UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 (I.R.S. Employer
of Incorporation or Organization) Identification
Number)
3910 Adler Place
Bethlehem, PA 18017
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (610) 691-0437
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since
Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
The number of shares outstanding of the registrant's common stock is
9,113,310 (as of November 12, 1998)
<PAGE>
PIERCING PAGODA, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated balance sheets as of
September 30, 1998 (unaudited) and March 31, 1998 3
Consolidated statements of operations for the three
months ended September 30, 1998 and 1997(unaudited
and six months ended September 30, 1998
and 1997(unaudited) 4
Consolidated statements of cash flows for the six
months ended September 30, 1998 and 1997(unaudited) 5
Notes to consolidated financial statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PIERCING PAGODA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September March 31,
30, 1998
1998
------------ -------------
Assets (Unaudited)
Current assets
<S> <C> <C>
Cash $ 4,220 $ 2,699
Accounts receivable 916 1,454
Inventory 72,449 53,149
Deposits for inventory purchases 659 546
Prepaid expenses and other current assets 493 1,058
Prepaid income taxes 1,939 215
Deferred tax assets 2,074 1,972
------------ -------------
Total current assets 82,750 61,093
Property, fixtures and equipment, net 31,599 27,215
Goodwill, net 20,366 6,296
Other assets 2,111 1,495
============ =============
$ 136,826 $ 96,099
============ =============
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable 10,032 3,232
Current installments of long-term debt 384 247
Income taxes payable - 889
Accrued expenses and other current liabilities 12,679 12,423
------------ -------------
Total current liabilities 23,095 16,791
Long-term debt, less current installments 44,861 9,742
Deferred tax liabilities 2,906 2,535
Other liabilities 964 703
------------ -------------
Total liabilities 71,826 29,771
Commitments and contingencies
Stockholders' equity
Preferred stock, par value $.01 per share,
authorized 3,000,000 shares. None issued. - -
Common stock, par value $.01 per share, authorized
15,000,000 shares. Issued 9,113,310 shares and
9,087,616 91 91
at September 30, 1998 and March 31, 1998,
respectively.
Additional paid-in capital 40,721 40,387
Retained earnings 24,188 25,850
------------ -------------
Total stockholders' equity 65,000 66,328
------------ -------------
$ 136,826 $ 96,099
============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Six months ended
September 30, September 30,
--------------------- -------------------
1998 1997 1998 1997
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 49,670 $ 42,877 $97,688 $ 85,750
Cost of goods sold and occupancy
expenses, (excluding depreciation on
kiosks) 27,620 24,099 54,253 48,865
---------- --------- -------- ---------
Gross profit 22,050 18,778 43,435 36,885
Selling, general and administrative
expenses, (including depreciation on
kiosks) 24,172 18,445 44,927 36,299
---------- --------- -------- ---------
Income (loss) from operations (2,122) 333 (1,492) 586
Interest and other income 89 105 185 208
Interest expense 837 682 1,400 1,525
---------- --------- -------- ---------
Loss before income taxes (2,870) (244) (2,707) (731)
Income tax benefit (1,106) (91) (1,045) (281)
========== ========= ======== =========
Net loss $ (1,764) $ (153) $(1,662) $ (450)
========== ========= ======== =========
Basic loss per share $ (0.19) $ (0.02) ] $ (0.18) $ (0.05)
========== ========= ======== =========
Diluted loss per share $ (0.19) $ (0.02) $ (0.18) $ (0.05)
========== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
September 30,
-------------------------
1998 1997
------------ -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (1,662) $ (450)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 3,205 2,512
Gain on disposal of property, fixtures and
equipment - (2)
Other changes in other assets 54 (20)
Deferred income taxes 269 604
Change in operating assets and liabilities
net of effects of acquisitions:
Accounts receivable 70 1,422
Inventory (17,490) (5,468)
Deposits for inventory purchases (113) (4,887)
Prepaid expenses and other current assets 567 210
Prepaid income taxes (1,724) (1,081)
Accounts payable 6,800 1,790
Accrued expenses and other current liabilities 56 (249)
Income taxes payable (798) -
Other liabilities (239) (89)
------------ -----------
Net cash used in operating activities (11,005) (5,708)
Cash flows from investing activities:
Additions to property, fixtures and equipment (6,606) (4,267)
Payments for purchase of businesses (14,867) (7,948)
Proceeds from disposal of property, fixtures and
equipment - 38
Noncurrent deposits, net (160) (26)
------------ -----------
Net cash used in investing activities (21,633) (12,203)
Cash flows from financing activities:
Repayments of long-term debt (17) (18)
Revolving line of credit, net 31,466 (900)
Loan fees paid (98) (16)
Proceeds from issuance of long-term debt 2,565 -
Net proceeds from issuance of common stock under
employee share plans 243 256
Proceeds from issuance of common stock, net - 17,189
------------ -----------
Net cash provided by financing activities 34,159 16,511
------------ -----------
Net increase (decrease) in cash 1,521 (1,400)
Cash at beginning of period 2,699 4,119
============ ===========
Cash at end of period $ 4,220 $ 2,719
============ ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
Six months ended
September 30,
-------------------------
1998 1997
------------ -----------
Supplementaldisclosures of cash flow information:
Cash paid during the period
for:
<S> <C> <C>
Interest $ 1,280 $ 1,401
============ ===========
Income taxes, net $ 1,299 $ 277
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of significant accounting policies
The accompanying consolidated financial statements of Piercing Pagoda, Inc.
and subsidiaries (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These consolidated financial statements include the
results of operations for Piercing Pagoda, Inc. and its wholly owned
subsidiaries. All intercompany transactions have been eliminated in
consolidation. These consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and notes
thereto for the year ended March 31, 1998. The financial information
included herein is unaudited; however, the information reflects all
adjustments (consisting solely of normal recurring adjustments) that are,
in the opinion of management, necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim
periods.
In June 1998, the Company's Board of Directors authorized a three-for-two
stock split effected in the form of a stock dividend payable to
shareholders of record on July 31, 1998, payable on August 13, 1998.
Stockholders' equity has been restated to give retroactive recognition to
the stock split for all periods presented by reclassifying from additional
paid-in capital to common stock the par value of the additional shares
arising from the split. In addition, all share and per share amounts have
been restated to reflect the stock split.
Operating results for the three-month and six month periods ended September
30, 1998 are not necessarily indicative of the results that may be expected
for the entire fiscal year.
Note 2 Per Share Amounts
The following weighted average number of shares of common stock were used
in the calculations for loss per share.
<TABLE>
<CAPTION>
1998 1997
-------------------- --------------------
Quarter YTD Quarter YTD
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Basic 9,100,489 9,108,007 9,000,728 8,500,273
Dilutive effect of
outstanding stock
options, using the
treasury stock
method (1) - - - -
========= ========= ========= =========
Diluted 9,100,489 9,108,007 9,000,728 8,500,273
========= ========= ========= =========
</TABLE>
(1) For the periods presented, the dilutive effect of outstanding stock
options was not considered in the calculation of diluted loss per share
because their effects were anti-dilutive.
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period.
<PAGE>
Note 3 Property, Fixtures and Equipment
A summary of major classes of property, fixtures and equipment follows (in
thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
-------------- -----------
<S> <C> <C>
Land $ 688 $ 688
Furniture and fixtures 4,394 3,881
Kiosks 27,595 24,043
Buildings and improvements 7,090 5,413
Computer equipment, software and other
equipment 10,677 9,326
-------------- -----------
50,444 43,351
Less accumulated depreciation and
amortization 18,845 16,136
============== ===========
$ 31,599 $ 27,215
============== ===========
</TABLE>
Note 4 Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are summarized as follows
(in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
-------------- -----------
Accrued payroll, vacation and related
<S> <C> <C>
taxes $ 5,674 $ 5,230
Sales tax payable 784 794
Accrued rents payable 637 938
Liability under jewelry club program 1,133 1,109
Liability under lifetime guarantee
program 1,471 1,411
Other accrued expenses 2,980 2,941
============== ===========
$ 12,679 $ 12,423
============== ===========
</TABLE>
Note 5 Purchase of businesses
In July 1998, the Company purchased approximately 104 of the retail outlets
of Sedgwick Sales, Inc., an independent kiosk retailer operating primarily
under the name Golden Chain Gang ("GCG"). The purchase agreement provides
for the payment of $3.0 million for these kiosk locations, leases and store
fixtures. No inventory was acquired. The cost in excess of the fair value
of the net assets acquired over their fair value of approximately $2.7
million has been recorded as goodwill and is being amortized over 15 years.
After a review of the initial sales results and future sales potential of
the 104 locations acquired from GCG, management announced on September 28,
1998 that it would close between 20 and 30 of these locations by March 31,
1998. The Company does not anticipate that the cost to close these
locations will be material.
On August 31, 1998, the Company purchased all of the outstanding common
stock of Piercing Pagoda of Florida, Inc. ("PPF"), the Company's sole
licensee and operator of 22 locations under the Company's Piercing Pagoda
and Plumb Gold trade names. The purchase agreement provides for the payment
of approximately $11.5 million, subject to certain post closing
adjustments, for all of the outstanding
<PAGE>
common stock of PPF and the payment of $100,000 per year for five years
under the terms of a non-competition agreement with the former shareholder
of PPF. Additionally, the former shareholder of PPF entered into an
employment agreement with the Company as a corporate vice president at an
annual salary of $125,000. The cost in excess of the fair value of the net
assets acquired over their fair value of approximately $11.4 million has
been recorded as goodwill and is being amortized over 15 years. The
acquisition was accounted for as a purchase and the net assets acquired and
operations of these kiosks are included in the Company's consolidated
financial statements from the date of acquisition.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the Florida Licensee as
if the acquisition had occurred as of the beginning of fiscal 1998 and
1999, after giving effect to certain adjustments, including amortization of
goodwill, increased interest expense on debt related to the acquisition and
related income tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had
the Company and the Florida Licensee constituted a single entity during
such periods.
<TABLE>
<CAPTION>
Six months ended
September 30,
---------------------------
1998 1997
------------ -------------
(In thousands, except per
share data)
<S> <C> <C>
Net sales $ 99,695 $ 87,256
============ =============
Net loss $(2,311) $ (981)
============ =============
Basic and Diluted loss per $ (0.26) $(0.13)
share
============ =============
</TABLE>
Note 6 Litigation
On October 19, 1998, a lawsuit was filed, purportedly as a class action,
against the Company and certain of its executive officers in the U.S.
District Court of the Eastern District of Pennsylvania. The lawsuit
alleges, among other things, that the Company and certain of its officers
made materially false and misleading statements and/or failed to disclose
material information regarding the Company's business performance and
prospects. The Company believes that the lawsuit has no merit, and intends
to vigorously defend the action. Although the ultimate outcome of the
lawsuit cannot be determined, management does not believe the outcome of
the lawsuit will have a material adverse effect on the financial position,
results of operations or cash flows of the Company. However, there can be
no assurance as to the ultimate resolution of this matter.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Background
The Company's consolidated net sales are comprised primarily of sales
generated by the Company's stores and, to a much lesser extent, wholesale
sales primarily to an independent store operator in Florida to which the
Company licensed the use of its store name and concept (the "Florida
Licensee"). On August 31, 1998, the Company acquired all of the outstanding
common stock of the Florida Licensee and now operates all the stores
previously owned by the Florida Licensee. Beginning on September 1, 1998
net sales consist entirely of sales generated by the Company's retail
stores. Cost of goods sold and occupancy expenses include the cost of
merchandise, rent and occupancy, and the cost of preparing merchandise for
sale. Selling, general and administrative expenses include store and
supervisory payroll, corporate overhead and non-occupancy store expenses
including depreciation of kiosks.
Results of operations
Three months ended September 30, 1998 and 1997
Consolidated net sales increased $6.8 million, or 16% from $42.9 million
for the three months ended September 30, 1997 to $49.7 million for the
three months ended September 30, 1998. This increase was due primarily to
net sales generated by new stores opened or acquired by the Company.
Comparable store sales increased $195,000, or 0.5% in the quarter. There
were a total of 956 stores open at September 30, 1998 compared to 769 at
September 30, 1997, an increase of 24%. A significant portion of the
increase in the total number of stores was due to the acquisition on July
1, 1998 of approximately 104 stores from Sedgwick Sales, Inc., an
independent kiosk retailer, previously operated under the name Golden Chain
Gang ("GCG") and the acquisition of 22 stores previously operated by the
Florida Licensee. On August 31, 1998, the Company acquired all of the
outstanding common stock of the Florida Licensee. Accordingly, wholesale
sales to the Florida Licensee decreased to $412,000 for the three months
ended September 30, 1998 from $707,000 in the three months ended September
30, 1997.
The average jewelry units sold per store were unchanged at approximately
2,400 for the three months ended September 30, 1998 and the three months
ended September 30, 1997. The average price per jewelry unit sold was
relatively unchanged at $23.29 for the three months ended September 30,
1998 compared to $22.96 for the three months ended September 30, 1997.
Gross profit increased $3.3 million, or 18%, from $18.8 million for the
three months ended September 30, 1997 to $22.1 million for the three months
ended September 30, 1998. The Company's gross profit margin improved from
43.8% for the three months September 30, 1997 to 44.4% for the three months
ended
<PAGE>
September 30, 1998. This improvement is primarily due to lower merchandise
costs as a percentage of net sales as well as lower wholesale sales to the
Florida Licensee. Wholesale sales to the Florida Licensee produce a lower
gross margin than the Company's own retail net sales. These improvements
were partially offset by an increase in rent and occupancy costs as a
percentage of sales due to the large number of newer stores operated by the
Company.
Selling, general and administrative expenses increased $5.8 million, or
32%, from $18.4 million for the three months ended September 30, 1997 to
$24.2 million for the three months ended September 30, 1998. As a
percentage of net sales, selling, general and administrative expenses
increased from 43.0% for the three months ended September 30, 1997 to 48.7%
for the three months ended September 30, 1998. The increase in selling,
general and administrative expenses as well as the increase in these
expenses as a percentage of net sales reflect the increased costs
associated with the significant number of new and acquired stores opened by
the Company during the period. During the three months ended September 30,
1998, the Company opened 150 new and acquired stores, the largest number of
new stores it has ever opened in a single three month period. The combined
effect of non-recurring pre-opening costs and lower than expected sales
results at many of the acquired locations resulted in the significant
increase in both selling, general and administrative expenses and their
relationship to net sales. After a review of the initial sales results and
future sales potential of the approximately 104 locations acquired from
GCG, management announced on September 28, 1998 that it would close between
20 and 30 of these locations by March 31, 1999 and work to improve
operations at the remaining stores. The Company does not anticipate that
the cost to close these locations will be material, however, these factors
may negatively impact results in future quarters. Also, the Company
typically reviews the results of operations of all its locations after the
completion of the year-end holiday shopping season and makes decisions
regarding the closure of stores it believes are under performing. In
addition to the closure of 20 to 30 GCG locations previously announced, the
Company anticipates closing 20 to 30 additional locations upon completion
of this period end review.
Depreciation and amortization expense increased 31% to $1.7 million in the
three months ended September 30, 1998 from $1.3 million in the three months
ended September 30, 1997 due primarily to capital expenditures for new and
acquired stores, increased amortization of goodwill from acquisitions, the
upgrading of kiosks in existing locations and the completion of a new
warehouse and distribution facility adjacent to the Company's corporate
headquarters.
Interest expense increased $155,000, or 23%, from $682,000 for the three
months ended September 30, 1997 to $837,000 for the three months ended
September 30, 1998, and as a percentage of net sales increased from 1.6%
for the three months ended September 30, 1997 to 1.7% for the three months
ended September 30, 1998. The increase in interest expense reflects higher
average balances on the Company's revolving line of credit agreement and an
increase in the number of ounces consigned under the Company's gold
consignment arrangements. Additionally, the Company completed a secondary
offering of its common stock in June of 1997, the proceeds of which were
used to reduce indebtedness.
<PAGE>
As a result of the foregoing, the Company's net loss increased from a loss
of $153,000 for the three months ended September 30, 1997 to a net loss of
$1.8 million for the three months ended September 30, 1998.
Six months ended September 30, 1998 and 1997
Consolidated net sales increased $11.9 million, or 14%, from $85.8 million
for the six months ended September 30, 1997 to $97.7 million for the six
months ended September 30, 1998. This increase was primarily due to an
increase in the average number of stores open for the six months ended
September 30, 1998, as compared to the six months ended September 30, 1997
and a $1.4 million, or 2%, increase in comparable store net sales. There
were a total of 956 stores open at September 30, 1998 compared to 769 at
September 30, 1997, an increase of 24%. The average jewelry units sold per
store decreased 6% to 4,700 for the six months ended September 30, 1998
compared to 5,000 for the six months ended September 30, 1997. The average
price per jewelry unit sold increased 2% to $23.98 for the six months ended
September 30, 1998 compared to $23.46 for the six months ended September
30, 1997. The decrease in average jewelry units sold primarily reflects the
impact of lower unit sales at newly opened and acquired stores. These
stores generally have lower unit and dollar sales volume than the Company's
more mature stores.
Gross profit increased $6.5 million, or 18%, from $36.9 million for the six
months ended September 30, 1997 to $43.4 million for the six months ended
September 30, 1998. The Company's gross profit margin improved from 43.0%
for the six months ended September 30, 1997 to 44.5% for the six months
ended September 30, 1998. The increase in gross profit dollars was
attributable to the Company's increase in net sales. Gross profit margin
improved primarily due to improved merchandise margins caused by lower
merchandise costs partially offset by increases in rent and occupancy as a
percentage of net sales due to the large number of new and acquired stores
opened by the Company during the period.
Selling, general and administrative expenses increased $8.6 million, or
24%, from $36.3 million for the six months ended September 30, 1997 to
$44.9 million for the six months ended September 30, 1998. As a percentage
of net sales, selling, general and administrative expenses increased from
42.3% for the six months ended September 30, 1997 to 46.0% for the six
months ended September 30, 1998. The increase in selling, general and
administrative expenses as well as the increase in these expenses as a
percentage of net sales reflect the negative impact of the significant
number of new and acquired stores opened by the Company during the period,
primarily stores added during the second half of the period. See the
discussion of selling, general and administrative for the three months
ended September 30, 1998 for a description of the impact of these store
openings.
Depreciation and amortization expense increased 28% to $3.2 million in the
six months ended September 30, 1998 from $2.5 million in the six months
ended September 30, 1997 due primarily to capital expenditures for new and
acquired stores, increased amortization of goodwill from acquisitions, the
upgrading of kiosks in existing
<PAGE>
locations and the completion of a new warehouse and distribution
facility adjacent to the Company's corporate headquarters.
Interest expense decreased $100,000, or 7%, from $1.5 million for the six
months ended September 30, 1997 to $1.4 million for the six months ended
September 30, 1998, and as a percentage of net sales decreased from 1.8%
for the six months ended September 30, 1997 to 1.4% for the six months
ended September 30, 1998. The decrease in interest expense was due
primarily to lower average balances on the Company's revolving line of
credit agreement partially offset by an increase in fees paid under the
Company's gold consignment arrangements.
As a result of the foregoing, the Company's net loss increased from
$450,000 for the six months ended September 30, 1997 to a net loss of $1.7
million for the six months ended September 30, 1998.
Liquidity and capital resources
The Company's primary ongoing short-term capital requirements have been to
fund an increase in inventory and to fund capital expenditures and working
capital (mostly inventory) for new and acquired stores. The Company's
long-term liquidity requirements relate principally to the maturity of its
long-term debt in July of 2000, operating lease commitments and store
expansion. The Company's primary sources of liquidity have been funds
provided from operations, a gold consignment program, bank borrowings and,
in June 1997, an offering of the Company's common stock. The Company's
working capital increased to $59.6 million at September 30, 1998 from $44.3
million at September 30, 1997. At September 30, 1998, the Company had
outstanding borrowings of $40.2 million under its revolving line of credit
and $5.0 million of long-term debt outstanding, including $384,000
classified as a current liability. In addition, the Company had consigned
140,322 ounces of gold under its gold consignment program valued at
approximately $41.2 million.
Net cash used in operating activities was $11.0 million for the six months
ended September 30, 1998 compared to $5.7 million for the same period in
the prior year. Net cash used in operating activities primarily reflects
increases in inventory to stock newly acquired and opened stores as well as
a seasonal increase in inventory in anticipation for the year-end holiday
selling season. This was partially offset by depreciation and amortization
and an increase in accounts payable.
Net cash used in investing activities was $21.6 million during the six
months ended September 30, 1998 compared to $12.2 million during the six
months ended September 30, 1997. Net cash used in investing activities
primarily reflects the purchase of approximately 104 GCG locations in July
of 1998, the acquisition of the Company's Florida Licensee in August of
1998 and the addition of property, fixtures and equipment in connection
with the opening of new stores, the renovation of existing stores and the
construction of an additional warehouse and distribution center on land
adjacent to the Company's current facility.
Net cash provided by financing activities was $34.2 million for the six
months ended September 30, 1998 versus $16.5 million during the six months
ended September 30,
<PAGE>
1997. Net cash provided by financing activities during the six months ended
September 30, 1998 primarily reflects increased borrowings under the
Company's existing line of credit and the proceeds of $2.6 million in
Industrial Development Authority financing. During the six months ended
September 30, 1997, the Company completed a secondary offering of its
common stock, raising net proceeds of approximately $17.2 million which was
used to repay a portion of existing indebtedness.
At September 30, 1998, the Company had $5.4 million available to be
borrowed under its then existing revolving credit facility and was in
compliance with covenants contained in that agreement. During September
1998 and again in October 1998, the Company's revolving credit facility was
amended to provide additional funds for the operation and expansion of its
business. On September 2, 1998, the Company's lenders granted a temporary
$10.0 million dollar increase in the revolving credit facility to a maximum
of $90.0 million. The entire $10.0 million increase was added to the
sublimit for cash advances ($60.0 million maximum). On October 16, 1998 an
additional lender was added to the financing syndicate and the revolving
credit facility was increased further to provide for maximum borrowings of
$108.0 million through a combination of cash advances (which may not exceed
$68.0 million) and letters of credit (which may not exceed $70.0 million)
to support the Company's gold consignment programs. On December 15, 1998,
under the terms of this amended facility, the maximum borrowings will be
reduced to $105.0 million with a corresponding decrease in the amount
available for cash advances to $65.0 million. The Company believes that the
expected cash flows from operations, its gold consignment program and bank
borrowings will be sufficient to fund the Company's currently anticipated
capital and liquidity needs.
Year 2000 Compliance & Year 2000 Readiness Disclosures
The Company is aware of "Year 2000" issues existing in the programming code
of some information technology ("IT") and non-IT systems. The Year 2000
issue may arise because many computer hardware and software systems only
use two digits to represent the year. As a result, these systems may not be
able to process dates beyond 1999, which may cause errors in information
systems or systems failures.
The Company relies significantly on both IT and non-IT systems in its
retail outlets as well as at its corporate headquarters and distribution
center. These systems include hardware and software that the Company uses
to conduct its operations, analyze business performance and safeguard
assets. The Company is in the midst of a comprehensive review of these
systems in preparation for the Year 2000. The Company's strategy for
addressing Year 2000 compliance is to replace or renovate all critical
systems identified as non-compliant by a target date of June 30, 1999
followed by final testing and remediation by September 30, 1999. The first
phase of this approach involves identifying all critical IT and non-IT
systems and making an initial assessment of each as either Year 2000
compliant or non-compliant. The Company is substantially complete with this
phase of its Year 2000 review and has begun the process of replacing or
renovating systems which were found to be non-compliant and verifying the
compliance of systems initially assessed as compliant. To date, the Company
has not incurred any material costs related to its Year 2000 project and
does not anticipate incurring material costs in the completion of its
remediation efforts.
<PAGE>
The Company expects its own Year 2000 project to be completed on a timely
basis. However, there can be no assurance that the systems of other
companies on which the Company's systems also rely will be compliant. The
Company is seeking confirmation from its primary vendors that they are
developing and implementing plans to become Year 2000 compliant. However,
there can be no assurance that the systems of third parties, which are not
within the control of the Company, will function properly. As a result the
failure of certain primary vendors to be Year 2000 compliant may have an
adverse impact on the Company's performance. The Company is developing
contingency plans as part of its remediation efforts and the Company
expects such plans to be completed by September 30, 1999.
While the Company continues to believe that the Year 2000 matters discussed
above will not have a material impact on its business, financial condition
or results of operations, it remains uncertain whether or to what extent
the Company may be affected.
Seasonality
The Company's business is highly seasonal. Due to the impact of the
year-end holiday shopping season, the Company experiences a substantial
portion of its annual net sales and profitability in its third fiscal
quarter (ending December 31st). The Company has generally experienced lower
net sales in each of the first, second and fourth quarters and lower net
income or net losses in each of those quarters.
The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a variety of factors, including
fluctuations in the price of gold, the amount and timing of acquisitions
and new store openings, the integration of recently acquired and newly
opened stores into the operations of the Company, the timing of promotions,
and changes in national and regional economic conditions.
<PAGE>
Recent accounting pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. This statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management believes the effect on the Company of the adoption of this
standard will be limited to changes in financial statement disclosure and
will not have a material impact on financial condition or results of
operations.
Forward-looking statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. A number of the matters and subject areas
discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are not limited to historical or current facts
and deal with potential future circumstances and developments. Prospective
investors are cautioned that such forward-looking statements are only
predictions and that actual events or results may differ materially. A
variety of factors could cause the Company's actual results to differ
materially from the expected results expressed in the Company's
forward-looking statements, including, without limitation: the Company's
ability to secure suitable store sites on a timely basis and on
satisfactory terms; the Company's ability to hire, train and retain
qualified personnel, the availability of adequate capital resources and the
successful integration of new stores into the Company's existing
operations; the Company's ability to successfully implement and improve
management information systems, procedures and controls on a timely basis
and in such a manner as is necessary to accommodate the increased number of
transactions and customers and the increased size of the Company's
operations; the Company's ability to successfully complete its Year 2000
project on a timely basis; the Company's ability to improve the operations
of its newly opened and acquired stores; fluctuations in quarterly net
sales, and, in particular, third quarter net sales; fluctuations in gold
prices; competitive conditions; economic conditions affecting disposable
consumer income, such as employment, business conditions, interest rates
and taxation, as well as trends with respect to mall shopping generally and
the ability of mall anchor tenants and other attractions to generate
customer traffic in the vicinity of the Company's stores; and the
possibility of the enactment of legislation, or the modification of
existing or pending legislation, in jurisdictions in which the Company
operates, that would adversely affect the Company's ear piercing or other
activities.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 19, 1998, a lawsuit was filed, purportedly as a class action,
against the Company and certain of its executive officers in the U.S.
District Court of the Eastern District of Pennsylvania. The lawsuit
alleges, among other things, that the Company and certain of its officers
made materially false and misleading statements and/or failed to disclose
material information regarding the Company's business performance and
prospects. The Company believes that the lawsuit has no merit, and intends
to vigorously defend the action. Although the ultimate outcome of the
lawsuit cannot be determined, management does not believe the outcome of
the lawsuit will have a material adverse effect on the financial position,
results of operations or cash flows of the Company. However, there can be
no assurance as to the ultimate resolution of this matter.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 16, 1998, the Registrant held its Annual Meeting of
Stockholders. The stockholders approved the following proposals:
1. To elect one director to hold office until the 2001 Annual Meeting of
Stockholders and until his successor has been duly elected and
qualified.
2. To ratify the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the 1999 fiscal year.
By a margin in excess of 95% of the votes cast, Mark A. Randol was elected
to serve as a director until the 2001 Annual Meeting and until his
successor has been duly elected and qualified and the appointment of KPMG
Peat Marwick LLP as the Company's independent auditors for the 1999 fiscal
year was ratified.
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Financial Data Schedule.
27.1 Financial Data Schedule.
b) Reports on Form 8-K
On September 11, 1998, one report on Form 8-K was filed by the
Company reporting the acquisition of the Company's sole licensee,
Piercing Pagoda of Florida, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PIERCING PAGODA, INC.
(Registrant)
Date: November 12, 1998 /s/ John F. Eureyecko
John F. Eureyecko
President,
Chief Operating Officer
(Principal Financial Officer)
Date: November 12, 1998 /s/ Brandon R. Lehman
Brandon R. Lehman
Treasurer
(Principal Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
27 Financial Data Schedule - September 30, 1998 21
27.1 Financial Data Schedule - September 30, 1997 22
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 4220
<SECURITIES> 0
<RECEIVABLES> 916
<ALLOWANCES> 0
<INVENTORY> 72449
<CURRENT-ASSETS> 82750
<PP&E> 50444
<DEPRECIATION> 18845
<TOTAL-ASSETS> 136826
<CURRENT-LIABILITIES> 23095
<BONDS> 44861
0
0
<COMMON> 91
<OTHER-SE> 64909
<TOTAL-LIABILITY-AND-EQUITY> 136826
<SALES> 97688
<TOTAL-REVENUES> 97688
<CGS> 54253
<TOTAL-COSTS> 54253
<OTHER-EXPENSES> 44927
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1400
<INCOME-PRETAX> (2707)
<INCOME-TAX> (1045)
<INCOME-CONTINUING> (1662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1662)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> SEP-30-1997
<CASH> 2719
<SECURITIES> 0
<RECEIVABLES> 811
<ALLOWANCES> 0
<INVENTORY> 50944
<CURRENT-ASSETS> 65135
<PP&E> 39681
<DEPRECIATION> 14594
<TOTAL-ASSETS> 96594
<CURRENT-LIABILITIES> 15044
<BONDS> 25772
0
0
<COMMON> 91
<OTHER-SE> 54507
<TOTAL-LIABILITY-AND-EQUITY> 96594
<SALES> 85750
<TOTAL-REVENUES> 85750
<CGS> 48865
<TOTAL-COSTS> 48865
<OTHER-EXPENSES> 36299
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1525
<INCOME-PRETAX> (731)
<INCOME-TAX> (281)
<INCOME-CONTINUING> (450)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (450)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
