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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended January 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _______ to _______
Commission File No. 1-13919
PawnMart, Inc.
(Name of small business issuer in its charter)
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DELAWARE 75-2520896
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
301 COMMERCE STREET, SUITE 3600, FORT WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
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Issuer's telephone number: (817) 335-7296
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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Common Stock, Par Value $.01 Per Share Nasdaq SmallCap Market and Boston Stock Exchange
Series A Redeemable Common Stock Purchase Warrants Nasdaq SmallCap Market and Boston Stock Exchange
Series B Redeemable Common Stock Purchase Warrants Nasdaq SmallCap Market and Boston Stock Exchange
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] No [X]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $10,178,108.
The aggregate market value of voting stock held by non-affiliates as of May 1,
1998 was approximately $28,317,000. Shares of common stock held by each officer
and director have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of Common Stock outstanding as of May 1, 1998 was
7,209,445. The number of Series A Redeemable Common Stock Purchase Warrants
outstanding as of May 1, 1998 was 1,380,000. The number Series B Redeemable
Common Stock Purchase Warrants outstanding as of May 1, 1998 was 1,380,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's definitive proxy statement relating to the Annual
Meeting of Stockholders for the fiscal year ended January 31, 1998, are
incorporated by reference in Part III of this Form 10-KSB.
Transitional small business disclosure format (check one): Yes [ ] No [X]
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PawnMart, Inc.
Form 10-KSB Annual Report
for the Fiscal Year Ended January 31, 1998
Table of Contents
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PART I
Item 1. Description of Business................................................................ 1
Item 2. Description of Property................................................................ 7
Item 3. Legal Proceedings...................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders.................................... 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters............................... 9
Item 6. Management's Discussion and Analysis or Plan of Operation.............................. 10
Item 7. Consolidated Financial Statements...................................................... 19
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure............................................................................. 41
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section
16(a) of the Exchange Act.............................................................. 41
Item 10. Executive Compensation................................................................. 41
Item 11. Security Ownership of Beneficial Owners and Management................................. 41
Item 12. Certain Relationships and Related Transactions......................................... 41
Item 13. Exhibits and Reports on Form 8-K....................................................... 41
Signatures ....................................................................................... 43
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS
Statements contained in this Annual Report on Form 10-KSB that are not
historical facts are forward-looking statements ("forward-looking statements")
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities and Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created by those sections. In
addition, such forward-looking statements may be contained in filings by the
Company with the Securities and Exchange Commission, or press releases or oral
statements made from time to time by or with the approval of an authorized
executive officer of the Company. Such forward-looking statements are
necessarily estimates reflecting the best judgment of the Company's management
based upon current information and involve known and unknown risks,
uncertainties and other factors which may cause the actual results, performance
or achievements of the Company, or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other factors,
include, but are not limited to, those set forth herein under the caption "Item
6. Management's Discussion and Analysis or Plan of Operation - Factors That
Could Affect Future Performance" and appearing elsewhere in this Annual Report
and appearing from time to time in filings made by the Company with the
Securities and Exchange Commission. These risks, uncertainties and other factors
should not be construed as exhaustive and the Company does not undertake, and
specifically disclaims any obligation, to update any forward-looking statements
to reflect occurrences or unanticipated events or circumstances after the date
of such statements.
GENERAL
PawnMart, Inc. (the "Company") was incorporated under the laws of the
State of Delaware on January 13, 1994 and began operations under the name
"Pawnco, Inc." On June 14, 1994, the Company changed its name to PCI Capital
Corporation and conducted business under the trade name "PAWNMART(SM)." On
October 21, 1997, the Company changed its name to "PawnMart, Inc." As of April
30, 1998, the Company was one of five publicly traded pawnshop operators in the
United States, and it owned and operated nineteen stores located in Texas,
Georgia, Alabama, and North Carolina. The Company's principal office is located
at 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102 and its telephone
number is (817) 335-7296.
The Company is a financial services and specialty retail enterprise
principally engaged in establishing and operating stores which advance money
secured by the pledge of tangible personal property and sell pre-owned
merchandise to the value-conscious consumer. The Company generates income in two
ways: through collection of a monthly service charge from advancing money to
individuals based primarily upon the estimated resale value of pledged personal
property such as jewelry, consumer electronics, tools, musical instruments,
firearms, automobiles and other miscellaneous items and through profit realized
on the retail sale of the unredeemed or other purchased pre-owned merchandise.
COMPLETION OF INITIAL PUBLIC OFFERING AND FINANCIAL RESTRUCTURING
On March 20, 1998, the Company completed an initial public offering of
1,200,000 shares of its common stock, $.01 par value per share ("Common Stock")
at a price of $5.00 per share, 1,380,000 Series A Redeemable Common Stock
Purchase Warrants at a price of $0.125 per warrant ("Series A Warrants"), and
1,380,000 Series B Redeemable Common Stock Purchase Warrants at a price of
$0.0625 per warrant ("Series B Warrants") (collectively, the "Securities") and,
on April 17, 1998, the Company sold an additional 165,000 shares of its Common
Stock pursuant to the underwriters' over-allotment option resulting in total net
proceeds to the Company of approximately $5,704,000.
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In connection with the initial public offering, $9,520,000 in aggregate
principal amount of the Company's 14% Convertible Subordinated Debentures were
automatically converted into 2,380,000 shares of Common Stock (the "Debenture
Conversion") and the Company's $.50 Series A Convertible Preferred Stock, Series
B Convertible Preferred Stock, Series C Convertible Preferred Stock, and 12%
Series D Convertible Exchangeable Preferred Stock were automatically converted
into an aggregate of 1,482,766 shares of Common Stock (the "Preferred
Conversion"). Additionally, the Company utilized $2,489,000 of the net offering
proceeds to repay $2,142,000 in 15% notes payable, $157,000 in notes payable to
stockholders and $190,000 in notes payable to the Company's Chief Executive
Officer.
In connection with the Debenture Conversion, the Preferred Conversion,
and the repayment of $2,489,000 in notes payable, the Company's annual cash
interest requirements decreased by approximately $1,697,000 and the Company's
annual cash dividend requirements decreased by approximately $130,000.
The following table presents selected balance sheet data on (i) an actual
basis as of January 31, 1998 and (ii) on a pro forma basis as of January 31,
1998 to reflect the sale of the Securities, the application of the net proceeds
therefrom of approximately $5,704,000, the Debenture Conversion, net of issuance
costs totaling $474,341 and $494,545 in unamortized debt discount, the Preferred
Conversion, and the repayment of $2,489,000 in notes payable of which $1,737,000
was current at January 31, 1998.
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<CAPTION>
Actual at Pro Forma at
January 31, 1998 January 31, 1998
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Loans $ 2,420,553 2,420,553
Inventories, net 1,943,960 1,943,960
Working capital 1,757,572 6,709,572
Total assets 6,677,018 9,417,677
Long-term notes payable, net of
current installments 9,777,455 --
Stockholders' equity (deficit) (6,221,578) 8,033,536
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INDUSTRY
The pawnshop industry is a multi-billion dollar, rapidly growing industry
with an increasing number of states adopting favorable pawnshop regulations.
States with favorable pawn regulations include, but are not limited to, Alabama,
Florida, Georgia, Indiana, Kentucky, Illinois, Mississippi, Missouri, North
Carolina, Oklahoma, South Carolina, Tennessee, and Texas. The industry is highly
fragmented, with approximately 95% of the approximately 13,000 stores in the
United States owned by "mom and pop" operators and approximately 5% owned by
five public companies. The Company believes that pawnshops generally perform
well during recessions and all other economic cycles due to (i) the need for
loans, by non-banking individuals, remaining stable during such economic cycles
and (ii) pawnshops serving as a value-priced retailer regardless of economic
conditions.
Pawnshops provide short-term secured loans. Most pawn loans are for less
than $500. Industry sources believe that banks could not recover the
administrative costs of these small loans without substantial increases in rates
and charges. In addition, many pawn loans are to people who would not qualify as
"credit worthy" at a bank. An estimated 20-40 million people occasionally have
short-term needs, such as for utility bills and medical expenses. For these
people, pawnshops supply cash conveniently and quickly.
During the fiscal year ended January 31, 1998, the Company developed a
targeted database marketing segmentation system and has utilized such
information to begin direct mailing campaigns which target specific customer
profiles. During the fiscal year ended January 31, 1998, the Company incurred
approximately $25,000 in research and development costs to implement the
targeted database marketing segmentation system. The Company did not incur any
research and development costs during the fiscal year ended January 26, 1997.
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BUSINESS STRATEGY
The Company has developed extensive demographical information that
identifies both its borrowing and retail customers. Based on its research, the
Company has observed somewhat different demographics for its customers from
those generally published for the pawnshop industry in general. This data
indicates that the Company's customers have a median household income in the
$45,000 to $55,000 range, more than 50% are female and approximately half are
married with children. In this regard, the Company's strategic market
positioning targets these customer groups for both pawn and retail transactions
with specialty retail concepts such as "PAWNMART(SM) - An Estate Sale
Everyday(SM)." To attract these customers, all PAWNMART(SM) stores are
attractive, clean, well-lit and often located close to national discount stores,
with merchandise displayed in an organized and easy-to-shop manner similar to
national discount stores. Because the Company believes that most existing
pawnshops are situated in locations that do not satisfy the Company's customer
demographics, the Company has opened new stores rather than acquire smaller "mom
and pop" stores.
The Company's strategic objective is to capitalize upon growth
opportunities afforded by the highly fragmented pawnshop industry through a
roll-out of new PAWNMART(SM) stores. To achieve its strategic objectives, the
Company has adopted the following strategy:
o Develop New - Rather Than Acquire - Stores That Meet Site Selection,
Store Size and Configuration Requirements in Selected Markets. The
Company believes that by opening new stores - rather than acquiring
smaller "mom and pop" stores - it will enjoy substantial long-term
strategic benefits. First, the Company believes that ideal site
selection is one of the most critical factors in creating a
successful PAWNMART(SM) store. In this regard, the Company has
developed extensive customer demographics that identify both its
borrowing and retail customers. The Company believes that most
existing pawnshops are situated in less than ideal locations. The
Company, therefore, believes that by opening new stores only in
locations meeting its demographic and site selection requirements,
it will be well situated to compete effectively in the highly
fragmented pawnshop industry. Second, the Company believes that the
"look and feel" of its stores is an important factor in establishing
a successful specialty retail store and that most existing pawnshops
do not meet, and cannot cost-effectively be modified to meet, the
Company's store size and configuration requirements. By opening new
stores only in accordance with its specifications, the Company can
ensure that each PAWNMART(SM) has a similar "look and feel." During
the next fiscal year, the Company anticipates opening between 12 and
15 stores.
o Market Positioning Strategy. The Company's strategy is to operate
attractive stores that are clean, well-lit and conveniently located,
with merchandise displayed in an organized and easy-to-shop manner,
similar to national discount stores. The Company's store design and
layout specifically target both its borrowing and retail customers.
o Utilize Targeted Database Marketing. The Company has developed a
targeted database marketing segmentation system that identifies the
customers for both pawn and product sales from proprietary data
collected at the store level. Given this customer information, the
Company has developed a marketing strategy that seeks to leverage its
understanding of customer demographics, motivations and purchasing
behavior. This demographic data will include utilizing direct
marketing for customer acquisition, retention and promotions, and for
store site selection.
o Expand in Metropolitan Areas in States With Favorable Pawn
Regulations. The Company's roll-out strategy is to generate operating
efficiencies by first expanding in the metropolitan areas of Atlanta,
Georgia, Mobile, Alabama and Charlotte, North Carolina, and
thereafter, in metropolitan areas in states with favorable pawn
regulations.
o Franchise Operations in Smaller Markets. The Company intends to sell
PAWNMART(SM) franchises in secondary markets. The Company's franchise
strategy is designed to allow future franchisees to benefit from the
Company's targeted database marketing segmentation system,
PAWNLINK(TM) computer software and information system, as well as the
Company's standardized operating procedures.
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o Utilize Information Technology. The Company has developed
PAWNLINK(TM), a proprietary software system, which is connected to a
"wide area network" that allows for real-time point of sale
connectivity. PAWNLINK(TM) is a user friendly, menu driven software
package that operates in a Windows 95 (TM) environment. PAWNLINK(TM)
interfaces with the Company's centralized database, assists in
determining the maximum amount of funds to advance on any particular
pawn item, and provides in-store assistance with operational and
sales management, inventory control and accounting.
o Operational Excellence. The Company believes that its success will be
substantially dependent on its ability to achieve excellence in
operating its stores. In this regard, the Company intends to
capitalize upon the operational expertise of its experienced
specialty retail management team and board of directors, employ
specialty retailers as store management personnel, utilize extensive
training programs for employees and maintain effective extensive
operating controls.
LENDING OPERATIONS
The Company is a financial services and specialty retail enterprise
principally engaged in developing and operating stores which advance money
secured by the pledge of tangible personal property and sell pre-owned
merchandise to the value-conscious consumer. The pledged tangible personal
property is intended to provide security to the Company for the repayment of the
amount advanced plus accrued pawn service charges. Pawn loans are made without
personal liability to the borrower. Because the loan is made without the
borrower's personal liability, the Company does not investigate the
creditworthiness of the borrower, but relies on the pledged personal property,
and the possibility of its forfeiture, as a basis for its lending decision.
PAWNLINK (TM) interfaces with the Company's centralized database, and assists in
determining the maximum amount of funds to advance on any particular pawn item.
The Company contracts for a pawn service charge as compensation for the use of
the funds advanced to cover such costs as storage, insurance, title
investigation and other transaction costs. Pawn service charges contributed to
28.1% and 29.0% of the Company's total revenues during the fiscal years ended
January 31, 1998 and January 26, 1997, respectively.
The pledged property is held through the term of the transaction, which
generally is one month with an automatic sixty-day redemption period, except for
automobile title loans, where a shorter redemption period applies under state
regulations. The term of the transaction may continue if the loan is extended
prior to the end of the redemption period. Extensions are for one month with an
additional redemption period. In the event the borrower does not repay or extend
the loan by the end of the redemption period, the unredeemed collateral is
forfeited to the Company and becomes merchandise available for sale.
The recovery of the amount advanced, as well as realization of a profit
on the sale of merchandise, is dependent on the Company's initial assessment of
the property's estimated resale value. Improper assessment of the resale value
of the collateral in the lending function can result in reduced marketability of
the property and resale of the merchandise for an amount less than the amount
advanced. For example, unexpected technological changes could adversely impact
the value of consumer electronic products and declines in gold and silver prices
could reduce the resale value of jewelry items acquired in pawn transactions and
could adversely affect the Company's ability to recover the carrying cost of the
acquired collateral. However, historically, the Company has experienced profits
from the sale of such merchandise.
RETAIL SALES OPERATIONS
The Company retails pre-owned products acquired either when a loan is not
repaid or from individual customers or other sources. Merchandise sales
contributed to 70.9% and 69.9% of the Company's total revenues during the fiscal
years ended January 31, 1998 and January 26, 1997, respectively. During the
fiscal year ended January 31, 1998, $5,164,770 of products were added to
inventory, of which $4,565,183 was from loans not repaid and $599,587 was
otherwise purchased.
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The Company provides its customers with a 30-day guarantee on pre-owned
products, providing the customer with an exchange or cash refund. The Company
believes that most pawnshops do not offer this type of guarantee. The Company
provides a layaway plan, with a maximum holding period of 90 days, whereby the
customer agrees to purchase an item by making an initial cash deposit
representing at least 20% of the sales price and making additional, non-interest
bearing payments of the balance of the sales price in accordance with a
specified schedule. The Company then holds the item until the sales price is
paid in full. Should the customer fail to make a required payment, the item
becomes inventory available for sale and previous payments are forfeited to the
Company.
The Company provides an allowance for inventory valuation of its
merchandise held for resale based upon management's evaluation of the
marketability of the merchandise. Management's evaluation takes into
consideration the age of slow moving merchandise on hand and markdowns necessary
to liquidate slow moving merchandise. At January 31, 1998, total merchandise
held for resale was $1,943,960 after reduction for a valuation allowance of
$159,815.
FRANCHISING
The Company's business strategy is to continue expanding its pawnshop
business within new geographic markets through its franchising operation. The
Company is prepared to begin offering single store and multi-store franchises
throughout the United States. Although the Company is currently legally
permitted to offer and sell its franchises in over 40 states, no franchise has
been sold as of April 30, 1998. The Company's franchises will generally be
offered directly by the Company.
OPERATIONS
Retail Store Management. Each location has a store manager who typically
supervises its personnel and assures that it is managed in accordance with
Company guidelines and established policies and procedures. Each store manager
reports to a District Manager who will typically supervise up to seven stores.
At April 30, 1998, the Company has established three operating districts, each
of which is managed by a District Manager.
Trade Name. The Company operates its stores under the trade name
"PAWNMART(SM)." The Company has filed applications to register the "PAWNMART
(SM)" marks and descriptive logos and phrases with the United States Patent and
Trademark Office. However, such trademark protection has not been granted as of
the date of this filing.
Personnel. As of April 30, 1998, the Company has a total of 119 employees
(of which 15 were in executive, administrative, clerical and accounting
functions), 64 of whom were salaried and 55 of whom were hourly employees. The
Company has an established training program that provides a combination of
classroom instruction and on-the-job loan and specialty retail training. None of
the Company's employees are represented by a union. Furthermore, no work
stoppages have occurred at any of the Company's stores.
COMPETITION
The Company encounters significant competition in connection with the
operation of its business. In connection with lending operations, the Company
competes with other pawnshops (owned by individuals and by large operators) and
certain financial institutions, such as consumer finance companies, which
generally lend on an unsecured as well as on a secured basis. The Company's
competitors in connection with its retail sales include numerous retail and
discount stores. Many competitors have greater financial resources than the
Company, including Cash America International, Inc. and EZCORP, Inc. These
competitive conditions may adversely affect the Company's revenues,
profitability and ability to expand.
The Company's stores are positioned similarly to national discount
stores. They are attractive, clean, well-lit and conveniently located.
Merchandise is displayed in an organized, easy-to-shop manner and the Company's
stores do not retail handguns or assault rifles. The Company believes that this
positioning provides a more comfortable and desirable shopping experience with
better customer demographics.
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OPERATING CONTROLS
The Company has an organizational structure that management believes can
support a larger operating base. The store locations are monitored on a daily
basis from corporate headquarters through an online, real time computer network
system. The Company has an internal audit staff that performs physical counts of
merchandise inventory and pawn loan collateral at each of the Company's
locations every 45 to 60 days. Additionally, the internal audit staff assists
the corporate headquarters in verifying that the Company's policies and
procedures are consistently followed. Management believes that the current
operating and financial controls and computer systems are adequate for its
current operating base and for anticipated expansion in the near term.
REGULATION
The Company's store operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations in the four states in which it operates. Set forth
below is a summary of the state pawnshop regulations in those states of the
Company's present operating locations.
Georgia Pawnshop Regulations. Georgia state law requires pawnbrokers to
maintain detailed permanent records concerning pawn transactions and to keep
them available for inspection by duly authorized law enforcement authorities.
The Georgia statute prohibits pawnbrokers from failing to make entries of
material matters in their permanent records; making false entries in their
records; falsifying, obliterating, destroying, or removing permanent records
from their places of business; refusing to allow duly authorized law enforcement
officers to inspect their records; failing to maintain records of each pawn
transaction for at least four years; accepting a pledge or purchase from a
person under the age of eighteen or who the pawnbroker knows is not the true
owner of the property; making any agreement requiring the personal liability of
the pledgor or seller or waiving any of the provisions of the Georgia statute;
or failing to return or replace pledged goods upon payment of the full amount
due (unless the pledged goods have been taken into custody by a court or a law
enforcement officer). In the event pledged goods are lost or damaged while in
the possession of the pawnbroker, the pawnbroker must replace the lost or
damaged goods with like kinds of merchandise. Under Georgia law, total interest
and service charges may not, during each thirty-day period of the loan, exceed
25% of the principal amount advanced in the pawn transaction (except that after
ninety days from the original date of the loan, the maximum rate declines to
12.5% for each subsequent thirty-day period). The statute provides that
municipal authorities may license pawnbrokers, define their powers and
privileges by ordinance, impose taxes upon them, revoke their licenses, and
exercise such general supervision as will ensure fair dealing between the
pawnbroker and his customers.
Alabama Pawnshop Regulations. The Alabama Pawnshop Act regulates the
licensing, operation and reporting requirements of pawnshops in that state. The
general fitness of pawnshop applicants is investigated by the Supervisor of the
Bureau of Loans of the State Department of Banking ("the Supervisor"). The
Supervisor also issues pawnshop licenses. The Alabama Pawnshop Act requires that
certain bookkeeping records be maintained and made available to the Supervisor
and to local law enforcement authorities and that motor vehicles are retained on
the premises for at least 21 days prior to sale by the pawnshop. The Alabama
Pawnshop Act establishes a maximum allowable pawn service charge of 300%
annually.
North Carolina Pawnshop Regulations. In North Carolina, the Pawnbrokers
Modernization Act of 1989 regulates the licensing, reporting and financial
responsibility of pawnbrokers. Appropriate city and county governments must be
petitioned in order to acquire a license. Once licensed, a pawnbroker must keep
consecutively numbered records of each and every pawn transaction. No pawnbroker
may receive an effective rate of interest in excess of 2% per month, except that
the pawnbroker may charge additional fees up to 20% per month for services such
as title investigation, insurance, reporting fees, etc., so long as certain
total dollar limits are not exceeded. Mobile homes, recreational vehicles, or
motor vehicles other than a motorcycle may not be pledged.
Texas Pawnshop Regulations. Pursuant to the terms of the Texas Pawnshop
Act, the Texas Consumer Credit Commissioner has primary responsibility for the
regulation of pawnshops and enforcement of laws relating to pawnshops in Texas.
The Company is required to furnish the Texas Consumer Credit Commissioner with
copies of information, documents and reports which are required to be filed by
it with the Securities and Exchange Commission.
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The Texas Pawnshop Act prescribes the stratified loan amounts and the
maximum allowable rates of service charge that pawnbrokers in Texas may charge
for the lending of money within each stratified range of loan amounts ranging
from one percent per month to 20% per month.
As part of the license application process, any existing pawnshop
licensee who would be affected by the granting of the proposed application may
request a public hearing at which to appear and present evidence for or against
the application. For an application for a new license in a county with a
population of 250,000 or more, the Consumer Credit Commissioner must find not
only that the applicant meets the other requirements for a license, but also
that (i) there is a public need for the proposed pawnshop and (ii) the volume of
business in the community in which the pawnshop will conduct business indicates
a profitable operation is probable.
Other Regulatory Matters, Etc. With respect to firearm sales, each of the
stores must comply with the Brady Handgun Violence Prevention Act (the "Brady
Act"), which took effect on February 28, 1994. The Brady Act imposes a waiting
period/background check in connection with the disposition of handguns by
federally licensed firearms dealers. In addition, the Company must continue to
comply with the longstanding regulations promulgated by the Department of the
Treasury, Bureau of Alcohol, Tobacco and Firearms, which require each store
dealing in guns to maintain a permanent written record of all receipts and
dispositions of firearms.
In addition to the state statutes and regulations described above, many
of the Company's stores are subject to municipal ordinances, which may require,
for example, local licenses or permits and specified record-keeping procedures,
among other things. Each of the Company's stores, voluntarily or pursuant to
municipal ordinance, provides to the police department having jurisdiction
copies of all daily transactions involving pawn loans and over-the-counter
purchases. These daily transaction reports are designed to provide the local
police with a detailed description of the goods involved including serial
numbers, if any, and the name and address of the owner obtained from a valid
identification card.
A copy of the transaction ticket is provided to local law enforcement
agencies for processing by the National Crime Investigative Computer to
determine rightful ownership. Goods which are either purchased or held to secure
pawn loans and which are determined to belong to an owner other than the
borrower or seller are subject to recovery by the rightful owner. However, the
Company historically has not experienced a material number of claims of this
sort, and the claims experienced have not had a material adverse effect on the
Company's consolidated results of operations.
Casualty insurance, including burglary coverage, is maintained for each
of the Company's stores, and fidelity bond coverage is maintained on each of the
Company's employees.
Management of the Company believes its operations are conducted in
material compliance with all federal, state and local laws and ordinances
applicable to its business.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's corporate offices are leased under a five year lease
expiring in May 1999. At January 31, 1998, the Company operated 19 leased store
locations with monthly rental payments ranging from $2,000 to $6,250 per
location and having initial lease terms expiring from January 1999 through May
2002. All of the Company's leased locations, other than one, include renewal
options. The size of the leased store locations range from approximately 4,000
to 12,000 square feet. With the exception of the location in Weatherford, Texas,
the Company leases all of these properties from unaffiliated third parties. See
"Item 12. Certain Relationships and Related Transactions." The following table
sets forth the geographic markets served by the Company and the number of stores
in each market as of January 31, 1998.
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Number of Stores
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Georgia:
Atlanta Metropolitan Area.............. 9
Rome................................... 1
Calhoun................................ 1
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Total Georgia...................... 11
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Alabama:
Mobile................................. 4
Dothan................................. 1
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Total Alabama...................... 5
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North Carolina:
Charlotte.............................. 2
-----
Total North Carolina............... 2
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Texas:
Weatherford............................ 1
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Total Texas........................ 1
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Total.............................. 19
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</TABLE>
The Company considers is equipment, furniture and fixtures and leased
buildings to be in good condition. The Company's leases typically require the
Company to pay all maintenance costs, insurance costs and property taxes.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits encountered in the
ordinary course of its business. Certain of these matters are covered to an
extent by insurance. In the opinion of management, the resolution of these
matters will not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 23, 1998, a special meeting of the Company's stockholders was
held for the purpose of considering and acting upon (i) an amendment to the
Company's Amended and Restated Certificate of Incorporation to effect a
1-for-1.5163715 reverse stock split of the Company's issued and outstanding
shares of Common Stock on a basis of one (1) new share for each 1.5163715 shares
outstanding and (ii) an amendment to the Company's Amended and Restated
Certificate of Incorporation changing the automatic conversion price of the
Company's $.50 Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock and 12% Series D
Convertible Exchangeable Preferred Stock to be the lower of the conversion price
in effect upon completion of an initial public offering or 80 percent of the
price to the public of the Common Stock in an initial public offering. Both
proposals were approved at the special meeting with 4,787,377 votes cast in
favor of such amendments, no votes cast against such amendments, and no votes
abstaining from voting on such amendments.
8
<PAGE> 11
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
On March 17, 1998, the Company's Common Stock, Series A Warrants and
Series B Warrants began trading on the Nasdaq SmallCap Market ("NASDAQ") under
the symbols of "PMRT", "PMRTW" and "PMRTZ", respectively, and on the Boston
Stock Exchange under the symbols of "PMT", "PMTA" and "PMTB", respectively. On
May 1, 1998, the closing bid price for the Company's Common Stock, Series A
Warrants and Series B Warrants as reported by NASDAQ was $4.25, $0.625 and
$0.3125, respectively.
As of May 8, 1998, the Company had approximately 1,200 stockholders of
record. To date, the Company has not declared or paid any cash dividends on its
Common Stock, and the present policy of the Board of Directors is to retain any
earnings to provide for the Company's growth. Any future determination to pay
dividends will be at the discretion of the Board of Directors, and dependent
upon the Company's consolidated financial position, results of operations,
capital requirements and such other factors as the Board of Directors deems
relevant.
During the fiscal year ending January 31, 1998, the Company has sold the
securities listed below pursuant to exemptions under the Securities Act.
1. From December 1996 through June 1997, the Company made a private
placement offering to accredited investors for up to $2,655,000 in
principal amount of 14% unsecured Convertible Subordinated
Debentures due January 31, 2001 ("2001 Debentures"). The total
underwriting commissions associated with the 2001 Debentures were
$232,500. As of January 31, 1998, the Company has sold $2,655,000
in 2001 Debentures. In connection with the 2001 Debentures, the
Company has issued 50,915 Common Stock purchase warrants to
participating NASD Broker-Dealers. The warrants have an exercise
price of $5.50 per share and are exercisable through January 2,
2002. The sale of securities were made in reliance upon Section
4(2) of the Securities Act, and Rule 506 pursuant to Regulation D,
promulgated thereunder, as an offering only to accredited
investors.
2. In June 1997, the Company's Board of Directors authorized the
issuance of up to 500,000 shares of Series C Convertible Preferred
Stock ("Series C") with a par value of $.01 per share to be issued
to employees in connection with the Company's employee stock
purchase plan. The employee stock purchase plan allowed employees
to purchase, through payroll deductions and Company matches
approved by the Board of Directors, shares of Series C at a price
of $2.50 per share. On June 23, 1997, the Company issued 26,592
Series C shares and, on September 10, 1997, the Company issued 250
Series C shares with total proceeds received by the Company from
both issuances of $47,932. The sale of securities were made in
reliance upon Rule 701 which provides for an exemption for offers
and sales of securities pursuant to compensatory benefit plans and
contracts relating to compensation.
3. In July 1997, the Company's Board of Directors authorized the
issuance of up to 1,000,000 shares of 12% Series D Convertible
Exchangeable Preferred Stock ("Series D") with a par value of $.01
per share to be issued to accredited investors. From July 10, 1997
to October 26, 1997, the Company issued 542,500 Series D shares
with total proceeds received by the Company of $1,085,000. The
sale of securities were made in reliance upon Section 4(2) of the
Securities Act, and Rule 506 pursuant to Regulation D, promulgated
thereunder, as an offering only to accredited investors.
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<PAGE> 12
4. From January 27, 1997 through October 26, 1997, the Company issued
104,602 shares of Common Stock of which 54,408 shares were issued
to certain directors in exchange for Board of Director services,
36,181 shares were issued to certain employees in exchange for
employment services, pay reductions and performance awards, 10,716
were issued to certain attorneys and consultants in exchange for
legal and consulting services, and 3,297 shares were issued to
National Audio Electronics, Inc. in exchange for merchandise. On
May 8, 1997, the Company issued 824 shares of Common Stock to an
employee for $3.03 per share. The sale of securities were made in
reliance upon Rule 701 which provides for an exemption for offers
and sales of securities pursuant to compensatory benefit plans and
contracts relating to compensation.
5. From January 1997 to July 1997, the Company issued $474,000 in 15%
notes payable, to mature on December 31, 2000, to 11
non-accredited investors and a class of accredited investors. The
sale of securities were made in reliance upon Section 4(2) of the
Securities Act which provides exemptions for transactions not
involving any public offering to investors believed by the Company
to be sophisticated business-persons and investors.
The sale of securities above were made in reliance upon Rule 701 which
provides for exemption for offers and sales of securities pursuant to
compensatory benefit plans and contracts relating to compensation and Section
4(2) of the Securities Act, which provides exemptions for transactions not
involving a public offering to investors believed by the Company to be
sophisticated business-persons and investors, and Regulation D, promulgated
thereunder, as an offering only to accredited investors. The purchasers of
securities described above acquired them for their own account and not with a
view to any distribution thereof to the public. The certificates evidencing the
securities bear legends stating that the shares are not to be offered, sold or
transferred other than pursuant to an effective registration statement under the
Securities Act, or an exemption from such registration requirements.
The Company's $.50 Series A Convertible Preferred Stock, Series B
Convertible Preferred Stock, Series C Convertible Preferred Stock, 12% Series D
Convertible Exchangeable Preferred Stock, 14% Convertible Subordinated
Debentures Due June 30, 1999, 14% Convertible Subordinated Debentures Due June
30, 2000, and 14% Convertible Subordinated Debentures Due January 31, 2001 are
convertible into Common Stock upon the occurrence of certain events. See the
notes to the consolidated financial statements included in "Item 7. Consolidated
Financial Statements" for further information relating to these conversion
features.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Statements appearing in the following discussion that are not historical
facts are forward-looking statements ("forward-looking statements") within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, which are intended
to be covered by the safe harbors created by those sections. Such
forward-looking statements are necessarily estimates reflecting the best
judgment of the Company's management based upon current information and involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors, include, but are not limited to, those set
forth below under the caption "Factors That Could Affect Future Performance" and
appearing elsewhere in this Annual Report and appearing from time to time in
filings made by the Company with the Securities and Exchange Commission. These
risks, uncertainties and other factors should not be construed as exhaustive and
the Company does not undertake, and specifically disclaims any obligation, to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements. See "Item 1.
Description of Business - Forward-Looking Statements."
In addition, the following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and other financial data appearing elsewhere in this Annual Report.
10
<PAGE> 13
OVERVIEW
Since its inception in January 1994, the Company's store growth has been
funded primarily through debt and equity issuances. With the net proceeds from
such issuances, the Company opened seven, ten and two stores during the fiscal
years ended January 29, 1995, January 28, 1996 and January 26, 1997,
respectively. Additionally, the Company has invested in the management and
financial controls necessary to support rapid growth. This growth strategy and
the investment in management and financial controls have substantially increased
interest expense and general and administrative expenses as a percentage of
total revenue. Other factors which have impacted or are expected to impact the
Company's results of operations and cash flows include the maturation of newly
established stores and the initial capital expenditures and costs associated
with new stores. Management of the Company believes that material fluctuations
in the results of operations from lending activities and product sales due to
seasonality will not occur.
The completion of the Company's initial public offering during March 1998
(see "Item 1. Description of Business - Completion of Initial Public Offering
and Financial Restructuring") resulted in a significant financial restructuring
of the Company's capital structure which dramatically improved the Company's
consolidated balance sheet and virtually eliminated the Company's interest and
dividend requirements.
Maturation of Newly Established Stores
The Company's newer stores typically experience lower profitability and
operating cash flows than its more mature stores. The Company's newly
established stores experience substantially higher levels of profitability after
reaching two years of age. As of January 31, 1998, two of the Company's 19
stores were under two years of age. These stores are expected to have a
favorable impact on profitability if they achieve the substantially increased
lending and retail volumes experienced by the Company in its other stores.
The Company's historical operating results have also indicated
improvements in same store (stores open 12 months or more) total revenues and
store contribution (defined as total store revenues less direct operating
expenses, which exclude general and administrative expenses, interest expense,
and depreciation and amortization expense). The Company experienced increases in
total revenues and total store contribution of 24% and 30%, respectively, during
the fiscal year ended January 31, 1998 based on a same store comparison of
stores which have been open for at least two years (17 stores). There can be no
assurance that future same store total revenues and total store contribution
will not vary from historical amounts.
Initial Capital Expenditures and Costs
A key element of the Company's strategy has been to establish (rather
than acquire) PAWNMART(SM) stores meeting the Company's required store size,
configuration, and site selection requirements, in regional and local markets.
Management believes that such anticipated expansion will continue to provide
economies of scale in supervision, purchasing supplies and inventory,
administration and marketing by decreasing the overall average cost of such
functions per unit owned.
After a suitable location has been found and a lease and license are
obtained, the new location can be ready for business within four to six weeks,
with completion of counters, vaults and security system and transfer of
merchandise from existing stores, and external purchases of pre-owned
merchandise. The Company projects the initial capital expenditures and costs
associated with opening a new PAWNMART(SM) store to total approximately
$225,000.
In addition, the Company projects incurring aggregate start-up losses of
approximately $13,000 during the first four months of new store operations.
Because of these start-up losses and expenditures necessary to support its
anticipated growth, the Company may incur losses during its high-growth phase.
There can be no assurance that future initial capital expenditures and costs and
start-up losses with new store operations will not vary from historical amounts.
The Company does not capitalize start-up losses and does not recognize pawn
service charges on defaulted loans.
11
<PAGE> 14
Selected elements of the Company's consolidated financial statements are
shown below for the last two years as a percentage of total revenues and as a
percentage change from year to year.
<TABLE>
<CAPTION>
% of Total Revenues
Years Ended January,
-------------------------------
1998 1997 % Increase
---------- ----------- --------------
<S> <C> <C> <C>
Pawn Service Charges......................... 28.1 % 29.0 % 24.9%
Merchandise Sales............................ 70.9 69.9 30.6
Other Income................................. 1.0 1.1 12.5
------- ------- ------
Total Revenues............................... 100.0 100.0 28.8
Cost of Sales................................ 51.0 47.3 38.8
------- ------- ------
Gross Profit................................. 49.0 52.7 19.8
Operating Expenses........................... 39.7 46.2 10.6
------- ------- ------
Store Contribution........................... 9.3 6.5 84.8
Administrative Expenses...................... 20.8 21.7 23.6
Interest..................................... 36.9 17.2 176.4
Depreciation and Amortization................ 5.0 6.3 1.8
------- ------- ------
Net Loss..................................... (53.4)% (38.7)% 77.9%
======= ======= ======
</TABLE>
Effective January 2, 1998, the Company changed its year end to a fiscal
year end which ends on the Saturday closest to January 31. Accordingly, the
fiscal year ended January 31, 1998 contains 53 weeks and the fiscal year ended
January 26, 1997 contains 52 weeks. The following discussion and analysis should
consider the above and should be read in conjunction with the consolidated
financial statements and the notes thereto included in "Item 7.
Consolidated Financial Statements."
RESULTS OF OPERATIONS
Year Ended January 31, 1998 Compared to Year Ended January 26, 1997
Total revenues increased 28.8% to $10,178,108 for the fiscal year ended
January 31, 1998 ("Fiscal 1997") as compared to $7,903,402 for the fiscal year
ended January 26, 1997 ("Fiscal 1996"). $1,811,554 of this increase was due to a
24.1% increase in comparative store revenue for stores opened 12 months or more
("Comparative Stores") and $463,152 from two stores opened during Fiscal 1996.
Comparative Store revenue gains were primarily attributable to store maturation,
increased store traffic and marketing programs. The overall increase is
primarily attributable to a 30.6% increase in product sales and a 24.9% increase
in pawn service charges.
Merchandise sales increased 30.6% to $7,215,235 during Fiscal 1997 from
$5,522,731 during Fiscal 1996. $1,369,106 of this increase was due to a 26.1%
increase in sales gains for Comparative Stores and $323,398 from two stores
opened during Fiscal 1996.
Pawn service charges increased 24.9% to $2,862,127 during Fiscal 1997
from $2,291,104 during Fiscal 1996 primarily due to pawn loans increasing 8.7%
from $2,227,565 at January 26, 1997 to $2,420,553 at January 31, 1998. $432,698
of this increase was due to a 19.7% increase in pawn service charge gains for
Comparative Stores and $138,325 from two stores opened during Fiscal 1996. The
Company expects that, during the first four years of operation, a store should
experience significant increases in loan activity resulting in a higher
percentage of loans being renewed, causing pawn service charges to increase as a
percentage of loans outstanding.
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<PAGE> 15
Gross profit as a percentage of total revenues declined 3.7% from 52.7%
during Fiscal 1996 to 49.0% during Fiscal 1997 primarily due to a conscious
effort by the Company to turn older inventory, an uninsured theft at one of the
Company's locations during February 1997 and allowances provided for shrinkage
and valuation based on management's evaluation of inventories on hand. The
Company's annualized inventory turnover rate was 2.6 times during Fiscal 1997
compared to 2.2 times during Fiscal 1996 primarily due to increased store
traffic, marketing programs and a conscious effort by the Company to turn older
inventory. Management expects to continue a positive trend in inventory turns as
the Company continues to implement its specialty retail strategies. The Company
currently maintains theft insurance at all locations.
Operating expenses increased 10.6% to $4,040,436 during Fiscal 1997 from
$3,651,647 during Fiscal 1996 primarily due to increased labor at Comparative
Stores to support increased store activity and the addition of two new stores
during Fiscal 1996. Operating expenses as a percent of total revenues decreased
to 39.7% during Fiscal 1997 from 46.2% during Fiscal 1996 primarily resulting
from significant increases in comparable store sales and pawn service charges
discussed above.
Interest expense increased 176.4% to $3,760,525 during Fiscal 1997 from
$1,360,511 during Fiscal 1996 primarily due to $1,885,455 in additional non-cash
interest expense recognized in the fourth quarter of Fiscal 1997 resulting from
the accounting treatment relating to the beneficial conversion feature
associated with the Company's Convertible Subordinated Debentures and increases
in the aggregate outstanding principal amount of Convertible Subordinated
Debentures. See note 6 to the consolidated financial statements included in
"Item 7. Consolidated Financial Statements" for further discussion of the
accounting treatment relating to the beneficial conversion feature associated
with the Company's Convertible Subordinated Debentures.
Administrative expenses increased 23.6% to $2,117,492 during Fiscal 1997
from $1,712,568 during Fiscal 1996 primarily due to (i) increased salaries
associated with the hiring of additional executive management, (ii) increased
expenses associated with development of marketing programs, (iii) increased
expenses associated with the Company's comprehensive insurance package, (iv) and
increased professional fees associated with human resource development, the
preparation of the Company's franchise offering circular and fees associated
with the preparation of tax returns. However, administrative expenses decreased
to 20.8% of total revenues during Fiscal 1997 compared to 21.7% during Fiscal
1996 primarily resulting from significant increases in comparable store sales
and pawn service charges discussed above.
Store contribution margin increased 84.8% to $946,121 during Fiscal 1997
compared to $511,889 during Fiscal 1996 primarily due to increases in same store
product sales and pawn service charges which were not offset by corresponding
increases in operating expenses.
At January 31, 1998, the Company has accumulated net operating loss
carryforwards for tax purposes of approximately $9,724,000 which are available
to offset future federal taxable income, if any, through 2013.
LIQUIDITY AND CAPITAL RESOURCES
The profitability and liquidity of the Company are affected by the amount
of loans outstanding, which is controlled in part by the Company's loan
decisions. The Company is able to influence the frequency of forfeiture of
collateral by increasing or decreasing the amount loaned in relation to the sale
value of the pledged property. Tighter credit decisions generally result in
smaller loans in relation to the estimated sale value to the pledged property
and can thereby decrease the Company's aggregate loan balance and, consequently,
decrease pawn service charges. Additionally, small loans in relation to the
pledged property's estimated sale value tend to increase loan redemptions and
improve the Company's liquidity. Conversely, providing larger loans in relation
to the estimated sale value of the pledged property can result in an increase in
the Company's pawn service charge income. Also larger average loan balances can
result in an increase in loan forfeitures, which increases the quantity of goods
on hand and, unless the Company increases inventory turnover, reduces the
Company's liquidity. In addition to these factors, liquidity is also affected by
product sales and the pace of store expansions.
13
<PAGE> 16
At January 31, 1998 and January 26, 1997, the Company operated 19 stores.
The Company funded these operations from proceeds attributable to debt and
equity issuances. At January 31, 1998, the Company's primary sources of
liquidity were $150,750 in cash and cash equivalents, $233,438 in pawn service
charges receivable, $2,420,553 in loans, and $1,943,960 in inventories. The
Company had a current ratio of approximately 1.6 to 1.0 and 1.9 to 1.0 at
January 31, 1998 and January 26, 1997, respectively. Net cash used in operating
activities was $3,308,093 during Fiscal 1997 and $2,356,914 during Fiscal 1996.
The Company's operations during Fiscal 1997 and Fiscal 1996 have been
financed from funds generated from private debt and equity offerings and funds
generated from operations at the Company's established stores. Subsequent to
January 31, 1998, the Company completed an initial public offering of the
Securities resulting in net proceeds to the Company of approximately $5,704,000.
See "Item 1. Description of Business - Completion of Initial Public Offering and
Financial Restructuring." In connection with the completion of the initial
public offering, $9,520,000 in aggregate principal amount of the Company's 14%
Convertible Subordinated Debentures were automatically converted into 2,380,000
shares of common and all classes of the Company's preferred stock were
automatically converted into an aggregate of 1,482,766 shares of Common Stock.
Additionally, the Company utilized $2,489,000 of the net proceeds to repay
$2,142,000 in 15% notes payable, $157,000 in notes payable to stockholders and
$190,000 in notes payable to the Company's Chief Executive Officer. In
connection with the Debenture Conversion, the Preferred Conversion, and the
repayment of $2,489,000 in notes payable, the Company's annual cash interest
requirements have been decreased by approximately $1,697,000 and the Company's
annual cash dividend requirements have been decreased by approximately $130,000.
Management believes the completion of the initial public offering and the
resulting financial restructuring have positioned the Company with a capital
structure that will allow its planned retail store expansion.
The Company believes that its planned retail store expansion program will
be funded by cash flow from operations from its established stores, the net
proceeds from the initial public offering and a commercial credit facility. The
Company has had discussions with several commercial banks with regard to a
credit facility which would be provided to the Company on terms similar to
credit facilities provided to other public companies in the pawnshop industry.
No assurance can be made that the Company will obtain long or short-term
financing to realize certain business opportunities. In the event the Company
does not obtain the credit facility, the Company will modify or reduce its
expansion schedule. While management does not expect that the failure to obtain
the credit facility would adversely affect the Company's cash flows, there can
be no assurance that cash flow would not be affected.
YEAR 2000 COMPLIANCE
Many computer software programs installed over the past several decades
utilize two digits to recognize the year, such as "97" for 1997 (the "Year 2000
Issue"). As a result of the Year 2000 Issue, time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. In some
cases, the date "00" may cause computers to stop operating, while in other
cases, incorrect output may result. Many of the Company's software programs are
time-sensitive.
The Company has upgraded its hardware and software programs to prevent
the Year 2000 Issue from affecting its reliance on its computer network. The
vendors who provide accounting systems and general office programs to the
Company have upgraded their software systems to solve the Year 2000 Issue. Based
on preliminary information, costs of addressing additional potential problems
are not currently expected to have a material adverse impact on the Company's
consolidated financial position, results of operations or cash flows in future
periods. The Company plans to devote the necessary resources to resolve all
additional Year 2000 Issues in a timely manner.
14
<PAGE> 17
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general purpose financial statements. Statement No.
130 requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Statement No. 130 is effective for fiscal years beginning after
December 15, 1997. Pursuant to Statement No. 130, the Company will be required
to display comprehensive income in its consolidated financial statements issued
for periods beginning with February 1, 1998, and thereafter.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
Lack Of Profitability, Potential Losses
From its inception on January 13, 1994 through January 31, 1998, the
Company has experienced aggregate losses of $12,974,227. Further, a key element
of the Company's strategy consists of developing (rather than acquiring)
multiple PAWNMART(SM) stores meeting the Company's required store size,
configuration, and site selection requirements in regional and local markets.
This strategy may result in continued net losses for the Company during its
roll-out phase due to start-up losses associated with the anticipated high
number of new stores. Results of operations in the future will be influenced by
numerous factors including, among others, new store expansions, the ability of
the Company to manage its growth and maintain the quality of its personnel, and
the ability of the Company to implement its strategic plan.
Capital Requirements
The Company is dependent upon the proceeds from the initial public
offering (see "Item 1. Description of Business - Completion of Initial Public
Offering and Financial Restructuring"), anticipated cash flow from operations
and a commercial credit facility to complete its current expansion plans. The
Company has had discussions with several commercial banks with regard to a
credit facility which would be provided to the Company on terms similar to
credit facilities provided to other public companies in the pawnshop industry.
There can be no assurance that the Company will be able to raise such capital or
financing when needed or on acceptable terms, and therefore, the Company may be
unable to achieve its goals, including anticipated growth.
Management of Growth
The Company plans to expand its business through a roll-out of new
PAWNMART(SM) stores. To a significant extent, the Company's future success will
be dependent upon its ability to engage in a successful expansion program and
will be dependent, in part, upon its ability to secure suitable sites for its
new stores, obtain adequate inventory for its new stores, maintain adequate
financial controls and reporting systems to manage a larger operation, and to
obtain additional capital upon favorable terms. There can be no assurance that
the Company will be able to successfully implement its planned expansion,
finance its growth or manage the resulting larger operation.
Availability of Qualified Store Management Personnel
The Company's ability to expand may also be limited by the availability
of qualified store management personnel. While the Company seeks to train
existing qualified personnel for management positions and to create attractive
compensation packages to retain existing management personnel, there can be no
assurance that sufficient qualified personnel will be available to satisfy the
Company's needs with respect to its planned expansion.
15
<PAGE> 18
Competition
The Company encounters significant competition in connection with the
operation of its business. In connection with lending operations, the Company
competes with other pawnshops (owned by individuals and by large operators) and
certain financial institutions, such as consumer finance companies, which
generally lend on an unsecured as well as on a secured basis. The Company's
competitors in connection with its retail sales include numerous retail and
discount stores. Many competitors have greater financial resources than the
Company, including Cash America International, Inc. and EZCORP, Inc. These
competitive conditions may adversely affect the Company's revenues,
profitability and ability to expand.
Government Regulation
The Company's lending operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations. These statutes prescribe, among other things,
service charges a pawnshop may charge for lending money and the rules of conduct
that govern an entity's ability to maintain a pawnshop license. With respect to
firearm and ammunition sales, a pawnshop must comply with the regulations
promulgated by the United States Department of the Treasury-Bureau of Alcohol,
Tobacco and Firearms. Governmental regulators have broad discretionary authority
to refuse to grant a license or to suspend or revoke any or all existing
licenses of licensees under common control if it is determined that any such
licensee has violated any law or regulation or that the management of any such
licensee is not suitable to operate pawnshops. In addition, there can be no
assurance that additional state or federal statutes or regulations will not be
enacted at some future date which could inhibit the ability of the Company to
expand, significantly decrease the service charges it can charge for lending
money, or prohibit or more stringently regulate the sale of certain goods, such
as firearms, any of which could significantly adversely affect the Company's
prospects. The Company's ability to open new stores in other states could be
affected by the enactment of state or local legislation, similar to current
Texas legislation, which requires a finding of public need and probable
profitability by the Texas Consumer Credit Commissioner as a condition to the
issuance or activation of any new pawnshop license in Texas counties having a
population of more than 250,000. In addition, the present statutory and
regulatory environment of some states renders expansion into those states
impractical. For instance, certain states require public sale of forfeited
collateral or do not permit service charges sufficient to make pawnshop
operations profitable.
Risks Related to Improper Assessment of the Pledged Property's Estimated Resale
Value
The Company makes pawn loans without the borrower's personal liability
and does not investigate the creditworthiness of the borrower, but relies on the
pledged personal property, and the possibility of its forfeiture, as a basis for
its lending decision. In this regard, the recovery of the amount advanced, as
well as realization of a profit on sale of merchandise, is dependent on the
Company's initial assessment of the property's estimated resale value. Improper
assessment of the resale value of the collateral in the lending function can
result in reduced marketability of the property and resale of the merchandise
for an amount less than the amount advanced. Although, historically, the Company
has experienced profits from the sale of such merchandise, no assurances can be
given that the Company's historical results will continue. For example,
unexpected technological changes could adversely impact the value of consumer
electronic products and declines in gold and silver prices could reduce the
resale value of jewelry items acquired in pawn transactions and could adversely
affect the Company's ability to recover the amount advanced on the acquired
collateral.
Dependence on Key Management
The Company relies on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chief
Executive Officer, Carson Thompson and its Chief Operating Officer, Robert
Bourland. The Company does not have an employment agreement with any member of
its executive staff. The loss of the services of any of these individuals could
have a material adverse effect on the Company. No assurance can be given that
their services will be available in the future. The Company's success will also
be dependent on its ability to attract and retain additional qualified
management personnel.
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<PAGE> 19
Risks Related to Firearm Sales
The Company has not, and, at present, the Company does not intend to
engage in the sale of handguns or assault rifles to the public. The Company does
wholesale handguns and assault rifles to licensed firearm dealers. The Company
has engaged in the sale of sporting rifles to the public leaving it open to the
risk of lawsuits from persons who may claim injury as a result of an improper
sale. No such claims have been asserted against the Company as of the date
hereof. The Company does maintain insurance covering potential risks related to
the sale of firearms.
Risks Related to Automobile Title Loans
Alabama and Georgia pawn regulations allow the Company to advance funds
secured by automobile titles. Approximately 8% of the Company's total revenues
for the fiscal year ended January 31, 1998 were related to pawn service charges
generated from such advances. The adoption of additional, or the revision of
existing, laws and regulations impacting the Company's ability to advance funds
against automobile titles could have a material adverse effect on the Company's
business. In addition, the Company could be subject to consumer claims and
litigation seeking damages based upon wrongful repossession of automobiles.
No Trademark Protection
The Company has not been issued any registered trademark for its
"PAWNMART(SM)" or "PAWNLINK(TM)" trade names. No assurance can be given that the
Company will be successful in obtaining any trademarks, or that the trademarks,
if obtained, will afford the Company any competitive advantages.
Shares Eligible for Future Sale; Potential Adverse Effect on Market Price of
Common Stock
Sales of shares of Common Stock in the public market, including
"restricted shares" first becoming eligible for resale following the completion
of the initial public offering, could adversely affect prevailing market prices.
As of January 31, 1998, there were 5,800,000 "restricted shares" outstanding on
a pro forma basis after giving effect to the Debenture Conversion and the
Preferred Conversion. Additional shares of Common Stock may become eligible for
sale in the public market from time to time upon exercise of warrants and stock
options.
No Dividends
The Company has not paid any cash or other dividends on its Common Stock
and does not expect to declare or pay any cash dividends on its Common Stock in
the foreseeable future. See "Item 5. Market for Common Equity and Related
Stockholder Matters."
Possible Volatility of Securities Prices
Recent history relating to the market prices of newly public companies
indicates that, from time to time, there may be significant volatility in their
market price. There can be no assurance that the market price of the Common
Stock, Series A Warrants and Series B Warrants will not be volatile as a result
of a number of factors, including the Company's consolidated financial results
or various matters affecting the stock market generally.
17
<PAGE> 20
Certain Anti-takeover Effects
Certain provisions of the Company's Restated Certificate of Incorporation
and By-laws could prohibit or delay mergers or other takeover or change in
control attempts with respect to the Company and, accordingly, may discourage
attempts to acquire the Company. These provisions include: (i) a classified
Board of Directors; (ii) a prohibition on stockholder action through written
consents; (iii) a requirement that special meetings of stockholders be called
only by the Board; (iv) advance notice requirements for stockholder proposals
and nominations; (v) limitations requiring the affirmative vote of holders of at
least 66 2/3% of the total votes eligible to be cast in the election of
directors to amend, alter or repeal the Company's Restated Certificate of
Incorporation and By-laws; and (vi) the authority of the Board to issue
preferred stock with such terms as the Board may determine without stockholder
approval. The Company will also be afforded the protections of Section 203 of
the Delaware General Corporation Law, which could have similar effects.
Outstanding Options and Warrants; Risk of Further Dilution
As of January 31, 1998, the Company has outstanding warrants to purchase
a total of 213,455 shares of Common Stock at an exercise price of $5.50 per
share and outstanding options to purchase a total of 306,389 shares of Common
Stock at an exercise price of $3.79 per share. The price that the Company would
receive for its Common Stock upon exercise of such options or warrants may be
significantly less than the value of, or market price for, the Common Stock at
the time such options or warrants are exercised. To the extent that any such
options or warrants are exercised, the interests of the Company's stockholders
may be diluted proportionately.
Limitations on Director Liability
The Company's Restated Certificate of Incorporation provides, as
permitted by the Delaware General Corporation Law, that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions. These provisions may discourage stockholders from bringing suit
against a director for breach of fiduciary duty and may reduce the likelihood of
derivative litigation brought by stockholders on behalf of the Company against a
director. In addition, the Company's Restated Certificate of Incorporation and
By-laws provide for mandatory indemnification of directors and officers to the
fullest extent permitted by Delaware law. In addition, the Company has entered
into indemnification agreements pursuant to which the Company is obligated to
advance litigation costs and indemnify its directors and officers to the fullest
extent permitted by Delaware law.
Authorization of Preferred Stock
The Company's Restated Certificate of Incorporation authorizes the
issuance of up to 10,000,000 shares of preferred stock with such rights and
preferences as may be determined from time to time by the Board of Directors.
Accordingly, under the Restated Certificate of Incorporation, the Board of
Directors may, without stockholder approval, issue preferred stock with
dividend, liquidation, conversion, voting, redemption or other rights which
could adversely affect the voting power or other rights of the holders of the
Company's Common Stock. The issuance of any shares of preferred stock having
rights superior to those of the Company's Common Stock may result in a decrease
of the value or market price of the Common Stock and could further be used by
the Board as a device to prevent a change in control of the Company. Holders of
the preferred stock may have the right to receive dividends, certain preferences
in liquidation and conversion rights.
18
<PAGE> 21
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
Index to Consolidated Financial Statements
<TABLE>
<S> <C>
Independent Auditors' Report.................................................... 20
Consolidated Balance Sheets at January 31, 1998 and January 26, 1997............ 21
Consolidated Statements of Operations for the Years Ended January 31, 1998
and January 26, 1997................................................... 23
Consolidated Statements of Stockholders' Deficit for the Years Ended
January 31, 1998 and January 26, 1997.................................. 24
Consolidated Statements of Cash Flows for the Years Ended January 31, 1998
and January 26, 1997................................................... 26
Notes to Consolidated Financial Statements...................................... 27
</TABLE>
19
<PAGE> 22
Independent Auditors' Report
The Board of Directors and Stockholders
PawnMart, Inc.:
We have audited the accompanying consolidated balance sheets of PawnMart, Inc.
and subsidiaries as of January 31, 1998 and January 26, 1997, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 PawnMart, Inc. and
subsidiaries as of January 31, 1998 and January 26, 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Fort Worth, Texas
April 20, 1998
20
<PAGE> 23
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
January 31, January 26,
1998 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 150,750 142,993
Accounts receivable 31,812 22,735
Pawn service charges receivable 233,438 229,918
Loans (note 6) 2,420,553 2,227,565
Inventories, net (note 6) 1,943,960 1,970,741
Prepaid expenses and other current assets 98,200 18,117
------------ ------------
Total current assets 4,878,713 4,612,069
------------ ------------
Property and equipment, net (notes 4 and 6) 802,438 1,049,281
Goodwill and other intangible assets, net (note 5) 62,794 122,787
Debt issuance costs, net of accumulated amortization
of $600,817 and $329,838 at January 31, 1998
and January 26, 1997, respectively (note 6) 545,083 555,262
Other assets 387,990 134,296
------------ ------------
$ 6,677,018 6,473,695
============ ============
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable, including $80,000 to a company
owned by a stockholder at January 26, 1997 $ 404,376 331,489
Bank overdraft -- 109,915
Accrued interest payable 142,325 103,291
Accrued payroll and payroll taxes 113,413 384,930
Deferred rent 105,266 115,316
Accrued bonuses 33,210 78,573
Other accrued expenses 252,551 284,130
Current installments of notes payable, including $347,000 and
$50,000 payable to stockholders at January 31, 1998
and January 26, 1997, respectively (notes 2 and 6) 2,070,000 1,056,667
------------ ------------
Total current liabilities 3,121,141 2,464,311
------------ ------------
Long-term notes payable, net of current installments (notes 2 and 6) 9,777,455 8,287,333
------------ ------------
Total liabilities 12,898,596 10,751,644
------------ ------------
</TABLE>
(Continued)
21
<PAGE> 24
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
<TABLE>
<CAPTION>
January 31, January 26,
1998 1997
------------ ------------
<S> <C> <C>
Stockholders' deficit (notes 2, 6, 8, 9, 10 and 11):
Preferred stock, $.01 par value; authorized 10,000,000 shares:
$.50 Series A Convertible Preferred stock; 2,000,000 shares
issued and outstanding (liquidation preference of $.50
per share) $ 20,000 20,000
Series B Convertible Preferred stock; 1,091,858 and 1,089,020
shares issued at January 31, 1998 and January 26, 1997,
respectively (liquidation preference of $2.00 per share) 10,919 10,890
Series C Convertible Preferred stock; 26,842 shares issued
and outstanding at January 31, 1998 (liquidation preference
of $2.50 per share) 268 --
12% Series D Convertible Exchangeable Preferred stock;
542,500 shares issued and outstanding at January 31, 1998
(liquidation preference of $2.00 per share) 5,425 --
Common stock, $.01 par value; authorized 20,000,000 shares;
1,950,424 and 1,844,998 shares issued at January 31, 1998
and January 26, 1997, respectively 19,504 18,450
Additional paid-in capital 7,656,885 3,275,807
Preferred stock discount (673,607) --
Accumulated deficit (13,190,972) (7,538,096)
------------ ------------
(6,151,578) (4,212,949)
------------ ------------
Less treasury stock, at cost; 13,189 common shares and 25,000
Series B Convertible Preferred shares at January 31, 1998 and
9,892 common shares and 25,000 Series B Convertible
Preferred shares at January 26, 1997 (70,000) (65,000)
------------ ------------
Total stockholders' deficit (6,221,578) (4,277,949)
Commitments, contingencies and subsequent event
(notes 2 and 12)
------------ ------------
$ 6,677,018 6,473,695
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 25
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year Ended Year Ended
January 31, January 26,
1998 1997
-------------- --------------
<S> <C> <C>
Revenues:
Merchandise sales $ 7,215,235 5,522,731
Pawn service charges 2,862,127 2,291,104
Other 100,746 89,567
-------------- --------------
Total revenues 10,178,108 7,903,402
Cost of sales 5,191,551 3,739,866
-------------- --------------
4,986,557 4,163,536
-------------- --------------
Expenses:
Operating (note 12) 4,040,436 3,651,647
Interest (note 6) 3,760,525 1,360,511
Depreciation 444,242 435,131
Amortization 59,993 59,994
Administrative (note 8) 2,117,492 1,712,568
-------------- --------------
Total expenses 10,422,688 7,219,851
-------------- --------------
Net loss (5,436,131) (3,056,315)
Preferred stock dividends (note 9) 216,745 --
-------------- --------------
Net loss to common stockholders $ (5,652,876) (3,056,315)
============== ==============
Loss per common share (note 3(m)):
Basic $ (3.01) (1.67)
============== ==============
Diluted $ (3.01) (1.67)
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years Ended January 31, 1998 and January 26, 1997
<TABLE>
<CAPTION>
$.50 Series A Series B
Convertible Convertible
Common stock Preferred stock Preferred stock
----------------------------- ----------------------------- -----------------------------
Shares Amount Shares Amount Shares Amount
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1996 1,759,071 $ 17,591 2,000,000 $ 20,000 1,074,626 $ 10,746
Issuance of common stock
(note 8) 85,927 859 -- -- -- --
Issuance of preferred stock
(notes 8 and 11) -- -- -- -- 14,394 144
Acquisition of 9,892 shares
of common stock (note 8) -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 26, 1997 1,844,998 18,450 2,000,000 20,000 1,089,020 10,890
Issuance of common stock (note 8) 105,426 1,054 -- -- -- --
Acquisition of 3,297 shares of
common stock (note 8) -- -- -- -- -- --
Issuance of preferred
stock (notes 8 and 11) -- -- -- -- 2,838 29
Recognition of Convertible
Subordinated Debenture
beneficial conversion
feature (note 6) -- -- -- -- -- --
Recognition of preferred stock
beneficial conversion
feature (note 9) -- -- -- -- -- --
Amortization of preferred stock
beneficial conversion
feature (note 9) -- -- -- -- -- --
Preferred stock dividends paid -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 31, 1998 1,950,424 $ 19,504 2,000,000 $ 20,000 1,091,858 $ 10,919
============ ============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Deficit
Years Ended January 31, 1998 and January 26, 1997
<TABLE>
<CAPTION>
Series C 12% Series D
Convertible Convertible Exchangeable
Preferred stock Preferred stock Additional
----------------------------- ----------------------------- paid-in Preferred
Shares Amount Shares Amount capital stock discount
------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1996 -- $ -- $-- $ 3,209,553 --
Issuance of common stock
(note 8) -- -- -- -- 30,413 --
Issuance of preferred stock
(notes 8 and 11) -- -- -- -- 35,841 --
Acquisition of 9,892 shares
of common stock (note 8) -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 26, 1997 -- -- -- -- 3,275,807 --
Issuance of common stock (note 8) -- -- -- -- 29,996 --
Acquisition of 3,297 shares of
common stock (note 8) -- -- -- -- -- --
Issuance of preferred
stock (notes 8 and 11) 26,842 268 542,500 5,425 1,147,785 --
Recognition of Convertible
Subordinated Debenture
beneficial conversion
feature (note 6) -- -- -- -- 2,380,000 --
Recognition of preferred stock
beneficial conversion
feature (note 9) -- -- -- -- 823,297 (823,297)
Amortization of preferred stock
beneficial conversion
feature (note 9) -- -- -- -- -- 149,690
Preferred stock dividends paid -- -- -- -- -- --
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at January 31, 1998 26,842 $ 268 542,500 $ 5,425 $ 7,656,885 (673,607)
============ ============ ============ ============ ============ ============
<CAPTION>
Total
Accumulated Treasury stockholders'
deficit stock deficit
------------ ------------ ------------
<S> <C> <C> <C>
Balance at January 28, 1996 (4,481,781) (50,000) (1,273,891)
Issuance of common stock
(note 8) -- -- 31,272
Issuance of preferred stock
(notes 8 and 11) -- -- 35,985
Acquisition of 9,892 shares
of common stock (note 8) -- (15,000) (15,000)
Net loss (3,056,315) -- (3,056,315)
------------ ------------ ------------
Balance at January 26, 1997 (7,538,096) (65,000) (4,277,949)
Issuance of common stock (note 8) -- -- 31,050
Acquisition of 3,297 shares of
common stock (note 8) -- (5,000) (5,000)
Issuance of preferred
stock (notes 8 and 11) -- -- 1,153,507
Recognition of Convertible
Subordinated Debenture
beneficial conversion
feature (note 6) -- -- 2,380,000
Recognition of preferred stock
beneficial conversion
feature (note 9) -- -- --
Amortization of preferred stock
beneficial conversion
feature (note 9) (149,690) -- --
Preferred stock dividends paid (67,055) -- (67,055)
Net loss (5,436,131) -- (5,436,131)
------------ ------------ ------------
Balance at January 31, 1998 (13,190,972) (70,000) (6,221,578)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year Ended Year Ended
January 31, January 26,
1998 1997
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,436,131) (3,056,315)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 504,235 495,125
Amortization of debt issuance costs 270,979 228,358
Amortization of debt discount (note 6) 1,885,455 --
Common and preferred stock issued for services 33,550 31,272
Changes in operating assets and liabilities:
Accounts receivable (9,077) (12,496)
Pawn service charges receivable (3,520) (22,172)
Inventories 26,781 (481,212)
Prepaid expenses and other current assets (80,083) 29,113
Other assets (253,694) (10,432)
Accounts payable 72,887 31,762
Accrued liabilities (319,475) 410,083
-------------- --------------
Net cash used in operating activities (3,308,093) (2,356,914)
-------------- --------------
Cash flows from investing activities:
Net increase in pawn loans (192,988) (781,062)
Purchases of property and equipment (197,399) (279,167)
-------------- --------------
Net cash used in investing activities (390,387) (1,060,229)
-------------- --------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 3,172,157 4,269,168
Principal payments on notes payable (174,157) (563,418)
Proceeds from issuance of common stock 2,500 --
Purchase of treasury stock (5,000) (15,000)
Payment of debt issuance costs (260,800) (375,085)
Net proceeds from issuance of preferred stock 1,148,507 35,985
Preferred stock dividends paid (67,055) --
Increase (decrease) in bank overdraft (109,915) 81,568
-------------- --------------
Net cash provided by financing activities 3,706,237 3,433,218
-------------- --------------
Net increase in cash and cash equivalents 7,757 16,075
Cash and cash equivalents at beginning of year 142,993 126,918
-------------- --------------
Cash and cash equivalents at end of year $ 150,750 142,993
============== ==============
Supplemental disclosures of cash flow information -
Cash paid for interest $ 1,565,057 1,341,293
============== ==============
Noncash activities:
Recognition of Convertible Subordinated Debenture beneficial conversion
feature (note 6) $ 2,380,000 --
============== ==============
Preferred stock dividends resulting from the preferred stock beneficial
conversion feature (note 9) $ 149,690 --
============== ==============
Recognition of preferred stock beneficial conversion feature (note 9) $ 823,297 --
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Organization and Business
PawnMart, Inc. (the "Company"), was incorporated in Delaware on January
13, 1994. The Company is a financial services and specialty retail
enterprise principally engaged in establishing and operating stores
which advance money secured by the pledge of tangible personal
property and sell pre-owned merchandise to the value-conscious
consumer. As of January 31, 1998, the Company owned and operated 19
stores located in Texas, Georgia, North Carolina, and Alabama.
(2) Completion of Initial Public Offering
On March 20, 1998, the Company completed an initial public offering of
1,200,000 shares of common stock at a price of $5.00, 1,380,000
Series A redeemable common stock purchase warrants at a price of
$0.125, and 1,380,000 Series B redeemable common stock purchase
warrants at a price of $0.0625 (collectively, the "Securities") and,
on April 17, 1998, the Company sold an additional 165,000 shares of
common stock pursuant to an over-allotment option resulting in total
net proceeds to the Company of approximately $5,704,000. Each Series
A warrant and Series B warrant entitles the holder to purchase one
share of common stock at a price of $6.00 per share and $8.00 per
share, respectively, through March 2003 and March 2004.
In connection with the completion of the initial public offering,
$9,520,000 in aggregate principal amount of the Company's 14%
Convertible Subordinated Debentures were automatically converted into
2,380,000 shares of common stock (the "Debenture Conversion) and the
Company's $.50 Series A Convertible Preferred stock, Series B
Convertible Preferred stock, Series C Convertible Preferred stock,
and 12% Series D Convertible Exchangeable Preferred stock were
automatically converted into an aggregate of 1,482,766 shares of
common stock (the "Preferred Conversion") (notes 6 and 9).
Additionally, the Company utilized $2,489,000 of the net proceeds to
repay $2,142,000 in 15% notes payable, $157,000 in notes payable to
stockholders and $190,000 in notes payable to the Company's Chief
Executive Officer (note 6).
The following table presents selected balance sheet data on (i) an
actual basis as of January 31, 1998 and (ii) on a pro forma basis as
of January 31, 1998 to reflect the sale of the Securities, the
application of the net proceeds therefrom of approximately
$5,704,000, the Debenture Conversion, net of issuance costs totaling
$474,341 and $494,545 in unamortized debt discount (note 6), the
Preferred Conversion, and the repayment of $2,489,000 in notes
payable of which $1,737,000 was current at January 31, 1998.
<TABLE>
<CAPTION>
Actual at Pro Forma at
January 31, 1998 January 31, 1998
---------------- ----------------
<S> <C> <C>
Loans $ 2,420,553 2,420,553
Inventories, net 1,943,960 1,943,960
Working capital 1,757,572 6,709,572
Total assets 6,677,018 9,417,677
Long-term notes payable, net of
current installments 9,777,455 --
Stockholders' equity (deficit) (6,221,578) 8,033,536
</TABLE>
27
(Continued)
<PAGE> 30
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies
(a) Principles of Consolidation and Fiscal Years
The consolidated financial statements include the financial
statements of the Company and its single purpose, wholly owned
subsidiaries PCI Finance 1994-I, Inc., PCI Finance 1995-I,
Inc., PCI Finance 1996-1, Inc., and PCI Finance 1996-2, Inc.
(Note 6). All significant intercompany balances and
transactions have been eliminated in consolidation.
Effective January 2, 1998, the Company changed its year end to a
fiscal year which ends on the Saturday nearest to January 31.
Accordingly, the fiscal year ended January 31, 1998 consists
of 53 weeks and the fiscal year ended January 26, 1997
consists of 52 weeks.
(b) Cash and Cash Equivalents
The Company considers any highly liquid investments with original
maturities of three months or less to be cash equivalents.
(c) Loans and Income Recognition
Pawn loans (loans) are generally made on the pledge of tangible
personal property for a one month period, with an automatic
sixty day extension period. Pawn service charges on loans are
recognized on an accrual basis during the initial thirty day
loan period and applicable sixty day extension period, net of
an allowance for pawn service charges deemed uncollectible,
based on the Company's historical loan redemption rate. If a
loan is not repaid, the principal amount advanced on the loan,
exclusive of any uncollected pawn service charges, becomes the
carrying value of the forfeited collateral (inventory), which
is recovered through sale.
(d) Inventories
Inventories are recorded at cost and represent merchandise
acquired from forfeited loans, merchandise purchased directly
from the public and merchandise purchased from vendors.
Inventories from forfeited loans are recorded at the principal
amount advanced on the related collateral, exclusive of any
uncollected pawn service charges. The cost of inventories is
determined on the specific identification method. Inventories
are stated at the lower of cost or market. Interim payments
from customers on layaway sales are credited to deferred
revenue and subsequently recorded as income during the period
in which final payment is received. Deferred revenues related
to layaway sales totaled $62,904 and $47,754 at January 31,
1998 and January 26, 1997, respectively, and are included in
other accrued expenses in the accompanying consolidated
balance sheets.
The Company provides an allowance for shrinkage and valuation
based on management's evaluation of the merchandise. The
allowance deducted from the carrying value of inventory
totaled $159,815 and $83,767 at January 31, 1998 and January
26, 1997, respectively.
28
(Continued)
<PAGE> 31
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(e) Property and Equipment
Property and equipment are recorded at cost. Depreciation is
determined on the straight-line method based on estimated
useful lives of three to five years for equipment. The costs
of improvements on leased stores are capitalized as leasehold
improvements and are amortized on the straight-line method
over the shorter of the lease term or their estimated useful
lives.
The cost of property retired or sold and the related accumulated
depreciation is removed from the accounts and any resulting
gain or loss is recorded in the results of operations in the
period retired.
(f) Goodwill
Goodwill, which represents the excess of purchase price over fair
value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, generally
five years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any,
is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's
average cost of funds. The assessment of the recoverability of
goodwill will be impacted if estimated future operating cash
flows are not achieved.
(g) Intangible Assets
Intangible assets consisting of an amount applicable to a
noncompete agreement with a founding stockholder and the cost
of acquiring a trade name are being amortized over an
estimated useful life of five years.
(h) Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(i) Advertising Costs
Advertising costs are expensed the first time advertising takes
place. Advertising expense was approximately $163,000 and
$104,000 for the fiscal years ended January 31, 1998 and
January 26, 1997, respectively.
29
(Continued)
<PAGE> 32
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(j) 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.
(k) Fair Values of Financial Instruments
Pawn loans are outstanding for a relatively short period of time,
generally 90 days or less, depending on local regulations. The
rate of finance and service charge is determined by regulatory
guidelines and bears no valuation relationship to interest
rate market movements. For these reasons, management believes
that the fair value of pawn loans approximates their carrying
value. The fair value of the Company's long-term debt is
estimated based on market values for debt issues with similar
characteristics or rates currently available for debt with
similar maturities and risks. Management believes that the
fair value of long-term debt approximates the carrying value.
The carrying amount of all other financial instruments
included in the Company's consolidated balance sheets
approximate fair value due to the short maturity of these
investments.
(l) Stock Based Compensation
Effective January 29, 1996, the Company adopted the Financial
Accounting Standards Board's (FASB) Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (Statement No. 123), which establishes financial
accounting and reporting standards for stock-based employee
compensation plans. Statement No. 123 defines a fair value
based method of accounting for an employee stock option or
similar equity instrument and encourages the adoption of that
method of accounting for all employee stock option
compensation plans. Statement No. 123 allows an entity to
continue to measure compensation cost for those plans using
the intrinsic value based method of accounting as prescribed
by the Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees." The Company
elected to remain with the accounting method prescribed by APB
No. 25 and has made the pro forma disclosures of net loss and
net loss per common share for the fiscal year ended January
31, 1998 as if the fair value based method of accounting had
been applied. Pro forma disclosures of net loss and net loss
per common share for the fiscal year ended January 26, 1997 as
if the fair value based method of accounting had been applied
have not been presented in the consolidated financial
statements as the effect of such adoption would not have been
material.
(m) Net Loss Per Common Share
Net loss per common share is calculated as required by FASB
Statement of Financial Accounting Standards No. 128 "Earnings
Per Share" (Statement No. 128). Statement No. 128 requires
dual presentation of basic and diluted earnings per share and
a reconciliation between the two amounts. Basic earnings per
share excludes dilution, and diluted earnings per share
reflects the potential dilution that would occur if securities
to issue common stock were exercised and converted into common
stock.
30
(Continued)
<PAGE> 33
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(m) Net Loss Per Common Share, Continued
Pursuant to the Securities and Exchange Commission Rules and
Regulations, nominal issuances of common stock, warrants,
convertible securities and common stock options issued during
the periods presented prior to the effective date of an
initial public offering, are to be included in the calculation
of common share equivalents, as if they were outstanding for
all periods presented.
The following table presents a reconciliation between basic and
diluted weighted average common shares outstanding at January
31, 1998 and January 26, 1997. Since the effect of using the
weighted average number of shares on a diluted basis was
antidilutive to the diluted loss per share calculation for the
years ended January 31, 1998 and January 26, 1997, diluted
loss per share was calculated using the same weighted average
number of common shares in the basic loss per share
calculation.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Weighted average shares - basic 1,878,307 1,824,900
Shares attributable to stock options, warrants
and convertible securities 3,627,624 2,522,070
--------------- ----------------
Weighted average shares - diluted 5,505,931 4,346,970
================ ================
</TABLE>
(n) New Accounting Standard
In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
(Statement No. 130). Statement No. 130 establishes standards
for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full
set of general purpose financial statements. Statement No. 130
requires that all items that are required to be recognized
under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
Statement No. 130 is effective for fiscal years beginning
after December 15, 1997. Pursuant to Statement No. 130, the
Company will be required to display comprehensive income in
its consolidated financial statements issued for periods
beginning with February 1, 1998, and thereafter.
(o) Reclassifications
Certain amounts in 1997 have been reclassified to conform with the
1998 presentation.
31
(Continued)
<PAGE> 34
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(4) Property and Equipment
Property and equipment consists of the following at January 31, 1998 and
January 26, 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Automobiles $ 64,038 64,038
Furniture and equipment 1,369,328 1,183,742
Leasehold improvements 699,222 687,409
----------- -----------
2,132,588 1,935,189
Less accumulated depreciation and amortization (1,330,150) (885,908)
----------- -----------
$ 802,438 1,049,281
=========== ===========
</TABLE>
(5) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following at January
31, 1998 and January 26, 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Goodwill $ 189,057 189,057
Noncompete agreement 60,000 60,000
Corporate trademark 50,000 50,000
------------ -------------
299,057 299,057
Less accumulated amortization (236,263) (176,270)
------------ -------------
$ 62,794 122,787
============ =============
</TABLE>
(6) Notes Payable
Notes payable consist of the following at January 31, 1998 and January
26, 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Unsecured convertible subordinated debentures to various
individuals, bearing interest at 14% payable monthly,
to mature on June 30, 1999 $ 4,865,000 4,865,000
Unsecured convertible subordinated debentures to various
individuals, bearing interest at 14% payable monthly,
to mature on June 30, 2000 2,000,000 2,000,000
Unsecured convertible subordinated debentures to various
individuals, bearing interest at 14% payable monthly,
to mature on January 31, 2001 2,655,000 461,000
</TABLE>
32
(Continued)
<PAGE> 35
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
<TABLE>
<CAPTION>
(6) Notes Payable, Continued
<S> <C> <C>
Notes payable issued by PCI Finance 1995-I, Inc. to various
individuals, bearing interest at 15% payable monthly, to mature on
March 31, 1998, secured by pawn loans and associated collateral $ 1,390,000 1,390,000
Notes payable issued by PCI Finance 1996-2, Inc. to various
individuals, bearing interest at 15% payable monthly, to mature on
December 31, 2000, secured by pawn loans and associated collateral 474,000 220,000
Notes payable issued by PCI Finance 1996-1, Inc. to various
individuals, bearing interest at 15% payable monthly, to mature on
March 31, 2000, secured by pawn loans and associated collateral
278,000 278,000
Note payable to a bank, principal and interest due on January 31,
1997, with interest at 8.75%, guaranteed by an officer of the
Company and secured by collateral of a stockholder - 80,000
Notes payable to a trust, bearing interest at 12% payable monthly, to
mature on January 9, 1999, secured by pawn loans and merchandise
inventory 250,000 -
Note payable to a stockholder of the Company pursuant to a $50,000
revolving line of credit, due on demand, bearing interest at 15%,
secured by certain property and equipment 50,000 50,000
Note payable to a stockholder of the Company pursuant to a $200,000
revolving line of credit, bearing interest at 12%, due on demand,
unsecured 107,000 -
Note payable to the Chief Executive Officer of the Company, bearing
interest at 12%, principal and interest due on March 31, 1998,
unsecured 190,000 -
Other unsecured notes payable 83,000 -
------------- ---------
12,342,000 9,344,000
Less: Unamortized debt discount (494,545) -
Current portion (2,070,000) (1,056,667)
------------- ---------
$ 9,777,455 8,287,333
------------- ---------
</TABLE>
33
(Continued)
<PAGE> 36
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Notes Payable, Continued
On June 13, 1995, the Company began marketing a private placement
offering for up to $6,000,000 in principal amount of 14% unsecured
Convertible Subordinated Debentures due June 30, 1999 (1999
Debentures). Interest on the 1999 Debentures is payable monthly
commencing on August 15, 1995. At the option of the holder, each 1999
Debenture is convertible at any time into shares of common stock at a
conversion price of $9.10, subject to adjustments should the Company
issue common stock dividends, initiate stock splits, or issue common
stock rights or warrants for the purchase of common stock at below
market prices. In the event that the Company consummates a publicly
registered offering of at least $5,000,000, the 1999 Debentures will
be automatically converted into common stock at a conversion price
equal to the lower of $9.10 in principal amount per share or 80
percent of the initial public offering price (note 2). The 1999
Debentures may be redeemed at the option of the Company, subject to
certain notification requirements, prior to the maturity date at a
stipulated redemption price.
On June 21, 1996, the Company began marketing a private placement
offering for up to $2,000,000 in principal amount of 14% unsecured
Convertible Subordinated Debentures due June 30, 2000 (2000
Debentures). Interest on the 2000 Debentures is payable monthly
commencing on August 15, 1996. At the option of the holder, each 2000
Debenture is convertible at any time into shares of common stock at a
conversion price of $9.10, subject to adjustments should the Company
issue common stock dividends, initiate stock splits, or issue common
stock rights or warrants for the purchase of common stock at below
market prices. In the event that the Company consummates a publicly
registered offering of at least $5,000,000, the 2000 Debentures will
be automatically converted into common stock at a conversion price
equal to the lower of $9.10 in principal amount per share or 80
percent of the initial public offering price (note 2). The 2000
Debentures may be redeemed, subject to certain notification
requirements, prior to the maturity date at a stipulated redemption
price.
On December 13, 1996, the Company began marketing a private placement
offering for up to $2,655,000 in principal amount of 14% unsecured
Convertible Subordinated Debentures due January 31, 2001 (2001
Debentures). Interest on the 2001 Debentures is payable monthly
commencing on February 15, 1997. At the option of the holder, each
2001 Debenture is convertible at any time into shares of common stock
at a conversion price of $9.10, subject to adjustments should the
Company issue common stock dividends, initiate stock splits, or issue
common stock rights or warrants for the purchase of common stock at
below market prices. In the event that the Company consummates a
publicly registered offering of at least $5,000,000 at an offering
price of $5.00 per share, the 2001 Debentures will be automatically
converted into common stock at a conversion price equal to the lower
of $9.10 in principal amount per share or 80 percent of the initial
public offering price (note 2). The 2001 Debentures may be redeemed,
subject to certain notification requirements, prior to the maturity
date at a stipulated redemption price.
On October 30, 1997, the holders of the 1999 Debentures, 2000
Debentures, and 2001 Debentures amended the conversion price related
to the automatic conversion of the convertible subordinated
debentures in the event of an initial public offering to be the lower
of $9.10 principal amount per share or 80 percent of the initial
public offering stock price (note 2). The value of the resulting
beneficial conversion feature has been recognized by the Company as
additional financing costs by recording $2,380,000 in debt discount
and additional paid-in-capital. Such amount is required to be
amortized into interest expense over the period from October 30, 1997
until the date of the initial public offering (note 2). Amortization
expense related to the beneficial conversion feature totaled
$1,885,455 for the fiscal year ended January 31, 1998, and is
included in interest expense in the accompanying consolidated
statements of operations.
34
(Continued)
<PAGE> 37
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Notes Payable, Continued
In connection with the sale of the 1999 Debentures, the Company issued
warrants to purchase 97,280 shares of the Company's common stock to
participating National Association of Securities Dealers, Inc.
broker-dealers (NASD Broker-Dealers). The warrants have an exercise
price of $5.50 per share and are exercisable through January 2, 2002.
In connection with the sale of the 2000 Debentures, the Company issued
warrants to purchase 38,601 shares of the Company's common stock to
participating NASD Broker-Dealers. The warrants have an exercise
price of $5.50 per share and are exercisable through January 2, 2002.
In connection with the sale of the 2001 Debentures, the Company issued
warrants to purchase 50,915 shares of the Company's common stock to
participating NASD Broker-Dealers. The warrants have an exercise
price of $5.50 per share and are exercisable through January 2, 2002.
At January 31, 1998, debt issuance costs totaling $1,145,900 have been
paid in connection with the sale of the 1999 Debentures, 2000
Debentures, 2001 Debentures, and other notes payable. Such amounts
are being amortized on a straight-line basis through the respective
maturity date of each debenture or notes payable. Amortization
expense related to debt issuance costs was $270,979 and $228,358 for
the fiscal years ended January 31, 1998 and January 26, 1997,
respectively, and is included in interest expense in the accompanying
consolidated statements of operations.
During the year ended January 26, 1997, the Company repaid $411,000 in
notes payable issued by PCI Finance 1994-I, Inc. Additionally,
$220,000, $249,000 and $100,000 in notes payable issued by PCI
Finance 1994-I, Inc. were converted to PCI Finance 1996-2, Inc. notes
payable, 2001 Debentures and 2000 Debentures, respectively.
On March 20, 1998, the Company completed an initial public offering
which allowed for the repayment of $2,489,000 of notes payable and
the conversion of $9,520,000 in unsecured convertible subordinated
debentures (note 2).
(7) Income Taxes
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 31, 1998 and January 26, 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
---- ----
Deferred tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 3,595,000 2,431,152
Property and equipment 163,956 125,949
Inventories 59,084 30,969
Intangible assets 58,355 43,546
----------- -----------
Total gross deferred tax assets 3,876,395 2,631,616
Less valuation allowance (3,876,395) (2,631,616)
----------- -----------
Net deferred tax assets -- --
----------- -----------
Total deferred tax liabilities -- --
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
</TABLE>
35
(Continued)
<PAGE> 38
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(7) Income Taxes, Continued
At January 31, 1998, the Company has net operating loss carryforwards
for tax purposes of approximately $9,724,000 which are available to
offset future federal taxable income, if any, through 2013. Deferred
tax valuation allowances of $3,876,395 and $2,631,616 offset deferred
tax assets at January 31, 1998 and January 26, 1997, respectively,
based on management's determination that it is more likely than not
that such amounts may not be subsequently realized.
(8) Equity Transactions
During the fiscal years ended January 31, 1998 and January 26, 1997, the
Company issued 338 and 14,394 shares, respectively, of Series B
Convertible Preferred stock in connection with the Company's employee
stock purchase plan (note 11).
During the fiscal year ended January 31, 1998, the Company issued 2,500
shares of Series B Convertible Preferred stock to an employee in
exchange for various services rendered on behalf of the Company. In
connection with such issuance, the Company has recorded
administrative expenses totaling $5,000 during the fiscal year ended
January 31, 1998.
During the fiscal years ended January 31, 1998 and January 26, 1997, the
Company acquired 3,297 and 9,892 shares of common stock,
respectively, from a former officer of the Company at a price of
$1.52 per share.
During the fiscal years ended January 31, 1998 and January 26, 1997, the
Company issued 104,602 and 85,927 shares, respectively, of the
Company's common stock to certain officers, employees and other
individuals in exchange for various services rendered on behalf of
the Company. In connection with such issuances, the Company has
recorded administrative expenses totaling $28,550 and $31,272 during
the fiscal years ended January 31, 1998 and January 26, 1997,
respectively.
During the fiscal year ended January 31, 1998, the Company issued 26,842
shares of Series C Convertible Preferred stock in connection with the
Company's employee stock purchase plan (note 11). Additionally, the
Company issued 542,500 shares of 12% Series D Convertible
Exchangeable Preferred stock (note 9).
During the fiscal year ended January 31, 1998, the Company granted
306,389 nonqualified stock options to various officers and employees
for the purchase of shares of common stock at a price of $3.79 (note
10).
During the fiscal year ended January 31, 1998, the Company adopted (i) a
reverse stock split of its issued and outstanding shares of common
stock on a basis of one new share for each two shares currently
outstanding and (ii) an additional reverse stock split of its issued
and outstanding shares of common stock on a basis of one new share
for each 1.5163715 shares currently outstanding. The effect of the
reverse stock splits have been accounted for retroactively to January
28, 1996 in the accompanying consolidated financial statements and,
accordingly, all applicable share and per share amounts have been
restated to reflect these reverse stock splits.
36
(Continued)
<PAGE> 39
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(9) Preferred Stock
Each share of $.50 Series A Convertible Preferred stock (Series A) has a
liquidation preference of $.50 per share. Holders of Series A are not
entitled to receive any cash dividends. The Company is restricted
from the declaration of dividends to holders of common stock or any
other class of stock of the Company ranking junior to Series A as
long as Series A is outstanding. At the option of the holder, each
share of Series A is convertible at any time into 0.33 shares of
common stock, subject to adjustment should the Company pay common
stock dividends or initiate stock splits or similar changes to its
common stock. Shares of Series A are automatically convertible into
0.33 shares of common stock immediately upon the earlier of (i) the
date specified by the vote or written consent or agreement of holders
of at least a majority of Series A or (ii) the closing of the sale of
the Company's securities in an underwritten public offering, the
aggregate proceeds of which equal or exceed $5,000,000 (note 2). At
the option of the Company, shares of Series A can be redeemed at
$1.00 per share. Holders have the option of converting such shares
into common stock in lieu of redemption, pursuant to certain
requirements.
Each share of the Series B Convertible Preferred stock (Series B) has a
liquidation preference of $2.00 per share after considering the
liquidation preference for Series A. At the option of the holder,
each share of Series B is convertible at any time into 0.33 shares
of common stock, subject to adjustments should the Company pay
common stock dividends or initiate stock splits or similar changes
to its common stock. Each share of Series B shall automatically be
converted into shares of common stock immediately upon the earlier
of (i) the date specified by agreement of the holders of a majority
of the shares of such series or (ii) the closing of the sale of the
Company's common stock in a public offering where the aggregate
proceeds exceed $5,000,000 at a conversion price equal to the lower
of $6.07 or 80 percent of the initial public offering price (note
2). At the option of the Company, subject to certain notice
requirements, shares of Series B can be redeemed at $4.00 per share.
Holders have the option of converting such shares into common stock
in lieu of redemption, pursuant to certain requirements.
In connection with the Series B offering, the Company has issued Series
B stock purchase warrants to participating NASD Broker-Dealers to
purchase 80,850 Series B shares. The warrants have an exercise price
of $2.40 per share and are exercisable for four years commencing July
22, 1995. Upon completion of the closing of a sale of the Company's
common stock in a public offering where the aggregate proceeds exceed
$5,000,000, the Series B stock purchase warrants will convert to
26,659 common stock purchase warrants with an exercise price of $5.50
per share exercisable through January 2, 2002 (note 2).
On June 20, 1997, the Company's Board of Directors authorized the
issuance of 500,000 shares of Series C Convertible Preferred stock
(Series C) with a par value of $.01 per share. Holders of Series C
are not entitled to receive any cash dividends. Each share of Series
C has a liquidation preference of $2.50 per share and has the same
ranking as Series A and Series B. At the option of the holder, each
share of Series C is convertible at any time into 0.33 shares of
common stock, subject to adjustments should the Company pay common
stock dividends or initiate stock splits or similar changes to its
common stock. Each share of Series C shall automatically be converted
into shares of common stock immediately upon the earlier of (i) the
date specified by agreement of the holders of a majority of the
shares of such series or (ii) the closing of the sale of the
Company's common stock in a public offering where the aggregate
proceeds exceed $5,000,000 at a conversion price equal to the lower
of $7.58 or 80 percent of the initial public offering price (note 2).
At the option of the Company, subject to certain notice requirements,
shares of Series C can be redeemed at $4.00 per share. Holders have
the option of converting such shares into common stock in lieu of
redemption, pursuant to certain requirements. As of January 31, 1998,
26,842 Series C shares had been issued in connection with the
Company's employee stock purchase plan (note 11).
37
(Continued)
<PAGE> 40
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(9) Preferred Stock, Continued
On July 10, 1997, the Company's Board of Directors authorized the
issuance of 1,000,000 shares of 12% Series D Convertible Exchangeable
Preferred stock (Series D) with a par value of $.01 per share.
Dividends on Series D are payable in arrears in monthly installments
when, and if, declared by the Board of Directors. Each share of
Series D has a liquidation preference of $2.00 per share and has the
same ranking as Series A, Series B, and Series C. At the option of
the holder, each share of Series D is convertible at any time into
0.33 shares of common stock, subject to adjustments should the
Company pay common stock dividends or initiate stock splits or
similar changes to its common stock. Each share of Series D shall
automatically be converted into shares of common stock immediately
upon the earlier of (i) the date specified by agreement of the
holders of a majority of the shares of such series or (ii) the
closing of the sale of the Company's common stock in a public
offering where the aggregate proceeds exceed $5,000,000 at a
conversion price equal to the lower of $6.07 or 80 percent of the
initial public offering price (note 2). At the option of the Company,
subject to certain notice requirements, shares of Series D can be
redeemed at $5.00 per share. Holders have the option of converting
such shares into common stock in lieu of redemption, pursuant to
certain requirements. As of January 31, 1998, 542,500 shares had been
issued with net proceeds received by the Company totaling $1,085,000.
On January 23, 1998, the Company's common and preferred stockholders
approved an amendment to the Company's certificate of incorporation
changing the Series A, Series B, Series C, and Series D conversion
price related to the automatic conversion of preferred stock in the
event of an initial public offering to be equal to the lower of the
conversion price in effect at the time of an initial public offering
or 80 percent of the initial public offering price. The value of the
resulting beneficial conversion feature is required to be recognized
as a return to the preferred shareholders by recording $823,297 in
preferred stock discounts and additional paid-in capital. Such
amounts are required to be amortized as a return to the preferred
shareholders using the effective interest method over the period from
January 23, 1998 until the date of the initial public offering.
During the fiscal year ended January 31, 1998, the Company recorded
$149,690 in preferred stock dividends resulting from the amortization
of the preferred stock beneficial conversion feature.
On March 20, 1998, the Company completed an initial public offering
which allowed for the Preferred Conversion (note 2).
(10) Stock Options
During the year ended January 31, 1998, the Board of Directors and
stockholders adopted the 1997 PawnMart, Inc. Employee Stock Option
Plan (Employee Option Plan) and the 1997 PawnMart, Inc. Director
Stock Option Plan (Directors' Option Plan). The number of shares
reserved for issuance under the Employee Option Plan and Directors'
Option Plan is 494,602 and 263,788 shares, respectively.
Options granted pursuant to the Employee Option Plan may be either
incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended, or nonqualified stock
options. All options granted are exercisable on such dates as
specified by the Compensation and Human Resources Committee of the
Board of Directors. Options granted under the Employee Option Plan
are required to have an exercise price equal to the closing price of
common stock on the date of grant. In October 1997, the Company
granted 306,389 nonqualified stock options to various officers and
employees for the purchase of shares of common stock at a price of
$3.79. The stock options granted have contractual terms of ten years
and generally vest ratably over a four year period beginning on the
first anniversary of the date of grant. At January 31, 1998, all
options granted under the Employee Option Plan remain unexercised and
32,973 options are exercisable.
38
(Continued)
<PAGE> 41
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(10) Stock Options, Continued
Under the Directors' Option Plan, stock options will be granted to any
director who is not an employee of the Company and is not a holder of
more than 5% of the outstanding shares of common stock. Newly
appointed eligible directors will automatically receive an initial
grant of options to purchase 25,000 shares of common stock. All
eligible directors will receive annual grants of options to purchase
the lessor of 20,000 shares of common stock or $200,000 in market
value of underlying common stock. Options granted under the
Directors' Option Plan are required to have an exercise price equal
to the closing price of common stock on the date of grant. The
options will be immediately exercisable and will have a contractual
term of six years from the date of grant. At January 31, 1998, no
options had been granted under the Directors' Option Plan.
The Company applies the intrinsic value method of accounting for its
stock option issuances. Accordingly, no compensation expense has been
recognized for its stock option and warrant grants. If the Company
had adopted the fair value based method prescribed by Statement No.
123 and determined compensation cost based on the fair value at the
grant dates of such options and warrants, the Company's net loss
would have been increased by $51,918 during the fiscal year ended
January 31, 1998. Basic loss per common share and diluted loss per
common share would have been increased by $0.03 and $0.03 per share
during the fiscal year ended January 31, 1998.
The weighted average grant-date fair value of options issued during the
year ended January 31, 1998 was $0.85 which was calculated in
accordance with the Black-Scholes option pricing model using the
following weighted average assumptions:
<TABLE>
<S> <C>
Expected term (years) 3.29
Risk-free interest rate 5.61%
Expected dividend yield 0.00%
</TABLE>
(11) Employee Stock Purchase Plan
Effective October 1, 1994, the Company established an employee stock
purchase plan (Plan) covering substantially all employees. The Plan
allowed participating employees to purchase, through payroll
deductions and Company matches approved by the Board of Directors,
shares of the Company's Series B Convertible Preferred stock and
Series C Convertible Preferred stock at a price of $2.50 per share.
The Company has issued 43,358 shares of its Series B Convertible
Preferred stock and 26,842 shares of its Series C Convertible
Preferred stock under the Plan as of January 31, 1998. The Company
has recorded $19,416 and $10,282 in compensation expense during the
fiscal years ended January 31, 1998 and January 26, 1997,
respectively, which represents the value of Company matches approved
by the Board of Directors.
(12) Commitments and Contingencies
The Company is obligated under various long-term operating lease
agreements for store locations and office space. Total rent expense
for all operating leases, including leases with a related party, was
approximately $1,112,000 and $1,055,000 for the fiscal years ended
January 31, 1998 and January 26, 1997, respectively.
39
(Continued)
<PAGE> 42
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(12) Commitments and Contingencies, Continued
Future minimum lease payments under noncancelable operating leases as of
January 31, 1998 are:
<TABLE>
<CAPTION>
Fiscal years ending Related
January Party Other Total
------- ----- ----- -----
<S> <C> <C> <C>
1999 48,000 1,110,613 1,158,613
2000 8,000 759,527 767,527
2001 - 433,215 433,215
2002 - 109,005 109,005
2003 - 17,521 17,521
---------- ------------ ------------
Total minimum
lease payments 56,000 2,429,881 2,485,881
========== ============ ============
</TABLE>
The Company leases its Weatherford, Texas pawnshop from a joint venture
owned by certain stockholders of the Company. Rent expense related
to this lease totaled $48,000 during each of the fiscal years ended
January 31, 1998 and January 26, 1997.
The Company is involved in various claims and lawsuits arising in the
ordinary course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect
on the Company's consolidated financial statements.
40
<PAGE> 43
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company did not change its principal independent accounting firm nor
have any disagreements with such firm on accounting and financial disclosure
matters during the two fiscal years ended January 31, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 31, 1998 to be filed with the Securities and
Exchange Commission (the "SEC") not later than 120 days after the end of the
such year.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 31, 1998 to be filed with the SEC not later than
120 days after the end of the such year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 31, 1998 to be filed with the SEC not later than
120 days after the end of the such year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 31, 1998 to be filed with the SEC not later than
120 days after the end of the such year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 (1) PawnMart, Inc.'s Restated and Amended Certificate of
Incorporation
3.2 (1) PawnMart, Inc.'s Second Amended and Restated Bylaws
4.1 (2) Specimen Common Stock Certificate
4.2 (2) Specimen Series A Warrant Certificate
4.3 (2) Specimen Series B Warrant Certificate
4.4 (2) Form of Warrant Agreement
4.5 (3) Form of National Association of Securities Dealers, Inc.
broker-dealer warrants
10.1 (2) Form of Indemnity Agreement with Officers and Directors of
PawnMart, Inc.
10.2 (1) 1997 PawnMart, Inc. Employee Stock Option Plan
41
<PAGE> 44
10.3 (2) 1997 PawnMart, Inc. Director Stock Option Plan
21.1 (2) Subsidiaries of PawnMart, Inc.
27.1 Financial Data Schedule as of January 31, 1998
27.2 Amended Financial Data Schedule as of January 26, 1997
- -----------------------------------
(1) Filed as an Exhibit to the registrant's Registration Statement on Form
SB-2, filed on October 23, 1997 (File No. 333-38597).
(2) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 2 to Form SB-2, filed on February 9, 1998
(File No. 333-38597).
(3) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 3 to Form SB-2, filed on March 11, 1998
(File No. 333-38597).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter of
the fiscal year ended January 31, 1998.
42
<PAGE> 45
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PAWNMART, INC.
<TABLE>
<S> <C> <C> <C>
By: /s/ Carson R. Thompson May 14, 1998 By: /s/ Thomas W. White May 14, 1998
------------------------- ------------ --------------------- ------------
Carson R. Thompson Date Thomas W. White Date
Chief Executive Officer, Director Vice President - Finance
and Chairman of the Board and Chief Accounting Officer
</TABLE>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Carson R. Thompson Chief Executive Officer, Director May 14, 1998
- ----------------------- and Chairman of the Board
Carson R. Thompson
/s/ Robert D. Bourland, Jr. President, Chief Operating Officer May 14, 1998
- --------------------------- and Director
Robert D. Bourland, Jr.
/s/ Thomas W. White Vice President - Finance and May 14, 1998
- ------------------- Chief Accounting Officer
Thomas W. White
/s/ Randall L. Haden Vice President - Information Services May 14, 1998
- ---------------------
Randall L. Haden
/s/ Robert E. Camp Director May 14, 1998
- --------------------
Robert E. Camp
/s/ James E. Berk Director May 14, 1998
- ------------------
James E. Berk
/s/ Monty R. Standifer Director May 14, 1998
- -----------------------
Monty R. Standifer
/s/ Mark E. Kane Director May 14, 1998
- -----------------
Mark E. Kane
/s/ J. Roger Williams Director May 14, 1998
- ---------------------
J. Roger Williams
</TABLE>
43
<PAGE> 46
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<S> <C> <C>
3.1 (1) PawnMart, Inc's Restated and Amended Certificate of
Incorporation
3.2 (1) PawnMart, Inc's Second Amended and Restated Bylaws
4.1 (2) Specimen Common Stock Certificate
4.2 (2) Specimen Series A Warrant Certificate
4.3 (2) Specimen Series B Warrant Certificate
4.4 (2) Form of Warrant Agreement
4.5 (3) Form of National Association of Securities Dealers,
Inc. broker-dealer warrants
10.1 (2) Form of Indemnity Agreement with Officers and
Directors of PawnMart, Inc.
10.2 (1) 1997 PawnMart, Inc. Employee Stock Option Plan
10.3 (2) 1997 PawnMart, Inc. Director Stock Option Plan
21.1 (2) Subsidiaries of PawnMart, Inc.
27.1 Financial Data Schedule as of January 31, 1998
27.2 Amended Financial Data Schedule as of January 26, 1997
</TABLE>
- ----------------------------------------
(1) Filed as an Exhibit to the registrant's Registration Statement on Form
SB-2, filed on October 23, 1997 (File No. 333-38597).
(2) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 2 to Form SB-2, filed on February 9, 1998 (File No. 333-
38597)
(3) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 3 to Form SB-2, filed on March 11, 1998 (File No. 333-
38597)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PAWNMART, INC. AND SUBSIDIARIES AS OF AND
FOR THE YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1998
<PERIOD-END> JAN-31-1998
<CASH> 150,750
<SECURITIES> 0
<RECEIVABLES> 2,685,803
<ALLOWANCES> 0
<INVENTORY> 1,943,960
<CURRENT-ASSETS> 4,878,713
<PP&E> 2,132,588
<DEPRECIATION> (1,330,150)
<TOTAL-ASSETS> 6,677,018
<CURRENT-LIABILITIES> 3,121,141
<BONDS> 9,777,455
0
36,612
<COMMON> 19,504
<OTHER-SE> (6,277,694)
<TOTAL-LIABILITY-AND-EQUITY> 6,677,018
<SALES> 7,215,235
<TOTAL-REVENUES> 10,178,108
<CGS> 5,191,551
<TOTAL-COSTS> 9,231,987
<OTHER-EXPENSES> 2,621,727
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,760,525
<INCOME-PRETAX> (5,436,131)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,436,131)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,436,131)
<EPS-PRIMARY> (3.01)
<EPS-DILUTED> (3.01)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PAWNMART, INC. AND SUBSIDIARIES AS OF AND
FOR THE YEAR ENDED JANUARY 26, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-26-1997
<PERIOD-END> JAN-26-1997
<CASH> 142,993
<SECURITIES> 0
<RECEIVABLES> 2,480,218
<ALLOWANCES> 0
<INVENTORY> 1,970,741
<CURRENT-ASSETS> 4,612,069
<PP&E> 1,935,189
<DEPRECIATION> (885,908)
<TOTAL-ASSETS> 6,473,695
<CURRENT-LIABILITIES> 2,464,311
<BONDS> 8,287,333
0
30,890
<COMMON> 18,450
<OTHER-SE> (4,327,289)
<TOTAL-LIABILITY-AND-EQUITY> 6,473,695
<SALES> 5,522,731
<TOTAL-REVENUES> 7,903,402
<CGS> 3,739,866
<TOTAL-COSTS> 7,391,513
<OTHER-EXPENSES> 2,207,693
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,360,511
<INCOME-PRETAX> (3,056,315)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,056,315)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,056,315)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
