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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number 0-24860
PIERCING PAGODA, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 23-1894725
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3910 Adler Place
Bethlehem, PA 18017
(Address of Principal (Zip Code)
Executive Offices)
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 9,161,124 (as of November 11, 1999)
<PAGE>
PIERCING PAGODA, INC.
INDEX
PAGE
PART I - FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated balance sheets as of
September 30, 1999 (unaudited) and March 31, 3
1999
Consolidated statements of operations
for the three months ended
September 30, 1999 and 1998 (unaudited)
and the six months ended September 30, 1999
and 1998 (unaudited) 4
Consolidated statements of cash flows for the
six months ended September 30, 1999 and 1998 5
(unaudited)
Notes to consolidated financial statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures 17
About Market Risk
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security 18
Holder
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PIERCING PAGODA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30, March 31,
1999 1999
---------- -----------
Assets (Unaudited)
Current assets
Cash $ 1,245 $ 4,068
Accounts receivable 5,110 4,674
Inventory 65,991 53,685
Deposits for inventory purchases 467 707
Prepaid expenses and other current assets 500 1,337
Prepaid income taxes 1,804 131
Deferred tax assets 1,766 2,213
---------- -----------
Total current assets 76,883 66,815
Property, fixtures and equipment, net 35,559 34,293
Goodwill, net 19,744 20,199
Other assets 2,065 1,993
========== ===========
$134,251 $123,300
========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 5,525 $ 3,934
Current installments of long-term debt and
revolving line of credit 33,426 432
Income taxes payable - 125
Accrued expenses and other current 12,192 14,753
liabilities
---------- -----------
Total current liabilities 51,143 19,244
Long-term debt, less current installments 5,209 25,169
Deferred tax liabilities 3,922 3,476
Other liabilities 721 920
---------- -----------
Total liabilities 60,995 48,809
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 9,124,624 shares and 9,133,901
at September 30, 1999 and
March 31, 1999, respectively. 92 92
Additional paid-in capital 41,127 40,906
Treasury stock at cost (462) -
Retained earnings 32,499 33,493
---------- -----------
Total stockholders' equity 73,256 74,491
---------- -----------
$134,251 $ 123,300
========== ===========
See accompanying notes to consolidated financial statements.
<PAGE>
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,
------------------- -----------------
1999 1998 1999 1998
--------- -------- ------- --------
Net sales $ 54,827 $49,670 $112,981 $97,688
Cost of goods sold and
occupancy expenses,
(excluding depreciation on 29,208 27,620 61,873 54,253
kiosks and store fixtures)
--------- -------- ------- --------
Gross profit 25,619 22,050 51,108 43,435
Selling, general and
administrative expenses,
(including depreciation on
kiosks and store fixtures) 25,848 24,172 51,196 44,927
--------- -------- ------- --------
Loss from operations (229) (2,122) (88) (1,492)
Interest and other income 54 89 95 185
Interest expense 944 837 1,646 1,400
--------- -------- ------- --------
Loss before income taxes ( 1,119) (2,870) (1,639) (2,707)
Income tax benefit (436) (1,106) (645) (1,045)
========= ======== ======= ========
Net loss $ (683) $(1,764) $(994) $(1,662)
========= ======== ======= ========
Basic and diluted loss per
share $ (0.07) $(0.19) $(0.11) $(0.18)
========= ======== ======= ========
See accompanying notes to consolidated financial statements.
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended
September 30,
---------------------
1999 1998
--------- ----------
Cash flows from operating activities:
Net loss $ (994) $(1,662)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,075 3,205
Loss on disposal of furniture, fixtures and
equipment 91 -
Other changes in other assets 87 54
Deferred income taxes 893 269
Change in operating assets and liabilities
net of effects of acquisitions:
Accounts receivable (436) 70
Inventory (12,306) (17,490)
Deposits for inventory purchases 240 (113)
Prepaid expenses and other current assets 837 567
Prepaid income taxes (1,673) (1,724)
Accounts payable 1,591 6,800
Accrued expenses and other current
liabilities (2,561) 56
Income taxes payable (122) (798)
Other liabilities (199) (239)
--------- ----------
Net cash used in operating activities (10,477) (11,005)
Cash flows from investing activities:
Additions to property, fixtures and equipment (4,529) (6,606)
Payments for purchase of businesses (298) (14,867)
Noncurrent deposits, net (296) (160)
--------- ----------
Net cash used in investing activities (5,123) (21,633)
Cash flows from financing activities:
Repayments of long-term debt (166) (17)
Revolving line of credit, net 13,200 31,466
Loan fees paid (13) (98)
Proceeds from issuance of long-term debt - 2,565
Net proceeds from issuance of common stock
under employee share plans 218 243
Purchase of treasury stock (462) -
--------- ----------
Net cash provided by financing activities 12,777 34,159
--------- ----------
Net increase (decrease) in cash (2,823) 1,521
Cash at beginning of period 4,068 2,699
========= ==========
Cash at end of period $ 1,245 $4,220
========= ==========
<PAGE>
PIERCING PAGODA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In thousands)
(Unaudited)
Six months ended
September 30,
---------------------
1999 1998
--------- ----------
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ 1,841 $ 1,280
========= ==========
Income taxes, net $ 260 $ 1,299
========= ==========
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, 1999. 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.
The Company effected a three-for-two stock split in the form of a stock
dividend paid on August 13, 1998 to shareholders of record on July 31, 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, 1999 are not necessarily indicative of the results that may be expected
for the entire fiscal year.
Note 2 Earnings Per Share
The following weighted average number of shares of common stock were used in
the calculations for loss per share. The diluted weighted average number of
shares includes the net shares that would be issued upon the exercise of
outstanding stock options, using the treasury stock method.
1999 1998
------------------- ---------------------
Quarter YTD Quarter YTD
--------- ---------- ---------- ----------
Basic 9,137,047 9,133,452 9,100,489 9,108,007
Dilutive effect
of outstanding
stock options,
using the
treasury stock
method (1) - - - -
========= ========== ========== ==========
Diluted 9,137,047 9,133,452 9,100,489 9,108,007
========= ========== ========== ==========
(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.
<PAGE>
Basic loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during the period. Diluted loss
per share is computed by dividing net loss by the weighted average number of
common shares outstanding during the period increased to include the number
of additional common shares that would have been outstanding if the dilutive
potential common shares had been issued.
Note 3 Property, Fixtures and Equipment
A summary of major classes of property, fixtures and equipment follows (in
thousands):
September March
30, 1999 31, 1999
------------ ---------
Land 688 688
Furniture and fixtures 5,810 5,043
Kiosks 33,397 30,681
Buildings and improvements 7,301 7,283
Computer equipment, software
and other equipment 12,453 11,622
------------ ---------
59,649 55,317
Less accumulated depreciation
and amortization 24,090 21,024
============ =========
$35,559 $ 34,293
============ =========
Note 4 Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are summarized as follows (in
thousands):
September March
30, 1999 31, 1999
------------ ---------
Accrued payroll, vacation and
related taxes $ 5,658 $ 6,254
Sales tax payable 751 719
Accrued rents payable 373 1,089
Liability under jewelry club
program 1,040 989
Liability under merchandise
guarantee program 1,321 1,321
Accrued store closure costs 784 1,250
Other accrued expenses 2,265 3,131
============ =========
$12,192 $14,753
============ =========
During the six months ended September 30, 1999, the Company closed 20
stores, including 10 stores for which anticipated closure costs had been
accrued at March 31, 1999. In addition, the Company made payments to settle
20 outstanding lease obligations which had also been accrued at March 31,
1999. Accordingly, the Company's accrual for store closure costs was reduced
to reflect the payments towards these obligations.
<PAGE>
Note 5 Stock Repurchase
On August 11, 1999 the Company's Board of Directors authorized the
repurchase of up to 200,000 shares of the Company's common stock. At
September 30, 1999, the Company had repurchased 35,000 shares of its common
stock at an average price of $13.21 per share.
Note 6 Litigation
On October 19, 1999, the previously announced securities class action
litigation that had been filed against the Company and certain of its
officers by Israel H. Buck et al. was dismissed with prejudice by the United
States District Court for the Eastern District of Pennsylvania. The Company
does not know whether the dismissal will be appealed by the plaintiffs.
<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 and amortization of goodwill.
Results of operations
Three months ended September 30, 1999 and 1998
Consolidated net sales increased $5.1 million, or 10%, from $49.7 million
for the three months ended September 30, 1998 to $54.8 million for the three
months ended September 30, 1999. This increase was due primarily to a $2.7
million, or 6%, increase in comparable store net sales and net sales
generated by new stores opened or acquired by the Company. There were a
total of 934 stores open at September 30, 1999 compared to 956 at September
30, 1998, a decrease of 2%. The average jewelry units sold per comparable
store during the quarter increased 4% to 2,500 for the three months ended
September 30, 1999 compared to 2,400 at September 30, 1998. The average
price per jewelry unit sold per comparable store increased to $24.30 for the
three months ended September 30, 1999 compared to $23.55 for the three
months ended September 30, 1998.
Gross profit increased $3.6 million, or 16%, from $22.0 million for the
three months ended September 30, 1998 to $25.6 million for the three months
ended September 30, 1999. The Company's gross profit margin increased from
44.4% for the three months ended September 30, 1998 to 46.7% for the three
months ended September 30, 1999. The increase in gross profit dollars is
primarily attributable to the increase in net sales. The improvement in
gross profit margin reflects improved merchandise margins due to lower
merchandise costs, less promotional activity during the quarter and changes
in merchandise mix compared to the previous year. During the current fiscal
year, the Company has implemented certain changes to its merchandise
selection which have had a favorable impact on sales and gross profit
margin. These changes include the introduction of new 10k and 14k gold
merchandise styles and increasing the selection of non-gold merchandise.
Additionally, better leverage of fixed rent and occupancy
<PAGE>
costs have resulted in lower store rent expense as a percentage of net
sales. Over the last twelve months, the Company has closed 93
underperforming stores and worked to improve the operations at its remaining
stores.
Selling, general and administrative expenses increased $1.6 million, or 7%,
from $24.2 million for the three months ended September 30, 1998 to $25.8
million for the three months ended September 30, 1999. As a percentage of
net sales, selling, general and administrative expenses decreased from 48.7%
for the three months ended September 30, 1998 to 47.1% for the three months
ended September 30, 1999. The decrease in selling, general and
administrative expenses as a percentage of net sales primarily reflects
lower store payroll costs as a percentage of sales partially offset by
higher administrative expenses and amortization expense as a percentage of
net sales. Store payroll costs as a percentage of net sales decreased due to
the lower amount of new stores opened in the quarter and the corresponding
reduction in labor expense for training and new store set-up. The Company
opened only nine new stores in the quarter ended September 30, 1999 versus
149 new stores in the same period last year. Administrative costs increased
primarily to support expansion of the merchandise purchasing and human
resource functions.
Depreciation and amortization expense increased 24% to $2.1 million in the
three months ended September 30, 1999 from $1.7 million in the three months
ended September 30, 1998. The increase was due primarily to capital
expenditures made for new stores and the upgrading of kiosks in existing
locations and higher amortization of goodwill recorded in connection with
the Company's acquisitions of its Florida Licensee in August of 1998 and 104
locations from Sedgwick Sales, Inc. in July of 1998.
Interest expense increased $107,000, or 13%, from $837,000 for the three
months ended September 30, 1998 to $944,000 for the three months ended
September 30, 1999, and as a percentage of net sales was unchanged at 1.7%
for the three months ended September 30, 1999 and 1998, respectively. The
increase in interest expense primarily reflects an increase in the number of
ounces consigned under the Company's gold consignment arrangements partially
offset by lower average balances on the Company's revolving line of credit.
Income tax benefit decreased $670,000 to $436,000 for the three months ended
September 30, 1999 from $1.1 million for the three months ended September
30, 1998. As a percentage of loss before income taxes, income tax benefit
increased to 39.0% for the three months ended September 30, 1999 from 38.5%
for the three months ended September 30, 1998. The decrease in income tax
benefit is due to the decrease in the Company's loss before income taxes.
As a result of the foregoing, the Company's net loss decreased from a loss
of $1.8 million for the three months ended September 30, 1998 to a net loss
of $683,000 for the three months ended September 30, 1999.
<PAGE>
Six months ended September 30, 1999 and 1998
Consolidated net sales increased $15.3 million, or 16% from $97.7 million
for the six months ended September 30, 1998 to $113.0 million for the six
months ended September 30, 1999. This was due primarily to net sales
generated by new stores opened or acquired by the Company. Comparable store
sales increased $5.4 million or 6% in the six-month period. There were a
total of 934 stores open at September 30, 1999 compared to 956 at September
30, 1998, a decrease of 2%. The average jewelry units sold per comparable
store increased 4% in the period to 5,100 from 4,900 in the six months last
year. The average price per jewelry unit sold increased approximately 2%
from $24.22 for the six months ended September 30, 1998 to $24.65 for the
six months ended September 30, 1999.
Gross profit increased $7.7 million, or 18%, from $43.4 million for the six
months ended September 30, 1998 to $51.1 million for the six months ended
September 30, 1999. The Company's gross profit margin improved from 44.5%
for the six months ended September 30, 1998 to 45.2% for the six months
ended September 30, 1999. The increase in gross profit dollars is primarily
attributable to the increase in net sales caused by the higher average
number of stores operated by the Company during the period and the increase
in comparable store sales. Gross profit margin improved due primarily to
better leverage of generally fixed, non-merchandise costs, primarily rent
and occupancy. These improvements were partially offset by an increase in
merchandise costs as a percentage of net sales due to higher levels of
promotional activity in the first three months of the period.
Selling, general and administrative expenses increased $6.3 million, or 14%,
from $44.9 million for the six months ended September 30, 1998 to $51.2
million for the six months ended September 30, 1999. As a percentage of net
sales, selling, general and administrative expenses decreased from 46.0% for
the six months ended September 30, 1998 to 45.3% for the six months ended
September 30, 1999. The decrease in selling, general and administrative
expenses as a percentage of net sales reflects lower store expenses,
primarily payroll, as a percentage of sales partially offset by higher
administrative expenses and amortization expense as a percentage of net
sales. Store costs as a percentage of net sales decreased due to the lower
amount of new stores opened in the period and the corresponding reduction in
labor expense for training and new store set-up. The Company opened only
twenty-three new stores in the six-month period ended September 30, 1999
versus 175 new stores in the same period last year. Administrative costs
increased primarily to support expansion of the merchandise purchasing and
human resource functions.
Depreciation and amortization expense increased 28% to $4.1 million in the
six months ended September 30, 1999 from $3.2 million in the six months
ended September 30, 1998. The increase was due primarily to capital
expenditures made for new stores and the upgrading of kiosks in existing
locations and higher amortization of goodwill recorded in connection with
the Company's acquisitions of its Florida Licensee in August of 1998 and 104
locations from Sedgwick Sales, Inc. in July of 1998.
<PAGE>
Interest expense increased $246,000, or 18%, from $1.4 million for the six
months ended September 30, 1998 to $1.6 million for the six months ended
September 30, 1999, and as a percentage of net sales was increased to 1.5%
for the six months ended September 30, 1999 versus 1.4% in the previous
year. The increase in interest expense primarily 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.
Income tax benefit decreased $400,000 to $645,000 for the six months ended
September 30, 1999 from $1.0 million for the six months ended September 30,
1998. As a percentage of loss before income taxes, income tax benefit
increased to 39.4% for the six months ended September 30, 1999 from 38.6%
for the six months ended September 30, 1998.The decrease in income tax
benefit is due to the decrease in the Company's loss before income taxes.
As a result of the foregoing, the Company's net loss decreased from a loss
of $1.7 million for the six months ended September 30, 1998 to a net loss of
$994,000 for the six months ended September 30, 1999.
<PAGE>
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 and a revolving credit
facility. The Company's working capital decreased to $25.7 million at
September 30, 1999 from $59.7 million at September 30, 1998. This reduction
primarily reflects the current classification of the Company's revolving
line of credit which is due in July of 2000. At September 30, 1999, the
Company had outstanding borrowings of $33.0 million under its revolving line
of credit and $5.6 million of long-term debt outstanding, including $426,000
classified as a current liability. In addition, the Company had consigned
160,186 ounces of gold under its gold consignment program valued at
approximately $47.9 million.
Net cash used in operating activities was $10.5 million for the six months
ended September 30, 1999 compared to $11.0 million for the same period in
the prior year. Net cash used in operating activities primarily reflects a
seasonal increase in inventory in anticipation of the year-end holiday
selling season, partially offset by depreciation and amortization and net
changes in other operating assets and liabilities. Net cash used in
operating activities in the six months ended September 30, 1998 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 $5.1 million during the six months
ended September 30, 1999 compared to $21.6 million during the six months
ended September 30, 1998. Net cash used in investing activities primarily
reflects the addition of property, fixtures and equipment in connection with
the opening of new stores, and the renovation of existing stores. Investing
activities in the six months ended September 30, 1998 primarily reflect the
purchase of approximately 104 locations from Sedgwick Sales, Inc. 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 expansion
of the Company's warehouse and distribution facilities.
Net cash provided by financing activities was $12.8 million for the six
months ended September 30, 1999 versus $34.2 million during the six months
ended September 30, 1998. Net cash provided by financing activities during
the six months ended September 30, 1999 primarily reflects increased
borrowings under the Company's existing line of credit to fund operations.
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.
<PAGE>
The Company's revolving credit facility provides for maximum borrowings of
$105.0 million through a combination of cash advances (which may not exceed
$65 million) and letters of credit (which may not exceed $70 million) to
support the Company's gold consignment financing program. At September 30,
1999, the Company had $19.2 million available to be borrowed under its
revolving credit facility and was either in compliance with covenants
contained in the agreement or had obtained appropriate waivers. 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. The Company is currently
renegotiating its revolving line of credit agreement and anticipates signing
a new agreement prior to the expiration of the existing revolving credit
facility. The Company is also currently considering expanding its gold
consignment program by establishing consignment arrangements with a new
consignment bank.
Year 2000 compliance
The information set forth in this section is a Year 2000 Readiness
Disclosure as defined in the Year 2000 Information Readiness and Disclosure
Act.
The Company is aware of "Year 2000" issues existing in the programming code
of some information technology ("IT") and non-IT systems. The Year 2000
issue may arise because many hardware and software systems only use two
digits to represent the year. As a result, these systems may not be able to
process dates beyond 1999, which may cause errors or failures in IT or
non-IT systems.
The Company relies significantly on both IT and non-IT systems in its retail
outlets as well as at its corporate headquarters and distribution center.
These systems include hardware and software that the Company uses to conduct
its operations, analyze business performance and safeguard assets. The
Company's strategy for addressing Year 2000 compliance has been to replace
or renovate all critical systems identified as non-compliant. Accordingly,
in fiscal 1999, the Company implemented a process to identify, remediate and
test all critical systems. The Company has now substantially completed this
process. For the remainder of calendar 1999, the Company will focus its
efforts developing and refining contingency plans to address Year 2000
related issues which may occur as a result of circumstances beyond the
Company's control. The Company has created a Year 2000 contingency plan
which addresses how the Company will respond to potential failures of third
party systems. These preparations primarily include responses to power,
telecommunication and transportation systems failures at either store
locations or the Company's corporate office and distribution facility.
The Company has met all costs of its Year 2000 remediation efforts with
existing internal staff resources and has spent less than $500,000 on
hardware and software purchased to specifically address Year 2000 issues.
The cost of these efforts, other than hardware and software purchases, has
not been separately tracked or allocated and, accordingly, the Company
cannot precisely determine the expense incurred. The Company does not
anticipate future Year 2000 costs will be material and will continue to use
internal staff supplemented by external resources if necessary.
<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 has sought confirmation from its primary vendors that they are
developing and implementing plans to become Year 2000 compliant. However,
there can be no assurance that the systems of third parties, which are not
within the control of the Company, will function properly. The failure of
certain primary vendors to be Year 2000 compliant may have an adverse impact
on the Company's performance.
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.
Forward-looking statements
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. A number of the matters and subject areas
discussed in "Management's Discussion and Analysis of Financial Condition
and Results of Operations," are not limited to historical or current facts
and deal with potential future circumstances and developments. Prospective
investors are cautioned that such forward-looking statements are only
predictions and that actual events or results may differ materially. A
variety of factors could cause the Company's actual results to differ
materially from the expected results expressed in the Company's
forward-looking statements, including, without limitation: the Company's
ability to secure suitable store sites on a timely basis and on satisfactory
terms; the Company's ability to hire, train and retain qualified personnel;
the availability of adequate capital resources and the successful
integration of new stores into the Company's existing operations; the
Company's ability to successfully implement and improve management
information systems, procedures and controls on a timely basis and in such a
manner as is necessary to accommodate the increased number of transactions
and customers and the increased size of the Company's operations;
fluctuations in quarterly net sales, and, in particular, third quarter net
sales; fluctuations in gold prices; competitive conditions; economic
conditions affecting
<PAGE>
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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in market risk exposures that affect the
quantitative and qualitative disclosures presented as of March 31, 1999.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 19, 1999, the previously announced securities class action
litigation that had been filed against the Company and certain of its
officers by Israel H. Buck et al. was dismissed with prejudice by the United
States District Court for the Eastern District of Pennsylvania. The Company
does not know whether the dismissal will be appealed by the plaintiffs.
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 15, 1999, the Registrant held its Annual Meeting of
Stockholders. The stockholders approved the following proposals:
1. To elect John F. Eureyecko a director to hold office until the 2002
Annual Meeting of Stockholders and until his successor has been duly
elected and qualified.
Votes For Votes to Withhold
Authority
7,370,950 330,542
2. To amend the Piercing Pagoda, Inc. 1994 Stock Option Plan in
order to increase the number of shares available
thereunder.
Votes For Votes Against Abstain
7,269,042 399,931 12,224
3. To ratify the appointment of KPMG LLP as the Company's independent
auditors for the 2000 fiscal year.
Votes For Votes Against Abstain
7,690,481 5,883 5,128
<PAGE>
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
27 Financial Data Schedule.
b) Reports on Form 8-K
During the quarter ended September 30, 1999, no reports on Form 8-K
were filed.
<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 11, 1999 /s/ John F. Eureyecko
John F. Eureyecko
President,
Chief Operating Officer
(Principal Financial Officer)
Date: November 11, 1999 /s/ Brandon R. Lehman
Brandon R. Lehman
Treasurer
(Principal Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Page
27 Financial Data Schedule 21
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 1245
<SECURITIES> 0
<RECEIVABLES> 5110
<ALLOWANCES> 0
<INVENTORY> 65991
<CURRENT-ASSETS> 76883
<PP&E> 59649
<DEPRECIATION> 24090
<TOTAL-ASSETS> 134251
<CURRENT-LIABILITIES> 51143
<BONDS> 5209
0
0
<COMMON> 92
<OTHER-SE> 73164
<TOTAL-LIABILITY-AND-EQUITY> 134251
<SALES> 112981
<TOTAL-REVENUES> 112981
<CGS> 61873
<TOTAL-COSTS> 61873
<OTHER-EXPENSES> 51196
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1646
<INCOME-PRETAX> (1639)
<INCOME-TAX> (645)
<INCOME-CONTINUING> (994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (994)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
