<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended August 1, 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.
(Exact name of small business issuer as specified in its charter)
DELAWARE 75-2520896
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 COMMERCE STREET, SUITE 3600, FORT WORTH, TEXAS 76102
(Address of principal executive offices)
(817) 335-7296
(Issuer's telephone number)
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 [X] No [ ]
The number of shares of Common Stock outstanding as of September 1, 1998 was
7,209,445. The number of Series A Redeemable Common Stock Purchase Warrants
outstanding as of September 1, 1998 was 1,380,000. The number Series B
Redeemable Common Stock Purchase Warrants outstanding as of September 1, 1998
was 1,380,000.
Transitional small business disclosure format (check one): Yes [ ] No [X]
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
August 1, January 31,
1998 1998
----------- -----------
(Unaudited)
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 877 $ 151
Accounts receivable 147 32
Pawn service charges receivable 244 233
Loans 2,420 2,421
Inventories, net 2,361 1,944
Prepaid expenses and other current assets 119 98
-------- --------
Total current assets 6,168 4,879
-------- --------
Property and equipment, net 1,175 802
Goodwill and other intangible assets, net 33 63
Debt issuance costs, net (note 2) 16 545
Other assets 150 388
-------- --------
$ 7,542 $ 6,677
======== ========
Liabilities and Stockholders' Equity (Deficit)
---------------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 590 $ 1,051
Current installments of notes payable (note 2) 362 2,070
-------- --------
Total current liabilities 952 3,121
-------- --------
Long-term notes payable, net of current installments (note 2) -- 9,778
-------- --------
952 12,899
-------- --------
Stockholders' equity (deficit) (note 2):
Preferred stock, $.01 par value; authorized 10,000,000 shares;
3,661,200 shares issued at January 31, 1998 -- 37
Common stock, $.01 par value; authorized 20,000,000 shares;
7,230,877 and 1,950,424 shares issued at August 1, 1998 and
January 31, 1998, respectively 72 19
Series A redeemable common stock purchase warrants, $0.125 par
value; 1,380,000 warrants issued and outstanding at August 1, 1998 173 --
Series B redeemable common stock purchase warrants, $0.0625 par
value; 1,380,000 warrants issued and outstanding at August 1, 1998 86 --
Additional paid-in capital 22,241 7,657
Preferred stock discount -- (674)
Accumulated deficit (15,912) (13,191)
-------- --------
6,660 (6,152)
Less treasury stock, at cost; 21,432 common shares at August 1,
1998 and 13,189 common shares and 25,000 preferred shares at
January 31, 1998 (70) (70)
-------- --------
Total stockholders' equity (deficit) 6,590 (6,222)
-------- --------
$ 7,542 $ 6,677
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PAWNMART, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, July 27, August 1, July 27,
1998 1997 1998 1997
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 1,685 $ 1,468 $ 3,527 $ 3,082
Pawn service charges 776 700 1,551 1,374
Other 38 27 71 35
------- ------- ------- -------
Total revenues 2,499 2,195 5,149 4,491
Cost of sales 1,125 964 2,344 2,111
------- ------- ------- -------
1,374 1,231 2,805 2,380
------- ------- ------- -------
Expenses:
Store operating expenses 1,162 930 2,223 1,852
Corporate administrative expenses 764 589 1,523 988
Interest expense 22 455 831 874
Depreciation and amortization 136 124 257 255
------- ------- ------- -------
Total expenses 2,084 2,098 4,834 3,969
------- ------- ------- -------
Net loss (710) (867) (2,029) (1,589)
Preferred stock dividends -- -- 692 --
------- ------- ------- -------
Net loss to common
stockholders $ (710) $ (867) $(2,721) $(1,589)
======= ======= ======= =======
Loss per common share (note 3):
Basic $ (0.10) $ (0.47) $ (0.47) $ (0.86)
======= ======= ======= =======
Diluted $ (0.10) $ (0.47) $ (0.47) $ (0.86)
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PAWNMART, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
August 1, July 27,
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $(2,029) $(1,589)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 257 255
Amortization of debt issuance costs 96 128
Amortization of debt discount 495 --
Common stock issued for services 200 4
Changes in operating assets and liabilities:
Accounts receivable (115) --
Pawn service charges receivable (11) (14)
Inventories (417) (153)
Prepaid expenses and other current assets (21) (16)
Other assets 238 8
Accounts payable and accrued liabilities (461) (744)
------- -------
Net cash used in operating activities (1,768) (2,121)
------- -------
Cash flows from investing activities:
Net (increase) decrease in pawn loans 1 (138)
Purchases of property and equipment (600) (111)
------- -------
Net cash provided by investing activities (599) (249)
------- -------
Cash flows from financing activities:
Proceeds from issuance of notes payable 135 2,409
Principal payments on notes payable (2,596) (107)
Net proceeds from issuance of common stock and warrants 5,582 3
Purchase of treasury stock -- (5)
Net proceeds from issuance of preferred stock -- 817
Payment of debt issuance costs (10) (228)
Preferred stock dividends paid (18) --
------- -------
Net cash provided by financing activities 3,093 2,889
------- -------
Net increase in cash and cash equivalents 726 519
Cash and cash equivalents at beginning of period 151 143
------- -------
Cash and cash equivalents at end of period $ 877 $ 662
======= =======
Supplemental disclosures of cash flow information -
Cash paid for interest $ 381 $ 714
======= =======
</TABLE>
Noncash Financing Activities:
On March 20, 1998, $9,520,000 in convertible subordinated debentures, net of
unamortized debt issuance costs of $443,000, were automatically converted into
2,380,000 shares of common stock and 3,661,200 shares of preferred stock were
automatically converted into 1,482,766 shares of common stock in connection with
the completion of the Company's initial public offering (note 2). During the six
months ended August 1, 1998, the Company recognized $674,000 in preferred stock
dividends in connection with the amortization of preferred stock discounts
resulting from the preferred stock beneficial conversion feature. On May 1,
1998, the Company issued 44,445 shares of unregistered common stock to a
corporation in exchange for $200,000 in professional services associated with
marketing and new store site selection analysis.
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PAWNMART, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim
financial information and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of
management, all adjustments have been made that are necessary for a fair
presentation of the financial position and results of operations and cash
flows as of and for the periods presented. All such adjustments are of a
normal recurring nature. Due to a change in the Company's fiscal year end
during January 1998, the financial results as of and for the three and
six months ended July 27, 1997 end six days earlier than the financial
results as of and for the three and six months ended August 1, 1998. The
results of operations for the three and six months ended August 1, 1998
are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other interim period.
The consolidated financial statements include the financial
statements of PawnMart, Inc. (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. All
significant intercompany balances and transactions have been eliminated
in consolidation. The consolidated financial statements should be read in
conjunction with the consolidated financial statements for the fiscal
year ended January 31, 1998 included in the Company's Form 10-KSB which
has been previously filed with the Securities and Exchange Commission.
(2) 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 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, and 1,380,000 Series B redeemable common stock
purchase warrants at a price of $0.0625 per warrant 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 $5,582,000. 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 and 3,661,200 shares of preferred stock
automatically converted into an aggregate of 1,482,766 shares of common
stock. Through August 1, 1998, the Company had utilized $2,524,000 of the
net proceeds to repay certain notes payable.
(3) Net Loss Per Common Share
Net loss per common share is calculated as required by the Financial
Accounting Standards Board's 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. In loss periods, dilutive common equivalent
shares are excluded as the effect would be anti-dilutive.
5
<PAGE> 6
PAWNMART, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Net Loss Per Common Share, Continued
The following table presents a reconciliation between basic and
diluted weighted average common shares outstanding for the three and six
months ended August 1, 1998 and July 27, 1997, respectively. 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 three
and six months ended August 1, 1998 and July 27, 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>
Three Months Ended Six Months Ended
(In Thousands) August 1, July 27, August 1, July 27,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares - basic 7,209 1,840 5,803 1,838
Shares attributable to stock options, warrants
and convertible securities -- 3,456 1,040 3,353
===== ===== ===== =====
Weighted average shares - diluted 7,209 5,296 6,843 5,191
===== ===== ===== =====
</TABLE>
6
<PAGE> 7
ITEM 2. 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 and those 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.
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 included in the Company's Form 10-KSB for the
fiscal year ended January 31, 1998.
GENERAL
PawnMart, Inc. (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. As of September 1, 1998, the Company was one of five
publicly traded pawnshop operators in the United States, and it owned and
operated twenty two (22) stores located in Texas, Georgia, Alabama, and North
Carolina.
The completion of the Company's initial public offering on March 20, 1998
(see "Item 1. Consolidated Financial Statements") 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 existing interest and dividend requirements.
Expansion of Operations
With the completion of the Company's initial public offering and
financial restructuring in March 1998, the Company strategic objective is to
implement a rapid roll-out of new PAWNMART(SM) stores in order to capitalize
upon growth opportunities afforded by the highly fragmented pawnshop industry.
To achieve its strategic objectives, the Company has adopted the following
strategy:
7
<PAGE> 8
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 fiscal year ending January 30, 1999 ("Fiscal 1998"), 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.
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.
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Selected Financial Information
Selected elements of the Company's unaudited consolidated financial
statements are shown below for the three and six months ended May 2, 1998 and
April 27, 1997 as a percentage of total revenues.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 1, July 27, August 1, July 27,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Merchandise Sales ................... 67.4 % 66.9 % 68.5 % 68.6 %
Pawn Service Charges ................ 31.1 31.9 30.1 30.6
Other Income ........................ 1.5 1.2 1.4 0.8
----- ----- ----- -----
Total Revenues ...................... 100.0 100.0 100.0 100.0
Cost of Sales ....................... 45.0 43.9 45.5 47.0
----- ----- ----- -----
Gross Profit ........................ 55.0 56.1 54.5 53.0
Store Operating Expenses ............ 46.5 42.4 43.2 41.2
----- ----- ----- -----
Store Contribution .................. 8.5 13.7 11.3 11.8
Corporate Administrative Expenses ... 30.6 26.8 29.6 22.0
Interest Expense .................... 0.9 20.7 16.1 19.5
Depreciation and Amortization ....... 5.4 5.6 5.0 5.7
----- ----- ----- -----
Net Loss ............................ (28.4)% (39.4)% (39.4)% (35.4)%
===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Six Months Ended August 1, 1998 Compared to Six Months Ended July 27, 1997
Total revenues increased 14.7% to $5,149,000 for the six months ended
August 1, 1998 (the "Six Month 1998 Period") as compared to $4,491,000 for the
six months ended July 27, 1997 (the "Six Month 1997 Period"). The overall
increase is attributable to a 12.0% increase in comparable store revenues at
stores opened 12 months or more as of August 1, 1998 ("Comparative Stores") and
revenues from two new locations opened during the second quarter of the Six
Month 1998 Period.
Merchandise sales increased 14.4% to $3,527,000 during the Six Month 1998
Period from $3,082,000 during the Six Month 1997 Period due to a 11.9% increase
in merchandise sales from Comparative Stores and merchandise sales from two new
locations opened during the second quarter of the Six Month 1998 Period.
Pawn service charges increased 12.9% to $1,551,000 during the Six Month
1998 Period from $1,374,000 during the Six Month 1997 Period primarily due to a
12.3% increase in pawn service charges from Comparative Stores and pawn service
charges from two new locations opened during the second quarter of the Six Month
1998 Period.
Gross profit as a percentage of total revenues increased 1.5% from 53.0%
during the Six Month 1997 Period to 54.5% during the Six Month 1998 Period
primarily due to improvements in shrinkage at the Company's locations and an
uninsured theft at one of the Company's locations during February 1997.
Excluding the uninsured theft at one of the Company's locations during February
1997, the Company's annualized inventory turnover rate was 2.2 times during the
Six Month 1998 Period compared to 2.0 times during the Six Month 1997 Period
primarily due to increased store traffic 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.
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<PAGE> 10
Store operating expenses increased 20.0% to $2,223,000 during the Six
Month 1998 Period from $1,852,000 during the Six Month 1997 Period primarily due
to increased labor at Comparative Stores to support increased store activity,
increased advertising expenses associated with the Company's marketing programs
and expenses attributable to new locations opened during the second quarter of
the Six Month 1998 Period. On a Comparative Store basis, store operating
expenses comprised 41.8% of total revenues during the Six Month 1998 Period
compared to 41.2% of total revenues during the Six Month 1997 Period.
Store contribution margin increased 10.2% to $582,000 during the Six
Month 1998 Period compared to $528,000 during the Six Month 1997 Period.
Excluding the effects of new locations opened during the second quarter of the
Six Month 1998 Period, store contribution margin increased 20.3% to $635,000
during the Six Month 1998 Period compared to $528,000 during the Six Month 1997
Period.
Corporate administrative expenses increased 54.1% to $1,523,000 during
the Six Month 1998 Period from $988,000 during the Six Month 1997 Period
primarily due to (i) the Company issuing 44,445 shares of unregistered common
stock in exchange for $200,000 in non-recurring professional fees associated
with marketing and new store site selection, (ii) increased labor costs
associated with the hiring of manager trainees to support new store openings
during the remainder of Fiscal 1998, (iii) increased labor costs associated with
the hiring of additional executive management to support planned growth, and
(iv) increased professional fees associated with human resource development and
regulatory matters.
Interest expense decreased 4.9% to $831,000 during the Six Month 1998
Period from $874,000 during the Six Month 1997 Period. The Six Month 1998 Period
includes $495,000 in noncash non-recurring interest expense resulting from the
accounting treatment relating to the beneficial conversion feature associated
with the Company's convertible subordinated debentures and $313,000 in interest
expense which was incurred by the Company related to debt that was either
converted or repaid upon completion of the Company's initial public offering.
See note 6 to the consolidated financial statements included in the Company's
Form 10-KSB for the year ended January 31, 1998 for a discussion of the
accounting treatment relating to the beneficial conversion feature associated
with the Company's convertible subordinated debentures. The Six Month 1997
Period included $855,000 in interest expense which was incurred by the Company
related to debt that was either converted or repaid upon completion of the
Company's initial public offering.
During the Six Month 1998 Period, the Company recognized $674,000 in
noncash non-recurring preferred stock dividends resulting from the accounting
treatment relating to the beneficial conversion feature associated with the
Company's convertible preferred stock and $18,000 in non-recurring preferred
stock dividends associated with the Company's 12% Series Convertible
Exchangeable Preferred stock. See note 9 to the consolidated financial
statements included in the Company's Form 10-KSB for the year ended January 31,
1998 for a discussion of the accounting treatment relating to the beneficial
conversion feature associated with the Company's convertible preferred stock.
Net loss to common stockholders during the Six Month 1998 Period was
$2,721,000, or $0.47 per basic and diluted share, compared to $1,589,000, or
$0.86 per basic and diluted share, during the Six Month 1997 Period. Excluding
the non-recurring corporate administrative expenses, non-recurring interest
expense, interest expense related to debt that was either converted or repaid
upon completion of the Company's initial public offering and non-recurring
preferred stock dividends, net loss to common stockholders during the Six Month
1998 Period would have been $1,021,000, or $0.18 per basic and diluted share,
compared to $734,000, or $0.40 per basic and diluted share, during the Six Month
1997 Period.
Three Months Ended August 1, 1998 Compared to Three Months Ended July 27, 1997
Total revenues increased 13.8% to $2,499,000 for the three months ended
August 1, 1998 (the "Three Month 1998 Period") as compared to $2,195,000 for the
three months ended July 27, 1997 (the "Three Month 1997 Period"). The overall
increase is attributable to a 8.9% increase in revenues at Comparative Stores
and revenues from two new locations opened during the Three Month 1998 Period.
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<PAGE> 11
Merchandise sales increased 14.8% to $1,685,000 during the Three Month
1998 Period from $1,468,000 during the Three Month 1997 Period due to a 9.4%
increase in merchandise sales from Comparative Stores and merchandise sales from
two new locations opened during the Three Month 1998 Period.
Pawn service charges increased 10.9% to $776,000 during the Three Month
1998 Period from $700,000 during the Three Month 1997 Period primarily due to a
9.7% increase in pawn service charges from Comparative Stores and pawn service
charges from two new locations opened during the Three Month 1998 Period.
Gross profit as a percentage of total revenues decreased 1.1% from 56.1%
during the Three Month 1997 Period to 55.0% during the Three Month 1998 Period
primarily due to a conscious effort by the Company to turn older inventory and
the impact of lower gross margins realized from promotions at two new locations
opened during the Three Month 1998 Period. On a Comparative Store basis, gross
profit as a percentage of total revenues decreased 0.7% from 56.1% during the
Three Month 1997 Period to 55.4% during the Three Month 1998 Period. The
Company's annualized inventory turnover rate was 2.0 times during the Three
Month 1998 Period compared to 1.9 times during the Three Month 1997 Period.
Store operating expenses increased 24.9% to $1,162,000 during the Three
Month 1998 Period from $930,000 during the Three Month 1997 Period primarily due
to increased labor at Comparative Stores to support increased store activity,
increased advertising expenses associated with the Company's marketing programs
and expenses attributable to new locations opened during the Three Month 1998
Period. On a Comparative Store basis, store operating expenses comprised 43.8%
of total revenues during the Three Month 1998 Period compared to 43.5% of total
revenues during the Three Month 1997 Period.
Store contribution margin decreased 29.5% to $212,000 during the Three
Month 1998 Period compared to $301,000 during the Three Month 1997 Period
primarily due to the impacts of planned start-up losses at new locations.
Excluding the effects of new locations opened during the Three Month 1998
Period, store contribution margin decreased 7.6% to $278,000 during the Three
Month 1998 Period compared to $301,000 during the Three Month 1997 Period
primarily due to increases in Comparative Store operating expenses which were
not offset by corresponding increases in gross profit.
Corporate administrative expenses increased 29.7% to $764,000 during the
Three Month 1998 Period from $589,000 during the Three Month 1997 Period
primarily due to (i) increased labor costs associated with the hiring of manager
trainees to support new store openings during the remainder of Fiscal 1998, (ii)
increased labor costs associated with the hiring of additional executive
management to support planned growth, and (iii) increased professional fees
associated with human resource development and regulatory matters.
Interest expense decreased 95.2% to $22,000 during the Three Month 1998
Period from $455,000 during the Three Month 1997 Period due to the repayment or
conversion of substantially all of the Company's debt upon completion of the
initial public offering. Interest expense incurred during the Three Month 1997
Period was related to debt that was either converted or repaid upon completion
of the Company's initial public offering.
Net loss to common stockholders during the Three Month 1998 Period was
$710,000, or $0.10 per basic and diluted share, compared to $867,000, or $0.47
per basic and diluted share, during the Three Month 1997 Period. Excluding the
interest expense related to debt that was either converted or repaid upon
completion of the Company's initial public offering, net loss to common
stockholders during the Three Month 1997 Period would have been $412,000, or
$0.22 per basic and diluted share.
11
<PAGE> 12
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.
At September 1, 1998, the Company operated twenty two (22) stores. Prior
to the completion of the Company's initial public offering on March 20, 1998,
the Company's operations were financed from funds generated from private debt
and equity offerings and funds generated from operations. On March 20, 1998, the
Company completed an initial public offering resulting in net proceeds to the
Company of approximately $5,582,000. See "Item 1. Consolidated Financial
Statements." 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 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 $2,524,000 of the net proceeds to repay $2,142,000 in 15%
notes payable, $157,000 in notes payable to stockholders and $225,000 in notes
payable to the Company's Chief Executive Officer. In connection with this
financial restructuring, 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.
At August 1, 1998, the Company's primary sources of liquidity were
$877,000 in cash and cash equivalents, $244,000 in pawn service charges
receivable, $2,420,000 in loans, and $2,361,000 in inventories. The Company had
a current ratio of approximately 6.5 to 1.0 and 1.6 to 1.0 at August 1, 1998 and
January 31, 1998, respectively. Net cash used in operating activities was
$1,768,000 during the Six Month 1998 Period and $2,121,000 during the Six Month
1997 Period.
The Company believes that its planned retail store expansion program will
be funded by borrowings from a commercial credit facility, the remaining net
proceeds from the initial public offering, cash flows generated from its
established stores, and future debt or equity offerings. The Company is
currently finalizing the terms of an expected three-year, $10 million revolving
line of credit with a commercial bank which will be provided to the Company on
terms similar to credit facilities provided to other public companies in the
pawnshop industry. However, no assurance can be made that the credit facility
will be obtained. In the event the Company does not obtain the credit facility,
the Company will pursue additional capital in the form of debt or equity
offerings. Notwithstanding the above, the Company's planned retail store
expansion program could be reduced or modified.
12
<PAGE> 13
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 all 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. The Company has
upgraded substantially all of its hardware to prevent the Year 2000 Issue from
affecting its operations and anticipates incurring approximately $30,000 to
bring existing hardware into compliance with 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.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on June 12, 1998 in
Fort Worth, Texas. Of the 7,209,445 shares outstanding as of the record date,
5,467,410 shares were present or represented by proxy at the meeting. The
following matters were submitted to a vote of the security holders:
(1) To elect the following to serve as Class I directors for terms
expiring in 2001:
<TABLE>
<CAPTION>
Votes For Votes Abstaining
--------- ----------------
<S> <C> <C>
Carson R. Thompson 5,383,573 83,837
Robert E. Camp 5,383,573 83,837
J. Roger Williams 5,383,573 83,837
</TABLE>
(2) To approve an amendment to the PawnMart, Inc. 1997 Employee Stock
Option Plan to increase the number of shares of common stock
authorized for issuance from 494,602 to 1,000,000:
<TABLE>
<S> <C>
Votes for: 3,843,055
Votes against: 1,535,315
Votes abstaining: 89,040
</TABLE>
(3) To ratify the Company's appointment of KPMG Peat Marwick LLP as
independent auditors for the fiscal year ending January 30, 1999:
<TABLE>
<S> <C>
Votes for: 5,289,530
Votes against: 80,063
Votes abstaining: 97,817
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27.1 - Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K: None
14
<PAGE> 15
SIGNATURES
In accordance with the requirements 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 September 16, 1998 By: /s/ Thomas W. White September 16, 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>
<PAGE> 16
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
Exhibit 27.1 - Financial Data Schedule (EDGAR version only)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PAWNMART, INC. AND SUBSIDIARIES
AS OF AND FOR THE SIX MONTHS ENDED AUGUST 1, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> AUG-1-1998
<CASH> 877,000
<SECURITIES> 0
<RECEIVABLES> 2,811,000
<ALLOWANCES> 0
<INVENTORY> 2,361,000
<CURRENT-ASSETS> 6,168,000
<PP&E> 2,732,000
<DEPRECIATION> (1,557,000)
<TOTAL-ASSETS> 7,542,000
<CURRENT-LIABILITIES> 952,000
<BONDS> 0
0
0
<COMMON> 72,000
<OTHER-SE> 6,518,000
<TOTAL-LIABILITY-AND-EQUITY> 7,542,000
<SALES> 3,527,000
<TOTAL-REVENUES> 5,149,000
<CGS> 2,344,000
<TOTAL-COSTS> 4,567,000
<OTHER-EXPENSES> 1,780,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 831,000
<INCOME-PRETAX> (2,029,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,029,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,029,000)
<EPS-PRIMARY> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
