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, 1997
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
6,034,920 (as of August 11, 1997)
<PAGE>
PIERCING PAGODA, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated balance sheets as of
June 30, 1997 and March 31, 1997 3
Consolidated statements of operations for the three
months 4
ended June 30, 1997 and 1996
Consolidated statements of cash flows for the three
months ended June 30, 1997 and 1996 5
Notes to consolidated financial statements 7
Item 2. Management's discussion and analysis of financial
condition and results of operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
------------ -----------
Assets (Unaudited)
Current assets
<S> <C> <C>
Cash $ 2,681 $ 4,119
Accounts receivable 1,411 2,233
Inventory 48,869 43,109
Deposits for inventory purchases 384 850
Prepaid expenses and other current assets 863 757
Prepaid income taxes 2,082 1,494
Deferred tax assets 1,697 1,530
------------ -----------
Total current assets 57,987 54,092
Property, fixtures and equipment, net 24,258 22,572
Other assets 6,460 3,077
============ ===========
$ 88,705 $ 79,741
============ ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 6,509 $ 3,668
Current installments of long-term debt 234 234
Accrued expenses and other current liabilities 9,346 9,541
------------ -----------
Total current liabilities 16,089 13,443
Long-term debt, less current installments 19,481 26,690
Deferred tax liabilities 183 1,550
Other liabilities 661 536
------------ -----------
Total liabilities 36,414 42,219
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share,
authorized 3,000,000 shares. None issued. - -
Common stock, par value $.01 per share,
authorized
15,000,000 shares. Issued 5,933,620 shares and 60 53
5,273,994
at June 30, 1997 and March 31, 1997,
respectively.
Additional paid-in capital 37,647 22,588
Retained earnings 14,584 14,881
------------ -----------
Total stockholders' equity 52,291 37,522
------------ -----------
$ 88,705 $ 79,741
============ ===========
</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,
-------------------
1997 1996
-------- ---------
<S> <C> <C>
Net sales $42,873 $ 30,244
Cost of goods sold and occupancy
expenses, 24,766 17,463
(excluding depreciation on
kiosks)
-------- ---------
Gross profit 18,107 12,781
Selling, general and administrative
expenses, 17,854 12,421
(including depreciation on
kiosks)
-------- ---------
Income from operations 253 360
Interest and other income 103 60
Interest expense 843 361
-------- ---------
Earnings (loss) before income taxes (487) 59
Income tax expense (benefit) (190) 24
======== =========
Net (loss) income $ (297) $ 35
======== =========
Earnings (loss) per share $(0.05) $ 0.01
======== =========
Weighted average common shares and
equivalent shares outstanding 5,492 5,356
======== =========
</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,
-------------------------
1997 1996
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (297) $ 35
Adjustments to reconcile net income (loss) to net
cash provided
by (used in) operating activities:
Depreciation and amortization 1,221 781
(Gain) loss on disposal of property, fixtures
and equipment (10) -
Other changes in other assets (32) (9)
Deferred income taxes 318 -
Change in operating assets and liabilities
net of effects of acquisitions:
Accounts receivable 822 6
Inventory (3,393) (4,688)
Deposits for inventory purchases 466 (1,936)
Prepaid expenses and other current assets (106) 173
Prepaid income taxes (552) (82)
Accounts payable 2,841 5,313
Accrued expenses and other current liabilities (255) (535)
Other liabilities (115) 60
------------ -----------
Net cash provided by (used in) operating activities 908 (882)
Cash flows from investing activities:
Additions to property, fixtures and equipment (2,284) (2,518)
Payments for purchase of businesses (7,904) -
Proceeds from disposal of property, fixtures and
equipment 38 -
Noncurrent deposits, net (17) 81
------------ -----------
Net cash used in investing activities (10,167) (2,437)
Cash flows from financing activities:
Repayments of long-term debt (9) (2)
Revolving line of credit, net (7,200) 2,970
Loan fees paid - (20)
Proceeds from issuance of long-term debt - 400
Net proceeds from issuance of common stock under
employee share plans 128 85
Proceeds from issuance of common stock, net 14,902 -
------------ -----------
Net cash provided by financing activities 7,821 3,433
------------ -----------
Net increase (decrease) in cash (1,438) 114
Cash at beginning of period 4,119 1,864
============ ===========
Cash at end of period $ 2,681 $ 1,978
============ ===========
</TABLE>
5
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30,
-------------------------
1997 1996
<S> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 677 $ 297
============ ===========
Income taxes, net $ 80 $ 106
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of significant accounting policies
The accompanying consolidated financial statements of Piercing Pagoda, Inc.
and subsidiary (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements include the
results of operations for Piercing Pagoda, Inc. and a wholly owned
subsidiary. All intercompany transactions have been eliminated in
consolidation. These consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended March 31, 1997. 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, 1997 are not
necessarily indicative of the results that may be expected for the entire
fiscal year.
Note 2 Property, Fixtures and Equipment
A summary of major classes of property, fixtures and equipment follows (in
thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
-------------- -----------
<S> <C> <C>
Land $ 688 $ 688
Furniture and fixtures 3,292 3,054
Kiosks 21,616 19,832
Building and improvements 4,050 4,037
Computer equipment, software and other
equipment 8,041 7,396
-------------- -----------
37,687 35,007
Less accumulated depreciation and
amortization 13,429 12,435
============== ===========
$ 24,258 $ 22,572
============== ===========
</TABLE>
7
<PAGE>
Note 3 Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
June 30, March 31,
1997 1997
------------- -----------
<S> <C> <C>
Accrued payroll, vacation
and related taxes $ 3,685 $ 4,160
Sales tax payable 765 704
Accrued rents payable 666 1,091
Liability under jewelry club program 788 747
Liability under lifetime guarantee
program 1,261 1,211
Other accrued expenses 2,181 1,628
============== ===========
$ 9,346 $ 9,541
============== ===========
</TABLE>
Note 4 Purchase of businesses
In April 1997, the Company purchased substantially all the operations of
Silver and Gold Connection, Inc, an independent kiosk retailer ("Silver and
Gold"). Silver and Gold had operated approximately 46 kiosk locations
selling primarily gold and silver jewelry. The purchase agreement provides
for the payment of $4.7 million for the kiosk locations, leases and store
fixtures. The Company also acquired all of Silver and Gold's inventory for
approximately $2.8 million. The excess of the net assets acquired over
their fair value of approximately $3.0 million has been recorded as
goodwill and is being amortized over 15 years. In connection with the
acquisition, the Company entered into a non-competition agreement with the
principal stockholder of Silver & Gold which provides for annual payments
of $60,000 to be made over a five year period. Also during the quarter
ended June 30, 1997, the Company acquired two other kiosk locations from
unrelated third parties. The total purchase price for these acquisitions of
$99,000 has been recorded as goodwill. The effect of these transactions was
not material to the results of operations of the Company.
Note 5 Secondary Offering
On June 30, 1997, the Company completed a secondary offering of 650,000
shares of its common stock. The transaction resulted in net proceeds (after
offering expenses) to the Company of approximately $14.9 million which was
used to repay indebtedness under the Company's revolving line of credit.
Subsequently, in July 1997, the underwriters of the offering exercised
their option to purchase an additional 97,500 shares of stock from the
Company resulting in additional proceeds (after underwriting discounts and
commissions) to the Company of approximately $2.3 million.
8
<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, 1997 and 1996
Consolidated net sales increased $12.7 million, or 42% from $30.2 million
for the three months ended June 30, 1996 to $42.9 million for the three
months ended June 30, 1997. This increase was due primarily to net sales
generated by new stores opened or acquired by the Company and a $1.7
million, or 6%, increase in comparable store net sales. There were a total
of 749 stores open at June 30, 1997 compared to 535 at June 30, 1996, an
increase of 40%. In addition, wholesale sales to the Florida licensee
increased to $878,000 for the three months ended June 30, 1997 from
$336,000 in the three months ended June 30, 1997. This increase reflects
increased sales volume at the Florida Licensee's stores and the purchase of
initial inventory for locations purchased by the Florida Licensee from the
Company in May 1997. The average jewelry units sold per store increased 16%
to 2,900 for the three months ended June 30, 1997 compared to 2,500 at June
30, 1996. The average price per jewelry unit sold declined to $23.96 for
the three months ended June 30, 1997 compared to $24.52 for the three
months ended June 30, 1996. The increase in average jewelry units sold and
decrease in average price per jewelry unit reflect greater promotional
activity during the period as compared to the previous year. The Company
increased promotions in an effort to increase unit sales and produce
greater gross profit dollars.
Gross profit increased $5.3 million, or 41%, from $12.8 million for the
three months ended June 30, 1996 to $18.1 million for the three months
ended June 30, 1997. The Company's gross profit margin was relatively
unchanged at 42.2% for the three months ended June 30, 1997 versus 42.3%
for the three months ended June 30, 1996. Gross profit margin decreased
slightly due to an increase in sales activity to the Florida licensee.
Wholesale sales to the Florida licensee produce a lower gross margin than
the Company's own retail net sales.
9
<PAGE>
Selling, general and administrative expenses increased $5.4 million, or
43%, from $12.4 million for the three months ended June 30, 1996 to $17.8
million for the three months ended June 30, 1997. As a percentage of net
sales, selling, general and administrative expenses increased from 41.1%
for the three months ended June 30, 1996 to 41.6% for the three months
ended June 30, 1997. The increase in selling, general and administrative
expenses as a percentage of net sales primarily reflects higher expenses
associated with new stores opened and acquired by the Company. This was
partially offset by improvements in corporate overhead as a percentage of
net sales, reflecting leverage over a larger sales base. Depreciation and
amortization expense increased 54% to $1.2 million in the three months
ended June 30, 1997 from $781,000 in 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 $482,000, or 133%, from $361,000 for the three
months ended June 30, 1996 to $843,000 for the three months ended June 30,
1997, and as a percentage of net sales increased from 1.2% for the three
months ended June 30, 1996 to 2.0% for the three months ended June 30,
1997. The increase in interest expense was due primarily to higher average
balances on the Company's revolving line of credit agreement, principally
to fund recent acquisitions and an increase in the number of ounces
consigned under the Company's gold consignment arrangements.
As a result of the foregoing, the Company's net income declined from
$35,000 for the three months ended June 30, 1996 to a net loss of $297,000
for the three months ended June 30, 1997.
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
in June 1997, an offering of the Company's common stock. On June 30, 1997,
the Company completed a public offering of 650,000 shares of its common
stock. The transaction resulted in net proceeds (after offering expenses)
to the Company of approximately $14.9 million which was used to repay
indebtedness under the Company's revolving line of credit. Subsequently, in
July 1997, the underwriters of the offering exercised their option to
purchase an additional 97,500 shares of stock from the Company resulting in
additional proceeds (after underwriting discounts and commissions) to the
Company of approximately $2.3 million. The Company's working capital
increased to $41.9 million at June 30, 1997 from $14.8 million at June 30,
1996. At June 30, 1997, the Company had outstanding borrowings of $17.0
million under its revolving line of credit and $2.7 million of long-term
debt outstanding, including $234,000 classified as a current liability. In
addition, the Company had consigned 92,677 ounces of gold under its gold
consignment program valued at approximately $31.0 million.
10
<PAGE>
Net cash provided by operating activities was $908,000 for the three months
ended June 30, 1997 compared to net cash used by operating activities of
$882,000 for the same period in the prior year. Net cash provided by
operating activities primarily reflects increases in liabilities, a
reduction in accounts receivable and inventory deposits; and adjustments
for depreciation and amortization. These were partially offset by an
increase in inventory to stock newly acquired and opened stores.
Net cash used in investing activities was $10.2 million during the three
months ended June 30, 1997 compared to $2.4 million during the three months
ended June 30, 1996. Net cash used in investing activities primarily
reflects the purchase of substantially all the operations of Silver and
Gold Connection in April 1997 and the addition of property, fixtures and
equipment in connection with the opening of new stores and the renovation
of existing stores.
Net cash provided by financing activities was $7.8 million for the three
months ended June 30, 1997 versus $3.4 million during the three months
ended June 30, 1996. On June 25, 1997, the Company completed a secondary
offering of its common stock, raising net proceeds of approximately $14.9
million which was used to repay a portion of existing indebtedness.
The Company's revolving credit facility provides for maximum borrowings of
$75.0 million through a combination of cash advances (which may not exceed
$45 million) and letters of credit (which may not exceed $55 million) to
support the Company's gold consignment financing program. At June 30, 1997,
the Company had $25.9 million available to be borrowed under its revolving
credit facility and was in compliance with covenants contained in the
agreement. The Company believes that the expected cash flows from
operations, its gold consignment program and bank borrowings will be
sufficient to fund the Company's currently anticipated capital and
liquidity needs.
Seasonality
The Company's business is highly seasonal. Due to the impact of the
year-end holiday shopping season, the Company experiences a substantial
portion of its annual net sales and profitability in its third fiscal
quarter (ending December 31st). The Company has generally experienced lower
net sales in each of the first, second and fourth quarters and lower net
income or net losses in each of those quarters.
The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a variety of factors, including
fluctuations in the price of gold, the amount and timing of acquisitions
and new store openings, the integration of recently acquired and newly
opened stores into the operations of the Company, the timing of promotions,
and changes in national and regional economic conditions.
11
<PAGE>
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. A number of the matters and subject areas
discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are not limited to historical or current facts
and deal with potential future circumstances and developments. Prospective
investors are cautioned that such forward-looking statements are only
predictions and that actual events or results may differ materially. 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: 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; 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; fluctuations in quarterly net sales, and, in particular, third
quarter net sales; fluctuations in gold prices; competitive conditions;
economic conditions affecting disposable consumer income, such as
employment, business conditions, interest rates and taxation, as well as
trends with respect to mall shopping generally and the ability of mall
anchor tenants and other attractions to generate customer traffic in the
vicinity of the Company's stores; and 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.
12
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings against the Company
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
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).
11 Statement regarding computation of net loss per common share
and common share equivalent.
27 Financial Data Schedule.
b) Reports on Form 8-K
During the quarter ended June 30, 1997, no reports on Form 8-K were
filed.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIERCING PAGODA, INC.
(Registrant)
Date: August 14, 1997 /s/ John F. Eureyecko
---------------------
John F. Eureyecko
President,
Chief Operating Officer
(Principal Financial Officer)
Date: August 14, 1997 /s/ Brandon R. Lehman
---------------------
Brandon R. Lehman
Treasurer
(Principal Accounting Officer)
14
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
11 Statement regarding computation of net loss per
common share and common share equivalent 16
27 Financial Data Schedule 17
15
<PAGE>
Exhibit 11 - Statement regarding computation of net loss per common share and
common share equivalent.
(In thousands, except per share data) Three months
ended June 30,
1997
--------------
Average shares outstanding 5,321
Net effect of dilutive stock options, based
on the treasury stock method 171
=============
Total shares used in computation 5,492
=============
Net loss $ (297)
=============
Net loss per common share and
common share equivalent $ (0.05)
=============
16
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2681
<SECURITIES> 0
<RECEIVABLES> 1411
<ALLOWANCES> 0
<INVENTORY> 48869
<CURRENT-ASSETS> 57987
<PP&E> 37687
<DEPRECIATION> 13429
<TOTAL-ASSETS> 88705
<CURRENT-LIABILITIES> 16089
<BONDS> 0
0
0
<COMMON> 60
<OTHER-SE> 52231
<TOTAL-LIABILITY-AND-EQUITY> 88705
<SALES> 42873
<TOTAL-REVENUES> 42873
<CGS> 24766
<TOTAL-COSTS> 24766
<OTHER-EXPENSES> 17854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 843
<INCOME-PRETAX> (487)
<INCOME-TAX> (190)
<INCOME-CONTINUING> (297)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (297)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
