operating and anticipated new store openings. Also, the Company obtained an
additional $400,000 long term loan in connection with the expansion of the
Company's corporate headquarters and distribution facility in the prior
fiscal year. The loan requires monthly payments of principal and interest
of approximately $4,000 through June of 2006 at an effective annual
interest rate of 4.59%.
At June 30, 1996, the Company had $9.1 million available to be borrowed
under its existing revolving credit facility and was in compliance with
covenants contained in the revolving credit facility. The Company believes
that the expected cash flows from operations, its gold consignment program,
and bank borrowings will be sufficient to fund the Company's currently
anticipated capital and liquidity needs.
Seasonality
The Company's business is highly seasonal. Due to the impact of the
year-end holiday shopping season, the Company experiences a substantial
portion of its annual net sales and profitability in its third fiscal
quarter (ending December 31st). The Company has generally experienced lower
net sales in each of the first, second and fourth quarters and lower net
income or net losses in each of those quarters.
The Company's results of operations may also fluctuate from quarter to
quarter as a result of a variety of factors, including fluctuations in the
price of gold or gold consignment rates, the amount and timing of new store
openings, the integration of such new stores into the operations of the
Company and the net sales contributed by new stores. The addition of a
large number of new stores significantly affects results of operations on a
quarter-to-quarter basis.
10
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange
Commission on June 14, 1994).
3.2 Amended and Restated By-Laws of the Registrant (incorporated
by reference to Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1, File No. 33-80200, initially filed
with the Securities and Exchange Commission on June 14,
1994).
4 Specimen Common Stock Certificate (incorporated by reference
to Exhibit 4 to the Registrant's Registration Statement on
Form S-1, File No. 33-80200, initially filed with the
Securities and Exchange Commission on June 14, 1994).
11 Statement regarding computation of net income per common
share and common share equivalent.
b) Reports on Form 8K
During the quarter ended June 30, 1996, no reports on Form 8-K
were filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIERCING PAGODA, INC.
(Registrant)
Date: August 9, 1996 /s/ John F. Eureyecko
---------------------------------
John F. Eureyecko
President,
Chief Operating Officer
(Principal Financial Officer)
Date: August 9, 1996 /s/ Brandon R. Lehman
---------------------------------
Brandon R. Lehman
Treasurer
(Principal Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
11 Statement regarding computation of net income per
common share and common share equivalent. 14
13
Exhibit 11 - Statement regarding computation of net income per common
share and common share equivalent.
Three months ended
June 30, 1996
(In thousands, except per share data)
Average shares outstanding 5,243
Net effect of dilutive stock options,
based on the treasury stock method 113
------
Total shares used in computation 5,356
======
Net income $ 35
======
Net income per common share
and common share equivalent $ 0.01
======
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1996
<CASH> 1,978
<SECURITIES> 0
<RECEIVABLES> 788
<ALLOWANCES> 0
<INVENTORY> 30,078
<CURRENT-ASSETS> 37,094
<PP&E> 28,143
<DEPRECIATION> 10,573
<TOTAL-ASSETS> 56,232
<CURRENT-LIABILITIES> 22,283
<BONDS> 2,718
0
0
<COMMON> 53
<OTHER-SE> 29,646
<TOTAL-LIABILITY-AND-EQUITY> 56,232
<SALES> 30,244
<TOTAL-REVENUES> 30,244
<CGS> 17,463
<TOTAL-COSTS> 17,463
<OTHER-EXPENSES> 12,421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 361
<INCOME-PRETAX> 59
<INCOME-TAX> 24
<INCOME-CONTINUING> 35
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
