<PAGE> 1
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, 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
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 25, 1997 was approximately $44,262,873.
The number of shares outstanding of the Registrant's common stock is 5,283,620
(as of June 25, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Commission in
connection with the Annual Meeting of Shareholders presently scheduled to be
held on September 17, 1997 are incorporated by reference into Part III of this
Form 10-K.
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PIERCING PAGODA, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I
<S> <C>
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 THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 15
Item 6. SELECTED CONSOLIDATED FINANCIAL DATA 15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA 27
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 49
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT 49
Item 11. EXECUTIVE COMPENSATION 49
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 49
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 49
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 50
</TABLE>
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PART I
ITEM 1. BUSINESS
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. A number of the matters and
subject areas discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in the following
"Business" section and elsewhere in this Annual Report are not limited
to historical or current facts and deal with potential future
circumstances and developments. Prospective investors are cautioned
that such forward-looking statements, which may be identified by words
such as "anticipate," "believe," "expect," "estimate," "intend,"
"plan," and similar expressions, are only predictions and that actual
events or results may differ materially. Forward-looking statements
include those relating to: the ability of the Company to successfully
assimilate and increase the net sales volume and profitability of
recently acquired and newly opened stores, anticipated store openings
and closings, estimated capital expenditures, and the absence of
material adverse impact expected from the possible loss of any current
supplier, the possible termination of any current consignment agreement
arrangement, the possible enactment of new legislation or modification
of existing legislation, the possible purchase of the Company's stores
in Florida by a licensee of the Company and legal proceedings. A
variety of factors could cause the Company's actual results to differ
materially from the expected results expressed in the Company's
forward-looking statements, including, without limitation: (i) the
Company's ability to secure suitable store sites on a timely basis and
on satisfactory terms, the Company's ability to hire, train and retain
qualified personnel, the availability of adequate capital resources and
the successful integration of new stores into the Company's existing
operations; (ii) the Company's ability to successfully implement and
improve management information systems, procedures and controls on a
timely basis and in such a manner as is necessary to accommodate the
increased number of transactions and customers and the increased size
of the Company's operations; (iii) fluctuations in quarterly net sales,
and, in particular, third quarter net sales; (iv) fluctuations in gold
prices; (v) competitive conditions; (vi) economic conditions affecting
disposable consumer income, such as employment, business conditions,
interest rates and taxation, as well as trends with respect to mall
shopping generally and the ability of mall anchor tenants and other
attractions to generate customer traffic in the vicinity of the
Company's stores; and (vii) the possibility of the enactment of
legislation, or the modification of existing or pending legislation, in
jurisdictions in which the Company operates, that would adversely
affect the Company's ear piercing or other activities.
GENERAL
Piercing Pagoda is the largest retailer of gold jewelry
through kiosk stores in the United States. At May 7, 1997, the Company
operated 734 stores in 43 states and Puerto Rico, including 710 kiosk
stores and 24 in-line stores. The Company offers an extensive selection
of popular-priced 14 karat and 10 karat gold chains, bracelets,
earrings, charms and rings, as well as a selection of silver jewelry,
all in basic styles at everyday low prices. The Company's stores are
generally located in high traffic concourses of regional shopping malls
and are primarily operated under the names Piercing Pagoda, Plumb Gold
and Silver and Gold Connection. The Company's kiosk stores average
approximately 165 square feet in size, typically carry approximately
3,300 SKUs, require a low initial investment, can be opened quickly and
are easily accessible and visible within malls. During fiscal 1997, the
average price of a jewelry item sold by the Company was
approximately $24 and average comparable store net sales per square
foot were approximately $1,848. The Company believes that its low
price points and focused merchandise selection differentiate it from
other mall-based jewelry retailers.
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OPERATING STRATEGIES
Piercing Pagoda's objective is to maintain its leadership of
the gold jewelry kiosk market and increase its penetration in malls
throughout the United States while enhancing the profitability of its
overall operations. Principal elements of the Company's strategy to
achieve this objective are as follows:
Focused Merchandise Selection. The Company differentiates its
merchandise selection from other jewelry retailers by focusing on basic
styles of lower-priced 14 karat and 10 karat gold jewelry, comprised
primarily of chains, bracelets, earrings, charms and rings. The Company
offers an extensive selection within each merchandise category, and its
stores typically carry approximately 3,300 SKUs. The average price of a
jewelry item sold by the Company in fiscal 1997 was approximately $24.
Approximately 73% of a typical store's merchandise is common to all
stores, and the remaining products are selected based upon the
characteristics and local preferences of the particular store's
customer base.
Easy-to-Shop Environment. The Company seeks to locate its
kiosk stores in high traffic areas of regional malls and emphasizes
strong visual presentations of its stores and its merchandise to appeal
to both destination customers and impulse shoppers. Each item has a
clearly visible price tag that facilitates browsing and comparison
shopping while minimizing the need for sales support. The merchandise
is displayed on specially designed pads in glass showcases which
maximize the number of items shown.
Competitive Everyday Low Pricing. Piercing Pagoda's pricing
policy is to maintain everyday low prices complemented by selective
promotions. The Company's goal is to be the value leader in the
popular-priced gold jewelry business in the markets that it serves. The
Company regularly monitors price levels at its competitors in order to
ensure that its prices are competitive and the Company believes that
its volume purchasing and established relationships with suppliers
contribute to its ability to remain competitive.
Customer Service. The Company emphasizes providing
knowledgeable and responsive customer service to distinguish Piercing
Pagoda from its competition and to create customer loyalty.
Accordingly, the Company has developed and implemented extensive
employee training and incentive programs. The Company believes that its
commitment to customer service, along with a lifetime guarantee for its
merchandise, its complimentary ear piercing service with the purchase
of earrings and its "buy-five-get-one-free" jewelry club, enhance the
Company's ability to generate repeat business and to attract new
customers.
Sophisticated Management Information Systems. The Company is
committed to maintaining sophisticated management information systems.
Currently, the Company utilizes a customized management information
system that incorporates point-of-sale computers in its stores with an
inventory management and replenishment system. These proprietary
systems allow the Company to monitor and control effectively the
merchandise at its stores and enable the Company to identify and react
promptly to sales trends. Based on the sales data, the Company tailors
individual stores' merchandise levels, plans its purchasing in order to
benefit from volume purchasing discounts from its suppliers and
prioritizes the in-house preparation of merchandise. The Company is
presently in the process of upgrading its inventory management and
financial and accounting systems to accommodate its growth. The new
inventory management software system will utilize Windows NT-based
client/server technology and will be modified to replicate certain
custom elements of the Company's current system. The new financial and
accounting and inventory management systems are expected to be
operational in the third quarter of fiscal 1998 and in early fiscal
1999, respectively.
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EXPANSION STRATEGY
Prior to fiscal 1996, the Company expanded primarily through
new store openings. The Company solidified its position as the largest
operator of gold jewelry kiosk stores in the United States by acquiring
93 stores in January 1997 and 43 stores in April 1997 from companies
that had been the second and third largest gold jewelry kiosk store
operators. The Company believes that the Gemstone Acquisition (as
hereinafter defined in "Management's Discussion and Analysis of
Financial Condition and Results of Operations") and the Silver & Gold
Acquisition (as hereinafter defined in "Management's Discussion and
Analysis of Financial Condition and Results of Operations") provide the
Company with many attractive store locations and that the Company's
plan to convert the acquired stores to the Company's format and to
implement the Company's merchandising strategies will result in
increased net sales and profitability in the acquired stores. The
Company plans to achieve these results by revising and managing the
product mix of the acquired stores to reflect the Company's
merchandising strategy, and by retraining sales associates and store
management personnel to provide the level of customer service
emphasized in the Company's other stores and to improve operational
efficiencies. Based on information provided by the respective sellers,
the average net sales of the stores acquired in the Gemstone
Acquisition for the twelve months ended December 31, 1996 were
approximately $205,000, and the average net sales of the stores
acquired in the Silver & Gold Acquisition for the twelve months ended
January 31, 1997 were approximately $272,000. For fiscal 1997, the
Company's average net sales per comparable store was $303,000. The
Company believes that its substantial experience in opening new stores
and recent experience in integrating the stores acquired in the Earring
Tree Acquisition (as hereinafter defined in "Management's Discussion
and Analysis of Financial Condition and Results of Operations") will
facilitate the integration of the acquired stores. However, there is no
assurance that the Company will successfully integrate the acquired
stores and failure to do so could have a material adverse effect on the
Company's results of operations and financial condition.
With a total of 734 stores in operation as of May 7, 1997, the
Company intends to focus its attention in fiscal 1998 on the
assimilation of these recently acquired stores, as well as on
increasing the productivity of the 80 net new stores it has opened
since the beginning of fiscal 1997. The Company believes that, because
the net sales volume and store contribution of the newly acquired
stores are generally below those in the Company's comparable store base
(currently, stores in operation since April 1995), the Company has an
opportunity to increase the net sales volume and store contribution of
these stores, as well as to better leverage central infrastructure
costs (as adjusted for increases resulting from the acquisitions).
However, as the newly acquired stores enter the Company's comparable
store base (beginning after fiscal 1999 as to the Gemstone Acquisition
and fiscal 2000 as to the Silver & Gold Acquisition), they are likely
to have a negative initial impact on comparable store productivity,
even if the Company registers an increase in total and comparable store
net sales.
Because the recent acquisitions included the two largest gold
jewelry kiosk operators other than the Company, the Company does not
expect to maintain the rate of recent store acquisitions. Accordingly,
the Company intends to return to its core strategy of expanding
primarily through opening new stores. The Company plans to open
approximately 60 to 70 new stores in fiscal 1998 and approximately 70
to 90 new stores in fiscal 1999 (excluding any acquisitions), and to
close an aggregate of approximately 20 existing stores during that
two-year period. At May 7, 1997, the Company had signed lease
commitments for 25 new stores (none of which is in Florida),
substantially all of which it plans to open during fiscal 1998. Of
these, 19 are in malls which are new to the Company.
In selecting sites for new stores, the Company generally seeks
malls that have at least 500,000 square feet, a high volume of shopping
traffic, strong anchor tenants and sites available in the higher
traffic areas of the mall. Opening a new store generally requires a
total investment of
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approximately $107,000, including approximately $70,000 of inventory (a portion
of which is generally financed through consignment arrangements), $30,000 for
construction of the kiosk, fixtures, point-of-sale register and other equipment
and supplies and $7,000 for pre-opening expenses which are expensed when
incurred. New stores can typically be opened within eight weeks after obtaining
a lease commitment. In addition to evaluating malls in which it does not operate
stores, the Company continually evaluates malls where its stores are located to
determine whether net sales volumes warrant another kiosk in such malls. The
Company believes that Piercing Pagoda's strong national retailing reputation,
along with the flexibility of its kiosk store format, make its stores attractive
to mall developers and managers.
As part of its ongoing operations, the Company continually evaluates
the performance of its stores and the malls in which they are located. Since
kiosks require a relatively low investment to open and can be moved relatively
easily, the Company's expansion strategy includes closing kiosks when
appropriate and relocating the kiosks to new locations. During the past three
fiscal years, the Company has closed 21 stores.
The Company's expansion may also include retail concepts and locations
other than the Company's standard kiosks in regional malls. As of May 7, 1997,
the Company operated 24 in-line stores, most of which were acquired as part of
the Earring Tree Acquisition, and expects to open less than five in-line stores
in fiscal 1998 as it evaluates whether to expand its in-line store operations.
The in-line store format may allow the Company to expand into malls where kiosks
are not utilized, as well as to increase its presence in malls where it already
operates kiosks; to offer a larger selection of merchandise, including higher
price points; and to take advantage of certain favorable lease opportunities if
and when they are presented. During the 1996 holiday season, the Company
operated 50 seasonal retail mall carts, selling primarily silver jewelry under
the name Silver Station. In addition, the Company may consider limited expansion
into outlet malls or less traditional retail locations such as airport
terminals. In appropriate situations, the Company will continue to evaluate
potential acquisitions of existing stores or store sites from third parties.
MERCHANDISING AND MARKETING
Merchandising
The Company offers an extensive selection of popular-priced 14 karat
and 10 karat gold chains, bracelets, earrings, charms and rings, as well as a
selection of silver jewelry. The Company focuses its merchandise selection,
approximately 95% of which is gold jewelry, on basic styles at everyday low
prices. The Company believes that, by offering a broad assortment of basic
styles, it provides its customers with a wide variety of choices while limiting
merchandising risks associated with fashion trends. The Company maintains a
balance between new merchandise and proven successful styles. Prior to
introducing new items in all of its stores, the Company usually tests the items
in approximately 50 of its highest volume stores. The Company's stores typically
carry approximately 3,300 SKUs, approximately 82% of which have list prices
between $10 and $80, and during fiscal 1997 generated an average jewelry item
selling price of approximately $24. The Company also offers a selection of non-
jewelry items such as ear care products and jewelry cleaners. Approximately 73%
of a typical store's merchandise is common to all stores, and the remaining
products are selected based upon the characteristics and local preferences of
the particular store's customer base.
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During fiscal 1997, the Company's store net sales by merchandise category as a
percentage of total store net sales were as follows:
<TABLE>
<CAPTION>
Percent
of Total
Merchandise Category Store Sales (1)
- -----------------------------------------------------------------------------
<S> <C>
Gold
Chains and bracelets 35%
Charms and rings 27
Earrings 25
Miscellaneous Items 1
- -----------------------------------------------------------------------------
Total gold 88
Silver jewelry and other items 12
- -----------------------------------------------------------------------------
Total net store sales 100.0%
- -----------------------------------------------------------------------------
</TABLE>
(1) Excludes $2.7 million of wholesale sales to the Florida Licensee.
See "Properties."
Marketing
Piercing Pagoda's pricing policy is to maintain everyday low prices
complemented by selective promotions. The Company seeks to be the value leader
for popular-priced gold jewelry in the malls in which its stores are located.
The Company's stores display merchandise on pads in glass enclosed showcases
with clearly visible price tags that facilitate browsing and comparison
shopping, while minimizing the need for sales support. The modular merchandise
display trays in which the merchandise pads fit are configured so as to maximize
the number of items displayed and to minimize unused space in the showcases.
Generally, gold merchandise is priced based on the price the Company paid its
suppliers for such merchandise, and the items are not repriced based on normal
fluctuations in the price of gold. The Company regularly monitors price levels
at its competitors in order to ensure that its prices are competitive, and the
Company believes that its volume purchasing and established supplier
relationships contribute to its ability to remain competitive. In addition to
everyday low prices, the Company has a "buy-five-get-one-free" jewelry club. In
fiscal 1997, the Company increased its promotional events, such as events
featuring "Your Choice $19" and "Buy One, Get One at 1/2 Off," as well as
occasional clearance sales. The Company intends to continue to emphasize these
promotions and to monitor them in order to assess their relative success.
In addition to emphasizing lower prices, extensive selection, 734
nationwide locations as of May 7, 1997 and over 20 years of retail experience,
the Company promotes the following:
Complimentary ear piercing. With the purchase of earrings, the Company
offers complimentary ear piercing and a free check-up after four weeks. The
Company utilizes a state-of-the-art ear piercing system and requires all
employees performing ear piercing services to be trained and recertified by the
Company annually. The Company limits its ear piercing service to the ear and
will not pierce any other part of the body. During fiscal 1997, approximately
11% of the Company's net sales were derived from the sale of earrings in
connection with complimentary ear piercing.
Lifetime guarantee on all jewelry items. The Company will repair or
replace, at no cost, all merchandise with manufacturing defects.
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Membership in the "buy-five-get-one-free" jewelry club. The Company
offers a customer incentive program pursuant to which, after five purchases, a
customer is entitled to a credit on the next purchase equal to the average price
paid for the five purchased items. During fiscal 1997, customers applied
approximately $3.8 million of credits received under the jewelry club to
purchases.
Free layaway. The Company will hold items for up to 90 days, with a
deposit, for customers until the full purchase price is paid.
Piercing Pagoda relies primarily on highly visible store locations,
attractive store designs and an inviting visual presentation of merchandise to
attract prospective customers. In addition, it occasionally utilizes fliers,
brochures and other point-of-sale materials to educate potential consumers about
the features and benefits of shopping at the Company's stores.
The Company generally does not advertise independently, but does
participate in programs sponsored by the malls in which the Company operates,
including local and regional newspaper advertising, advertising circulars,
seasonal full-color catalogues and radio and television commercials. In almost
all of the Company's locations, the Company is obligated by the terms of its
lease to contribute to the cost of the mall's advertising. The Company also
participates in national discount coupon book programs, mall-sponsored
promotions and a variety of public relations activities.
Unlike many jewelry retailers, the Company does not extend credit to
its customers, thereby minimizing bad debt expense. Approximately 76% of all
purchases are cash transactions (including personal checks) with the remaining
purchases being credit card sales.
STORES
At May 7, 1997, the Company operated 734 stores in 43 states and Puerto
Rico, including 710 kiosk stores and 24 in-line stores, primarily under the
names Piercing Pagoda, Plumb Gold and Silver & Gold Connection. The Company's
kiosk stores average approximately 165 square feet, with approximately 37 linear
feet of display cases. The Company generally seeks to locate its kiosk stores in
high traffic areas of mall concourses, and has created several standard kiosk
store designs that can be adapted to a particular store's location or to the
design requirements of the mall. The kiosks are manufactured to the Company's
specifications by third party kiosk suppliers and typically can be completed so
that new stores can be opened within eight weeks after obtaining a lease
commitment. At May 7, 1997, the Company operated stores in 539 malls, and
operated more than one location in 163 of those malls. Of the stores operated,
24 were in-line stores, most of which were acquired as part of the Earring Tree
Acquisition.
In January 1997 and April 1997, the Company solidified its position as
the largest operator of gold jewelry kiosk stores by acquiring 93 and 43 kiosk
stores, respectively, from the companies that had been the second and third
largest gold jewelry kiosk operators. The stores purchased were generally
comparable in size to the Company's other stores and sold similar merchandise.
In addition, 113 of those stores are in malls where the Company is already
operating.
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The following table sets forth the Company's store openings and closings for
the periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended March 31,
------------------------------------------------------
1995 1996 1997 1998(1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of stores:
Beginning of period .......... 295 366 513 682
Opened/acquired:
Piercing Pagoda(2) ........ 63 121 108 18
Plumb Gold(3) ............. 14 34 66 2
Silver & Gold Connection(4) -- -- -- 34
Other(5) .................. -- -- 2 --
- --------------------------------------------------------------------------------------------
Total opened(6) ...... 77 155 176 54
- --------------------------------------------------------------------------------------------
Total closed(7) ........... 6 8 7 2
- --------------------------------------------------------------------------------------------
Total at end of period .... 366 513 682 734
============================================================================================
</TABLE>
(1) Through May 7, 1997.
(2) Includes six stores in fiscal 1995, 42 stores in fiscal 1996, 41
stores in fiscal 1997 and eight stores in fiscal 1998, respectively,
that were acquired and reopened under the Piercing Pagoda name.
Includes stores operated under the name Piercing Pagoda Too in malls
where a store is operated under the name Piercing Pagoda. Other than
the acquisitions noted, stores that change names are not included as
new openings.
(3) Includes seven stores in fiscal 1995, 24 stores in fiscal 1996, 55
stores in fiscal 1997 and two stores in fiscal 1998, respectively,
that were acquired and reopened under the Plumb Gold name. Other
than the acquisitions noted, stores that change names are not
included as new openings.
(4) All of these stores were acquired in April 1997 and reopened in May
1997 under the same name.
(5) These stores are currently operated under the Gemstone name,
although the Company intends to change the name of these stores to
one of its three primary names.
(6) Includes one in-line store in fiscal 1995, 14 in-line stores in
fiscal 1996 and seven in-line stores in fiscal 1997.
(7) Includes one store sold to the Florida Licensee in each of fiscal
1995 and fiscal 1997, and two stores sold in fiscal 1998. Does not
include three stores that the Florida Licensee notified the Company
in April 1997 it intends to purchase. See "Properties."
STORE OPERATIONS
Store operations are divided into eight regions, each of which is
supervised by a regional manager. The regional managers supervise the Company's
district managers, each of whom is responsible for an average of approximately
ten stores within a specific geographic area. Each of the Company's stores has a
full-time manager and a full-time assistant manager in addition to hourly sales
associates, most of whom work part-time. The number of hourly sales associates
fluctuates greatly depending on seasonal needs.
The Company believes that providing knowledgeable and responsive
customer service is a crucial element to its success and, accordingly, has
developed and implemented extensive employee training and incentive programs. In
addition to training during the first few weeks of employment and frequent field
training, the Company produces training videos for sales associates. The Company
monitors its training program by having sales associates complete worksheets
after viewing each video. Additionally, every August, all sales personnel
complete "Piercing University" where they are retrained in the state-of-the-art,
safe, sterile ear piercing method utilized by the Company. Store managers, most
of whom are promoted from within the Company and over 34% of whom (excluding
personnel hired in connection with the January and April 1997 acquisitions) have
been with the
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Company longer than three years, also complete extensive training programs
during which they receive training in management skills and employee relations
as well as in sales and customer service. The Company regularly monitors
customer service at its stores by using "secret shoppers" who complete
evaluation forms after visiting stores as customers. Regional managers and
district managers, over 57% of whom have been with the Company over five years,
generally spend approximately one week, two to four times per year, in the
Company's corporate headquarters where they receive ongoing administrative and
operational training.
The Company seeks to instill enthusiasm and dedication in its store
management personnel and sales associates through incentive programs and
regularly solicits employee suggestions regarding store operations. Management
believes that its employee-oriented culture creates a sense of personal
accountability among its employees, as well as pride in the Company and its
merchandise, resulting in a higher level of customer service. Sales associates,
as well as store management personnel, receive base compensation plus incentive
compensation and are entitled to discounts on purchases. The Company seeks to
motivate its store personnel to focus on team success by having the incentive
portion of their compensation related primarily to store performance and to a
lesser extent to individual performance. District managers and their supervisors
are eligible for stock options and stock purchases on a discounted basis
pursuant to the Company's 1995 Employee Stock Purchase Plan, as well as for
commissions and bonuses. The Company experiences a significant amount of
turnover among its personnel, especially among its sales associates, that it
believes is typical of its industry.
PURCHASING AND DISTRIBUTION
The Company's centralized purchasing department selects and test
markets its merchandise, develops relationships with suppliers and monitors the
merchandise levels at the Company's stores and corporate distribution center.
Target merchandise levels for each store are calculated according to the
individual store's sales volume of each item. Merchandise is delivered in bulk
to the Company's headquarters where the Company's in-house merchandise staff
prepares all items for display on merchandise pads, thereby eliminating supplier
display preparation charges. Items are tagged with a price and stickered with a
bar code label for tracking.
The Company utilizes approximately 150 vendors, primarily in the United
States, Italy and Asia, who supply various jewelry products. The Company's
purchase agreements with its suppliers are all denominated in U.S. dollars.
During fiscal 1997, the Company's five largest suppliers accounted for
approximately 43% of the merchandise purchased by the Company. Two of these
suppliers accounted for 11% and 10%, respectively, of the Company's purchases
during fiscal 1997. The Company does not believe that the loss of any current
supplier would adversely affect its operations. The Company has no long-term
contracts for the purchase of merchandise. Management believes that the
relationships the Company has established with its suppliers are good. The
Company has not experienced any difficulty in obtaining satisfactory sources of
supply and believes that adequate alternative sources of supply exist for
substantially all types of merchandise sold in its stores.
The Company maintains a quality control program, with all shipments
from suppliers being counted or weighed and visually inspected upon receipt at
the Company's offices. In addition, the Company regularly assays a portion of
gold merchandise shipments to assure that the merchandise is of the karat
represented by the supplier.
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MANAGEMENT INFORMATION SYSTEMS
The Company currently uses a proprietary, customized
UNIX-based system for both its financial and accounting and inventory
management systems. Through nightly polling of in-store registers, the
Company monitors sell-through information and inventory levels,
enhancing the Company's ability to control effectively the merchandise
at its stores and to identify and react promptly to sales trends. Based
on the sales data, the Company tailors individual stores' merchandise
levels, plans its purchasing in order to benefit from volume purchasing
discounts from its suppliers and prioritizes the in-house preparation
of merchandise.
In order to accommodate recent growth, the Company plans to
implement new inventory management and replenishment software that is
currently used by certain other major retailers, and to upgrade its
financial and accounting software. It is expected that the new
inventory management software will be modified to replicate certain
custom elements of the Company's existing system. Both the inventory
management software and the financial and accounting software that the
Company plans to install utilize the SQL relational database and a
Windows NT-based client/server architecture. The Company believes that
the combination of the new software and client/server technology will
provide the Company with better analytical tools and enhance the
information-sharing capabilities of the Company's management
information systems. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
The Company anticipates that the new financial and accounting
and inventory management systems will be operational by the third
quarter of fiscal 1998 and the first quarter of fiscal 1999,
respectively. It is expected that the new systems will be run parallel
with the existing systems until the quality of performance of the new
systems is confirmed. There is no assurance that the Company will be
able to successfully implement these new systems.
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, 1997, the Company had approximately 1,672
full-time and approximately 2,053 part-time employees. Of these, 255
were employed full-time and 82 part-time at the Company's corporate
offices and distribution facility while the balance were employed as
part of the Company's field sales force. The number of employees
fluctuates depending on seasonal needs. During the fiscal 1997 peak
holiday season, the Company had 3,053 part-time employees. None of the
Company's employees is covered by a collective bargaining agreement,
and the Company considers relations with its employees to be good.
11
<PAGE> 12
TRADEMARKS
The Company believes its registered trademarks "Piercing
Pagoda and Design" and "Silver Station," along with the Company logo
and "Plumb Gold" name, are important elements of the Company's
marketing strategy. In addition, the Company has a trademark
application pending for "Piercing Pagoda the Gold Company," and
recently acquired rights to the name "Silver & Gold Connection," for
which there is also a trademark application pending. The Company is not
otherwise dependent on any patent, trademark, service mark or
copyright.
GOVERNMENT REGULATION
The Company's ear piercing service is not regulated by federal
statute. Currently, Oregon is the only state in which the Company
operates that regulates ear piercing activities. Legislation in Oregon
requires the Company, and any of its employees administering ear
piercing services in stores in Oregon, to be licensed by the State. The
legislation also deems ear piercing through anywhere but the lobe of
the ear to be body piercing, which is subject to additional
restrictions, including that it must be performed in a separate room.
Accordingly, the Company limits its ear piercing to the ear lobe in
Oregon. The Company is aware of approximately 31 jurisdictions in which
legislation to regulate ear piercing establishments is pending,
including Maryland and Massachusetts where the Company currently
operates 32 stores and 29 stores, respectively. The proposed Maryland
legislation would subject ear piercing through other than the lobe to
restrictions similar to those imposed by the Oregon legislation. The
proposed Massachusetts legislation directs regulators to develop
procedures applicable to body piercing, which the proposed legislation
currently defines to exclude the ear lobe but to include all other
parts of the ear. Generally, however, pending legislation proposes
requiring the consent of a parent or guardian in order to pierce the
ears of a minor (which the Company requires even in the absence of
legislation), the posting of certain notices and the obtaining of
certain registrations and licenses, but does not require special
procedures for piercing of portions of the ear other than the lobe.
Management believes that the Company complies in all material respects
with applicable legislation. While the Company does not expect existing
or proposed legislation to have a material adverse effect on the
Company's business, there is no assurance that governmental bodies will
not modify existing legislation in such a way, or enact new
legislation, that would restrict or prohibit the Company from providing
ear piercing services in its stores or otherwise continuing to conduct
its business as presently operated.
In April 1993, after an investigation, the Occupational Safety
and Health Administration ("OSHA") issued an opinion that
establishments which use an ear piercing system such as the one
utilized by the Company and which maintain an ear piercing policy such
as the Company's do not expose employees to blood and, therefore, are
not subject to OSHA regulations concerning employee exposure to blood.
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, 1997, approximately 128 expire before March 31,
1998. The acquisitions of 93 stores in January 1997 and 43 stores in
April 1997 were completed without obtaining landlords' prior consent.
Over 90% of the consents have now been obtained with respect to the
January 1997 acquisition. The Company has recently begun pursuing
consents in connection with the April 1997 acquisition and, as of
May 14, 1997, had obtained four of such
12
<PAGE> 13
consents. Although the Company believes that, as a result of its
financial and operating strength and its relationships with many major
landlords, it will be able to obtain substantially all the remaining
consents on reasonable terms, there is no assurance that its
negotiations will be successful. Accordingly, there is a risk that
certain stores would have to be closed if consent is not obtained.
The Company also licenses the use of its store names and
concept to an independent store operator with 16 stores and one retail
mall cart in Florida (the "Florida Licensee"). In order to reach a
negotiated resolution of rights of the Florida Licensee who had been a
franchisee of the Company, the Company entered into an agreement with
the Florida Licensee pursuant to which the Florida Licensee generally
has the right to acquire, at prices favorable to the Florida Licensee,
the Company's stores operating in the State of Florida and has the
right of first refusal with respect to new locations in that State. The
Florida Licensee purchases its inventory from the Company and pays the
Company a royalty on its net sales. In each of fiscal 1995 and fiscal
1997, the Florida Licensee exercised its right to acquire one store
from the Company. Since the beginning of fiscal 1998, the Florida
Licensee has delivered written notice to the Company of its intention
to acquire five additional stores, two of which the Florida Licensee
acquired in May 1997. In addition, the Florida Licensee has recently
expressed interest in acquiring another three stores from the Company.
Of the 38 stores which the Company currently operates in Florida, five
were acquired from the Florida Licensee. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations --
Overview."
The Company owns a 73,000 square foot building in Bethlehem,
Pennsylvania which serves as its corporate headquarters and
distribution center. As a result of recent acquisitions, the Company's
distribution facilities are near capacity. Accordingly, it plans to
begin construction during fiscal 1998 of an approximately 50,000 square
foot facility on approximately five acres of vacant land it owns
adjacent to the Bethlehem property. This new facility is planned to be
used primarily for additional distribution and warehousing functions.
ITEM 3. LEGAL PROCEEDINGS
Piercing Pagoda is not a party to any legal proceedings, other than
certain actions arising in the ordinary course of business. The Company
does not believe that any such claims and lawsuits, either individually
or in the aggregate, will have a material adverse effect on Piercing
Pagoda's results of operations or financial condition.
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, 1997.
13
<PAGE> 14
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, 1997. All executive officers
serve at the discretion of the Board of Directors of the Company.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Name Age Position with Company
- -------------------------------------------------------------------------------
<S> <C> <C>
Richard H. Penske 54 Chairman of the Board and Chief Executive Officer
John F. Eureyecko 48 President, Chief Operating Officer, Secretary and
Director
Barry R. Clauser 43 Senior Vice President -- Merchandise Operations
Sharon J. Zondag 42 Senior Vice President -- Store Operations
Brandon R. Lehman 44 Treasurer
- -------------------------------------------------------------------------------
</TABLE>
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.
14
<PAGE> 15
PART II
ITEM 5. MARKET FOR THE 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:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal year 1996
----------------
First Quarter $10.63 $ 7.63
Second Quarter $14.88 $10.25
Third Quarter $18.50 $13.75
Fourth Quarter $18.50 $12.75
Fiscal year 1997
----------------
First Quarter $18.75 $13.25
Second Quarter $22.25 $17.00
Third Quarter $24.25 $20.00
Fourth Quarter $26.63 $21.00
</TABLE>
As of June 13, 1997, there were approximately 128 holders of record
of the Company's common stock.
There are currently no restrictions on the use of retained earnings
for the distribution of dividends, as long as the Company is not, or
the making of such distribution would not cause the Company to be, in
default under its existing credit facility. However, the Company
currently intends to retain any future earnings to fund operations and
continued development of its business and, therefore, does not
anticipate paying cash dividends on its common stock for the
foreseeable future. The payment of dividends is at the discretion of
the Company's Board of Directors and will be based upon the earnings,
capital requirements and operating and financial condition of the
Company, among other factors, at the time such dividends are
considered. The Company has not paid any dividends since the beginning
of fiscal 1996.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data for the five years ended March 31, 1997
is qualified by reference to and should be read in conjunction with the
Company's consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere herein.
15
<PAGE> 16
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except per share and selected operating data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales .................................. $166,885 $121,581 $ 86,076 $ 68,922 $ 58,725
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks) ....... 92,308 67,440 48,069 37,961 31,766
- ---------------------------------------------------------------------------------------------------------------------
Gross Profit ............................... 74,577 54,141 38,007 30,961 26,959
Selling, general and administrative expenses
(including depreciation on kiosks) ....... 60,845 43,887 30,007 25,122 22,706
Restricted stock compensation bonus (1) .... -- -- -- 390 --
- ---------------------------------------------------------------------------------------------------------------------
Income from operations ..................... 13,732 10,254 8,000 5,449 4,253
Interest and other income .................. 386 282 307 370 228
Interest expense ........................... 2,208 1,306 1,427 1,464 1,498
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes ............... 11,910 9,230 6,880 4,355 2,983
Income tax expense (2) ..................... 4,372 3,553 3,352 121 112
- ---------------------------------------------------------------------------------------------------------------------
Net income (2) ............................. $ 7,538 $ 5,677 $ 3,528 $ 4,234 $ 2,871
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA:
Earnings per share ....................... $ 1.40 $ 1.07
Weighted shares outstanding .............. 5,389 5,325
PRO FORMA DATA:
Pro forma net income (2) ................... $ 4,156 $ 2,624
Pro forma net income per share (2) (3) ..... $ 0.91 $ 0.67
Pro form weighted share outstanding (3) .... 4,558 3,895
SELECTED OPERATING DATA:
Number of stores at beginning of period .... 513 366 295 279 285
Stores added (net of closures and sales) ... 169 147 71 16 (6)
- ---------------------------------------------------------------------------------------------------------------------
Stores at end of period .................... 682 513 366 295 279
- ---------------------------------------------------------------------------------------------------------------------
Average jewelry units sold per
comparable store (rounded) (4) ........... 12,000 11,600 10,800 9,500 8,300
Average comparable store net sales (5) ..... $303,000 $295,000 $266,000 $241,000 $ 208,000
Average comparable store
net sales per square foot (6) ............ $ 1,848 $ 1,821 $ 1,652 $ 1,544 $ 1,333
Average comparable store square footage (6) 164 162 161 153 153
Percentage increase in
comparable store net sales (7) ........... 7.6% 12.4% 9.8% 13.8% 14.2%
</TABLE>
<TABLE>
<CAPTION>
March 31,
--------------------------------------------------------------------------
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital ............................ $40,649 $15,948 $13,556 $ 3,464 $ 2,908
Inventory .................................. 43,109 25,390 15,128 12,413 11,378
Total assets ............................... 79,741 47,906 32,122 26,749 24,062
Current installments of long-term debt ..... 234 5,910 -- 5,693 6,216
Long term debt, less current installments... 26,690 2,350 -- 10,628 6,104
Stockholders' equity ....................... 37,522 29,579 23,862 2,335 6,636
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 17
(1) The restricted stock compensation bonus in fiscal 1994 was due
to the Company granting a bonus to seven employees and
directors equal to approximately $1.78 for each share
purchased by such employees and directors under the Company's
1994 Restricted Stock Plan. The bonuses were used by the
recipients to pay a portion of the purchase price for the
shares purchased. The Company has not since and does not
anticipate granting similar bonuses in the future.
(2) For fiscal years 1993 and 1994 the Company was an "S"
corporation for federal and certain state income tax purposes
and, accordingly, was subject only to limited corporate income
taxes. For fiscal 1995, income tax expense includes the state
tax expense for certain states in which the Company did not
elect "S" corporation status prior to the initial public
offering in October 1994, a one-time deferred tax charge for
conversion from "S" corporation to "C" corporation status for
federal and certain state purposes, and the current and
deferred taxes applicable to the Company's income as a "C"
corporation for the period after the initial public offering.
Due to the allocation method utilized for tax return purposes,
tax expense for the post offering period includes taxes
payable to taxing authorities and payments to certain of the
Company's stockholders pursuant to a tax indemnification
agreement between the Company and such stockholders. See Notes
to Consolidated Financial Statements.
(3) Pro forma net income per share has been computed by dividing
pro forma net income by the weighted average number of common
shares and common share equivalents outstanding during fiscal
1994 and fiscal 1995, as adjusted to give effect at all times
to the sale or other issuance of shares during March and June
of fiscal 1994. See Note 1 of Notes to Consolidated Financial
Statements.
(4) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average
jewelry units sold per comparable store based on 260, 283 and
355 comparable stores, respectively, which represent the
number of all stores open at the end of such fiscal year which
were also open as of the beginning of the preceding year.
Average jewelry units sold per store in fiscal 1993 and fiscal
1994 is calculated by dividing the total jewelry units sold by
the Company's stores during the period by the average of the
total beginning and ending number of stores and is rounded to
the nearest hundred. Due to the significant number of new
store openings in the last three fiscal years, the Company
believes comparable store data is a more meaningful measure of
the growth in unit sales at its stores than total store data.
(5) Average net sales per comparable store is calculated based on
the net sales of all stores open as of the beginning of the
preceding fiscal year divided by the number of such stores.
(6) Fiscal 1995, fiscal 1996 and fiscal 1997 reflect average net
sales per square foot for comparable stores (those stores open
at the end of the respective fiscal year which were also open
as of the beginning of the preceding fiscal year) based on the
approximate average square footage per comparable store of
161, 162 and 164 square feet, respectively. Average net sales
per square foot in fiscal 1993 and fiscal 1994 is based on the
average net sales per store divided by 153, the approximate
average square footage for all stores during both periods.
Average net sales per store in fiscal 1993 and fiscal 1994 is
based on the net sales, less wholesale sales, divided by the
average of the total beginning and ending number of stores per
period. Due to the significant number of larger, new store
openings in the latest three fiscal years, the Company
believes comparable store data is a more meaningful measure of
the growth in sales per square foot at its stores than total
store data.
(7) Comparable store net sales data are calculated based on the
change in net sales of all stores open as of the beginning of
the preceding fiscal year.
17
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a
safe harbor for forward-looking statements. A number of the matters and
subject areas discussed in the following "Management's Discussion and
Analysis of Financial Condition and Results of Operations," in the
"Business" section and elsewhere in this 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.
OVERVIEW
Founded in 1973 as a successor to a company that opened its first
store in 1972, Piercing Pagoda operated 710 kiosk stores and 24 in-line
stores in regional malls in 43 states and Puerto Rico as of May 7,
1997. Prior to fiscal 1996, the Company expanded primarily through new
store openings. Since the beginning of fiscal 1996 through May 7, 1997,
the Company has acquired an aggregate of 204 stores. In fiscal 1996,
the Company acquired 51 kiosks and 17 in-line stores previously
operated by Earring Tree, Inc., which was then in bankruptcy (the
"Earring Tree Acquisition"). In January 1997 and April 1997, the
Company solidified its position as the largest operator of gold jewelry
kiosk stores by acquiring 93 and 43 kiosk stores, respectively, from
the companies that had been the second and third largest gold jewelry
kiosk operators. The stores purchased in both of these acquisitions
were generally comparable in size to the Company's other stores and
sold similar merchandise. These acquisitions included the leases,
kiosks, fixtures and inventory of the acquired stores. The purchase
prices paid in connection with the January 1997 acquisition from
Gemstone Jewelry, Inc., and a related company (the "Gemstone
Acquisition"), and the April 1997 acquisition from The Silver & Gold
Trading Company, Inc. (the "Silver & Gold Acquisition"), were
approximately $8.0 million and $8.2 million, respectively (subject to
certain post-closing adjustments relating primarily to the cost of
inventory), of which $6.0 million and $3.3 million, respectively, was
paid for inventory at the respective sellers' cost. In addition, the
Company agreed to pay $60,000 per year for five years to induce the
principal stockholder of each seller to enter into a non-competition
agreement. Because these acquisitions included the two largest gold
jewelry kiosk store operators other than the Company, the Company does
not expect to maintain the rate of recent store acquisitions.
Accordingly, the rate of the Company's net sales growth is likely to
moderate beginning in fiscal 1998 and moderate further in fiscal 1999.
The Company plans to increase the net sales and store contribution
of the acquired stores to more closely approximate the productivity of
the Company's average comparable store ($303,000 in net sales in fiscal
1997) by revising and managing the product mix of the acquired stores
to reflect the Company's merchandising strategy, and by retraining
sales associates and store management personnel to provide the level of
customer service emphasized in the Company's other stores and to
improve operational efficiencies. The Company also believes that these
acquisitions have the potential over the longer term to increase the
Company's profitability by spreading overhead over a significantly
larger store base.
Based on information provided by the respective sellers, the
average net sales of the stores acquired in the Gemstone Acquisition
for the twelve months ended December 31, 1996 were approximately
$205,000, and the average net sales of the stores acquired in the
Silver & Gold Acquisition for the twelve months ended January 31, 1997
were approximately $272,000. The Company believes that the Gemstone
Acquisition and the Silver & Gold Acquisition provide the Company with
many attractive store locations and that the Company's plan to convert
the acquired stores to the Company's format and to implement the
Company's merchandising strategies will result
18
<PAGE> 19
in increased net sales and profitability in the acquired stores. The Company
believes that its substantial experience in opening new stores and recent
experience in integrating the stores acquired in the Earring Tree Acquisition
will facilitate the integration of the acquired stores. However, there is no
assurance that the Company will successfully integrate the acquired stores and
failure to do so could have a material adverse effect on the Company's results
of operations and financial condition. Because a large number of recently
acquired and newly opened stores, which generally have lower net sales volumes
than the Company's other stores, will be entering into the base for the
computation of comparable store information during the current and future fiscal
years, average net sales per comparable store and average comparable store net
sales per square foot may decrease in the future, even if the Company
experiences increases in total and comparable store net sales.
The rate of the Company's expansion and net sales growth may also be
adversely affected to the extent that an independent store operator that is a
licensee of the Company (the "Florida Licensee") exercises its right to purchase
any or all of the Company's stores in Florida. See "Properties" and Note 14 of
Notes to Consolidated Financial Statements. Because the Company sells
merchandise to the Florida Licensee and receives a royalty from it, the Company
does not believe that its net income is likely to be materially adversely
affected by any such purchases.
As part of its ongoing operations, the Company continually evaluates
the performance of its stores and the malls in which they are located. Since
kiosks require a relatively low investment to open and can be moved relatively
easily, the Company's expansion philosophy includes closing stores where
appropriate and using the kiosks, when possible, to open stores in new
locations. During the past three fiscal years, the Company has closed 21 stores
and expects to close an aggregate of approximately 20 stores during fiscal 1998
and fiscal 1999.
Net sales are comprised primarily of sales generated by stores and, to
a much lesser extent, wholesale sales (primarily to the Florida Licensee). See
"Properties." Cost of goods sold and occupancy expenses include the cost of
merchandise, rent and other occupancy expenses and the cost of preparing
merchandise for sale. Selling, general and administrative expenses include store
and supervisory payroll, corporate overhead and non-occupancy store expenses,
including depreciation on kiosks.
19
<PAGE> 20
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,
- --------------------------------------------------------------------------------
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Net sales .................................. 100.0% 100.0% 100.0%
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks) ...... 55.3 55.5 55.8
- -------------------------------------------------------------------------------
Gross profit ............................... 44.7 44.5 44.2
Selling, general and administrative expenses
(including depreciation on kiosks) ...... 36.5 36.1 34.9
- -------------------------------------------------------------------------------
Income from operations ..................... 8.2 8.4 9.3
Interest and other income .................. 0.2 0.2 0.4
Interest expense ........................... 1.3 1.1 1.7
- -------------------------------------------------------------------------------
Earnings before income taxes ............... 7.1 7.6 8.0
Income taxes ............................... 2.6 2.9 3.9
- -------------------------------------------------------------------------------
Net income ................................. 4.5% 4.7% 4.1%
===============================================================================
Pro forma net income (1) ................... 4.8%
===============================================================================
</TABLE>
(1) Income tax expense in fiscal 1995 includes certain amounts relating to
the Company's conversion from an "S" corporation to a "C" corporation.
See Notes to Consolidated Financial Statements. In fiscal 1996 and
fiscal 1997, the Company was taxed as a "C" corporation in all
jurisdictions. Pro forma net income is computed as if the Company were
subject to federal and all applicable state corporate income taxes.
COMPARISON OF FISCAL 1997 AND FISCAL 1996
Net Sales
Net sales increased $45.3 million, or 37.3%, to $166.9 million in
fiscal 1997 from $121.6 million in fiscal 1996. This increase was due
primarily to net sales generated by new stores opened or acquired by
the Company and to a $7.6 million, or 7.6%, increase in comparable
store net sales. At March 31, 1997, the Company operated 682 stores
compared to 513 stores at March 31, 1996. The average jewelry units
sold per comparable store increased 3.5%, to 12,000 in fiscal 1997 from
11,600 in fiscal 1996 partially due to an increase in the number of
promotional events at the Company's stores versus the prior year. The
average price per jewelry unit sold for all the Company's stores also
increased modestly by $0.33, or 1.4%, to $24.48 in fiscal 1997 from
$24.15 in fiscal 1996. Wholesale sales (primarily to the Florida
Licensee) increased 42.1% to $2.7 million in fiscal 1997 from $1.9
million in fiscal 1996 to support the increased retail sales of the
Florida Licensee including sales at one additional location purchased
from the Company during fiscal 1997.
Gross Profit
Gross profit increased $20.5 million, or 37.9%, to $74.6 million in
fiscal 1997 from $54.1 million in fiscal 1996 while gross profit margin
increased slightly to 44.7% in fiscal 1997 from 44.5% in fiscal 1996.
Gross profit margin increased due to higher mark-ups associated with
lower costs of merchandise during the period, offset by an increase in
promotional events held by the Company during fiscal 1997 versus fiscal
1996. The remaining improvement in gross margin primarily reflects an
improvement in rent and other occupancy expenses as a percentage of net
sales, reflecting the leverage of a larger sales base.
20
<PAGE> 21
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $17.0
million, or 38.7%, to $60.9 million in fiscal 1997 from $43.9 million
in fiscal 1996. As a percentage of net sales, selling, general and
administrative expenses increased to 36.5% in fiscal 1997 from 36.1% in
fiscal 1996. The increase in selling, general and administrative
expense as a percentage of net sales primarily reflects higher expenses
associated with new stores opened and acquired by the Company.
Depreciation and amortization expense increased 38.5% to $3.6 million
in fiscal 1997 from $2.6 million in fiscal 1996 due primarily to
capital expenditures for new stores and the upgrading of kiosks in
existing locations.
Interest Expense
Interest expense increased $902,000, or 69.4%, to $2.2 million in
fiscal 1997 from $1.3 million in fiscal 1996, and as a percentage of
net sales, increased to 1.3% in fiscal 1997 from 1.1% in fiscal 1996.
The increase in interest expense, which includes interest paid on bank
borrowings, fees paid for letters of credit as part of the Company's
gold consignment program and gold consignment fees, primarily reflects
an increase in the Company's total average borrowings under the
Company's revolving line of credit and an increase in the number of
ounces consigned under the Company's gold consignment program. In
addition, $2.9 million of long-term debt related to the Company's
fiscal 1996 expansion of its corporate headquarters and distribution
center was outstanding since the end of the first quarter of fiscal
1997.
Income Tax Expense
Income tax expense increased $819,000 to $4.4 million in fiscal
1997 from $3.6 million in fiscal 1996. As a percentage of earnings
before income taxes, income tax expense decreased to 36.7% in fiscal
1997 from 38.5% in fiscal 1996. The increase in income tax expense is
due to the increase in the Company's earnings before income taxes. The
decrease in income taxes as a percentage of earnings before income
taxes reflects the full year effect of certain tax planning strategies
implemented during fiscal 1996.
Net Income
The Company's net income increased $1.8 million, or 31.6%, to $7.5
million in fiscal 1997 from $5.7 million in fiscal 1996. The Company
believes that such increase resulted from the foregoing factors, among
other things.
COMPARISON OF FISCAL 1996 AND FISCAL 1995
Net Sales
Net sales increased $35.5 million, or 41.2%, to $121.6 million in
fiscal 1996 from $86.1 million in fiscal 1995. This increase was due
primarily to an increase in the number of stores open in fiscal 1996 as
compared to fiscal 1995 and to a $9.2 million, or 12.4%, increase in
comparable store net sales. At March 31, 1996, the Company was
operating 513 stores versus 366 at the end of the prior fiscal year.
The average jewelry units sold per comparable store increased 7.4%, to
11,600 in fiscal 1996 from 10,800 in fiscal 1995. The average price per
jewelry unit sold for all of the Company's stores increased modestly by
$0.85, or 3.6%, to $24.15 in fiscal 1996 from $23.30 in fiscal 1995.
Wholesale sales (primarily to the Florida Licensee) increased 26.7% to
$1.9 million in fiscal 1996 from $1.5 million in fiscal 1995 to support
the increased retail sales of the Florida Licensee, including sales at
one additional location purchased from the Company in the fourth
quarter of fiscal 1995.
21
<PAGE> 22
Gross Profit
Gross profit increased $16.1 million, or 42.4%, to $54.1 million in
fiscal 1996 from $38.0 million in fiscal 1995, while gross profit
margin increased slightly to 44.5% in fiscal 1996 from 44.2% in fiscal
1995. The gross profit margin increase primarily reflects a slight
improvement in rent expense as a percentage of net sales, reflecting
the leverage of a larger sales base. Also contributing to the increase
in gross margin was a reduction in wholesale sales as a percentage of
total net sales of the Company. Wholesale sales provide a lower gross
margin than the Company's own retail net sales.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $13.9
million, or 46.3%, to $43.9 million in fiscal 1996 from $30.0 million
in fiscal 1995. As a percentage of net sales, selling, general and
administrative expenses increased from 34.9% in fiscal 1995 to 36.1% in
fiscal 1996. The increase in selling, general and administrative
expense as a percentage of net sales primarily reflects higher expenses
associated with new store growth, an increase in staffing hours at the
Company's stores and an improved incentive package for store personnel
implemented in the third quarter of fiscal 1996. Depreciation and
amortization expense increased 44.4% to $2.6 million in fiscal 1996
from $1.8 million in fiscal 1995 due primarily to capital expenditures
for new stores and the upgrading of kiosks in existing locations.
Interest Expense
Interest expense decreased $121,000, or 8.6%, to $1.3 million in
fiscal 1996 from $1.4 million in fiscal 1995, and as a percentage of
net sales, decreased to 1.1% in fiscal 1996 from 1.7% in fiscal 1995.
The decline in interest expense, which includes interest paid on bank
borrowings, fees paid for letters of credit as part of the Company's
gold consignment program and gold consignment rates, was due primarily
to a decrease in the Company's total average borrowings, including a
$7.0 million stockholder note payable which was outstanding during
fiscal 1995 and not during fiscal 1996, and a reduction in the average
interest rate charged on the Company's revolving line of credit. These
decreases were partially offset by an increase in number of ounces
consigned under the Company's gold consignment program.
Income Tax Expense
Income tax expense increased $201,000 to $3.6 million in fiscal
1996 from $3.4 million in fiscal 1995. As a percentage of earnings
before income taxes, income tax expense decreased to 38.5% in fiscal
1996 from 48.7% in fiscal 1995. The increase in income tax expense is
due to the increase in the Company's earnings before income taxes. The
decrease in income taxes as a percentage of earnings before income
taxes reflects a change in the Company's taxable status which occurred
during fiscal 1995. See Note 10 of Notes to Consolidated Financial
Statements.
Net Income
The Company's net income increased $2.2 million or 62.9% to $5.7
million in fiscal 1996 from $3.5 million in fiscal 1995. The Company
believes that such increase resulted from the foregoing factors, among
other things.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing short-term capital requirements
have been to fund an increase in inventory and to fund capital
expenditures and working capital (mostly inventory) for
22
<PAGE> 23
new and acquired stores. The Company's long-term liquidity requirements
relate principally to the maturity of its long-term debt in July of
2000, operating lease commitments and store expansion. The Company's
primary sources of liquidity have been funds provided from operations,
a gold consignment program and bank borrowings. The Company had working
capital of $40.6 million and $15.9 million at the end of fiscal 1997
and fiscal 1996, respectively. See "- Seasonality."
Net cash provided by operating activities was $460,000 in fiscal
1997, while net cash used in operating activities amounted to $850,000
in fiscal 1996. Net cash provided by operating activities in fiscal
1997 primarily reflects net earnings plus depreciation, partially
offset by increases in working capital requirements, including
increases in inventory to support new and acquired store growth. Net
cash used in operating activities in fiscal 1996 primarily reflects
increases in inventory to support growth in new and acquired stores,
partially offset by increases in net earnings and depreciation.
Net cash used in investing activities was $17.1 million and $7.7
million in fiscal 1997 and fiscal 1996, respectively. These amounts
reflect $9.7 million and $7.2 million of capital expenditures related
to new and acquired store expansion and the Company's investment in
management information systems in fiscal 1997 and fiscal 1996,
respectively. Additionally, in fiscal 1997, the Company paid $8.0
million for the acquisition of 93 locations in the Gemstone
Acquisition. In fiscal 1996, the Company acquired 68 store locations in
the Earring Tree Acquisition for approximately $1.2 million.
Net cash provided by financing activities was $18.9 million in
fiscal 1997 and $8.1 million in fiscal 1996. Net cash provided by
financing activities in fiscal 1997 primarily reflects an increase of
$18.5 million under the Company's revolving line of credit and $400,000
of long-term industrial development authority financing. Net cash
provided by financing activities in fiscal 1996 reflects an increase of
$5.7 million in borrowings under the Company's revolving line of credit
and $2.5 million of long-term industrial development authority
financing.
During fiscal 1997, the Company renegotiated its existing unsecured
revolving line of credit with its primary lender acting as agent for a
syndicate of banks. The new facility, which expires July 31, 2000,
provides for maximum borrowings of $75 million through a combination of
cash advances (which may not exceed $45 million) and letters of credit
(which may not exceed $55 million) to support the Company's gold
consignment financing program. Amounts borrowed under the facility
generally accrue interest at the higher of (i) the prime rate of the
Company's primary lender minus 100 basis points (7.5% at March 31,
1997) or (ii) a rate based on overnight federal funds transactions with
Federal Reserve System members plus 50 basis points (5.9% at March 31,
1997); however, the Company may elect to have all or any portion of the
outstanding balance under the facility accrue interest at a rate based
on one, two, three or six month LIBOR plus 110 basis points (6.79% at
March 31, 1997 for a one month maturity), subject to certain
restrictions. Fees are paid on letters of credit based on amounts
outstanding at an annual rate of 0.75%. At March 31, 1997, the Company
had $19.0 million available for cash borrowings under this revolving
credit facility. Letters of credit in the amounts of approximately
$31.8 million and approximately $22.0 million were issued at March 31,
1997 and 1996, respectively.
The loan agreement contains various covenants which, among other
things, limit certain corporate acts of the Company such as mergers and
acquisitions; require the Company to maintain minimum ratios of
indebtedness to equity, current assets to current liabilities and cash
flow (as defined) to debt service; place limitations on the Company's
ability to incur additional debt or grant security interests in its
assets; and restrict the redemption, purchase or retirement of its
capital stock.
The Company utilizes gold consignment arrangements which allow the
Company to finance its gold merchandise at rates which are less than
its traditional bank borrowing rates. Under the consignment
arrangements, the Company generally sells to a consignor the gold
content of the
23
<PAGE> 24
merchandise which it owns and simultaneously has the gold consigned
back to the Company. The jewelry containing the consigned gold is
commingled with the gold jewelry owned by the Company. The Company's
obligation to the consignors is based upon the price of gold at the
time of the sale by the Company of the consigned gold and, therefore,
is subject to fluctuation based on changes in the market value of gold.
If the gold ounces in merchandise held for sale by the Company is about
to be reduced below the amount of gold consigned, the Company either
repurchases the gold from a consignor or purchases additional gold
jewelry from suppliers to support the amount of consigned gold. In the
event the price of gold at the time of such repurchases or purchases is
greater than the price at the time the gold was originally sold to the
consignor, the Company's gross profit margin will be decreased. The
Company does not engage, and currently has no plans to engage, in
hedging transactions to protect against fluctuations in the market
value of gold or to lock in prices for future purchases. The Company
does, however, manage the amount of gold consigned in relation to its
total merchandise available for sale in order to provide the Company
with the flexibility to consign or repurchase gold according to
seasonal fluctuations in merchandise levels and sales.
During fiscal 1997 and fiscal 1996, average financing costs under
the consignment agreements were approximately 2.45% and 2.31% per
annum, respectively, of the market value of the gold held under
consignment. Additionally, the current consignment agreements require a
letter of credit to support the market value of the gold consigned to
the Company. The financing cost to the Company of the consignment
program is substantially less than the cost that would have been
incurred if the Company financed the purchase of all of its gold
requirements with borrowings under its revolving credit facility. The
Company's current gold consignment arrangements are terminable by
either party upon either 30 or 45 days notice, depending on the
consignor. Gold consignment programs are common in the gold jewelry
industry and the Company believes that, if the institutions with which
it currently has gold consignment agreements were to terminate such
agreements, it would have a number of opportunities to establish gold
consignment programs with terms similar to its current arrangements.
During the last two fiscal years, the Company has financed an
average of approximately 73% of the gold content of its merchandise
under the consignment program. As of March 31, 1997, the amount of gold
consigned was 88,300 ounces with a value of $30.7 million versus 54,500
ounces with a value of $21.6 million at March 31, 1996. The consigned
gold is not included in inventory on the Company's balance sheet and,
therefore, there is no related liability recorded. If the market value
of gold increases, assuming the number of ounces consigned remain
constant, the financing costs incurred by the Company which are
included in interest expense, and the repayment obligations to the
consignors under the consignment arrangements, will increase in
proportion to the increase in the market value of gold. Additionally,
the amount of the letters of credit would need to be increased to
support the increased market value of the consigned gold, thereby
reducing the amount which might otherwise be available for cash
borrowings under the Company's revolving credit facility.
The Company anticipates capital expenditures in fiscal 1998 to
total approximately $8.0 million, of which approximately $3.0 million
is related primarily to the construction of new stores and the
renovation of existing stores, and approximately $5.0 million is
related to the construction of a new warehouse and distribution
facility, the implementation of new inventory management and
replenishment software, additional computer hardware associated with
this software and the upgrading of its financial and accounting
systems. The Company currently anticipates opening approximately 60 to
70 new stores in fiscal 1998, excluding any potential acquisitions.
Opening a new store generally requires a 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,
24
<PAGE> 25
bank borrowings under its revolving line of credit facility and the net
proceeds of this offering will be sufficient to fund the Company's
currently anticipated capital and liquidity needs.
SEASONALITY
The Company's business is highly seasonal. Due to the impact of the
holiday shopping season, the Company experiences a substantial portion
of its total net sales and profitability in its third fiscal quarter
(ending December 31st), and during the last two fiscal years, the month
of December, on average, has accounted for approximately 26% of the
Company's annual net sales and 103% of its annual income from
operations. The Company has generally experienced lower net sales in
each of the first, second and fourth quarters of each fiscal year, and
lower net income or net losses in each of those quarters.
QUARTERLY DATA
Set forth below is certain summary information with respect to the
Company's operations for the most recent eight fiscal quarters:
<TABLE>
<CAPTION>
Fiscal 1997 FISCAL 1996
1st 2nd 3rd 4th 1st 2nd 3rd
Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Net sales $ 30,244 $ 32,439 $ 66,339 $ 37,863 $ 22,375 $ 23,012 $ 49,141
Gross profit(1) 12,781 13,716 31,880 16,200 9,295 9,870 23,244
Selling, general and
administrative expenses(1) 12,421 13,477 18,477 16,470 8,927 9,528 13,491
Income (loss) from operations 360 239 13,403 (270) 368 342 9,753
Net income (loss) 35 (105) 7,824 (216) 162 45 5,700
Earnings (loss) per share $ 0.01 $ (0.02) $ 1.45 $ (0.04) $ 0.03 $ 0.01 $ 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
Comparable Store Net Sales
Increase 5.6% 9.4% 9.1% 7.4% 18.0% 13.7% 7.3%
As a Percentage of Net Sales:
Gross profit(1) 42.3% 42.3% 48.1% 42.8% 41.5% 42.9% 47.3%
Selling, general and
administrative expenses(1) 41.1 41.5 27.9 43.5 39.9 41.4 27.5
Income (loss) from operations 1.2 0.7 20.2 (0.7) 1.6 1.5 19.8
Net income (loss) 0.1 (0.3) 11.8 (0.6) 0.7 0.2 11.6
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FISCAL 1996
4th
Quarter
- --------------------------------------------
<S> <C>
Statement of Income Data:
Net sales $ 27,053
Gross profit(1) 11,732
Selling, general and
administrative expenses(1) 11,941
Income (loss) from operations (209)
Net income (loss) (230)
Earnings (loss) per share $ (0.04)
- --------------------------------------------
Comparable Store Net Sales
Increase 16.7%
As a Percentage of Net Sales:
Gross profit(1) 43.4%
Selling, general and
administrative expenses(1) 44.1
Income (loss) from operations (0.8)
Net income (loss) (0.9)
- --------------------------------------------
</TABLE>
(1) Gross profit excludes depreciation on kiosks. Depreciation on kiosks is
included in selling, general and administrative expenses. See Note 1 of
Notes to Consolidated Financial Statements.
If for any reason the Company's net sales were below those normally
expected for the third fiscal quarter, and, in particular, the month of
December, the Company's annual financial results would be materially
adversely affected. The seasonality of the Company's business puts a
significant demand on working capital resources to provide for a
build-up of merchandise for the holiday season. Historically, the
Company's working capital requirement is at its lowest level in
January, increases steadily through the end of November, when it
reaches its highest level, and declines rapidly through the holiday
season.
The Company's results of operations may fluctuate significantly
from quarter to quarter as a result of a variety of factors, including
fluctuations in the price of gold, the amount and timing of
acquisitions and new store openings, the integration of recently
acquired and newly opened stores
25
<PAGE> 26
into the operations of the Company, the timing of promotions,
fluctuations in the price of gold, and changes in national and regional
economic conditions. For example, earnings from operations in the
first, second and fourth quarters of fiscal 1997 were adversely
affected by the integration and assimilation of 331 stores opened or
acquired during fiscal 1996 and fiscal 1997. This was due primarily to
the relatively fixed nature of rent and other occupancy costs and
selling, general and administrative costs associated with the recently
acquired and newly opened stores, which had a significant adverse
impact on these lower net sales volume quarters.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting the relatively moderate levels of
inflation which have been experienced in the United States. The
Company's leases for stores typically provide for a percentage rent
based on store sales and, therefore, to the extent retail prices
increase, there may be an increase in occupancy costs. Generally, the
Company prices its gold merchandise based on the price it paid
suppliers for the merchandise and does not reprice the items based upon
normal fluctuations in the price of gold. While inflation has not had a
material impact upon operating results, there can be no assurance that
the Company's business will not be affected by inflation in the future.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In February, 1997, the Financial Accounting Standards Board issued
SFAS No. 128, Earnings per Share ("SFAS No. 128"). This statement
establishes standards for computing and presenting earnings per share
("EPS") and simplifies the standards for computing EPS previously found
in APB Opinion No. 15, Earnings per Share. It replaces the presentation
of primary earnings per share with the presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures.
The Company is required to adopt SFAS No. 128 during the quarter ended
December 31, 1997. The Company has not completed its evaluation of the
potential impact of the new standard on EPS. However, based on equity
instruments currently outstanding under existing stock compensations
plans, the new standard is not expected to have a material impact on
the Company's EPS.
26
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report .................................. 28
Consolidated Balance Sheets at March 31, 1997 and 1996 ........ 29
Consolidated Statements of Income for the Years ended March 31,
1997, 1996 and 1995 ........................................... 30
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended March 31, 1997, 1996 and 1995 ...... 31
Consolidated Statements of Cash Flows for the Years ended
March 31, 1997, 1996 and 1995 ................................. 32
Notes to Consolidated Financial Statements .................... 34
</TABLE>
27
<PAGE> 28
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, 1997 and 1996 and
the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period
ended March 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Piercing Pagoda, Inc. and subsidiary as of March 31, 1997 and 1996
and the results of their operations and their cash flows for each of
the years in the three-year period ended March 31, 1997, in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Allentown, Pennsylvania
May 5, 1997, except as to the second paragraph of Note 15, which
is as of May 15, 1997
28
<PAGE> 29
PIERCING PAGODA, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31,
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
ASSETS 1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 4,119 $ 1,864
Accounts receivable 2,233 794
Inventory 43,109 25,390
Deposits for inventory purchases 850 361
Prepaid expenses and other current assets 757 468
Prepaid income taxes 1,494 883
Deferred tax assets 1,530 693
- ---------------------------------------------------------------------------------
Total current assets 54,092 30,453
- ---------------------------------------------------------------------------------
Property, fixtures and equipment, net 22,572 15,806
Other assets 3,077 1,647
- ---------------------------------------------------------------------------------
$79,741 $47,906
- ---------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------
Current liabilities
Accounts payable $ 3,668 $ 1,811
Current installments of long-term debt and
revolving line of credit 234 5,910
Accrued expenses and other current liabilities 9,541 6,784
- ---------------------------------------------------------------------------------
Total current liabilities 13,443 14,505
- ---------------------------------------------------------------------------------
Long-term debt, less current installments 26,690 2,350
Deferred tax liabilities 1,550 1,259
Other liabilities 536 213
- ---------------------------------------------------------------------------------
Total liabilities 42,219 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 5,273,994 shares and
5,240,293 at March 31, 1997 and 1996,
respectively 53 53
Additional paid-in capital 22,588 22,183
Retained earnings 14,881 7,343
- ---------------------------------------------------------------------------------
Total stockholders' equity 37,522 29,579
- ---------------------------------------------------------------------------------
$79,741 $47,906
- ---------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE> 30
PIERCING PAGODA, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $166,885 $121,581 $86,076
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks) 92,308 67,440 48,069
- -------------------------------------------------------------------------------------
Gross profit 74,577 54,141 38,077
Selling, general and administrative expenses
(including depreciation on kiosks) 60,845 43,887 30,007
- -------------------------------------------------------------------------------------
Income from operations 13,732 10,254 8,000
Interest and other income 386 282 307
Interest expense 2,208 1,306 1,427
- -------------------------------------------------------------------------------------
Earnings before income taxes 11,910 9,230 6,880
Income taxes 4,372 3,553 3,352
- -------------------------------------------------------------------------------------
Net income $ 7,538 $ 5,677 $ 3,528
- -------------------------------------------------------------------------------------
Earnings per share $ 1.40 $ 1.07
- -------------------------------------------------------------------------------------
Weighted average common and equivalent
shares outstanding 5,389 5,325
- -------------------------------------------------------------------------------------
<CAPTION>
PRO FORMA DATA (UNAUDITED):
<S> <C>
Pro forma net income data:
Earnings before income taxes,
as reported $ 6,880
Pro forma income taxes 2,724
- -------------------------------------------------------------------------------------
Pro forma net income $ 4,156
- -------------------------------------------------------------------------------------
Pro forma net income per share $ 0.91
- -------------------------------------------------------------------------------------
Pro forma weighted average shares outstanding 4,558
- -------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE> 31
PIERCING PAGODA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31,
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Additional Retained
Common stock Paid-in earnings
Shares Amount Capital (deficit) Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - March 31, 1994 3,420,516 $ 34 $ 4,118 $ (1,817) $ 2,335
Issuance of restricted stock 5,000 -- 39 -- 39
Cash dividends declared -- -- -- (45) (45)
Initial public offering 1,810,271 19 17,984 -- 18,003
Share transactions under stock
option plan 300 -- 2 -- 2
Net income -- -- -- 3,528 3,528
- ------------------------------------------------------------------------------------------------
Balance - March 31, 1995 5,236,087 53 22,143 1,666 23,862
Share transactions under
employee stock plans 4,206 -- 40 -- 40
Net income -- -- -- 5,677 5,677
- ------------------------------------------------------------------------------------------------
Balance - March 31, 1996 5,240,293 53 22,183 7,343 29,579
Share transactions under
employee stock plans,
including tax benefit 33,701 -- 405 -- 405
Net income -- -- -- 7,538 7,538
- ------------------------------------------------------------------------------------------------
Balance - March 31, 1997 5,273,994 $ 53 $ 22,588 $ 14,881 $ 37,522
- ------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE> 32
PIERCING PAGODA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 7,538 $ 5,677 $ 3,528
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,636 2,639 1,770
Loss on disposal of property, fixtures and
equipment 93 49 23
Addition to deferred tax liabilities upon
conversion to "C" corporation -- -- 441
Common stock issued for interest expense
on note to shareholders -- -- 312
Other changes in other assets (97) (61) 76
Deferred income taxes 335 168 (88)
Change in operating assets and liabilities,
net of effects of acquisitions
Accounts receivable (1,428) 329 (645)
Inventory (12,951) (10,262) (2,715)
Deposits for inventory purchases (489) (11) 638
Prepaid expenses and other current
assets (289) (23) (90)
Prepaid income taxes (514) (883) --
Accounts payable 1,857 558 (922)
Accrued expenses and other current
liabilities 2,697 2,488 321
Tax indemnification payable -- (1,530) 1,530
Other liabilities 72 12 80
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 460 (850) 4,259
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, fixtures and equipment (9,724) (7,175) (3,469)
Payments for purchase of businesses (8,010) (1,150) (652)
Proceeds from disposal of property, fixtures and
equipment 22 -- 59
Return of (addition to ) deposit with Internal
Revenue Service -- 797 (434)
Noncurrent deposits, net 319 (251) 17
Collection of notes receivable from stockholders -- -- 472
Collection of notes receivable from licensee 255 75 78
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (17,138) (7,704) (3,929)
- -----------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 33
PIERCING PAGODA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED MARCH 31,
(IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt (216) -- (6,104)
Revolving line of credit, net 18,480 5,720 (3,217)
Proceeds from issuance of long-term debt 400 2,540 --
Debt issuance fees paid (39) (157) --
Proceeds from issuance of common stock, net -- -- 15,723
Payment of stockholders' note payable -- -- (5,000)
Net proceeds from the issuance of stock under
employee share plans 308 40 --
Cash dividends paid -- (45) (1,755)
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 18,933 8,098 (353)
- -----------------------------------------------------------------------------------------
Net increase (decrease) in cash 2,255 (456) (23)
Cash at beginning of period 1,864 2,320 2,343
- -----------------------------------------------------------------------------------------
Cash at end of period $ 4,119 $ 1,864 $ 2,320
- -----------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,100 $ 1,220 $ 1,427
- -----------------------------------------------------------------------------------------
Income taxes, net $ 4,551 $ 5,818 $ 1,404
- -----------------------------------------------------------------------------------------
</TABLE>
Supplemental disclosure of non-cash financing and investing activities:
During the year ended March 31, 1997, the Company entered into a
noncompetition agreement for $300,000.
During the year ended March 31, 1995, the Company exchanged 210,271
shares of common stock in partial satisfaction of obligations under $7,000,000
note payable to stockholders.
See accompanying notes to consolidated financial statements.
33
<PAGE> 34
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995
(1) STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary. Significant intercompany
accounts and transactions have been eliminated in consolidation.
OPERATIONS
The Company is a national retailer of gold jewelry primarily
through kiosk stores in enclosed shopping malls. The Company operates
stores primarily under the names Piercing Pagoda and Plumb Gold. At
March 31, 1997, the Company operated 682 stores, including 24 in-line
stores. The Company's home office provides centralized administrative
and warehousing services and assembles some of the products sold at its
stores.
In addition to its own retail units, the Company has licensed
operations at 16 stores and one retail cart location in Florida. The
Company provides the licensee with merchandise and promotional and
administrative services. Income from licensee operations is based on a
percentage of the licensee's sales and earnings from the sale of
merchandise to the licensee. See Note 13.
SALES
Sales consist primarily of net sales to the Company's retail
customers at its kiosk and in-line stores. Also included in sales are
wholesale sales to the Company's licensee. At the time of each retail
sale, the Company accrues the estimated costs of its
"buy-five-get-one-free" jewelry club promotional program. The Company
also accrues the estimated costs associated with its "lifetime
guarantee" program for subsequent customer returns due to
manufacturer's defects in the jewelry. All other returns have an
immaterial effect on the consolidated financial statements.
ACCOUNTS RECEIVABLE
The Company's accounts receivable consist principally of
receivables from credit card companies, merchandise credits receivable
from vendors, and certain receivables from its licensee.
INVENTORY AND COST OF GOODS SOLD
Inventories are stated at the lower of cost or market. Cost is
determined by the first-in, first-out (FIFO) method. The Company
purchases gold merchandise and sells the gold content of a portion of
such merchandise to financial institutions ("consignors") that
simultaneously consign the gold back to the Company. In accordance with
the terms of the agreements, the Company has the option of repaying the
consignors in an equivalent number of ounces of gold or cash based upon
the then quoted market price of gold.
The Company has excluded the consigned gold content of
merchandise in its possession from its inventory because it does not
yet have title to the gold which it holds under its consignment
arrangements. This gold has been manufactured into merchandise for sale
and the costs associated with this manufacturing process are included
in inventory.
34
<PAGE> 35
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 1997, two vendors accounted for approximately 11%
and 10%, respectively, of total merchandise purchased by the Company.
No vendors supplied more than 10% of purchases in fiscal 1996. In
fiscal 1995, one vendor accounted for approximately 14% 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 8-10 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 $1,890,000, $1,338,000 and $994,000
in fiscal 1997, fiscal 1996 and fiscal 1995, respectively.
Maintenance and repairs are expensed as incurred. Expenditures
for renovations are capitalized. Upon the sale, replacement or
retirement of property, fixtures and equipment, the cost and
accumulated depreciation thereon are removed from the accounts. Gain or
loss on sale, retirement or other disposition of property, fixtures and
equipment is reflected in earnings.
GOODWILL
Costs in excess of fair value of net assets acquired are being
amortized on a straight-line basis over periods of up to fifteen years.
The Company assesses the recoverability of goodwill by determining
whether the remaining balance can be recovered through projected future
cash flows.
LEASING EXPENSES
The Company recognizes lease expense on a straight-line basis
over the term of the lease when lease agreements provide for increasing
fixed rentals. The difference between lease expense recognized and
actual payments made is included in other liabilities on the
consolidated balance sheets.
PREOPENING COSTS AND ADVERTISING EXPENSE
Preopening and start-up costs for new stores are charged to
operations as incurred. Costs of advertising and sales promotion
programs are charged to operations in the year incurred.
35
<PAGE> 36
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
The Company records income taxes according to the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, which requires the use of the liability
method of accounting for deferred income taxes. The provision for
income taxes includes federal, state, and local income taxes currently
payable and those deferred because of temporary differences between the
financial statement and tax basis of assets and liabilities. Deferred
income taxes are recorded at the enacted rates expected to apply to
taxable income in the periods in which the deferred tax liability or
asset is expected to be settled or realized. The effect of a change in
tax rate is recognized as income or expense in the period that includes
the enactment date.
Prior to the completion of the Company's initial public
offering in October 1994, the Company was taxed as an "S" corporation
under the provisions of the Internal Revenue Code. As such, the
Company's taxable federal income was included in the individual income
tax returns of its stockholders. The Company was also taxed as an "S"
corporation in some states while remaining a taxable corporation in
others. Immediately prior to the consummation of the Company's initial
public offering, the Company's "S" corporation status terminated and
the Company became a "C" corporation subject to income taxes in all
jurisdictions. Pro forma income tax expense reflects the income tax
expense the Company would have recognized had it been taxed as a "C"
corporation for all of fiscal year 1995.
STOCK OPTION PLAN
The Company accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense would have been recorded
on the date of grant only if the market price of the underlying stock
exceeded its exercise price. On April 1, 1996, the Company adopted SFAS
No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). This
statement encourages the fair value based method of accounting for
stock options and similar equity instruments granted to employees. This
method requires that the fair value of equity instruments granted to
employees be recorded as compensation expense. However, the statement
allows companies to continue to apply APB Opinion No. 25, with
appropriate pro forma disclosure of the fair value based method. The
Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
NET INCOME PER SHARE
Net income per share has been computed by dividing net income
by the weighted average number of common shares and common share
equivalents outstanding using the treasury stock method.
36
<PAGE> 37
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PRO FORMA NET INCOME PER SHARE (UNAUDITED)
Pro forma net income per share has been computed by dividing
pro forma net income by the weighted average number of common shares
and common share equivalents outstanding during the year ended March
31, 1995, as adjusted to give effect to the sale of 218,713 shares of
restricted stock in March 1994, the sale of 5,000 shares of restricted
stock in June of 1994, the issuance of 454,545 shares at the initial
public offering price to repay $5,000,000 of a $7,000,000 note to the
Company's primary stockholder and trusts for the benefit of his
children, and the issuance in June of 1994 of options for 221,000
shares of common stock, using the treasury stock method at the average
market price (after the initial public offering) and the initial public
offering price per share (prior to the initial public offering),
respectively.
RECENT ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board
issued SFAS No. 128, Earnings per Share ("SFAS No. 128"). This
statement establishes standards for computing and presenting earnings
per share ("EPS") and simplifies the standards for computing EPS
previously found in APB Opinion No. 15, Earnings per Share. It replaces
the presentation of primary earnings per share with the presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex
capital structures. The Company is required to adopt SFAS No. 128
during the quarter ended December 31, 1997. The Company has not
completed its evaluation of the potential impact of the new standard on
EPS. However, based on equity instruments currently outstanding under
existing stock compensations plans, the new standard is not expected to
have a material impact on the Company's EPS.
(2) INITIAL PUBLIC OFFERING
On October 20, 1994, the Company completed an initial public
offering of 1,600,000 shares of its common stock. The transaction
resulted in net proceeds (after offering expenses) to the Company of
approximately $15.7 million which was used to repay certain
indebtedness of the Company including a portion of a note to certain
stockholders representing undistributed "S" corporation earnings.
(3) GOLD CONSIGNMENT AGREEMENTS
In connection with the acquisition of certain inventory, the
Company maintains gold consignment agreements. In accordance with these
consignment agreements, title to the gold remains with the gold
consignors until purchased by the Company. At March 31, 1997, 1996 and
1995, the Company had consigned 88,300, 54,500 and 35,000 ounces of
gold, respectively, with values of $30,749,000, $21,601,000 and
$13,720,000, 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,
1997, 1996 and 1995 are consignment fees of $620,000, $394,000 and
$261,000, respectively, based on approximately 2.45%, 2.31% and 2.28%,
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.
37
<PAGE> 38
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) PROPERTY, FIXTURES AND EQUIPMENT
A summary of major classes of property, fixtures and equipment follows
(in thousands):
<TABLE>
<CAPTION>
March 31,
--------------------
1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Land $ 688 $ 688
Furniture and fixtures 3,054 2,077
Kiosks 19,832 13,908
Building and improvements 4,037 3,822
Computer equipment, software and other equipment 7,396 5,130
-----------------------------------------------------------------------------------
35,007 25,625
Less accumulated depreciation and amortization 12,435 9,819
-----------------------------------------------------------------------------------
$22,572 $15,806
-----------------------------------------------------------------------------------
</TABLE>
(5) OTHER ASSETS
Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------
1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Notes receivable - licensee $ 28 $ 283
Noncurrent deposits, principally for leases, property, fixtures
and equipment 116 435
Goodwill (net of accumulated amortization or $237 and
$130 at March 31, 1997 and 1996, respectively) 1,907 314
Deferred expenses, principally long-term maintenance agreements 394 333
Cash surrender value of officers life insurance 342 282
Non-compete agreement (net of accumulated amortization of $10) 290 --
-----------------------------------------------------------------------------------
$3,077 $1,647
-----------------------------------------------------------------------------------
</TABLE>
The Company's notes receivable due from its licensee in Florida are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
--------------
1997 1996
-----------------------------------------------------------------------------------
<S> <C> <C>
Note receivable, repaid in fiscal 1997 $ -- $263
Non-interest bearing royalty note receivable due in yearly
installments of $32 60 96
-----------------------------------------------------------------------------------
60 359
Less current installments included in other current assets 32 76
-----------------------------------------------------------------------------------
$ 28 $283
-----------------------------------------------------------------------------------
</TABLE>
38
<PAGE> 39
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Included in accounts receivable at March 31, 1997 and 1996 are
$199,000 and $337,000, respectively, from the sale of merchandise and
other supplies to the licensee, and additionally, at March 31, 1997,
$137,000 from the sale of one of the Company's Florida Locations to the
licensee.
In January 1997, the Company purchased substantially all of
the operations of the companies operating retail kiosks under the names
Gemstone Jewelry, Gold-n-Gifts and Facets of Nature (collectively,
"Gemstone"), which sold gold and silver jewelry, pewter and other gift
items, for approximately $8.0 million. The acquisition was accounted
for as a purchase and the assets acquired and operations of these
kiosks are included in the Company's consolidated financial statements
from the date of acquisition. The excess of the net assets acquired
over their fair value of approximately $1.7 million has been recorded
as goodwill and is being amortized over 15 years. In connection with
the acquisition, the Company entered into a noncompetition agreement
with the principal stockholder of Gemstone which provides for annual
payments of $60,000 to be made over a five year period. The effect of
this transaction was not material to the results of operations of the
Company
During the year ended March 31, 1995, the Company acquired 13
kiosks and related operating locations and assumed related leases in
three separate transactions with unrelated third parties for a total of
$652,000. The excess of the net assets acquired over their fair market
value has been recorded as goodwill.
(6) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
-------------------
1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll, vacation and related taxes $4,160 $3,011
Sales tax payable 704 543
Accrued rents payable 1,091 661
Liability under jewelry club program 747 376
Liability under lifetime guarantee program 1,211 671
Other accrued expenses 1,628 1,522
--------------------------------------------------------------------------------
$9,541 $6,784
--------------------------------------------------------------------------------
</TABLE>
(7) LONG-TERM DEBT AND REVOLVING LINE OF CREDIT
A summary of long-term debt and revolving line of credit follows (in
thousands):
<TABLE>
<CAPTION>
March 31,
---------------------
1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $24,200 $ 5,720
Industrial development authority financing 2,724 2,540
--------------------------------------------------------------------------------
Total long-term debt 26,924 8,260
Less current installments 234 5,910
--------------------------------------------------------------------------------
$26,690 $ 2,350
--------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 40
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During fiscal 1997, the Company renegotiated its existing
unsecured revolving line of credit with its primary lender acting as
agent for a syndicate of banks. The new facility, which expires July
31, 2000, provides for maximum borrowings of $75 million through a
combination of cash advances (which may not exceed $45 million) or
letters of credit (which may not exceed $55 million) to support the
Company's gold consignment financing program. Amounts borrowed under
the facility generally accrue interest at the higher of the rates
designated by the Company's primary lender at its prime rate minus 100
basis points (7.5% at March 31, 1997) and a rate based on the rates
charged on overnight federal funds transactions with Federal Reserve
System members plus 50 basis points (5.9% at March 31, 1997). However,
the Company may elect to have all or any portion of the outstanding
balance under the facility accrue interest at a rate based on one, two,
three or six month LIBOR plus 110 basis points (6.79% at March 31, 1997
for a one-month maturity), subject to certain restrictions. Outstanding
letters of credit incur a fee charged at an annual rate of 0.75%. At
March 31, 1997, the Company had $19.0 million available for cash
borrowings under this revolving credit facility. Letters of credit in
the amounts of $31,762,000 and $21,988,000 were issued at March 31,
1997 and 1996, respectively.
The loan agreement contains various covenants which, among
other things, limit certain corporate acts of the Company such as
mergers and acquisitions; requires the Company to maintain minimum
ratios of indebtedness to equity, current assets to current liabilities
and cash flow (as defined) to debt service; places limitations on the
Company's ability to incur additional debt or grant security interests
in its assets and restricts the redemption, purchase or retirement of
its capital stock. The Company was in compliance with these covenants
as of March 31, 1997.
Borrowings under the revolving line of credit are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------------------
1997 1996 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
Borrowings at period end $ 24,200 $ 5,720 $ --
Interest rate on borrowings at period end 7.50% 7.50% 9.00%
Maximum amount of borrowings outstanding at
any month end $ 28,789 $ 20,360 $ 9,143
Average aggregate borrowings during the period $ 14,823 $ 8,051 $ 4,367
Weighted average interest rate during the period 7.50% 7.99% 8.35%
-------------------------------------------------------------------------------------
</TABLE>
In October 1995, the Company obtained a $2,540,000, ten-year term
loan through an industrial development authority. The loan is
collateralized by a letter of credit totaling $2,637,000 which is
supported by a lien on the Company's corporate headquarters and
distribution center which has a net carrying value of approximately $3.1
million at March 31, 1997. The terms of the loan require semiannual
interest payments at varying interest rates averaging 6.8% over the life
of the loan. Principal payments, in varying amounts, are required
annually.
In May 1996, the Company obtained an additional $400,000 loan in
connection with the expansion of the Company's corporate headquarters
and distribution facility in the prior fiscal year. This loan, through
an industrial development authority, requires monthly payments of
principal and interest of approximately $4,000 through May 2006 at an
effective annual interest rate of 4.59%.
40
<PAGE> 41
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Maturities of the term loans are as follows at March 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
Amount
--------------------------------------------------------------------------------
<S> <C>
1998 $ 234
1999 250
2000 262
2001 278
2002 295
Subsequent to 2002 1,405
--------------------------------------------------------------------------------
Total payments $ 2,724
--------------------------------------------------------------------------------
</TABLE>
(8) LEASES
The Company leases space primarily in shopping malls under
operating leases expiring in various years through fiscal 2005. In the
normal course of business, operating leases are generally renewed or
replaced by other leases; thus, it is anticipated that future annual
lease expense will not be less than the amount shown below for 1997.
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, 1997 under
non-cancelable operating leases having original terms in excess of one
year are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
--------------------------------------------------------------------------------
<S> <C>
1998 $ 17,343
1999 13,442
2000 10,408
2001 6,056
2002 2,138
Subsequent to 2002 951
--------------------------------------------------------------------------------
Total rental payments $ 50,338
--------------------------------------------------------------------------------
</TABLE>
A summary of minimum rent and contingent rent expense under
operating leases is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------
1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $17,292 $12,643 $ 9,201
Contingent rentals 1,498 1,191 763
--------------------------------------------------------------------------------
Total rental expense $18,790 $13,834 $ 9,964
--------------------------------------------------------------------------------
</TABLE>
41
<PAGE> 42
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 $300,000, $220,000 and $120,000 in fiscal 1997, fiscal
1996 and fiscal 1995, 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 $181,000 in fiscal
1997, $107,000 in fiscal 1996, and $42,000 in fiscal 1995. These
matching contributions are 100% vested at the time they are made.
See Note 12 for a description of the Company's employee stock
purchase plan.
(10) INCOME TAXES
For tax return purposes, taxable income for the year ended
March 31, 1995 has been allocated to the periods the Company was either
an "S" corporation or a "C" corporation under the provisions of the
Internal Revenue Code.
For financial statement purposes, income tax expense for the
year ended March 31, 1995 includes the state tax expense for certain
states in which the Company did not elect "S" corporation status prior
to the initial public offering, a one-time deferred tax charge for
conversion from "S" corporation to "C" corporation status for federal
and certain state purposes (see below), and the current and deferred
taxes applicable to the Company's income for financial reporting
purposes for the period after the initial public offering. Due to the
allocation method utilized for tax return purposes, tax expense for the
post "S" corporation period includes taxes payable to taxing
authorities and payments to certain of the Company's stockholders
pursuant to a tax indemnification agreement between the Company and
such stockholders. See Note 14.
42
<PAGE> 43
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income taxes in the consolidated statements of income consists
of the following components (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
------------------------------
1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Current tax expense:
Payable to taxing authorities
Federal $ 3,703 $ 2,877 $ 1,065
State 334 508 404
Payable under tax indemnification agreement -- -- 1,530
--------------------------------------------------------------------------------
4,037 3,385 2,999
--------------------------------------------------------------------------------
Deferred tax expense
Conversion from "S" to "C" corporation -- -- 441
Other
Federal 251 133 (55)
State 84 35 (33)
--------------------------------------------------------------------------------
335 168 353
--------------------------------------------------------------------------------
$ 4,372 $ 3,553 $ 3,352
--------------------------------------------------------------------------------
</TABLE>
As a result of the conversion from an "S" corporation to a "C"
corporation, the provision for income taxes for the year ended March
31, 1995 includes a one-time charge totaling $441,000 for the addition
to deferred tax liabilities reflecting certain differences between book
and tax accounting for depreciation, inventory and certain accrued
expenses.
The tax effect of temporary differences that give rise to
deferred tax assets and deferred tax liabilities are presented below
(in thousands):
<TABLE>
<CAPTION>
March 31,
------------------------
1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation $(1,754) $(1,378)
Inventory -- (158)
--------------------------------------------------------------------------------
Total gross deferred tax liabilities (1,754) (1,536)
--------------------------------------------------------------------------------
Deferred tax assets:
Inventory 129 --
Accrual for lifetime guarantee costs 484 265
Accrued vacation expense 381 238
Accrual for jewelry club costs 298 149
Other 442 318
--------------------------------------------------------------------------------
Total gross deferred tax assets 1,734 970
Less valuation allowance -- --
--------------------------------------------------------------------------------
Net deferred tax assets 1,734 970
--------------------------------------------------------------------------------
Net deferred tax liability $ (20) $ (566)
--------------------------------------------------------------------------------
</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
43
<PAGE> 44
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
net taxable income. Accordingly, the Company does not believe a
valuation allowance is necessary at March 31, 1997.
The following unaudited pro forma information reflects income
tax expense that the Company would have incurred if it had been subject
to federal and state income taxes for the year ended March 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
March 31,
--------
1995
--------------------------------------------------------------------------------
<S> <C>
Current
Federal $ 2,337
State 625
Deferred (238)
--------------------------------------------------------------------------------
$ 2,724
--------------------------------------------------------------------------------
</TABLE>
Income tax expense in 1997 and 1996 and pro forma income tax
expense in 1995 differs from the amounts computed by applying the
federal statutory rate of 34% to income before taxes as follows (in
thousands):
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------
1997 1996 1995
-------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rates $4,049 $3,138 $2,339
State income taxes net of federal benefit 276 358 380
Other 47 57 5
-------------------------------------------------------------------------------
$4,372 $3,553 $2,724
-------------------------------------------------------------------------------
</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, $14,000 and
$27,000 in fiscal 1997, fiscal 1996, and fiscal 1995, respectively,
representing certain direct expenses and the estimated fair value of
providing administrative services, primarily allocations of salary and
overhead.
On March 30, 1994, the Company declared a dividend to its then
current stockholders in the form of a $7,000,000 note which bore
interest at 8% per annum. The note was payable in annual installments
of $700,000 beginning March 1, 1995. Pursuant to an agreement between
the Company and the stockholders, the Company used a portion of the
proceeds from the initial public offering to fund $5,000,000 of this
distribution. The remainder, plus accrued interest, was exchanged for
shares of common stock at the initial offering price.
On March 31, 1994, the Company sold certain directors,
officers and employees 218,713 shares of its common stock for $862,000.
The difference of $390,000 between the cash price and the fair market
value of the shares at the date issued, as determined by an independent
appraisal, was recognized as restricted stock compensation bonus
expense for the year ended March 31, 1994. A receivable of $472,000 for
the cash was subsequently collected in full by the Company in May of
1994.
44
<PAGE> 45
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCKHOLDERS' EQUITY
The Company has a stock option plan which provides for the
grant of common stock options to eligible employees and others. The
aggregate maximum number of shares of common stock available for awards
under the plan is 450,000. Stock options granted may be the fair market
value of the stock or at a price determined by a committee of the Board
of Directors. The options vest over a four year period and are
exercisable over a period determined by the committee, but not longer
than ten years.
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 reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Net income As reported $ 7,538 $ 5,677
Pro forma $ 7,089 $ 5,614
Earnings per share As reported $ 1.40 $ 1.07
Pro forma $ 1.32 $ 1.05
--------------------------------------------------------------------------------
</TABLE>
The per share weighted average fair value of stock options
granted during fiscal 1997 and fiscal 1996 was $13.84 and $10.50,
respectively, on the date of grant and were determined using the
Black-Scholes option-pricing model based upon the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------------------------------
<S> <C> <C>
Expected dividend yield 0.0% 0.0%
Expected volatility 49.4 52.2
Risk-free interest rate 5.4 7.6
Expected life (in years) 9.6 9.5
--------------------------------------------------------------------------------
</TABLE>
Pro forma net income reflects only options granted in 1997 and
1996. Therefore, the full impact of calculating compensation cost for
stock options under SFAS No. 123 is not reflected in the pro forma net
income amounts presented above because compensation cost is reflected
over the options vesting period of four years and compensation cost for
options granted prior to April 1, 1995 is not considered.
45
<PAGE> 46
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized stock option data is as follows:
<TABLE>
<CAPTION>
Weighted
Average Shares
Exercise Price Under Option
--------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at March 31, 1994 $ -- --
Granted 8.15 234,000
Exercised 8.00 (300)
Canceled 8.00 (7,400)
--------------------------------------------------------------------------------
Outstanding at March 31, 1995 8.15 226,300
Granted 14.62 40,000
Exercised 8.00 (2,600)
Canceled 9.91 (14,100)
--------------------------------------------------------------------------------
Outstanding at March 31, 1996 9.09 249,600
Granted 20.79 186,000
Exercised 8.28 (25,550)
Canceled 13.58 (15,300)
--------------------------------------------------------------------------------
Outstanding at March 31, 1997 14.48 394,750
--------------------------------------------------------------------------------
Exercisable $ 11.67 152,950
--------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning
currently outstanding and exercisable options:
<TABLE>
<CAPTION>
Exercise Price
----------------------------------
$8.00 - $10.625 $18.00 - $24.50
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Options outstanding at March 31, 1997 195,450 199,300
Weighted average remaining contractual life (years) 7.27 9.56
Weighted average price $ 8.28 $ 20.56
Options exercisable at March 31, 1997 110,050 42,900
Weighted average price $ 8.26 $ 20.41
- ---------------------------------------------------------------------------------------
</TABLE>
On October 12, 1995, the Company created an Employee Stock
Purchase Plan under which the sale of 96,000 shares of its common stock
has been authorized. Generally, all employees who meet the requirements
for participation in any of the Company's other employee benefit plans
are also eligible to participate in this plan. Employees may designate
up to the lesser of $25,000 or 5% of their annual compensation for the
purchase of common stock. The price for the shares purchased under the
plan is the lower of 85% of the fair market value on the first or last
day of the purchase period. Employees are not permitted to obtain share
certificates or sell or transfer any shares for one year from the last
day of the offering period in which the shares were purchased. During
fiscal 1997 and fiscal 1996, 8,151 and 1,606 shares, respectively, were
issued under this plan.
On May 18, 1994, the Company's Board of Directors declared a
stock split, effective June 1, 1994, of 5,336 for 1 and a reduction in
the par value of the Company's stock from $.10 per
46
<PAGE> 47
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
share to $.01 per share. Prior years financial statements and all
references to common shares have been adjusted to reflect this stock
split and adjustment to par value.
On June 9, 1994, the Company sold 5,000 shares of its common
stock to the owner of its licensee for $6.00 per share.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
CASH, ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE AND GOLD
CONSIGNMENT AGREEMENTS
The carrying amount approximates fair value because of the
short maturity of these instruments.
LONG-TERM DEBT
The fair value of the Company's long-term debt approximates
its cost based on current rates offered to the Company for debt of the
same remaining maturities.
(14) COMMITMENTS AND CONTINGENCIES
The Company is periodically a defendant in certain legal
actions and other claims arising in the ordinary course of its
business. In the opinion of management, liabilities, if any, arising
from the ultimate resolution of such actions would not have a material
adverse effect on the Company's financial position, results of
operations or liquidity.
At March 31, 1997, the Company had commitments outstanding of
approximately $1,425,000 to fund capitalized expenditures, primarily
for the construction and installation of new kiosks.
Pursuant to the agreement between the Company and its
licensee, the licensee has the right to acquire, under certain
circumstances, the Company's 40 kiosk stores (at March 31, 1997)
operating in the state of Florida and has the right of first refusal
with respect to new locations in the state. Upon 90 days notice, the
licensee may purchase any or all locations in certain Florida counties.
Locations outside these counties may be purchased only during the first
seven months of any calendar year provided they have been open for two
full calendar years. The purchase price of a location is due within 30
days of closing and is determined based upon the cost of assets
acquired at the closing date. In each of fiscal 1995 and 1997, the
Licensee exercised its right to acquire one store for the Company, and
as of March 31, 1997 has delivered written notice to the Company of its
intention to acquire five additional stores from the Company in fiscal
1998.
The Company entered into a tax indemnification agreement in June of
1994 with certain current stockholders which provides for distributions
relating to tax liabilities for allocable taxable income for fiscal
1994 and 1995 and an indemnification of such stockholders for any
losses or liabilities with respect to any additional taxes resulting
from the Company's operations during the period in which it was an "S"
corporation. Liabilities of $1,530,000 and $1,755,000 were accrued at
March 31, 1995 and 1994, respectively, relating to the tax
indemnification agreements.
47
<PAGE> 48
PIERCING PAGODA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SUBSEQUENT EVENTS
In April, 1997, the Company purchased substantially all the
operations of Silver and Gold Connection, a kiosk retailers of gold and
silver jewelry for approximately $8.2 million, subject to certain
post-closing adjustments related to the valuation of acquired
inventory.
On May 15, 1997, the Company filed a registration statement on
Form S-1 for the sale of 650,000 shares of the Company's common stock.
The net proceeds estimated to be approximately $15.0 million are
expected to be used to repay indebtedness outstanding under its
revolving credit facility.
48
<PAGE> 49
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 1997 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 1997 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 1997 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 1997 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.
49
<PAGE> 50
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Report.
<TABLE>
<CAPTION>
1. Financial Statements Page
<S> <C>
Independent Auditors' Report 28
Consolidated Balance Sheets at March 31, 1997 and 1996 29
Consolidated Statements of Income for the Years ended March
31, 1997, 1996 and 1995 30
Consolidated Statements of Changes in Stockholders' Equity for
the Years ended March 31, 1997, 1996 and 1995 31
Consolidated Statements of Cash Flows for the Years ended
March 31, 1997, 1996 and 1995 32
Notes to Consolidated Financial Statements 34
</TABLE>
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.
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
50
<PAGE> 51
Commission on June 28, 1995).
10.2 Letter Amendment to Third Amended and Restated Loan
Agreement dated April 28, 1995 between the Registrant
and First Valley (incorporated by reference to Exhibit
10.2 to the Registrant's Form 10-K filed with the
Securities and Exchange Commission on June 28, 1995).
10.3 Amendment to Third Amended and Restated Loan Agreement
dated November 21, 1995 between the Registrant and
First Valley (incorporated by reference to Exhibit
10.11 to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on August 9, 1995).
10.4 Second Amendment to Third Amended and Restated Loan
Agreement dated November 21, 1995 between the
Registrant and First Valley (incorporated by reference
to Exhibit 10.11 to the Registrant's Form 10-Q filed
with the Securities and Exchange Commission on
February 14, 1996).
10.5 Tenth Replacement Revolving Loan Note dated November 21,
1995 between the Registrant and First Valley
(incorporated by reference to Exhibit 10.12 to the
Registrant's Form 10-Q filed with the Securities and
Exchange Commission on February 14, 1996).
10.6 Master Advance Note Extension And/Or Modification And/Or
Renewal Agreement dated November 21, 1995 between the
Registrant and First Valley (incorporated by reference
to Exhibit 10.13 to the Registrant's Form 10-Q filed
with the Securities and Exchange Commission on
February 14, 1996).
10.7 Letter of Amendment to Third Amended and Restated Loan
Agreement dated December 18, 1995 between the
Registrant and First Valley (incorporated by reference
to Exhibit 10.15 to the Registrant's Form 10-Q filed
with the Securities and Exchange Commission on
February 14, 1996).
10.8 Letter of Amendment to Third Amended and Restated Loan
Agreement Between Piercing Pagoda, Inc. and First
Valley dated February 28, 1996 (incorporated by
reference to Exhibit 10.8 to the Registrant's Form
10-K filed with Securities and Exchange Commission on
June 25, 1996).
10.9 Third Amendment to Third Amended and Restated Loan
Agreement dated September 5, 1996 between the
Registrant and Summit Bank (incorporated by reference
to Exhibit 10.1 to the Registrant's Form 10-Q filed
with the Securities and Exchange Commission on
November 13, 1996).
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).
51
<PAGE> 52
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,
52
<PAGE> 53
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).
10.42 Syndicated Loan Agreement dated March 27, 1997 by and among
Piercing Pagoda, Inc.,
53
<PAGE> 54
CoreStates Bank, N.A., Summit Bank and First Union
National Bank (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 earnings per share
(incorporated by reference to Exhibit 11 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).
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of the Registrant (incorporated by reference
to Exhibit 21 to the Registrant's Form 10-K filed with
the Securities and Exchange Commission on June 25,
1996).
22 Not applicable.
23.1 Consent of KPMG Peat Marwick LLP, independent certified
public accountants.*
24 None.
27 Financial Data Schedule (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).
* Filed herewith.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
last quarter of fiscal 1997.
54
<PAGE> 55
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 25, 1997.
PIERCING PAGODA, INC.
By: /s/ John F. Eureyecko
--------------------------------
John F. Eureyecko
President and
Chief Operating Officer
55
<PAGE> 56
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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Richard H. Penske June 25, 1997
----------------------------
Richard H. Penske Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
/s/ John F. Eureyecko June 25, 1997
----------------------------
John F. Eureyecko Director, President and
Chief Operating Officer
(Principal Financial and Accounting Officer)
/s/ Alan R. Hoefer June 25, 1997
----------------------------
Alan R. Hoefer Director
/s/ Mark A. Randol June 25, 1997
----------------------------
Mark A. Randol Director
</TABLE>
56
<PAGE> 57
INDEX TO EXHIBITS
Exhibit No. Exhibit Page No.
----------- ------- --------
23.1 Consent of KPMG Peat Marwick LLP, independent 58
certified public accountants.
57
<PAGE> 1
EXHIBIT 23.1
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 5, 1997, except as to the second paragraph of Note 15 which is as
of May 15, 1997, relating to the consolidated balance sheets of Piercing
Pagoda, Inc. as of March 31, 1997 and 1996, and related consolidated statements
of income, changes in stockholders equity, and cash flows and for each of the
years in the three-year period ended March 31, 1997, which report is included
in the March 31, 1997 Annual Report on Form 10-K of Piercing Pagoda, Inc.
KPMG Peat Marwick LLP
Allentown, Pennsylvania
June 24, 1997
