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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, 2000
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 22, 2000 was approximately $75,369,043.
The number of shares outstanding of the Registrant's common stock is 9,188,298
(as of June 22, 2000).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement to be filed with the Commission in
connection with its 2000 Annual Meeting of Shareholders are incorporated by
reference into Part III of this Form 10-K.
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PIERCING PAGODA, INC.
TABLE OF CONTENTS
PAGE
PART I
Item 1. BUSINESS 3
Item 2. PROPERTIES 13
Item 3. LEGAL PROCEEDINGS 14
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
Item 4A. EXECUTIVE OFFICERS OF THE REGISTRANT 14
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 16
Item 6. SELECTED FINANCIAL DATA 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 19
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 27
ABOUT MARKET RISK
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA 29
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE 50
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS
OF REGISTRANT 50
Item 11. EXECUTIVE COMPENSATION 50
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 50
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 50
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 51
<PAGE>
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, 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 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; (vii) the impact
of Year 2000 issues on the Company's own systems and external parties; and
(viii) 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 March 31, 2000, the Company operated
940 stores in 44 states and Puerto Rico, including 907 kiosk stores and 33
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 & Gold
Connection. The Company's kiosk stores average approximately 172 square
feet in size, typically carry approximately 3,500 SKUs, require a low
initial investment, can be opened quickly and are easily accessible and
visible within malls. During fiscal 2000, the average price of a jewelry
item sold by the Company was approximately $27 and average annual
comparable kiosk store net sales per square foot were $1,797. The Company
believes that its low price points and focused merchandise selection
differentiate it from other mall-based jewelry retailers.
<PAGE>
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 primarily
on basic styles of lower-priced 14 karat and 10 karat gold jewelry,
comprised primarily of chains, bracelets, earrings, charms and rings,
supplemented by a selection of sterling silver, diamond and gemstone
merchandise. The Company offers an extensive selection within each
merchandise category, and its stores typically carry approximately 3,500
SKUs. The average price of a jewelry item sold by the Company in fiscal
2000 was approximately $27. Approximately 60% 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 that 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 guarantee against manufacturers defects, its complimentary
ear piercing service with the purchase of earrings and its "preferred
customer" 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 periodically evaluates its information systems to determine if
new or additional hardware or software is necessary or desirable based
upon expected future growth plans. The Company believes it current
inventory, replenishment and point-of-sale systems are adequate to meet
expected future growth for at least the next two fiscal years. In fiscal
2000, the Company implemented a new product planning and analysis software
package to enhance the Company's existing systems.
<PAGE>
This system was fully installed during fiscal 2000 and provides the
Company with additional tools to monitor and analyze product performance.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of Year 2000 issues.
Growth Strategy
The Company's objective over the last several years has been to
secure its position as the dominant kiosk-based jewelry retailer. Since
the beginning of fiscal 1996, the Company has opened 728 new stores, 355
of which were acquired from third parties. Acquisitions completed over the
last 5 fiscal years include 67 locations acquired from Earring Tree in
fiscal 1996, 93 locations acquired from Gemstone Jewelry in fiscal 1997,
43 locations acquired from Silver & Gold Connection in fiscal 1998, 104
locations acquired from Sedgwick Sales, Inc. and 22 locations acquired
from the Company's former licensee in fiscal 1999.
Upon completing the purchase of store locations, the Company has
sought to increase the net sales and profitability of the acquired
locations by converting the acquired stores to the Company's format and
implementing the Company's merchandising strategies. This has been
accomplished by revising the merchandise mix of the acquired stores and by
retraining sales associates and store management personnel to provide the
same level of customer service emphasized in the Company's other stores.
The Company believes that its ability to execute these strategies has been
a key element in the successful assimilation of many of these acquired
stores into the Company's operations. Failure to successfully integrate
new and acquired stores into the Company's operations can have a material
adverse effect on the Company's results of operations, particularly during
the Company's first, second and fourth fiscal quarters which are
seasonally lower sales periods.
During fiscal 1999, the Company opened 221 new and acquired stores,
the largest number of store openings the Company has ever completed in one
fiscal year. Included in these openings were 104 locations purchased in
July 1998 from Sedgwick Sales, Inc., a kiosk-based retailer of primarily
gold-plated jewelry operating primarily under the name Golden Chain Gang
("GCG"). After a review of the initial sales results and future sales
potential of the locations acquired from GCG, the Company announced in
September 1998 that it would close many of these locations and work to
improve operations at the remaining stores. The combination of significant
pre-opening costs and lower than expected sales results at these, as well
as other under-performing stores, negatively affected the Company's
operating results for fiscal 1999, particularly in the second fiscal
quarter. Since that time, the Company has closed 40 of the former GCG
stores and plans to close up to another six. In addition, the Company
closed another 83 under-performing locations, bringing the total stores
closed in the last two fiscal years to 123. The Company focused its
efforts in fiscal 2000 on improving the operations at the remaining GCG
stores as well as other under-performing locations. These efforts included
new or renovated kiosks at many of the former GCG locations, additional
training and incentive programs for all store personnel and changes to the
merchandise selection across all the Company's stores. Based on fiscal
2000 results, the Company believes the steps it has taken have been
successful at improving the operations of these locations. The Company
will continue to monitor the results of all under-performing locations,
including former GCG stores, and may close additional locations in fiscal
2001 that do not meet its performance requirements.
The Company expects to continue to focus its efforts on improving the
productivity of its existing store base during fiscal 2001. Accordingly,
the Company plans to open 40 to 60 new stores in fiscal 2001 (excluding
any acquisitions) and to close approximately 30 to 40 existing stores
during the year. The Company expects to expand the pace of its store
openings in fiscal 2002 to approximately 60 to 80 new stores offset by
approximately 20 to 30 store closures. In selecting sites for new stores,
the Company generally seeks malls that have at least 500,000 square
<PAGE>
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 approximately $123,000,
including approximately $80,000 of inventory (a portion of which is
generally financed through consignment arrangements), $35,000 for
construction of the kiosk, fixtures, point-of-sale register and other
equipment and supplies and $9,000 for pre-opening expenses which are
expensed when incurred. New stores can typically be opened as soon as
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. At March 31, 2000 there
were 515 stores operating in malls where the Company operated more than
one location. Annual net sales for such stores, which were open for all of
fiscal 2000, averaged $333,000. 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 139 stores, 123 of
which closed in the last two fiscal years, including 40 former GCG stores.
The Company's expansion may also include retail concepts and
locations other than the Company's standard kiosks in regional malls. As
of March 31, 2000, the Company operated 33 in-line stores, most of which
were acquired as part of the Earring Tree acquisition. The Company
continues to evaluate and develop its in-line store concept. In fiscal
2000, the Company opened two in-line stores and expects to open up to four
in-line stores in fiscal 2001. 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.
The Company has also begun limited expansion into less traditional
retail locations such as airports and resorts. During fiscal 2000, the
Company expanded the number of airport terminal locations it operates to
four by adding two locations in Newark International Airport. The Company
plans to open at least one additional airport location in fiscal 2001. The
Company also added to the number of resort locations it operates in fiscal
2000 by opening a second location in Rehobeth Beach, Delaware, a seaside
resort community.
In appropriate situations, the Company will continue to evaluate
potential acquisitions of existing stores or store sites from third
parties.
During fiscal 2000 the Company significantly expanded the selection
of silver, diamond and gemstone merchandise at its stores. The selection
of silver merchandise was expanded at all the Company's locations while
the selection of diamond and gemstone merchandise was expanded to
approximately 400 stores from 180 in the previous year. Silver merchandise
displayed strong sales gains, increasing to approximately 13% of total
sales in fiscal 2000 from approximately 10% in fiscal 1999. The average
price of a silver item sold also increased from $13.15 in fiscal 1999 to
$17.85 in fiscal 2000. The performance of diamond and gemstone merchandise
was also encouraging. Diamond and gemstone products accounted for nearly
2% of sales in fiscal 2000. The price of an average jewelry unit of
diamond and gemstone merchandise was approximately $92.24, far exceeding
the Company average of approximately $26.55. The Company also continued to
expand its Diamond Isle concept, increasing the number of stores from one
in fiscal 1999 to nine in fiscal 2000. The Company has plans to add up to
five additional Diamond Isle locations prior to the 2000 holiday shopping
season.
<PAGE>
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 89% 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 3,500
SKUs, approximately 80% of which have list prices under $100, and during
fiscal 2000 generated an average jewelry item selling price of
approximately $27. The Company also offers a selection of non- jewelry
items such as ear care products and jewelry cleaners. Approximately 60% 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.
During fiscal 2000, 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
-----------------------------------------------------------------
<S> <C>
Gold
Chains and bracelets 35%
Charms and rings 22
Earrings 27
Miscellaneous items 2
-----------------------------------------------------------------
Total gold 86
Silver jewelry and other items 14
-----------------------------------------------------------------
Total net store sales 100%
-----------------------------------------------------------------
</TABLE>
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 "preferred customer" jewelry
club. The Company also utilizes promotional events such as "Buy Two Get
One Free" and "Buy One Get One at Half Off", in addition to other
promotional events and clearance sales. The Company intends to continue to
emphasize these promotions and to monitor them in order to assess their
relative success.
<PAGE>
In addition to emphasizing lower prices, extensive selection, 940
nationwide locations 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 2000, approximately 11% of the Company's net sales were derived
from the sale of earrings in connection with complimentary ear piercing.
Guarantee on all jewelry items. The Company will repair or replace,
at no cost, all merchandise with manufacturing defects up to one year from
date of purchase.
Preferred customer jewelry club. During fiscal 2000, the Company
modified its preferred customer jewelry club program. The Company now
offers a customer incentive program which rewards frequent customers with
a $10.00 discount certificate for every $100.00 of purchases. The Company
maintains purchase histories for customers who choose to enroll in the
program and issues discount certificates quarterly based upon purchase and
redemption activity. Certificates expire within 90 days if unused. The
Company's previous jewelry club program offered customers, after five
purchases, a credit on the next purchase equal to the average price paid
for the five purchased items. During fiscal 2000, customers applied a
total of approximately $4.2 million of credits received under the current
and previous jewelry club programs 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 73% of
all purchases are cash transactions (including personal checks) with the
remaining purchases being credit card sales.
<PAGE>
Stores
At March 31, 2000, the Company operated 940 stores in 44 states and
Puerto Rico, including 907 kiosk stores and 33 in-line stores, primarily
under the names Piercing Pagoda, Plumb Gold and Silver & Gold Connection.
The Company's kiosk stores average approximately 172 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 March 31,
2000, the Company operated stores in 659 malls, and operated more than one
location in 234 of those malls. Of the stores operated, 33 were in-line
stores, most of which were acquired from Earring Tree.
The following table sets forth the Company's store openings and closings
for the periods indicated:
<TABLE>
<CAPTION>
Fiscal year ended March 31,
-------------------------------------
1996 1997 1998 1999 2000
-------------------------------------------------------------------
Number of stores:
<S> <C> <C> <C> <C> <C>
Beginning of period 366 513 682 789 931
Opened/acquired:
Piercing Pagoda(1) 121 108 61 126 21
Plumb Gold(2) 34 66 24 11 1
Silver & Gold
Connection(3) -- -- 38 80 20
Other(4) -- 2 -- 4 11
-------------------------------------------------------------------
Total opened(5) 155 176 123 221 53
-------------------------------------------------------------------
Total closed(6) 8 7 16 79 44
-------------------------------------------------------------------
Total at end of period 513 682 789 931 940
-------------------------------------------------------------------
</TABLE>
(1) Includes 42 stores in fiscal 1996, 41 stores in fiscal 1997, 10
stores in fiscal 1998, 64 stores in fiscal 1999, and one store in
fiscal 2000, 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.
(2) Includes 24 stores in fiscal 1996, 55 stores in fiscal 1997, 3
stores in fiscal 1998 and 7 stores in fiscal 1999, 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.
(3) Includes 54 stores in fiscal 1999 and one store in fiscal 2000 that
were acquired and reopened under the Silver & Gold Connection name.
Other than the acquisitions noted, stores that change names are not
included as new openings.
(4) Includes 1 store in fiscal 1999 that was acquired and reopened under
the Gemstone name.
(5) Includes 14 in-line stores in fiscal 1996, 7 in-line stores in
fiscal 1997, 4 in-line stores in fiscal 1998 and 2 in-line stores in
fiscal 2000.
(6) Includes 1 store sold to a former licensee in fiscal 1997, and 3
stores sold in fiscal 1998. The Company acquired all of the
outstanding stock of the former licensee on August 31, 1998, and now
operates all the former licensed stores as its own.
<PAGE>
Store Operations
Store operations are divided into nine regions, each of which is
supervised by a regional sales manager. The regional sales managers
supervise the Company's district sales managers, each of whom is
responsible for an average of approximately twelve 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, 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 sales managers and district sales managers 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 sales 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.
Generally, merchandise is delivered in bulk to the Company's headquarters
where the Company's in-house merchandise staff prepares the items for
display on merchandise pads. 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 2000, the Company's five largest suppliers
accounted for approximately 41% of the merchandise purchased by the
Company. One of these vendors accounted for approximately 15% of the
Company's merchandise purchases during fiscal 2000. The
<PAGE>
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.
Management Information Systems
The Company currently uses proprietary, customized systems for both
its point-of-sale functions as well as for inventory management. The
Company's point-of-sale system processes all transaction-related activity,
collects payroll information, and provides data for the analysis of store
performance and inventory control at the corporate headquarters. Through
nightly polling of in-store registers, sales and inventory information is
provided to the corporate headquarters. This information is used by the
Company to monitor 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.
The Company periodically evaluates its information systems to
determine if new or additional hardware or software is necessary or
desirable based upon expected future growth plans. The Company believes
its current inventory, replenishment and point-of-sale systems are
adequate to meet expected future growth for at least the next two fiscal
years. The Company anticipates that subsequent to fiscal 2002 it may be
necessary to upgrade its inventory management and point-of-sale software.
It is expected that any new inventory management or point-of-sale software
may require modification to replicate certain custom elements of the
Company's existing system .
In fiscal 2000, the Company implemented new product planning and
analysis software. The new software utilizes the SQL relational database
and a Windows NT-based client/server architecture. This new system
provides enhanced merchandise analysis tools that will allow the Company
to better monitor and analyze the performance of its merchandise. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" for a discussion of Year 2000 issues.
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, televised home shopping networks and
internet based retailers. 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.
<PAGE>
Employees
As of March 31, 2000, the Company had approximately 2,247 full-time
and approximately 3,174 part-time employees. Of these, 270 were employed
full-time and 53 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 2000 peak holiday season, the Company
had 5,401 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.
Trademarks
The Company believes its registered trademarks "Piercing Pagoda,"
"Silver Station" and "Silver & Gold Connection," along with the Company
logo and "Plumb Gold" name, are important elements of the Company's
marketing strategy. In addition, the Company has trademark applications
pending for "Piercing Pagoda the Gold Company," "Diamond Isle" and "The
Gold Station." 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, Indiana, Texas and Minnesota are the only
states in which the Company operates that regulate 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 in Oregon 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 state of Indiana has enacted legislation similar
to the Oregon legislation, but which excludes the licensing requirement
and, accordingly, the Company limits its ear piercing to the ear lobe in
26 of the 27 stores it operates in Indiana. The state of Texas has enacted
legislation that regulates body piercing activities, but specifically
excludes the earlobe. Rules covering the other parts of the ear have not
yet been finalized and accordingly, the Company can not predict their
potential effect on its operations in Texas. Two municipalities, one in
Indiana and one in Minnesota have enacted legislation which imposes
various restrictions upon ear piercing that make it impractical for the
Company to comply. Accordingly, the Company does not perform ear piercing
in the one location in each municipality affected by the regulation.
Various other municipalities regulate or impose restrictions on the
piercing of ear cartilage. The Company believes that cartilage piercing
regulations and restrictions do not have a material impact on its
operations. Management also believes that the Company complies in all
material respects with all 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.
<PAGE>
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 four
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, 2000, 412 expire before March 31, 2001.
The Company owns a 73,000 square foot building in Bethlehem,
Pennsylvania that serves as its corporate headquarters and distribution
center. To accommodate the Company's recent growth, an additional facility
was constructed on approximately five acres of vacant land the Company
owns adjacent to the Bethlehem property. This new facility, which was
completed during fiscal 1999, is approximately 71,000 square feet and is
used primarily for additional distribution and warehousing functions
<PAGE>
Item 3. LEGAL PROCEEDINGS
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.
On October 19, 1999, the securities class action litigation that had
been filed during fiscal 1999 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. No
appeal of the dismissal was filed by the plaintiffs within the required
time period.
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, 2000.
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, 2000. All executive
officers serve at the discretion of the Board of Directors of the Company.
-------------------------------------------------------------------
Name Age Position with Company
-------------------------------------------------------------------
Richard H. Penske 57 Chairman of the Board and Chief
Executive Officer
John F. Eureyecko 51 President, Chief Operating Officer,
Secretary and Director
Barry R. Clauser 46 Senior Vice President -- Merchandise
Operations
Sharon J. Zondag 44 Senior Vice President -- Store
Operations
Gilbert P. Hollander 46 Senior Vice President of Merchandise
Purchasing
Brandon R. Lehman 48 Treasurer
Lisa E. Sankovsky 39 Vice President -- Real Estate
Richard J. McKeon 42 Director of Management Information
Systems
Christopher J. Barone 35 Corporate Controller
------------------------------------------------------------------
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.
<PAGE>
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.
Gilbert P. Hollander joined the Company in May of 1997 as Director of
New Business Development, was promoted to Vice President of Merchandise
Purchasing in February of 1999 and was promoted to Senior Vice President
of Merchandise Buying in February of 2000. Prior to joining the Company,
Mr. Hollander held various senior management positions with Silver & Gold
Connection, a kiosk based jewelry retailer and has owned and operated his
own wholesale and retail jewelry business.
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.
Lisa E. Sankovsky joined the Company in 1983 as an assistant to Mr.
Penske, focusing on lease administration. Ms. Sankovsky served as
Director of Real Estate from February 1994 to July 1995. Since July 1995,
Ms. Sankovsky has served as Vice President -- Real Estate.
Richard J. McKeon has served as Director of Management Information
Systems since he joined the Company in November 1990. From 1987 to 1990,
Mr. McKeon was a programmer trainer with Valley Computer Learning Center,
a computer training company.
Christopher J. Barone has served as the Corporate Controller since
October 1994. Prior thereto, he served in various capacities with KPMG LLP
from September 1989 to October 1994, most recently as Audit Manager.
<PAGE>
PART II
Item 5. MARKET FOR 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 1999
First Quarter $ 25.67 $ 20.83
Second Quarter $ 24.30 $ 11.06
Third Quarter $ 16.13 $ 8.50
Fourth Quarter $ 11.06 $ 8.88
Fiscal 2000
First Quarter $ 13.75 $ 8.81
Second Quarter $ 16.75 $ 12.75
Third Quarter $ 15.13 $ 8.13
Fourth Quarter $ 13.88 $ 11.50
</TABLE>
As of June 21, 2000, there were approximately 165 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.
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended March 31, 2000
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.
<TABLE>
<CAPTION>
Fiscal Year Ended March 31,
--------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
( In thousands, except per share and operating data)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 280,718 $ 255,147 $ 222,128 $ 166,885 $ 121,581
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks and store
fixtures) 144,556 137,072 119,328 92,308 67,440
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
Gross profit 136,162 118,075 102,800 74,577 54,141
Selling, general and administrative expenses
(including depreciation on kiosks and store
fixtures) 111,082 102,464 82,916 60,845 43,887
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
Income from operations 25,080 15,611 19,884 13,732 10,254
Interest and other income 251 367 562 386 282
Interest expense 3,698 3,110 2,896 2,208 1,306
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
Earnings before income taxes 21,633 12,868 17,550 11,910 9,230
Income taxes 8,652 5,225 6,581 4,372 3,553
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
Net income $ 12,981 $ 7,643 $ 10,969 $ 7,538 $ 5,677
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
Earnings Per Share Data:
Earnings per share:
Basic $ 1.43 $ 0.84 $ 1.25 $ 0.96 $ 0.72
Diluted $ 1.41 $ 0.82 $ 1.21 $ 0.93 $ 0.71
Weighted average shares outstanding:
Basic 9,066 9,119 8,765 7,886 7,856
Diluted 9,237 9,331 9,062 8,084 7,988
Selected Operating Data:
Number of stores at beginning of period 931 789 682 513 366
Stores added (net of closures and sales) 9 142 107 169 147
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
Stores at end of period 940 931 789 682 513
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
Average jewelry units sold per
comparable store (rounded) (1) 11,700 11,700 11,800 12,000 11,600
Average comparable store net sales (2) $ 312,000 $ 291,000 $ 295,000 $ 303,000 $ 295,000
Average comparable store
net sales per square foot (3) $1,668 $ 1,581 $ 1,630 $1,848 $ 1,821
Average comparable store square footage (3) 187 184 181 164 162
Percentage increase in
comparable store net sales (4) 6.7% 0.3% 3.0% 7.6% 12.4%
</TABLE>
<TABLE>
<CAPTION>
March 31,
----------------- ------------- ------------ -------------- --------------
2000 1999 1998 1997 1996
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital $ 37,836 $ 47,571 $ 44,302 $ 40,649 $ 15,948
Inventory 63,960 53,685 53,149 43,109 25,390
Total assets 127,293 123,300 96,099 79,741 47,906
Current installments of long-term debt and
revolving line of credit 17,639 432 247 234 5,910
Long term debt, less current installments 4,929 25,169 9,742 26,690 2,350
Stockholders' equity 84,714 74,491 66,328 37,522 29,579
------------------------------------------------------ ----------------- ------------- ------------ -------------- --------------
</TABLE>
<PAGE>
(1) Reflects average jewelry units sold per comparable store based on
283, 355, 493, 628 and 711 comparable stores in fiscal 1996, fiscal
1997, fiscal 1998, fiscal 1999 and fiscal 2000, 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.
(2) 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.
(3) Reflects 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 162,
164, 181, 184 and 187 square feet for fiscal 1996, 1997, 1998, 1999 and
fiscal 2000, respectively.
(4) Comparable store net sales data is calculated based on the change in
net sales of all stores open as of the beginning of the preceding
fiscal year.
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales are comprised primarily of sales generated by stores and,
until August 31, 1998, wholesale sales, primarily to a licensee operating
in the state of Florida (the "Florida Licensee"). 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.
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,
-------------------------------------------------------------------
2000 1999 1998
------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks) 51.5 53.7 53.7
-------------------------------------------------------------------
Gross profit 48.5 46.3 46.3
Selling, general and administrative
expenses(including depreciation
on kiosks) 39.6 40.2 37.3
-------------------------------------------------------------------
Income from operations 8.9 6.1 9.0
Interest and other income 0.1 0.1 0.2
Interest expense 1.3 1.2 1.3
-------------------------------------------------------------------
Earnings before income taxes 7.7 5.0 7.9
Income taxes 3.1 2.0 3.0
-------------------------------------------------------------------
Net income 4.6% 3.0% 4.9%
-------------------------------------------------------------------
</TABLE>
Comparison of Fiscal 2000 and Fiscal 1999
Net Sales
Net sales increased $25.6 million, or 10%, to $280.7 million in
fiscal 2000 from $255.1 million in fiscal 1999. This increase was due
primarily to a $13.9 million, or 6.7%, increase in net sales at the
Company's 711 comparable stores. At March 31, 2000, the Company operated
940 stores compared to 931 stores at March 31, 1999, an increase of 1%.
During the year, the Company opened 53 stores and closed 44. The average
jewelry units sold in fiscal 2000 per comparable store were unchanged at
11,700 from fiscal 1999. The average price per jewelry unit sold for all
the Company's stores increased to $26.55 in fiscal 2000 from $24.54 in
fiscal 1999.
Gross Profit
Gross profit increased $18.1 million, or 15.3%, to $136.2 million in
fiscal 2000 from $118.1 million in fiscal 1999. Gross margin also
increased from 46.3% of net sales in fiscal 1999 to 48.5% of net sales in
fiscal 2000, an improvement of 2.2% of net sales. The increase in gross
profit is primarily attributable to the Company's increase in net sales.
The improvement in gross profit margin primarily reflects improved
merchandise margins due to lower merchandise costs, less promotional
activity during the year and changes in merchandise mix compared to the
previous year. During the current fiscal year, the Company implemented
certain changes to its merchandise
<PAGE>
selection that had a favorable impact on sales and gross profit
margin. These changes include the introduction of new 10k and 14k gold
merchandise styles with higher gross profit margins and increasing the
selection of non-gold merchandise. In addition, the Company modified its
promotional strategy, reducing the amount of store-wide promotions in
favor of promotions on selected merchandise. As a result, a greater amount
of sales were achieved at a higher average unit price and produced better
gross profit dollars and margin. Additionally, better leverage of fixed
rent and occupancy costs have resulted in lower store rent expense as a
percentage of net sales. This is partially attributable to the Company's
efforts to eliminate under-performing stores from its portfolio. Since the
beginning of the previous fiscal year, the Company has closed 123
under-performing stores and worked to improve the operations at its
remaining stores.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $8.6 million,
or 8.4%, to $111.1 million in fiscal 2000 from $102.5 million in fiscal
1999. However, as a percentage of net sales, selling, general and
administrative expenses decreased to 39.6% in fiscal 2000 from 40.2% in
fiscal 1999. The increase in selling, general and administrative expense
primarily reflects the combination of higher store payroll expense,
greater corporate overhead expense and higher depreciation and
amortization expense compared to the prior year. These were partially
offset by reductions in supervisory and direct and indirect store
expenses. The increase in store payroll was caused by higher base
compensation as well as greater bonus payments due to higher sales volume.
Corporate overhead expense increased due to the hiring of additional
personnel into various corporate functions including merchandise buying
and expenditures to support the Company's revised jewelry club program.
Supervisory and direct and indirect store expense decreased due to the
lower level of both store openings and closings compared to the prior
year.
Depreciation and amortization expense increased 20.0% to $8.4 million
in fiscal 2000 from $7.0 million in fiscal 1999. This was due primarily to
capital expenditures for new stores and the upgrading of kiosks in
existing locations. Additionally, amortization expense includes a full
year of amortization of goodwill acquired in connection with the
acquisition of 104 former GCG stores in July 1998 and 22 stores acquired
from the former Florida Licensee in August 1998. Approximately $13.7
million of goodwill was recorded in connection with these two acquisitions
and is being amortized over fifteen years. Goodwill and other amortization
expense totaled $1.9 million and $1.3 million in fiscal 2000 and 1999,
respectively.
Interest Expense
Interest expense increased $588,000, or 19.0%, to $3.7 million in
fiscal 2000 from $3.1 million in fiscal 1999, and as a percentage of net
sales increased to 1.3% from 1.2%. Interest expense includes interest paid
on bank borrowings, fees paid for letters of credit, including letters of
credit to support the Company's gold consignment program, and gold
consignment fees. The increase in interest expense primarily reflects an
increase in total average borrowings under the Company's revolving line of
credit, higher average interest rates under the revolving credit facility
(6.84% versus 6.75%) and higher average rates paid under the Company's
gold consignment program (2.68% versus 1.94%).
Income Tax Expense
Income tax expense increased $3.5 million to $8.7 million in fiscal
2000 from $5.2 million in fiscal 1999. The increase in income tax expense
is due to the increase in the Company's earnings before income taxes. As a
percentage of earnings before income taxes, income tax expense decreased
slightly to 40.0% in fiscal 2000 from 40.6% in fiscal 1999. Income tax
expense in fiscal 1999
<PAGE>
included $165,000 of income taxes recognized for potential state
income exposure for periods which were under audit. Current year income
tax expense does not include a comparable charge.
Net Income
The Company's net income increased $5.3 million, or 69.7%, to $13.0
million in fiscal 2000 from $7.6 million in fiscal 1999 due to the factors
described above.
Comparison of Fiscal 1999 and Fiscal 1998
Net Sales
Net sales increased $33.0 million, or 14.9%, to $255.1 million in
fiscal 1999 from $222.1 million in fiscal 1998. This increase was due
primarily to net sales generated by new stores opened or acquired by the
Company and to a $794,000, or 0.3%, increase in comparable store net
sales. At March 31, 1999, the Company operated 931 stores compared to 789
stores at March 31, 1998, an increase of 18%. The average jewelry units
sold per comparable store were relatively unchanged at 11,700 in fiscal
1999 from 11,800 in fiscal 1998. The average price per jewelry unit sold
for all the Company's stores was also relatively unchanged at $24.54 in
fiscal 1999 from $24.53 in fiscal 1998. Included in total net sales is
approximately $982,000 of wholesale sales to the Florida Licensee,
compared to $4.3 million in fiscal 1998. On August 31, 1998, the Company
purchased all of the outstanding stock of the Florida Licensee and began
operating the former Licensee's 22 stores as its own. Accordingly,
wholesale sales ceased on that date and all subsequent sales activity of
the acquired stores is reflected as part of the Company's own net sales.
Gross Profit
Gross profit increased $15.3 million, or 14.9%, to $118.1 million in
fiscal 1999 from $102.8 million in fiscal 1998 while gross profit margin
remained level at 46.3% for both periods. Gross profit margin, while
unchanged in total, reflects an increase caused by the conversion of sales
from wholesale to retail sales at the 22 stores acquired from the former
Florida Licensee, offset by a decrease in merchandise margin and higher
rent and occupancy expenses. The Company realizes a higher margin on its
own retail sales than it previously obtained on wholesale sales to the
former Florida Licensee which caused the increase in gross profit margin.
Merchandise margins declined due to greater promotional activity in an
attempt to increase sales, particularly at the Company's comparable
stores. The increase in rent and occupancy as a percentage of sales
reflects the less than expected sales performance at the Company's
comparable stores, particularly during the holiday season, as well as
lower sales at other under-performing stores and the lower initial sales
volumes at new stores opened by the Company.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $19.6 million,
or 23.6%, to $102.5 million in fiscal 1999 from $82.9 million in fiscal
1998. As a percentage of net sales, selling, general and administrative
expenses increased to 40.2% in fiscal 1999 from 37.3% in fiscal 1998. The
combined effect of non-recurring pre-opening costs, lower than expected
sales results at many of the acquired locations and expenses recorded to
close under-performing stores resulted in the significant increase in both
selling, general and administrative expenses and their relationship to net
sales. During fiscal 1999, the Company opened 221 new and acquired stores,
including 104 former GCG locations. This represents the largest number of
new stores the Company has ever opened in a single fiscal year. After a
review of the initial sales results and future sales potential of the 104
locations acquired from GCG, the Company announced on September 28, 1998
that it would close 30 of these locations by March 31, 1999 and work to
improve operations at the remaining stores. In addition, the Company chose
to close another 49 under-performing stores by
<PAGE>
year-end, bringing the total stores closed in fiscal 1999 to 79, the
largest number of stores the Company has ever closed in one fiscal year.
During fiscal 1999, the Company recognized approximately $1.6 million of
store closure costs as additional selling, general and administrative
expense of which $1.3 million is included in accrued expenses and other
current liabilities at March 31, 1999. These costs include estimated
outstanding lease obligations and kiosk disposal costs associated with the
79 stores the Company closed in fiscal 1999 and 35 additional locations
for which a closure decision had been made at March 31, 1999, but which
are scheduled to close in fiscal 2000.
Depreciation and amortization expense increased 29.6% to $7.0 million
in fiscal 1999 from $5.4 million in fiscal 1998. This was due primarily to
capital expenditures for new stores and the upgrading of kiosks in
existing locations. Additionally, amortization expense for goodwill
increased due to the acquisition of 104 former GCG stores and the 22
stores acquired from the former Florida Licensee in July 1998 and August
1998, respectively. Approximately $13.7 million of goodwill was recorded
in connection with these two acquisitions and is being amortized over
fifteen years. Goodwill amortization expense totaled $1.3 million and
$613,000 in fiscal 1999 and 1998, respectively.
Interest Expense
Interest expense increased $214,000, or 7.4%, to $3.1 million in
fiscal 1999 from $2.9 million in fiscal 1998, and as a percentage of net
sales decreased to 1.2% from 1.3%. 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 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. These were
partially offset by lower average weighted interest rates on borrowings
under the Company's revolving line of credit (6.75% versus 7.03%) and
lower consignment rates charged by the Company's gold banks (1.94% versus
2.74%).
Income Tax Expense
Income tax expense decreased $1.4 million to $5.2 million in fiscal
1999 from $6.6 million in fiscal 1998. As a percentage of earnings before
income taxes, income tax expense increased to 40.6% in fiscal 1999 from
37.5% in fiscal 1998. The decrease in income tax expense is due to the
decrease in the Company's earnings before income taxes. The higher
effective income tax rate in 1999 resulted from the effect of certain
acquisition-related costs and other charges for which there were no
corresponding tax benefits and an additional $165,000 of income taxes
recognized for potential state income exposure for periods currently under
audit.
Net Income
The Company's net income decreased $3.4 million, or 30.9%, to $7.6
million in fiscal 1999 from $11.0 million in fiscal 1998. The Company
believes that the decrease resulted primarily from the factors described
above.
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,
<PAGE>
bank borrowings and a public offering of common stock that was
completed during fiscal 1998. The Company had working capital of $37.8
million and $47.6 million at the end of fiscal 2000 and fiscal 1999,
respectively. See "Seasonality."
Net cash provided by operating activities was $12.3 million in fiscal
2000 versus $15.0 million in fiscal 1999. Net cash provided by operating
activities in fiscal 2000 reflects net earnings plus depreciation and
amortization, increases in inventory reflecting the Company's introduction
of new merchandise styles, partially offset by changes in other current
assets and liabilities. Net cash provided by operating activities in
fiscal 1999 primarily reflects net earnings plus depreciation and
amortization, partially offset by changes in working capital requirements.
Net cash used in investing activities was $9.4 million and $28.3
million in fiscal 2000 and fiscal 1999, respectively. These amounts
reflect $8.8 million and $12.6 million of capital expenditures related
primarily to new stores in fiscal 2000 and fiscal 1999, respectively.
Additionally, in fiscal 1999, the Company paid $3.0 million for the
acquisition of 104 former GCG locations and $11.4 million for all of the
outstanding stock of the former Florida Licensee.
Net cash used in financing activities was $5.9 million in fiscal 2000
compared to $14.6 million provided by financing activities in fiscal 1999.
This reflects the repurchase of the Company's common stock pursuant to its
stock repurchase program and net activity under its revolving line of
credit facility. The stock repurchase program was approved by the Board of
Directors on August 13, 1999 and amended on November 22, 1999. This
program authorized the Company to repurchase up to 400,000 shares of its
common stock. Net cash provided by financing activities was $14.6 million
in fiscal 1999. This primarily reflects an increase in the Company's
revolving line of credit and additional long-term debt. These increases
were used to fund store expansion, acquisitions and the construction of an
additional warehouse and distribution center.
The Company currently has an unsecured revolving line of credit
facility, which expires July 31, 2000, that provides for maximum
borrowings of $105 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.
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 (8.00% at March 31, 2000) or (ii) a rate based on overnight
federal funds transactions with Federal Reserve System members plus 50
basis points (6.57% at March 31, 2000); 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 (7.24% at March 31, 2000 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, 2000, the
Company had $45.2 million available for cash borrowings under this
revolving credit facility. Letters of credit in the amounts of
approximately $40.1 million and approximately $41.4 million were issued at
March 31, 2000 and 1999, respectively. The Company is currently
negotiating with a syndicate of banks, which includes its current lenders,
for a new revolving credit facility. A new credit facility is expected to
be in place by July 31, 2000
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 adjusted net income (as defined), current assets to
current liabilities and indebtedness to capitalization (as defined); 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 was in compliance with all
the terms of its loan agreement at March 31, 2000
<PAGE>
The Company utilizes gold consignment arrangements that 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 merchandise
that 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 2000 and 1999, average financing costs under the
consignment agreements were approximately 2.68% and 1.94% 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 72% of the gold content of its merchandise under the
consignment program. As of March 31, 2000, the amount of gold consigned
was 142,000 ounces with a value of $39.3 million. At March 31, 1999,
143,443 ounces with a value of $40.1 million were consigned by the
Company. 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 2001 to total
approximately $9.5 million, of which approximately $4.6 million is related
primarily to the construction of new stores and the renovation of existing
stores. The Company currently anticipates opening approximately 40 to 60
new stores in fiscal 2001. The opening of a new store generally requires a
total investment of approximately $123,000, including approximately
$80,000 of inventory (a portion of which is generally financed through
consignment arrangements), $35,000 for construction of the kiosk,
fixtures, point-of-sale register and other equipment and supplies and
$9,000 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 and bank borrowings under its
revolving line of credit facility will be sufficient to fund the Company's
currently anticipated capital and liquidity needs.
<PAGE>
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). During the last two fiscal years, the month of December,
on average, has accounted for approximately 25% of the Company's annual
net sales and 129% 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 2000 Fiscal 1999
1st 2nd 3rd 4th 1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
Quarter Quarter Quarter Quarter
------------------------------- ----------- ---------- ----------- ---------- ---------- ----------- ---------- -----------
(In thousands, except per share data)
Statement of Income Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 58,154 $ 54,827 $ 105,279 $ 62,458 $ 48,018 $ 49,670 $ 101,985 $ 55,474
Gross profit(1) 25,489 25,619 55,093 29,961 21,385 22,050 50,066 24,574
Selling, general and
administrative expenses(1) 25,348 25,848 32,388 27,498 20,755 24,172 32,356 25,181
Income (loss)from 141 (229) 22,705 2,463 630 (2,122) 17,710 (607)
operations
Net income (loss) (311) (683) 12,972 1,003 102 $ (1,764) 10,169 (864)
Diluted earnings (loss) per
share $ (0.03) $ (0.07) $ 1.41 $ 0.11 $ 0.01 $ (0.19) $ 1.10 $ (0.09)
------------------------------- ----------- ---------- ----------- ---------- ---------- ----------- ---------- -----------
Comparable Store Net Sales
Increase (Decrease) 6.0% 6.3% 4.4% 11.8% 2.8% 0.3% (3.1)% 3.6%
As a Percentage of Net Sales:
Gross profit(1) 43.8% 46.7% 52.3% 48.0% 44.5% 44.4% 49.1% 44.3%
Selling, general and
administrative expenses(1) 43.6 47.1 30.8 44.0 43.2 48.7 31.7 45.4
Income (loss) from
operations 0.2 (0.4) 21.6 3.9 0.1 (4.3) 17.4 (1.1)
Net income (loss) (0.5) (1.2) 12.3 1.6 - (3.6) 10.0 (1.6)
------------------------------- ----------- ---------- ----------- ---------- ---------- ----------- ---------- -----------
</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.
<PAGE>
The Company's results of operations may fluctuate significantly from
quarter to quarter as a result of a variety of factors, including 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, fluctuations in the price of gold, and
changes in national and regional economic conditions. For example,
earnings from operations in the first and second and fourth quarters of
fiscal 1999 were adversely affected by the integration and assimilation of
520 stores opened or acquired over the last three fiscal years. 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.
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 successfully transitioned into the Year 2000 (Y2K)
without any major disruption of systems or business operations. No
significant Y2K issues were experienced relative to the Company's
merchandise and other third party vendors. Accordingly, it was not
necessary to invoke any of the Company's contingency plans, which were
developed for use in the event of supplier delivery delay or failure, or
critical system or support equipment interruption or failure. The Company
will continue to monitor its computer applications and those of its
suppliers and vendors throughout the year to ensure that any latent Y2K
matters that may arise are addressed promptly.
The Company spent less than $500,000 on hardware and software
purchased specifically to address Year 2000 issues. Expenditures were
funded through operating cash flows. Operating costs related to Y2K
compliance projects were incurred over several quarters and expensed as
incurred. These amounts did not have a material adverse effect on the
Company's financial condition or operating results. The Company does not
believe that the Y2K issue presents a material risk to the Company's
future results of operations, liquidity or capital resources.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) 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. In June of 1999,
the FASB issued SFAS No. 137, "Acounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS
No. 137 delays the effective date of SFAS No. 133 to the beginning of the
first quarter of the fiscal year beginning after June 15, 2000. The
Company does not anticipate adoption of this standard will have a material
impact on the Company's financial condition or results of operations.
<PAGE>
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk
The Company's primary market risk exposure is from changes in
interest rates. The Company's policy is to manage interest rate exposure
through the use of a combination of fixed and floating rate debt
instruments and, in fiscal 1999, an interest rate swap agreement.
Generally, the Company seeks to match the terms of its debt with its
purpose. The Company uses a variable rate line of credit to provide
working capital for operations and inventory build-up prior to the holiday
selling season. Construction and improvements to the Company's
headquarters and warehouse and distribution center are financed with
long-term, fixed rate notes. In fiscal 1999, the Company entered into an
interest rate swap agreement related to a new long-term note to
effectively convert it from a variable rate note to a fixed rate note. A
standard interest rate swap agreement involves the payment of a fixed rate
times a notional amount by one party in exchange for a floating rate times
the same notional amount from another party. The Company originated the
long-term note as a variable rate instrument in anticipation of a decline
in interest rates, then used the interest rate swap agreement to fix the
rate. The counterparty to the swap agreement is one of the Company's
primary lenders under its revolving line of credit.
The table below summarizes the Company's market risks associated with
long-term debt obligations and its interest rate swap as of March 31,
2000. For long-term debt obligations, the table presents cash flows
related to payments of principal and interest by expected year of
maturity. For the interest rate swap, the table reflects the notional
amount underlying the interest rate swap by year of maturity. The notional
amount is used to calculate contractual payments to be exchanged and is
not actually paid or received. Fair values were computed based upon
discounted cash flows using market interest rates as of the end of the
period.
<TABLE>
<CAPTION>
March 31, 2000
(In thousands) Expected Fiscal Year of Maturity
--------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt:
Long-term notes $ 439 $ 470 $ 500 $ 529 $ 569 $ 2,861 $ 5,368 $ 5,368
Interest expense $ 305 $ 283 $ 254 $ 222 $ 188 $ 667 $ 1,919
Average interest rate 5.90% 6.00% 6.00% 5.98% 5.94% 5.72%
Variable Rate Debt:
Revolving line of credit
$ 17,200 - - - - - $ 17,200 $ 17,200
Interest expense $ 1,376 - - - - - $ 1,376
Average interest rate 8.00%
Interest Rate Swaps:
1 Swap Receive Variable
Pay Fixed $ 120 $ 125 $ 130 $ 140 $ 150 $ 1,775 $ 2,440 $ 55
Variable Receive Rate
= 6.24%
Pay Rate = 6.23%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999
(In thousands) Expected Fiscal Year of Maturity
--------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Debt:
Long-term notes $ 425 $ 446 $ 470 $ 500 $ 529 $ 3,431 $ 5,801 $ 5,801
Interest expense $ 336 $ 311 $ 283 $ 254 $ 222 $ 857 $ 2,263
Average interest rate 6.02% 6.02% 6.02% 6.00% 5.97% 5.83%
Variable Rate Debt:
Revolving line of credit
- $19,800 - - - - $ 19,800 $ 19,800
Interest expense $ 1,253 $ 418 - - - - $ 1,671
Average interest rate 6.33% 6.33%
Interest Rate Swaps:
1 Swap Receive Variable
Pay Fixed $ 125 $ 120 $ 125 $ 130 $ 140 $ 1,925 $ 2,565 $ (49)
Variable Receive Rate
= 5.05%
Pay Rate = 6.23%
</TABLE>
Limitations of the tabular presentation
As the table incorporates only those interest rate risk exposures
that exist at March 31, 2000, it does not consider those exposures or
positions that could arise after that date. In addition, actual cash flows
of financial instruments may differ materially from cash flows presented
in the table due to future fluctuations in interest rates and Company debt
levels.
Commodity risk
For a discussion of the commodity risk associated with the Company's
holdings of gold merchandise see Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
<PAGE>
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report 30
Consolidated Balance Sheets at March 31, 2000 and 1999 31
Consolidated Statements of Income for the Years
ended March 31,2000, 1999 and 1998 32
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended
March 31, 2000, 1999 and 1998 33
Consolidated Statements of Cash Flows for the Years ended
March 31, 2000, 1999 and 1998 34
Notes to Consolidated Financial Statements 36
<PAGE>
Independent Auditors' Report
The Board of Directors
Piercing Pagoda, Inc.:
We have audited the accompanying consolidated balance sheets of
Piercing Pagoda, Inc. and subsidiaries as of March 31, 2000 and 1999 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, 2000. 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 auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit 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 subsidiaries as of March 31, 2000 and 1999 and
the results of their operations and their cash flows for each of the years
in the three-year period ended March 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Allentown, Pennsylvania
May 8, 2000
<PAGE>
PIERCING PAGODA, INC.
Consolidated Balance Sheets
March 31,
(In thousands, except share data)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------- ---------------- --- ----------------
Assets 2000 1999
-------------------------------------------------------------------------- ---------------- --- ----------------
<S> <C> <C>
Current assets:
Cash $ 1,137 $ 4,068
Accounts receivable 2,909 4,674
Inventory 63,960 53,685
Deposits for inventory purchases 197 707
Prepaid expenses and other current assets 1,476 1,337
Prepaid income taxes - 131
Deferred income taxes 992 2,213
-------------------------------------------------------------------------- ---------------- --- ----------------
Total current assets 70,671 66,815
-------------------------------------------------------------------------- ---------------- --- ----------------
Property, fixtures and equipment, net 35,692 34,293
Goodwill, net 19,155 20,199
Other assets, net 1,775 1,993
-------------------------------------------------------------------------- ---------------- --- ----------------
$ 127,293 $ 123,300
-------------------------------------------------------------------------- ---------------- --- ----------------
Liabilities and Stockholders' Equity
-------------------------------------------------------------------------- ---------------- --- ----------------
Current liabilities:
Accounts payable $ 2,912 $ 3,934
Current installments of long-term debt and
revolving line of credit 17,639 432
Income taxes payable 50 125
Accrued expenses and other current liabilities 12,234 14,753
-------------------------------------------------------------------------- ---------------- --- ----------------
Total current liabilities 32,835 19,244
-------------------------------------------------------------------------- ---------------- --- ----------------
Long-term debt, less current installments 4,929 25,169
Deferred income taxes 4,144 3,476
Other liabilities 671 920
-------------------------------------------------------------------------- ---------------- --- ----------------
Total liabilities 42,579 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 9,179,988
and 9,133,901 shares at March 31, 2000 and 1999, respectively. 92 92
Additional paid-in capital 41,339 40,906
Treasury stock, at cost (3,191) -
Retained earnings 46,474 33,493
-------------------------------------------------------------------------- ---------------- --- ----------------
Total stockholders' equity 84,714 74,491
-------------------------------------------------------------------------- ---------------- --- ----------------
$ 127,293 $ 123,300
-------------------------------------------------------------------------- ---------------- --- ----------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
PIERCING PAGODA, INC.
Consolidated Statements of Income
Years ended March 31,
(In thousands, except per share data)
<TABLE>
<CAPTION>
---------------------------------------------------------------------- ------------------ --------------- --------------
2000 1999 1998
---------------------------------------------------------------------- ------------------ --------------- --------------
<S> <C> <C> <C>
Net sales $ 280,718 $ 255,147 $ 222,128
Cost of goods sold and occupancy expenses
(excluding depreciation on kiosks and store fixtures) 144,556 137,072 119,328
---------------------------------------------------------------------- ------------------ --------------- --------------
Gross profit 136,162 118,075 102,800
Selling, general and administrative expenses
(including depreciation on kiosks and store fixtures) 111,082 102,464 82,916
---------------------------------------------------------------------- ------------------ --------------- --------------
Income from operations 25,080 15,611 19,884
Interest and other income 251 367 562
Interest expense 3,698 3,110 2,896
---------------------------------------------------------------------- ------------------ --------------- --------------
Earnings before income taxes 21,633 12,868 17,550
Income taxes 8,652 5,225 6,581
---------------------------------------------------------------------- ------------------ --------------- --------------
Net income $ 12,981 $ 7,643 $ 10,969
---------------------------------------------------------------------- ------------------ --------------- --------------
Basic earnings per share $ 1.43 $ 0.84 $ 1.25
---------------------------------------------------------------------- ------------------ --------------- --------------
Diluted earnings per share $ 1.41 $ 0.82 $ 1.21
---------------------------------------------------------------------- ------------------ --------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
PIERCING PAGODA, INC.
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except number of shares)
---------------------------------- ----------------------- -------------- ----------- ----------- -------------
Additional
Common stock paid-in Treasury Retained
Shares Amount capital Stock Earnings Total
---------------------------------- ------------- ---------- -------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance - March 31, 1997 7,910,991 $ 79 $ 22,562 - $ 14,881 $ 37,522
Share transactions under
employee stock plans,
including tax benefit 55,375 - 648 - - 648
Secondary public offering 1,121,250 12 17,177 - - 17,189
Net income - - - - 10,969 10,969
---------------------------------- ------------- ---------- -------------- ----------- ----------- -------------
Balance - March 31, 1998 9,087,616 $ 91 $ 40,387 - $ 25,850 $ 66,328
Share transactions under
employee stock plans,
including tax benefit 46,285 1 519 - - 520
Net income - - - - 7,643 7,643
---------------------------------- ------------- ---------- -------------- ----------- ----------- -------------
Balance - March 31, 1999 9,133,901 $ 92 $ 40,906 - $ 33,493 $ 74,491
Share transactions under
employee stock plans,
including tax benefit 46,087 - 433 - - 433
Purchase of treasury stock - - - (3,191) - (3,191)
Net income - - - - 12,981 12,981
---------------------------------- ------------- ---------- -------------- ----------- ----------- -------------
Balance - March 31, 2000 9,179,988 $ 92 $ 41,339 $ (3,191) $ 46,474 $ 84,714
---------------------------------- ------------- ---------- -------------- ----------- ----------- -------------
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
PIERCING PAGODA, INC.
Consolidated Statements of Cash Flows
Years ended March 31,
(In thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------- ------------------- -------------- ---------------
2000 1999 1998
-------------------------------------------------------------- ------------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 12,981 $ 7,643 $ 10,969
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,400 7,030 5,402
Loss on disposal of property, fixtures and
equipment 865 337 141
Other changes in other assets 69 76 (101)
Deferred income taxes 1,889 833 732
Changes in operating assets and liabilities,
net of effects of acquisitions:
Accounts receivable 1,765 (3,688) 779
Inventory (10,275) 1,274 (7,673)
Deposits for inventory purchases 510 (161) 304
Prepaid expenses and other current
assets (139) (277) (301)
Prepaid income taxes 131 84 1,279
Accounts payable (1,022) 702 (436)
Accrued expenses and other current
liabilities (2,519) 2,130 2,882
Income taxes payable (75) (671) 1,019
Other liabilities (249) (283) (133)
-------------------------------------------------------------- ------------------- -------------- ---------------
Net cash provided by operating activities 12,331 15,029 14,863
-------------------------------------------------------------- ------------------- -------------- ---------------
Cash flows from investing activities:
Additions to property, fixtures and equipment (8,793) (12,570) (9,066)
Payments for purchases of businesses (527) (15,583) (7,980)
Proceeds from disposal of property, fixtures and
equipment - - 67
Other changes in other assets, net (88) (100) (25)
-------------------------------------------------------------- ------------------- -------------- ---------------
Net cash used in investing activities $ (9,408) $ (28,253) $ (17,004)
-------------------------------------------------------------- ------------------- -------------- ---------------
</TABLE>
<PAGE>
PIERCING PAGODA, INC.
Consolidated Statements of Cash Flows - Continued
Years ended March 31,
(In thousands)
<TABLE>
<CAPTION>
-------------------------------------------------------------- ------------------- -------------- ---------------
2000 1999 1998
-------------------------------------------------------------- ------------------- -------------- ---------------
<S> <C> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt $ (433) $ (253) $ (235)
Revolving line of credit, net (2,600) 11,058 (16,700)
Proceeds from issuance of long-term debt - 3,565 -
Debt issuance fees paid (63) (204) (51)
Proceeds from issuance of common stock, net - - 17,189
Purchase of treasury stock (3,191) - -
Net proceeds from the issuance of stock under
employee share plans 433 427 518
-------------------------------------------------------------- ------------------- -------------- ---------------
Net cash provided by financing activities (5,854) 14,593 721
-------------------------------------------------------------- ------------------- -------------- ---------------
-------------------------------------------------------------- ------------------- -------------- ---------------
Net increase (decrease) in cash (2,931) 1,369 (1,420)
Cash at beginning of period 4,068 2,699 4,119
-------------------------------------------------------------- ------------------- -------------- ---------------
Cash at end of period $ 1,137 $ 4,068 $ 2,699
-------------------------------------------------------------- ------------------- -------------- ---------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 3,710 $ 3,053 $ 2,877
Income taxes, net $ 6,707 $ 5,072 $ 6,669
-------------------------------------------------------------- ------------------- -------------- ---------------
</TABLE>
Supplemental disclosure of operating activities:
During each of the years ended March 31, 1999 and 1998 the Company
entered into noncompetition agreements for $500,000 and $300,000
respectively.
See accompanying notes to consolidated financial statements.
<PAGE>
PIERCING PAGODA, INC.
Notes to Consolidated Financial Statements (continued)
PIERCING PAGODA, INC.
Notes to Consolidated Financial Statements
------------------------------------------------------------------------------
------------------------------------------------------------------------------
(1) Statement of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. 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, Plumb Gold and Silver & Gold
Connection. At March 31, 2000, the Company operated 940 stores, including
33 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 had licensed
operations at 22 stores and three retail cart locations in Florida until
August 31, 1998. The Company provided the licensee with merchandise and
promotional and administrative services. Income from licensee operations
was based on a percentage of the licensee's sales and earnings from the
sale of merchandise to the licensee. On August 31, 1998, the Company
acquired all of the outstanding common stock of the licensee and began
operating the stores as its retail outlets. See Note 5.
Sales
Sales consist primarily of net sales to the Company's retail
customers at its kiosk and in-line stores. Also included in sales through
August 31, 1998, are wholesale sales to the Company's licensee. At the
time of each retail sale, the Company accrues the estimated costs of its
preferred customer jewelry club promotional program. The Company also
accrues the estimated costs associated with its merchandise 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 receivables consist principally of
receivables from credit card companies, merchandise credits receivable
from vendors or the gold-content value of merchandise at smelters.
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
<PAGE>
arrangements. This gold has been manufactured into merchandise for sale
and the costs associated with this manufacturing process are included in
inventory.
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 2000, 1 vendor accounted for 15% of total merchandise
purchased. In fiscal 1999 this vendor accounted for 11% of total
merchandise purchased. In 1998, no vendors supplied more than 10% of total
merchandise purchased.
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 5-10 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 $3,853,000, $3,090,0000 and $2,508,000 in fiscal
2000, 1999, and 1998, 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 undiscounted
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.
<PAGE>
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 when incurred.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred income tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and their respective tax
bases. 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.
Net Income Per Share
Basic earnings per share calculations are determined by dividing net
income by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings per share are determined
by dividing net income by the weighted average number of shares of common
stock and dilutive common stock equivalents outstanding.
The following weighted average number of shares of common stock were
used in the calculations for earnings per share. The diluted weighted
average number of shares includes the net shares that would be issued upon
exercise of outstanding stock options, using the treasury stock method (in
thousands).
<TABLE>
<CAPTION>
Years ended March 31,
--------------------------
2000 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C>
Basic 9,066 9,119 8,765
Dilutive effect of outstanding stock
options, using the treasury stock
method 171 212 297
-------------------------------------------------------------------
Diluted 9,237 9,331 9,062
-------------------------------------------------------------------
</TABLE>
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.
<PAGE>
Stock Option Plan
The Company has elected to continue to account for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees as
permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation ("SFAS No. 123"). Accordingly,
compensation expense is recorded on the date of grant only if the market
price of the underlying stock exceeds its exercise price. However, pro
forma disclosure of net income and earnings per share is required under
SFAS No. 123 with compensation expense for the Company's stock option plan
determined based on the fair value method. (See Note 12.)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) 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. In June of 1999,
the FASB issued SFAS No. 137, "Acounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of SFAS No. 133." SFAS
No. 137 delays the effective date of SFAS No. 133 to the beginning of the
first quarter of the fiscal year beginning after June 15, 2000. The
Company does not anticipate adoption of this standard will have a material
impact on the Company's financial condition or results of operations.
(2) Common Stock Offering
On June 30, 1997, the Company completed a secondary offering of
975,000 shares of its common stock. The transaction resulted in net
proceeds (after underwriting discounts, commissions and offering expenses)
to the Company of approximately $14.9 million which was used to repay
indebtedness under the Company's revolving line of credit. Subsequently,
in July 1997, the underwriters of the offering exercised their option to
purchase an additional 146,250 shares of stock from the Company resulting
in additional net proceeds of approximately $2.3 million.
(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, 2000, 1999 and 1998, the
Company had consigned 142,000, 143,443, and 119,800 ounces of gold,
respectively, with values of $39,298,000, $40,085,0000 and $36,060,0000,
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, 2000,
1999, and 1998 are consignment fees of $1,150,000, $796,000 and $912,000,
respectively, based on fee rates of approximately 2.68 %, 1.94% and 2.74%,
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.
<PAGE>
(4) Property, Fixtures and Equipment
A summary of major classes of property, fixtures and equipment
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
-------------------------------------
2000 1999
----------------------------------------------------------------------------- ----------------- -- ----------------
<S> <C> <C>
Land $ 688 $ 688
Furniture and fixtures 6,416 5,043
Kiosks 33,744 30,681
Building and improvements 7,327 7,283
Computer equipment, software and other equipment 12,988 11,622
----------------------------------------------------------------------------- ----------------- -- ----------------
61,163 55,317
Less accumulated depreciation and amortization 25,471 21,024
----------------------------------------------------------------------------- ----------------- -- ----------------
$ 35,692 $ 34,293
----------------------------------------------------------------------------- ----------------- -- ----------------
</TABLE>
(5) Goodwill and Other Assets
Goodwill and other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31,
----------------------------------
2000 1999
-------------------------------------------------------------------------------- --------------- -- ---------------
<S> <C> <C>
Goodwill (net of accumulated amortization of $3,437 and
$1,866 at March 31, 2000 and 1999, respectively) $ 19,155 $ 20,199
-------------------------------------------------------------------------------- --------------- -- ---------------
Other Assets:
Noncompetition agreements (net of accumulated amortization of $523 and
$303 at March 31, 2000 and 1999, respectively) 577 797
Deferred expenses, principally long-term maintenance agreements 333 455
Cash surrender value of officers life insurance 522 487
Other 343 254
-------------------------------------------------------------------------------- --------------- -- ---------------
$ 1,775 $ 1,993
-------------------------------------------------------------------------------- --------------- -- ---------------
</TABLE>
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 provided for the
payment of approximately $11.4 million, subject to certain post closing
adjustments, for all of the outstanding 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 $11.1 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.
<PAGE>
In July 1998, the Company purchased 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 of approximately $2.6 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 30 of these locations by March 31, 1999. See Note 6.
In April 1997, the Company purchased substantially all the operations
of a company which operated retail jewelry kiosks under the name Silver &
Gold Connection for approximately $7.8 million. 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 cost in excess of the fair
value of net assets acquired of approximately $4.7 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 Silver & Gold Connection 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.
(6) Accrued expenses and other current liabilities
Accrued expenses and other current liabilities are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
---------------------
2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Accrued payroll, vacation and related taxes $ 5,083 $ 6,254
Sales tax payable 834 719
Accrued rents payable 1,129 1,089
Liability under jewelry club program 540 989
Liability under merchandise guarantee program 901 1,321
Accrued store closure costs 493 1,250
Other accrued expenses 3,254 3,131
-------------------------------------------------------------------
$ 12,234 $ 14,753
-------------------------------------------------------------------
</TABLE>
Included in accrued expenses is approximately $493,000 and $1,250,000
representing the estimated closure costs for stores closed or to be closed
at March 31, 2000 and 1999, respectively. These costs principally consist
of estimated outstanding lease obligations and kiosk disposal costs
associated with the 44 and 79 stores the Company closed in fiscal 2000 and
1999, respectively and 23 additional locations for which a closure decision
had been made at March 31, 1999, but which are yet to be closed. In
addition, the Company made payments to settle 31 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>
(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,
--------------------
2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $ 17,200 $ 19,800
Industrial development authority financing 5,368 5,801
-------------------------------------------------------------------
Total long-term debt 22,568 25,601
Less current installments 17,639 432
-------------------------------------------------------------------
$ 4,929 $ 25,169
-------------------------------------------------------------------
</TABLE>
The Company currently has an unsecured revolving line of credit with
its primary lender acting as agent for a syndicate of banks. This
facility, which expires July 31, 2000, provides for maximum borrowings of
$105 million through a combination of cash advances (which may not exceed
$65 million) or letters of credit (which may not exceed $70 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 as its prime rate minus 100
basis points (8.00% at March 31, 2000) and a rate based on the rates
charged on overnight federal funds transactions with Federal Reserve
System members plus 50 basis points (6.57% at March 31, 2000). 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 (7.24% at March 31, 2000
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, 2000, the Company had $45.2 million available for cash borrowings
under this revolving credit facility. Letters of credit in the amounts of
$40,137,000 and $41,387,000 were issued at March 31, 2000 and 1999,
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 adjusted net income (as defined), current assets to
current liabilities and indebtedness to capitalization (as defined);
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, 2000.
Borrowings under the revolving line of credit are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
March 31,
-------------------------------------------
2000 1999 1998
----------------------------------------------------------------------- ------------- -------------- --------------
<S> <C> <C> <C>
Borrowings at year end $17,200 $19,800 $ 7,500
Interest rate on borrowings at year-end 7.26% 6.33% 6.80%
Maximum amount of borrowings outstanding at
any month end $ 46,800 $ 54,000 $ 33,400
Average aggregate borrowings during the year $ 25,865 $ 23,147 $ 20,492
Weighted average interest rate during the year 6.84% 6.75% 7.03%
----------------------------------------------------------------------- ------------- -------------- --------------
</TABLE>
<PAGE>
In February 1999, the Company obtained a $1,000,000, fifteen-year
term loan in connection with the Company's construction of a second
warehouse and distribution center. This industrial development authority
sponsored loan requires monthly payments of principal and interest of
approximately $8,000 through March 2014 at an effective annual interest
rate of 5.38%.
In April 1998, the Company obtained a $2,565,000, fifteen-year term
loan to finance the construction of a second warehouse and distribution
facility on land the Company owns adjacent to its existing facility. This
loan is collateralized by a letter of credit totaling $2,495,000 at March
31, 2000 which is supported by a lien on the newly constructed warehouse
and distribution center which has a net carrying value of $3.0 million.
The loan requires annual payments of principal at a varying rate of
interest. In July 1999, the Company entered into an interest rate swap
agreement with one of its primary lenders for a notional amount of
$2,565,000 that effectively converted the variable rate interest
obligation to a 6.23% fixed rate obligation for the full term of the loan.
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%.
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 $2,032,000 at March 31, 2000
which is supported by a lien on the Company's corporate headquarters and
distribution center which has a net carrying value of approximately $2.8
million at March 31, 2000. The terms of the loan require semi-annual
interest payments at varying interest rates averaging 6.8% over the life
of the loan. Principal payments, in varying amounts, are required
annually.
Maturities of the term loans are as follows at March 31, 2000 (in
thousands):
<TABLE>
<CAPTION>
Amount
-------------------------------------------------------------------
<S> <C>
2001 $ 439
2002 470
2003 500
2004 529
2005 569
Subsequent to 2005 2,861
-------------------------------------------------------------------
Total payments $ 5,368
-------------------------------------------------------------------
</TABLE>
<PAGE>
(8) Leases
The Company leases space primarily in shopping malls under operating
leases expiring in various years through fiscal 2009. 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 2000. 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, 2000 under
non-cancelable operating leases having original terms in excess of one
year are as follows (in thousands):
<TABLE>
<CAPTION>
Amount
-------------------------------------------------------------------
<S> <C>
2001 $ 21,660
2002 14,717
2003 10,018
2004 6,539
2005 3,184
Subsequent to 2005 1,272
-------------------------------------------------------------------
Total rental payments $ 57,390
-------------------------------------------------------------------
</TABLE>
A summary of minimum rent and contingent rent expense under operating
leases is as follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
----------------------------
2000 1999 1998
-------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum rentals $ 31,376 $ 29,027 $ 23,690
Contingent rentals 2,181 2,003 1,916
-------------------------------------------------------------------------
Total rental expense $ 33,557 $ 31,030 $ 25,606
-------------------------------------------------------------------------
</TABLE>
(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 $400,000,
$250,000 and $500,000 in fiscal 2000, 1999 and 1998, 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 $377,000, $297,000 and
$212,000 in fiscal 2000, 1999 and 1998, respectively. 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.
<PAGE>
(10) Income Taxes
Income taxes in the consolidated statements of income consists of the
following components (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------
2000 1999 1998
----------------------------------------------------------------------- ------------- -------------- --------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 6,172 $ 3,673 $ 5,346
State 591 719 503
----------------------------------------------------------------------- ------------- -------------- --------------
6,763 4,392 5,849
----------------------------------------------------------------------- ------------- -------------- --------------
Deferred tax expense
Federal 1,416 645 570
State 473 188 162
----------------------------------------------------------------------- ------------- -------------- --------------
1,889 833 732
----------------------------------------------------------------------- ------------- -------------- --------------
$ 8,652 $ 5,225 $ 6,581
----------------------------------------------------------------------- ------------- -------------- --------------
</TABLE>
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,
-----------------------------
2000 1999
------------------------------------------------------------------------------------- -------------- --------------
<S> <C> <C>
Deferred tax liabilities:
Excess of tax over book depreciation $ (4,639) $ (3,877)
Inventory (462) -
Employee benefit plans (355) (310)
------------------------------------------------------------------------------------- -------------- --------------
Total deferred tax liabilities (5,456) (4,187)
------------------------------------------------------------------------------------- -------------- --------------
Deferred tax assets:
Inventory - 235
Accrual for merchandise guarantee costs 366 528
Accrued vacation expense 584 456
Accrual for jewelry club costs 219 395
Accrued group insurance 270 266
Accrued store closure costs 200 494
Other 665 550
------------------------------------------------------------------------------------- -------------- --------------
Total deferred tax assets 2,304 2,924
Less valuation allowance - -
------------------------------------------------------------------------------------- -------------- --------------
Net deferred tax assets 2,304 2,924
------------------------------------------------------------------------------------- -------------- --------------
Net deferred tax liability $ (3,152) $ (1,263)
------------------------------------------------------------------------------------- -------------- --------------
</TABLE>
Based upon the Company's current and historical taxable income 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 net taxable
income. Accordingly, the Company does not believe a valuation allowance is
necessary at March 31, 2000.
<PAGE>
Income tax expense in fiscal 2000, 1999 and 1998 differs from the
amounts computed by applying the federal statutory rate of 35% to income
before taxes as follows (in thousands):
<TABLE>
<CAPTION>
Years ended March 31,
-------------------------------------------
2000 1999 1998
------------------------------------------------------------------------ -------------- ------------- --------------
<S> <C> <C> <C>
Tax expense at statutory rates $ 7,572 $ 4,504 $ 6,142
State income taxes, net of federal benefit 692 590 432
Non-deductible amortization of cost in excess of net assets of acquired
business 300 192 40
Other 88 (61) (33)
------------------------------------------------------------------------ -------------- ------------- --------------
$ 8,652 $ 5,225 $ 6,581
------------------------------------------------------------------------ -------------- ------------- --------------
</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, $10,000 and $13,000 in fiscal
2000, 1999, and 1998, respectively, representing certain direct expenses
and the estimated fair value of providing administrative services,
primarily allocations of salary and overhead.
(12) Stockholders' Equity
The Company has a stock option plan that 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 1,100,000. 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 period of up to five years 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.
All options granted in fiscal 2000, 1999 and 1998 were granted at the fair
market value on the date of grant 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 changed to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years ended March 31,
-----------------------------------
2000 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C>
Net income:
As reported $ 12,981 $ 7,643 $ 10,969
Pro forma $ 11,319 $ 6,587 $ 9,762
Diluted earnings per share:
As reported $ 1.41 $ 0.82 $ 1.21
Pro forma $ 1.23 $ 0.71 $ 1.08
-------------------------------------------------------------------
</TABLE>
<PAGE>
The per share weighted average fair value of stock options granted
during fiscal 2000, 1999 and 1998 were $6.74, $12.21 and $10.56,
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>
2000 1999 1998
-------------------------------------------------------------------
<S> <C> <C> <C>
Expected dividend yield 0.0% 0.0% 0.0%
Expected volatility 59.4 58.9 42.1
Risk-free interest rate 6.3 5.3 5.7
Expected life (in years) 7.4 9.0 9.0
-------------------------------------------------------------------
</TABLE>
Pro forma net income reflects only options granted since fiscal 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
option's vesting period of up to five years and compensation cost for
options granted prior to April 1, 1995 is not considered.
Summarized stock option data is as follows:
<TABLE>
<CAPTION>
Weighted
Average Shares
Exercise Under Option
Price
-------------------------------------------------------------------
-------------------------------------------------------------------
<S> <C> <C>
Outstanding at March 31, 1997 $ 9.65 592,125
Granted 17.45 224,250
Exercised 7.97 (41,400)
Canceled 12.55 (24,300)
-------------------------------------------------------------------
Outstanding at March 31, 1998 11.98 750,675
Granted 17.52 71,000
Exercised 7.01 (19,825)
Canceled 18.24 (11,402)
-------------------------------------------------------------------
Outstanding at March 31, 1999 12.51 790,448
Granted 10.01 144,300
Exercised 9.06 (10,875)
Canceled 15.60 (35,850)
-------------------------------------------------------------------
Outstanding at March 31, 2000 12.03 888,023
-------------------------------------------------------------------
Exercisable $ 11.09 558,914
-------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The following table summarizes information concerning currently
outstanding and exercisable options:
Exercise Price
$ 5.33 - $ 12.06 $ 12.33 - $15.00 $ 16.33 - $ 24.17
------------------------------------------------ --------------------- -------------------- -----------------------
<S> <C> <C> <C>
Options outstanding at March 31, 2000 437,424 196,299 254,300
Weighted average remaining contractual life
(years) 6.00 7.12 7.41
Weighted average exercise price $ 7.60 $ 14.25 $ 17.92
Options exercisable at March 31, 2000 294,925 138,850 125,139
Weighted average exercise price $ 6.68 $ 14.35 $ 17.88
------------------------------------------------ --------------------- -------------------- -----------------------
</TABLE>
On October 12, 1995, the Company created an Employee Stock Purchase
Plan under which the sale of 144,000 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 2000,
1999 and 1998, 33,423, 26,484 and 13,976 shares, respectively, were issued
under this plan.
On August 11, 1999, the Company announced that its Board of Directors
authorized management to purchase up to 200,000 shares of its common
stock. On November 22, 1999, the Board of Directors authorized an increase
in the share repurchase program to a total of 400,000 shares. Purchases
will be made from time to time in the open market and in privately
negotiated transactions, and it is expected that funding of the program
will come from operating cash flow and existing banking facilities. As of
March 31, 2000, the Company has repurchased 254,150 shares of its common
stock under the repurchase program at an average price of $12.56.
(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.
<PAGE>
(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.
On October 19, 1999, the securities class action litigation that had
been filed during fiscal 1999 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. No
appeal of the dismissal was filed by the plaintiffs within the required
time period.
At March 31, 2000, the Company had commitments outstanding of
approximately $1.4 million primarily for the construction of new kiosks,
in-line stores or the renovation of existing stores as well as fixtures
and supplies for current and planned stores.
<PAGE>
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 2000 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 2000 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 2000 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 2000 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.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Report.
1. Financial Statements Page
Independent Auditors' Report 30
Consolidated Balance Sheets at March 31, 2000 and 1999 31
Consolidated Statements of Income for the Years ended
March 31, 2000, 1999 and 1998 32
Consolidated Statements of Changes in Stockholders'
Equity for the Years ended March 31, 2000, 1999 and 1998 33
Consolidated Statements of Cash Flows for the Years ended
March 31, 2000, 1999 and 1998 34
Notes to Consolidated Financial Statements 36
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.
<PAGE>
3. Exhibits
Exhibit
No.
2 See 10.40, 10.41 and 10.43.
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
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).
<PAGE>
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).
<PAGE>
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).
<PAGE>
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, 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).**
<PAGE>
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 reference to Exhibit 10.22 to the
Registrant's Registration Statement on Form S-1, File No.
33-80200, initially filed with the Securities and Exchange
Commission on June14, 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., CoreStates Bank, N.A., Summit Bank and
First Union National Bank (incorporated by reference to Exhibit
10.42 to the Registrant's Registration Statement on Form S-1
File No.333-27213, initially filed with the Securities and
Exchang Commission on May 15, 1997).
10.43 First Amendment to Syndicated Loan Agreement dated November,
21, 1997 between the Registrant and Summit Bank and CoreStates
bank, N.A. (incorporated by reference to Exhibit 10.43 to the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1998).
<PAGE>
10.44 Replacement Revolving Note dated November 21, 1997 between the
Registrant and Summit Bank (incorporated by reference to
Exhibit 10.44 to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1998).
10.45 Replacement Revolving Note dated November 21, 1997 between the
Registrant and First Union (incorporated by reference to
Exhibit 10.45 to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1998).
10.46 Replacement Revolving Note dated November 21, 1997 between the
Registrant and CoreStates Bank, N.A. (incorporated by reference
to Exhibit 10.46 to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1998).
10.47 Seventh Amendment and Agreement to Consignment Agreement dated
October 2, 1997 Between Fleet Precious Metals, Inc. and the
Registrant (incorporated by reference to the Registrant's Form
10-K filed with the Securities and Exchange Commission on June
22, 1998).
10.48 Asset Purchase Agreement dated May 8, 1998 between Piercing
Pagoda, Inc. and Sedgwick Sales, Inc., a Nevada corporation,
Donald M. Sedgwick, Gregory K. Stapley, The Sedgwick Family
Trust and the Beneficiary of the Trust.(incorporated by
reference to the Registrant's Form 10-K filed with the
Securities and Exchange Commission on June 22, 1998).
10.49 Not applicable.
10.50 Eighth Amendment and Agreement to Consignment Agreement Dated
May 5, 1998, Between the Registrant and Fleet Precious Metals
Inc. (incorporated by reference to the Registrant's Form 10-Q
filed with the Securities and Exchange Commission on August 13,
1998).
10.51 Fourth Amendment To Amended And Restated Consignment Agreement
Dated May 15, 1998 Between The Registrant And Rhode Island
Hospital Trust National Bank (incorporated by reference to the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on August 13, 1998).
10.52 Second Amendment to Syndicated Loan Agreement Date September 2,
1998 between the Registrant and Summit Bank, First Union
National Bank and CoreStates Bank, N.A. (incorporated by
reference to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1999).
10.53 Second Revolving Replacement Note Dated September 2, 1998
between the Registrant and Summit Bank. (incorporated by
reference to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1999).
10.54 Second Revolving Replacement Note Dated September 2, 1998
between the Registrant and First Union National Bank
(incorporated by reference to the Registrant's Form 10-Q filed
with the Securities and Exchange Commission on February 12,
1999).
10.55 Bond Placement Agreement Dated April 29, 1998 between the
Registrant and CoreStates Securities Corp. (incorporated by
reference to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1999).
10.56 Open-end Mortgage and Security Agreement Dated April 29, 1998
between the Registrant and CoreStates Bank, N.A. (incorporated
by reference to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1999).
10.57 Trust Indenture Dated April 29, 1998 between the Registrant and
Dauphin Deposit Bank And Trust Company (incorporated by
reference to the Registrant's Form 10-Q filed with the
Securities and Exchange Commission on February 12, 1999).
10.58 Pledge and Security Agreement Dated April 29, 1998 between the
Registrant and CoreStates Bank, N.A. (incorporated by reference
to the Registrant's Form 10-Q filed with the Securities and
Exchange Commission on February 12, 1999).
10.59 Assignment of Lease Interest Dated April 29, 1998 between the
Registrant and CoreStates Bank, N.A. (incorporated by reference
to the Registrant's Form 10-Q filed with the Securities and
Exchange Commission on February 12, 1999).
10.60 Reimbursement Agreement Dated April 29, 1998 between the
Registrant and Summit Bank, First Union National Bank and
CoreStates Bank, N.A. (incorporated by reference to the
Registrant's Form 10-Q filed with the Securities and Exchange
Commission on February 12, 1999).
10.61 Consent, Subordination and Assumption Agreement effective
February 18, 1999 between the Registrant, Northampton County
New Jobs Corp. in favor of the Pennsylvania Industrial
Development Authority.*
10.62 Mortgage subordination agreement between Northampton County New
Jobs Corp, First Union National Bank ,and the Registrant dated
February 18, 1999.*
10.63 Stock Purchase Agreement by and between Piercing Pagoda, Inc.
and Richard P. Russ, dated as of August 31, 1998 .
(incorporated by reference to the Registrant's Form 8-K filed
with the Securities and Exchange Commission on September 16,
1998).
<PAGE>
11 Not applicable.
12 Not applicable.
13 Not applicable.
16 Not applicable.
18 Not applicable.
21 Subsidiaries of Registrant.*
22 Not applicable.
23.1 Consent of KPMG LLP, independent certified public accountants.*
24 None.
27 Financial Data Schedule. *
* Filed herewith.
** Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the
last quarter of fiscal 2000
<PAGE>
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 19, 2000.
PIERCING PAGODA, INC.
By: /s/ John F. Eureyecko
John F. Eureyecko
President and
Chief Operating Officer
<PAGE>
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.
Signature Title Date
/s/ Richard H. Penske Chief Executive Officer and June 19, 2000
Richard H. Penske Chairman of the Board
Principal Executive Officer)
/s/ John F. Eureyecko Director, President and June 19, 2000
John F. Eureyecko Chief Operating Officer
(Principal Financial
and Accounting Officer)
/s/ Alan R. Hoefer Director June 19, 2000
Alan R. Hoefer
/s/ Mark A. Randol Director June 19, 2000
Mark A. Randol
--------------------
Douglas J. Tigert
