<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PAWNMART, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5940 75-2520896
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code)
</TABLE>
<TABLE>
<S> <C> <C>
301 COMMERCE STREET, SUITE 3600 CARSON R. THOMPSON
FORT WORTH, TEXAS 76102 301 COMMERCE STREET, SUITE 3600
(817) 335-7296 FORT WORTH, TEXAS 76102
(Address, including zip code, and (817) 335-7296
telephone number, including area (Address, including zip code, and
code, registrant's principal telephone number, including area
executive offices) code, of agent for service)
Copies to:
</TABLE>
<TABLE>
<S> <C> <C>
JAKES JORDAAN, ESQ. TOM HERBELIN
JORDAAN & PENNINGTON, PLLC 5925 FOREST LANE SUITE 410
300 CRESCENT COURT, SUITE 1605 DALLAS, TEXAS 75230
DALLAS, TEXAS 75201 (214) 219-1119
(214) 871-6550
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the date this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continual basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
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If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
TITLE OF EACH CLASS OF AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE REGISTRATION FEE
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<S> <C> <C> <C> <C>
12% Subordinated Notes Due 2004............. $10,000,000 100.0% $10,000,000 $2,780.00
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Series C Redeemable Common Stock Purchase
Warrants to Purchase Shares of Common
Stock, Par Value $.01 Per Share........... 600,000 (1) (1) (1)
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Common Stock Issuable Under Series C
Redeemable Common Stock Purchase
Warrants(2)............................... 600,000 $6.00 $3,600,000 $1,000.80
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Total....................................... $3,780.80
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</TABLE>
(1) Included in the Notes. No additional registration fee required.
(2) Represents the shares of Common Stock issuable upon exercise of the Series C
Redeemable Common Stock Purchase Warrants registered hereby together with
such indeterminate number of shares as may be issued upon exercise of such
Series C Redeemable Common Stock Purchase Warrants by reason of the
anti-dilution provisions contained herein.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
PAWNMART, INC.
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K
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<CAPTION>
FORM S-1 ITEM NO. LOCATION IN PROSPECTUS
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<C> <S> <C>
1. Forepart of the Registration Statement and Facing Page of Registration Statement and
Outside Front Cover of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus of Prospectus
3. Summary Information, Risk Factors and Prospectus Summary; Risk Factors; Selected
Ratio of Earnings to Fixed Charges Historical Consolidated Financial Data
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Plan of Distribution
9. Description of Securities to be Registered Prospectus Summary; Description of
Subordinated Notes Due 2004
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information With Respect to the Registrant Prospectus Summary; Risk Factors; Use of
Proceeds; Capitalization; Selected
Historical Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management; Security
Ownership of Certain Beneficial Owners and
Management; Certain Relationships and
Related Transactions; Description of
Subordinated Notes Due 2004; Consolidated
Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities
</TABLE>
<PAGE> 3
SUBJECT TO COMPLETION, DATED JANUARY 15, 1999
$10,000,000
PAWNMART, INC. LOGO
12% SUBORDINATED NOTES DUE 2004
THE OFFERING
We are offering up to $10,000,000 in principal amount of 12% Subordinated
Notes Due 2004 (the "Notes"). The Notes are being offered on a "best efforts"
basis by licensed broker dealers who are members of the National Association of
Securities Dealers, Inc. Massie Capital, Ltd. is serving as the managing broker
dealer for the Offering. See "Plan of Distribution." Pending the sale of the
minimum offering, all proceeds will be deposited into an escrow account with
Trust Management, Inc. (the "Escrow Agent"). In the event that the minimum
offering is not sold within the offering period or any extension thereof, the
offering will terminate and all funds will be returned promptly to subscribers
by the Escrow Agent without deduction for commissions or expenses. This Offering
will continue until all Notes are sold or until September 15, 2000, whichever is
earlier; however, we may extend the offering until all of the Notes offered
hereby are sold, as permitted under applicable securities laws and regulations.
We may reject a subscription for any reason or for no reason whatever and may
terminate the Offering at any time.
We will use the net proceeds from the sale of the Notes and additional
borrowings under our $10 million revolving credit facility for store expansion
and for general corporate purposes.
<TABLE>
<CAPTION>
TOTAL TOTAL
PER UNIT MINIMUM MAXIMUM
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<S> <C> <C> <C>
Price to Investors.......................................... 100.0% $250,000 $10,000,000
Broker's Commissions(1)(2).................................. 8.0% $ 20,000 $ 800,000
Proceeds to Company......................................... 92.0% $230,000 $ 9,200,000
</TABLE>
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(1) We will pay 6.0% to participating licensed broker dealers and 2.0% to Massie
Capital, Ltd., as managing broker dealer. See "Plan of Distribution."
(2) As additional compensation for the sale of the Notes in this Offering, we
will issue 60 Series C Redeemable Common Stock Purchase Warrants ("Series C
Warrants") to Massie Capital, Ltd. for each $1,000 in principal amount of
Notes sold. Massie Capital, Ltd. will distribute up to 40 of such Series C
Warrants to participating broker dealers as additional compensation under
the Offering. Each Series C Warrant will have an exercise price of $6.00 and
will expire on March 31, 2005. The Series C Warrants may be redeemed subject
to certain conditions. See "Description of Capital Stock -- Series C
Warrants."
TERMS OF THE SECURITIES
Maturity Date...............
Each Note will mature on December 31, 2004.
Interest Rate...............
Each Note will bear interest at 12% per annum,
payable monthly on the fifteenth day of each month
beginning with the second full calendar month
following issuance.
Optional Redemption.........
We may redeem each Note, in whole or in part, at the
specified redemption price, plus accrued interest to
the date of redemption.
Ranking.....................
The Notes are general unsecured obligations,
subordinated in right and payment to all existing and
future Senior Debt (as defined herein). At October
31, 1998, we had $1.6 million of Senior Debt which
would rank senior in right of payment to the Notes.
THE COMPANY
We are 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. We currently own and operate 32 stores located in
Alabama, Georgia, North Carolina, South Carolina and Texas.
Our Common Stock, $.01 par value per share ("Common Stock"), Series A
Redeemable Common Stock Purchase Warrants ("Series A Warrants") and Series B
Redeemable Common Stock Purchase Warrants ("Series B Warrants") are traded on
the Boston Stock Exchange under the symbols "PMT," "PMTA" and "PMTB,"
respectively, and on the NASDAQ SmallCap Market under the symbols "PMRT,"
"PMRTW" and "PMRTZ," respectively. At October 31, 1998, the closing market price
of our Common Stock, Series A Warrants and Series B Warrants as reported by
NASDAQ was $1.81, $.25, and $.19, respectively.
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THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK, INCLUDING RISKS OF DEFAULT
ON THE NOTES. SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
MASSIE CAPITAL, LTD.
The date of this Prospectus is January 15, 1999.
<PAGE> 4
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission"
or the "SEC") a registration statement on Form S-1 (the "Registration
Statement"), pursuant to the Securities Act of 1933, as amended (the "Securities
Act") covering the Notes offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For more information about the Notes or the Company, you
should read the Registration Statement and related exhibits, annexes and
schedules. THE STATEMENTS CONTAINED IN THIS PROSPECTUS AS TO THE CONTENTS OF ANY
CONTRACT OR OTHER DOCUMENT IDENTIFIED AS EXHIBITS IN THIS PROSPECTUS ARE NOT
NECESSARILY COMPLETE, AND IN EACH INSTANCE, REFERENCE IS MADE TO A COPY OF SUCH
CONTRACT OR DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH
STATEMENT BEING QUALIFIED IN ANY AND ALL RESPECTS BY SUCH REFERENCE. You may
inspect and copy the Registration Statement and related exhibits, annexes and
schedules at the Commission's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549. Information about the operation of the Public Reference
Room of the Commission may be obtained by calling the Commission at
1-800-SEC-0330. In addition, the Commission maintains a site on the World Wide
Web that contains reports, proxy and information statements and other
information regarding registrants, like us, that file electronically with the
Commission. The address of the Web site is: http://www.sec.gov.
REPORTS TO SECURITY HOLDERS
You may request a copy of our latest annual report containing audited
consolidated financial statements and other such reports filed with the
Commission, at no cost, by writing or telephoning us at the address under the
"Prospectus Summary -- The Company."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Business," and elsewhere in this Prospectus are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). When we use the words "anticipate," "assume," "believe," "estimate,"
"expect," "intend," and other similar expressions in this Prospectus, they are
generally intended to identify forward-looking statements. In connection with
such forward-looking statements, you should consider that they involve known and
unknown risks, uncertainties and other factors which are, in some cases, beyond
our control and which could materially affect our actual results, performance or
achievements. Factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the following:
- heightened competition, including specifically price competition, the
entry of new competitors or the introduction of new products by new and
existing competitors;
- adverse state and Federal legislation and regulation;
- the ability to attract and retain qualified personnel;
- fluctuations in operating results;
- changes in business strategy; and
- the inability to develop or acquire stores in selected markets.
We disclaim any obligation to update any such factors or to publicly
announce the result of any revisions to any of these forward-looking statements
contained herein to reflect subsequent events or developments.
i
<PAGE> 5
PROSPECTUS SUMMARY
The following is a summary of certain information contained herein. This
summary is qualified in its entirety by, and should be read in conjunction with,
the more detailed information and consolidated financial statements, including
the notes thereto, contained elsewhere in this Prospectus. Except as otherwise
set forth herein, references herein to "pro forma" financial data of the Company
are to the financial data of the Company which gives effect to the Offering of
the Notes.
THE COMPANY
BACKGROUND
PawnMart, Inc. ("we" or 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, we changed our name to PCI Capital Corporation
and conducted business under the trade name "PAWNMART(SM)." On October 21, 1997,
we changed our name to "PawnMart, Inc."
On March 20, 1998, we completed an initial public offering of 1,365,000
shares of Common Stock, 1,380,000 Series A Warrants, and 1,380,000 Series B
Warrants resulting in total net proceeds of approximately $5,583,000. In
connection with the completion of the initial public offering, we automatically
converted $9,520,000 in 14% convertible subordinated debentures into 2,380,000
shares of Common Stock and 3,661,200 shares of preferred stock into 1,482,766
shares of Common Stock. Additionally, we were able to utilize $2,524,000 of the
net proceeds to repay certain notes payable.
At the completion of the initial public offering, we owned and operated 19
stores. Our fiscal 1998 expansion plans called for the addition of 12 to 15
stores. In order to fund this expansion, we utilized the remaining proceeds from
the initial public offering and secured a $10 million revolving line of credit
facility (the "Credit Facility") with Comerica Bank. The Credit Facility
includes a borrowing base limitation based on the amount of eligible pawn loans,
pawn service charges receivable, and inventories. With the above, we were able
to achieve a 68% growth rate in number of stores by adding 13 locations in nine
months. The completion of our initial public offering and the finalization of
the Credit Facility have enhanced our ability to implement our business
strategy.
FISCAL 1999 EXPANSION PLANS
Our store expansion plans for fiscal 1999 include adding between 20 and 40
stores. The offering of the Notes pursuant to this Prospectus, combined with the
resulting additional borrowing base availability under the Credit Facility, is
expected to provide us with the financial ability to execute the planned store
expansion for fiscal 1999. However, there can be no assurance that we will be
able to achieve such growth. See "Risk Factors."
OUR BUSINESS
We are 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. We generate 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 December 30, 1998, we were one of five publicly traded pawnshop
operators in the United States, and owned and operated 32 stores located in
Alabama, Georgia, North Carolina, South Carolina and Texas. Our principal office
is located at 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102 and our
telephone number is (817) 335-7296.
1
<PAGE> 6
BUSINESS STRATEGY
The pawnshop industry is a multi-billion dollar, rapidly growing industry
and is highly fragmented. Of the approximately 13,000 pawnshops in the United
States, the industry's five public companies collectively own approximately
seven percent. With the completion of our initial public offering and financial
restructuring in March 1998, our strategic objective is to implement a rapid
roll-out of PAWNMART(SM) stores in order to capitalize upon growth opportunities
afforded by the highly fragmented pawnshop industry. To achieve our strategic
objectives, we have adopted the following strategy:
- Develop or acquire stores that meet site selection, store size and
configuration requirements in selected markets that allow us to be
positioned similar to national discount stores;
- Expand in metropolitan areas in states with favorable pawn regulations;
- Utilize information technology as a platform for collateral assessment
and management control;
- Capitalize on the operational expertise of our management team and board
of directors; and
- Utilize targeted database marketing segmentation system for promotions,
customer acquisition and retention, and store site selection.
EXPERIENCED SPECIALTY RETAIL MANAGEMENT TEAM AND BOARD OF DIRECTORS
Carson Thompson, our Chief Executive Officer and Chairman of the Board,
served as President and Chief Executive Officer for The Bombay Company, Inc.
during its roll-out phase. Also, Michael Record, our President, has more than
twenty years experience in the pawnshop industry, most recently serving as Vice
President of Operations at Cash America International, Inc. responsible for 118
stores.
Our Board of Directors includes Robert Camp who has 19 years of experience
with Pier 1 Imports, Inc., including five years as Chief Executive Officer or
Chief Operating Officer. Additional Directors include James Berk, who has served
as Vice Chairman and Chief Executive Officer of APC, Inc. and President and
Chief Executive Officer of Bizmart, Inc.; Monty Standifer, who served as Chief
Financial Officer of Bizmart, Inc. and is presently the Chief Financial Officer
of Gadzooks, Inc. (NASDAQ:GADZ); Mark Kane, who founded, and served as President
and Chief Executive Officer of CD Warehouse, Inc. (NASDAQ:CDWI); Robert
Bourland, Jr., who served previously as our President and Chief Operating
Officer and who worked for Tandy Corporation for twenty years serving as Senior
Vice President -- Managing Director, Tandy U.K. operations and other management
capacities; and Roger Williams, who is presently Chairman of the Board and Chief
Executive Officer of Roger Williams Automall. See "Management -- Directors and
Executive Officers." We intend to capitalize upon the specialty retail and pawn
experience and talents of these individuals to expand rapidly in a fragmented
industry.
THE OFFERING
Securities Offered......... $10,000,000 principal amount of 12% Subordinated
Notes Due December 31, 2004.
Use of Proceeds............ The net proceeds from the sale of the Notes, after
deduction of discounts and commissions and
estimated offering expenses, together with
additional borrowings under our Credit Facility,
will be used for store expansion and general
corporate purposes. See "Use of Proceeds."
Issuer..................... PawnMart, Inc.
Maturity Date of Notes..... December 31, 2004.
2
<PAGE> 7
Interest Payment Dates..... The Notes will bear interest at a rate of 12% per
annum, payable monthly on the fifteenth day of each
month beginning with the second full calendar month
following issuance.
Optional Redemption........ The Notes may be redeemed, in whole or in part, (i)
prior to March 31, 2000 at 103% of the principal
amount outstanding, (ii) from April 1, 2000 to
March 31, 2001 at 102% of the principal amount
outstanding, (iii) from April 1, 2001 to March 31,
2002 at 101% of the principal amount outstanding,
and (iv) subsequent to March 31, 2002 at 100% of
the principal amount outstanding. Payment for
redemption of the Notes will include amounts due
for accrued and unpaid interest, if any, to the
date of redemption.
Mandatory Redemption....... We are not required to make mandatory redemption or
sinking fund payments with respect to the Notes.
Ranking of Notes........... The Notes will be general unsecured obligations,
subordinated in right and payment to all existing
and future Senior Debt (as defined herein),
including borrowings under the Credit Facility. As
of October 31, 1998, we had $1.6 million of Senior
Debt which would rank senior in the right of
payment to the Notes. The indentures for the Notes
will permit us to incur additional Senior Debt,
subject to certain limitations. See "Description of
Subordinated Notes Due 2004 -- Subordination."
Listing.................... We do not intend to apply for listing of the Notes
on any securities exchange or authorization for
quotation on the NASDAQ system. We do not expect
that an active trading market will develop for the
Notes.
Certain Covenants.......... The indenture under which the Notes will be issued
contains certain covenants for your benefit which,
among other things, limit:
- the amount of permitted indebtedness;
- the payment of cash dividends on capital stock
and the purchase, redemption or retirement of
capital stock or subordinated indebtedness; and
- the sale of assets.
Trustee.................... Trust Management, Inc., Fort Worth, Texas.
Tax Status................. The Notes will be taxable obligations under the
Internal Revenue Code of 1986, as amended, and
interest paid or accrued will be taxable to
non-exempt holders of the Notes. A subsequent
purchaser of outstanding Notes may have to
recognize as ordinary income (rather than as
capital gain) any "market discount" on the Notes
upon its resale by the purchaser. Market discount
for Notes generally means the excess of its face
amount over the subsequent purchaser's tax basis in
such Notes. See "Certain U.S. Federal Income Tax
Considerations."
Denominations.............. The Notes will be issued in fully registered form
in denominations of $1,000 and integral multiples
thereof, subject to a minimum purchase by each
investor of $5,000 except for a $1,000 minimum
purchase for individual retirement accounts.
Plan of Distribution....... The Notes will be sold on a "best efforts" basis by
licensed broker dealers who are members of the
National Association of Securities
3
<PAGE> 8
Dealers, Inc. Massie Capital, Ltd. will serve as
the managing broker dealer for the Offering.
Investor funds will be held in a subscription
escrow account until the minimum of $250,000 in
principal amount of Notes are sold. If
subscriptions for the minimum amount of Notes are
not received on or before June 30, 1999, the
Offering will be terminated and the escrowed funds,
plus any accrued interest thereon, will be promptly
returned to the subscribing investors by the Escrow
Agent. Upon subscription of the minimum amount of
Notes, the escrowed funds will be released to us.
See "Plan of Distribution."
RISK FACTORS
Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before making any investment in the Notes.
4
<PAGE> 9
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data for the three fiscal years ended
January 31, 1998, January 26, 1997 and January 28, 1996 has been derived from
the audited Consolidated Financial Statements of the Company, together with the
notes thereto. The summary historical financial data of the Company for the
fiscal year ended January 29, 1995 has been derived from audited consolidated
financial statements of the Company which are not contained herein. The summary
financial information for the nine months ended October 31, 1998 and October 26,
1997 is unaudited, and in the opinion of the Company's management, reflects all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of such data. The summary information should be read in conjunction
with, and is qualified in its entirety by, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1) NINE MONTHS ENDED
----------------------------------------------------- -------------------------
(UNAUDITED) (UNAUDITED)
JANUARY 29, JANUARY 28, JANUARY 26, JANUARY 31, OCTOBER 26, OCTOBER 31,
1995 1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Pawn Service Charges................ $ 363 $ 1,338 $ 2,291 $ 2,862 $ 2,106 $ 2,438
Merchandise Sales................... 941 3,052 5,523 7,215 4,972 5,525
Other Income........................ 2 34 89 101 67 92
---------- ---------- ----------- ----------- ----------- -----------
Total Revenues.............. 1,306 4,424 7,903 10,178 7,145 8,055
Cost of Sales....................... 553 1,942 3,739 5,192 3,392 3,754
---------- ---------- ----------- ----------- ----------- -----------
Gross Profit................ 753 2,482 4,164 4,986 3,753 4,301
Store Operating Expenses............ 1,000 2,626 3,652 4,040 2,866 3,544
Corporate Administrative Expenses... 1,118 1,589 1,713 2,117 1,510 2,308
Interest Expense.................... 62 720 1,360 3,761 1,356 866
Depreciation and Amortization....... 198 375 495 504 377 419
---------- ---------- ----------- ----------- ----------- -----------
Net Loss.................... (1,625) (2,828) (3,056) (5,436) (2,356) (2,836)
Preferred Stock Dividends........... -- -- -- 217 -- 692
---------- ---------- ----------- ----------- ----------- -----------
Net Loss to Common
Stockholders.............. $ (1,625) $ (2,828) $ (3,056) $ (5,653) $ (2,356) $ (3,528)
========== ========== =========== =========== =========== ===========
Basic and Diluted Loss Per
Common Share.............. $ (1.02) $ (1.68) $ (1.67) $ (3.01) $ (1.27) $ (0.56)
========== ========== =========== =========== =========== ===========
OTHER DATA:
Stores Owned at End of Period(2).... 7 17 19 19 19 24
Average Age of Stores -- End of
Period............................ .61 years .93 years 1.77 years 2.78 years 2.51 years 2.83 years
EBITDA(3)........................... $ (1,365) $ (1,733) $ (1,201) $ (1,171) $ (623) $ (1,551)
Comparable Store Contribution
Margin(4)......................... -- -- $ 512 $ 946 $ 887 $ 946
Ratio of Earnings to Fixed
Charges(5)........................ -- -- -- -- -- --
BALANCE SHEET DATA -- END OF PERIOD:
Loans............................... $ 571 $ 1,447 $ 2,227 $ 2,421 $ 2,426 $ 2,958
Inventories, Net.................... 560 1,490 1,971 1,944 2,228 2,610
Working Capital..................... 225 2,251 2,148 1,758 4,621 5,379
Total Assets........................ 2,445 5,249 6,474 6,677 7,036 8,407
Long-Term Notes Payable, Net of
Current Installments.............. 866 5,445 8,288 9,778 10,272 1,600
Stockholders' Equity (Deficit)...... 422 (1,274) (4,278) (6,222) (5,487) 5,784
</TABLE>
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(1) Summary historical consolidated financial data has not been presented for
the period January 13, 1994 (date of inception) to January 30, 1994 as such
amounts are immaterial.
(2) At December 30, 1998, the Company owned and operated 32 stores.
5
<PAGE> 10
(3) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered as an alternative to income from continuing
operations or cash flows from operating activities (as determined in
accordance with generally accepted accounting principles) and should not be
construed as an indication of a company's operating performance or as a
measure of liquidity.
(4) Comparable store contribution margin is defined as gross profit less store
operating expenses. Comparable stores include stores which have been open
for at least twelve months as of October 31, 1998 (19 stores).
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income taxes plus fixed charges. Fixed charges consist
of interest expense incurred (which includes amortization of deferred
financing costs) whether expensed or capitalized and a portion of rental
expense estimated to be attributable to interest. Earnings were insufficient
to cover fixed charges by $1,625,000, $2,828,000, $3,056,000 and $5,436,000
during the fiscal years ended January 29, 1995, January 28, 1996, January
26, 1997, and January 31, 1998, respectively, and $2,356,000 and $2,836,000
during the nine months ended October 26, 1997 and October 31, 1998,
respectively.
6
<PAGE> 11
RISK FACTORS
An investment in the Notes offered hereby is speculative and involves a
high degree of risk, including the risk factors described below. In addition to
the other information presented in this Prospectus, each prospective investor
should carefully consider the following risk factors inherent in and affecting
our business and this Offering before making an investment decision. This
Prospectus contains certain forward-looking statements regarding our business
and prospects that are based upon numerous assumptions about future conditions
which may ultimately prove to be inaccurate and actual events and results may
materially differ from anticipated results described in such statements. Our
ability to achieve such results is subject to certain risks and uncertainties,
such as those risks detailed in this section, and other risks detailed
throughout this Prospectus. These forward-looking statements represent
management's judgment as of the date of the filing of this Prospectus. We
disclaim, however, any intent or obligation to update these forward-looking
statements.
LACK OF PROFITABILITY, EXPECTED LOSSES DURING ROLL-OUT PHASE
From our inception on January 13, 1994 through October 31, 1998, we have
experienced aggregate losses of $15,810,000. Further, a key element of our
strategy consists of developing multiple PAWNMART(SM) stores meeting our
required store size, configuration, and site selection requirements in regional
and local markets. This strategy is likely to result in continued net losses
during our roll-out phase due to start-up losses associated with the anticipated
high number of developed new stores. Results of operations in the future will be
influenced by numerous factors including, among others, the number of new store
expansions, our ability to manage our growth and maintain the quality of our
personnel, and our ability to implement our strategic plan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
After giving pro forma effect to the Offering, we would have total
indebtedness at October 31, 1998 of approximately $1,850,000 assuming the
minimum offering amount is subscribed and $11,600,000 assuming the maximum
offering amount is subscribed. The degree to which we are leveraged could have
adverse consequences to holders of the Notes, including the following: (i)
substantial cash flow from our operations will be required for the payment of
principal and interest on our indebtedness and will not be available for other
purposes; (ii) our ability to obtain additional financing in the future, whether
for capital expenditures, further development, refinancings or otherwise, may be
impaired; (iii) we may be more leveraged than certain of our competitors, which
may place us at a competitive disadvantage; (iv) our high degree of leverage
makes us more vulnerable to changes in economic conditions and may limit our
ability to withstand competitive pressures and capitalize on significant
business opportunities.
We expect to repay the Notes with either (i) cash flows from operations,
(ii) proceeds from the exercise of the Series A Warrants and Series C Warrants,
(iii) refinancing, or (v) the sale of certain assets. We will require
substantial cash flow to meet our interest payment obligations with respect to
the Notes and any other borrowings. Our cash flow is dependent on our future
performance and is subject to financial, economic and other factors, some of
which are beyond our control. Since the Credit Facility bears interest at a
floating rate, to the extent we have not hedged our interest rate exposure, we
are sensitive to any increase in prevailing interest rates. We believe that,
based upon anticipated levels of operations, we should be able to meet our debt
service obligations, including interest payments on the Notes and other
indebtedness, when due. If we are unable to generate such cash flow from
operations to satisfy our interest obligations on the Notes and other
indebtedness, we may be required to refinance all or a portion of such
obligations, sell assets, or repay such indebtedness with proceeds from other
capital transactions, such as the issuance of additional equity. There can be no
assurance that such refinancing or extension will be available on reasonable
terms or at all, that additional equity will be issued, or that a sale of assets
will occur. The inability to repay such indebtedness could have a material
adverse effect on us.
7
<PAGE> 12
SUBORDINATION OF THE NOTES
The Notes will be unsecured subordinated obligations. The payment of
principal, premium (if any), and interest on the Notes will be subordinated in
right of payment to all our Senior Debt, including all indebtedness and
obligations under our existing $10 million Credit Facility with Comerica Bank.
Borrowings under the Credit Facility will constitute Senior Debt. The Notes will
permit us to incur additional Senior Debt. "Senior Debt" means the principal of
and interest on our indebtedness owed or hereinafter owing to commercial banks
(including, without limitation Comerica Bank) and other lenders, unaffiliated
note or debenture holders incurred (a) to provide working capital necessary for
the proper conduct of our business, (b) to develop additional PAWNMART(SM)
stores or (c) to acquire pawn stores or companies or entities involved in the
pawn industry provided that certain conditions are met. By reasons of the
subordination provisions of the Notes, in the event of insolvency, liquidation,
reorganization, dissolution or other winding-up, holders of Senior Debt will
have to be paid in full before we make payments in respect of the Notes. In
addition, no payment will be made to you if (i) any Senior Debt is not paid when
due or (ii) any other default on Senior Debt occurs and the maturity of such
Senior Debt is accelerated in accordance with its terms. Accordingly, there may
be insufficient assets remaining after such payments to pay amounts due on the
Notes.
INABILITY TO SELL MAXIMUM SUBSCRIPTION OF NOTES
Although we are registering up to $10,000,000 in Notes pursuant to this
Prospectus, we can make no assurances that the maximum offering amount will be
subscribed. In addition to factors noted under "Risk Factors -- Management of
Growth," our store expansion during fiscal 1999 will largely be dependent upon
the number of Notes sold pursuant to this Offering. In the event we are unable
to sell the maximum subscription or additional financing alternatives are not
obtained, our fiscal 1999 expansion schedule could be reduced or modified. If we
only sell the minimum subscription of Notes and are unable to obtain additional
financing, we could be required to cease expansion and significantly reduce
corporate administrative expenses.
ASSETS PLEDGED AS COLLATERAL UNDER THE COMERICA LINE OF CREDIT FACILITY
Obligations under the Credit Facility are secured by liens on substantially
all of our assets. If we become insolvent or are liquidated, or if payment under
the terms of Senior Debt is accelerated, the Senior Debt holders will be
entitled to exercise the remedies available to a secured lender.
LIQUIDITY
Although we have entered into the $10 million Credit Facility, we can make
no assurances that our cash and cash equivalents on hand and our cash
availability will be sufficient to meet our anticipated working capital needs
and capital expenditures in the future. To finance future expenditures, we may
need to issue additional securities or incur additional debt. We may not be able
to obtain additional required capital on satisfactory terms, if at all. The
failure to raise the funds necessary to finance future cash requirements could
materially and adversely affect our operating results and anticipated growth in
future periods. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
MANAGEMENT OF GROWTH
We plan to expand our business through a roll-out of PAWNMART(SM) stores.
To a significant extent, our future success will be dependent upon our ability
to engage in a successful expansion program and will be dependent, in part, upon
our ability to secure suitable sites for our new stores, obtain adequate
inventory for our 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 we will be able to successfully
implement our planned expansion, finance our growth or manage the resulting
larger operation.
8
<PAGE> 13
AVAILABILITY OF QUALIFIED STORE MANAGEMENT PERSONNEL
Our ability to expand may also be limited by the availability of qualified
store management personnel. While we seek 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 our needs with respect to our
planned expansion.
COMPETITION
We encounter significant competition in connection with the operation of
our business. In connection with lending operations, we compete 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. Our competitors in connection with our
retail sales include numerous retail and discount stores. Many of our
competitors, including Cash America International, Inc., First Cash, Inc., and
EZCORP, Inc., have greater financial resources. These competitive conditions may
adversely affect our revenues, profitability and ability to expand.
GOVERNMENT REGULATION
Our 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 our ability to expand, significantly decrease
the service charges we 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 our prospects. Our 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
We make pawn loans without the borrower's personal liability and do not
investigate the creditworthiness of the borrower, but rely on the pledged
personal property, and the possibility of its forfeiture, as a basis for our
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 our 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, we have experienced profits
from the sale of such merchandise, no assurances can be given that our
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 our ability to recover the
amount advanced on the acquired collateral.
9
<PAGE> 14
DEPENDENCE ON KEY MANAGEMENT
We rely on the business and technical expertise of our executive officers
and certain other key employees, particularly our Chief Executive Officer,
Carson Thompson and our President, Michael Record. Except for an employment
agreement with Michael Record (see "Management -- Employment Agreements"), we do
not have an employment agreement with any member of our executive staff. The
loss of the services of any of these individuals could have a material adverse
effect on our operating results. No assurance can be given that their services
will be available in the future. Our success will also be dependent on our
ability to attract and retain additional qualified management personnel.
RISKS RELATED TO FIREARM SALES
We have not, and, at present, do not intend to engage in the sale of
handguns or assault rifles to the public. We do wholesale handguns and assault
rifles to licensed firearm dealers. We also engage in the sale of sporting
rifles to the public leaving us 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 us as of the date of this Prospectus. We maintain insurance
covering potential risks related to the sale of firearms.
RISKS RELATED TO AUTOMOBILE TITLE LOANS
Alabama and Georgia pawn regulations allow us to advance funds secured by
automobile titles. Approximately eight percent of our total revenues for the
nine months ended October 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 our ability to advance funds against
automobile titles could have a material adverse effect on our business. In
addition, we could be subject to consumer claims and litigation seeking damages
based upon wrongful repossession of automobiles.
NO TRADEMARK PROTECTION
We have not been issued any registered trademark for our "PAWNMART(SM)" or
"PAWNLINK(TM)" trade names. No assurance can be given that we will be successful
in obtaining any trademarks, or that the trademarks, if obtained, will afford us
any competitive advantages.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
We do not intend to apply for listing or quotation of the Notes on any
securities exchange or stock market. The managing broker dealer has advised us
that they intend to make a market in the Notes, subject to any limits imposed by
the Securities Act and the Exchange Act and subject to any limits imposed during
the pendency of any registration statement or shelf registration statement filed
under the Securities Act; however, the managing broker dealer is not obligated
to do so, and may discontinue such market-making at any time without notice.
Therefore, we can give no assurance as to the liquidity of any trading market
for the Notes or that an active market for the Notes will develop. Future
trading prices of the Notes will depend on many factors, including, among other
things, prevailing interest rates, our operating results and the market for
similar securities.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. We can give no assurance that the market for the Notes will not be
subject to similar disruptions. Any such disruptions could have an adverse
effect on the Notes.
NECESSITY TO MAINTAIN CURRENT PROSPECTUS AND REGISTRATION STATEMENT
We must maintain an effective registration statement on file with the
Commission before any of the Series A Warrants, Series B Warrants and Series C
Warrants (collectively, the "Warrants") may be redeemed or exercised. It is
possible that we may be unable to cause a registration statement covering the
Common Stock underlying the Warrants to be effective. It is also possible that
the Warrants could be
10
<PAGE> 15
acquired by persons residing in states where we are unable to qualify the Common
Stock underlying the Warrants for sale. In either event, the Warrants may
expire, unexercised, which would result in the holders losing all the value of
the Warrants.
STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of the Warrants have the right to exercise the Warrants only if the
underlying shares of Common Stock are qualified, registered or exempt from
registration under applicable securities laws of the states in which the various
holders of the Warrants reside. We cannot issue shares of Common Stock to
holders of the Warrants in states where such shares are not qualified,
registered or exempt. We have, however, qualified the Series A Warrants and
Series B Warrants for listing on the Boston Stock Exchange which provides for
blue sky registration in 13 states. See "Description of Capital Stock -- Series
A Warrants and Series B Warrants."
REDEEMABLE WARRANTS AND IMPACT ON INVESTORS
We may redeem the Warrants in certain circumstances. Our exercise of this
right would force a holder of the Warrants to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holder to do so,
to sell the Warrants at the then current market price when the holder might
otherwise wish to hold the Warrants for possible additional appreciation, or to
accept the redemption price, which is likely to be substantially less than the
market value of the Warrants in the event of a call for redemption. Holders who
do not exercise their Warrants prior to redemption will forfeit their right to
purchase the shares of Common Stock underlying the Warrants. The foregoing
notwithstanding, we may not redeem the Warrants at any time that a current
registration statement under the Act is not then in effect. See "Description of
Capital Stock -- Series A Warrants, Series B Warrants and Series C Warrants."
WARRANTS TO BROKERS
In connection with the Offering, we will issue up to 600,000 Series C
Warrants to participating broker dealers. To the extent that the Series C
Warrants are exercised, they would have a dilutive effect on the percentage of
outstanding shares of Common Stock. The exercise of the Series C Warrants is
likely to occur at a time when we could probably obtain additional equity
capital on terms more favorable than those provided by the Series C Warrants.
See "Description of Capital Stock -- Series C Warrants" and "Plan of
Distribution."
NO FIRM COMMITMENT TO PURCHASE NOTES
The Notes are being offered on a "best efforts" basis whereby the managing
broker dealer has no obligation, either express or implied, to purchase the
Notes offered hereby. Consequently, there can be no assurance that the minimum
offering will be sold. If the minimum offering is not completed, potential
investors who have deposited funds with the Escrow Agent will receive a full
refund of such funds without deduction for commissions or expenses. Any interest
earned on funds deposited with the Escrow Agent will be paid pro rata to
investors based on the time their payment was held in escrow. See "Plan of
Distribution."
NEW MANAGING BROKER DEALER; MARKET MAKING ACTIVITIES
Massie Capital, Ltd., the managing broker dealer, was registered as a
broker dealer in 1996 and has not acted as the sole or managing broker dealer of
any previous offerings. Massie Capital, Ltd. may be deemed to be inexperienced
in the management and distribution of public offerings and this lack of
experience may adversely affect the ability to complete this Offering.
11
<PAGE> 16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered by the
Company are estimated to range from approximately $0 under a minimum
subscription to $8,600,000 under a maximum subscription after deducting
estimated discounts to broker dealers and fees and expenses of the Offering. The
net proceeds from the issuance of the Notes, together with the resulting
increase in borrowing base availability under the Company's Credit Facility,
will be used for store expansion and other working capital and general corporate
purposes. At October 31, 1998, $1,600,000 was outstanding under the Credit
Facility and an additional $2,100,000 was available to the Company pursuant to
the available borrowing base. The Credit Facility matures on October 13, 2001
and all outstanding borrowings at October 31, 1998 bear interest at the prime
rate plus three-quarters of one percent (9.0% at October 31, 1998).
The approximate sources and uses of funds in connection with the Offering
are presented in the table below, assuming the Offering occurred as of October
31, 1998:
<TABLE>
<CAPTION>
TOTAL TOTAL
MINIMUM MAXIMUM
-------- -----------
<S> <C> <C>
Sources of Funds:
Proceeds from Notes offered hereby........................ $250,000 $10,000,000
Additional borrowing base availability under the Credit
Facility............................................... 125,000 8,400,000
-------- -----------
Total sources..................................... $375,000 $18,400,000
======== ===========
Uses of Funds:
Capital expenditures for store expansion.................. $ -- $13,500,000
Working capital and other general corporate purposes...... 75,000 3,500,000
Fees and expenses of the Offering......................... 300,000 1,400,000
-------- -----------
Total uses........................................ $375,000 $18,400,000
======== ===========
</TABLE>
The Company anticipates utilizing the net proceeds to open up to 30 stores
under a maximum subscription. The exact allocation of the proceeds for such
purposes and the timing of such expenditures may vary significantly depending
upon numerous factors, including the number of stores to be developed by the
Company. Pending the application of such proceeds, the Company intends to invest
the net proceeds of this Offering in short-term, investment-grade securities.
The Company estimates that such proceeds will be sufficient to fund such
expenditures and other cash requirements for the next 12 months. Over the longer
term, it is likely that the Company will require additional capital to fund its
anticipated growth. The Company has no present plans, proposals, arrangements,
commitments, agreements or understandings with respect to any acquisitions.
However, the Company may use a portion of the net proceeds to acquire additional
stores or other pawnshop companies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE> 17
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at October 31, 1998 and (ii) such consolidated capitalization as
adjusted to give effect to the Offering. The following table should be read in
conjunction with the respective Consolidated Financial Statements and notes
thereto of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1998
------------------------------
PRO FORMA
-------------------
ACTUAL MINIMUM MAXIMUM
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term notes payable, net of current installments(2)..... $ 1,600 $ 1,850 $ 11,600
-------- -------- --------
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000
shares; 7,230,877 issued(1)............................ 72 72 72
Series A redeemable common stock purchase warrants, $0.125
par value; 1,380,000 warrants issued and
outstanding(1)......................................... 173 173 173
Series B redeemable common stock purchase warrants,
$0.0625 par value; 1,380,000 warrants issued and
outstanding(1)......................................... 86 86 86
Additional paid-in capital................................ 22,242 22,242 22,242
Accumulated deficit....................................... (16,719) (16,719) (16,719)
Less treasury stock, at cost; 21,432 common shares........ (70) (70) (70)
-------- -------- --------
Total stockholders' equity........................ 5,784 5,784 5,784
-------- -------- --------
Total capitalization.............................. $ 7,384 $ 7,634 $ 17,384
======== ======== ========
</TABLE>
- ---------------
(1) Does not include: (i) 219,347 shares of Common Stock which may be issued
upon exercise of currently outstanding Common Stock purchase warrants issued
to broker/dealers in connection with the private placements of the Company's
securities, (ii) 858,423 shares of Common Stock which may be issued upon
exercise of currently outstanding Common Stock options issued under the 1997
PawnMart, Inc. Employee Stock Option Plan, (iii) 125,000 shares of Common
Stock which may be issued upon exercise of currently outstanding Common
Stock options issued under the 1997 Stock Option Plan for Directors, (iv)
120,000 shares of Common Stock, 120,000 Series A Warrants and 120,000 Series
B Warrants issuable upon exercise of warrants issued in connection with the
Company's initial public offering during March 1998, (v) 2,760,000 shares of
Common Stock which may be issued upon exercise of the Series A Warrants and
Series B Warrants, and (vi) from 15,000 shares of Common Stock under a
minimum subscription of the Notes to 600,000 shares of Common Stock under a
maximum subscription which may be issued upon exercise of the Series C
Warrants.
(2) Includes $250,000 in Notes issued under a minimum subscription and
$10,000,000 in Notes issued under a maximum subscription.
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<PAGE> 18
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical financial data of the Company. The selected consolidated
historical financial data has been derived from the audited and unaudited
historical consolidated financial statements of the Company and should be read
in conjunction with such financial statements and the notes thereto included
elsewhere in this Prospectus. The unaudited consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, contain all adjustments,
consisting of normal recurring accruals, necessary for a fair presentation of
the financial position and results of operations for the periods presented.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(1) NINE MONTHS ENDED
-------------------------------------------------------- --------------------------
(UNAUDITED) (UNAUDITED)
JANUARY 29, JANUARY 28, JANUARY 26, JANUARY 31, OCTOBER 26, OCTOBER 31,
1995 1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Pawn Service Charges............ $ 363 $ 1,338 $ 2,291 $ 2,862 $ 2,106 $ 2,438
Merchandise Sales............... 941 3,052 5,523 7,215 4,972 5,525
Other Income.................... 2 34 89 101 67 92
---------- ---------- ----------- ----------- ----------- -----------
Total Revenues.......... 1,306 4,424 7,903 10,178 7,145 8,055
Cost of Sales................... 553 1,942 3,739 5,192 3,392 3,754
---------- ---------- ----------- ----------- ----------- -----------
Gross Profit............ 753 2,482 4,164 4,986 3,753 4,301
Store Operating Expenses........ 1,000 2,626 3,652 4,040 2,866 3,544
Corporate Administrative
Expenses...................... 1,118 1,589 1,713 2,117 1,510 2,308
Interest Expense................ 62 720 1,360 3,761 1,356 866
Depreciation and Amortization... 198 375 495 504 377 419
---------- ---------- ----------- ----------- ----------- -----------
Net Loss................ (1,625) (2,828) (3,056) (5,436) (2,356) (2,836)
Preferred Stock Dividends....... -- -- -- 217 -- 692
---------- ---------- ----------- ----------- ----------- -----------
Net Loss to Common
Stockholders.......... $ (1,625) $ (2,828) $ (3,056) $ (5,653) $ (2,356) $ (3,528)
========== ========== =========== =========== =========== ===========
Basic and Diluted Loss
Per Common Share...... $ (1.02) $ (1.68) $ (1.67) $ (3.01) $ (1.27) $ (0.56)
========== ========== =========== =========== =========== ===========
OTHER DATA:
Stores Owned at End of
Period(2)..................... 7 17 19 19 19 24
Average Age of Stores -- End of
Period........................ .61 years .93 years 1.77 years 2.78 years 2.51 years 2.83 years
EBITDA(3)....................... $ (1,365) $ (1,733) $ (1,201) $ (1,171) $ (623) $ (1,551)
Comparable Store Contribution
Margin(4)..................... -- -- $ 512 $ 946 $ 887 $ 946
Ratio of Earnings to Fixed
Charges(5).................... -- -- -- -- -- --
BALANCE SHEET DATA -- END OF
PERIOD:
Loans........................... $ 571 $ 1,447 $ 2,227 $ 2,421 $ 2,426 $ 2,958
Inventories, Net................ 560 1,490 1,971 1,944 2,228 2,610
Working Capital................. 225 2,251 2,148 1,758 4,621 5,379
Total Assets.................... 2,445 5,249 6,474 6,677 7,036 8,407
Long-Term Notes Payable, Net of
Current Installments.......... 866 5,445 8,288 9,778 10,272 1,600
Stockholders' Equity
(Deficit)..................... 422 (1,274) (4,278) (6,222) (5,487) 5,784
</TABLE>
- ---------------
(1) Summary historical consolidated financial data has not been presented for
the period January 13, 1994 (date of inception) to January 30, 1994 as such
amounts are immaterial.
(2) At December 30, 1998, the Company owned and operated 32 stores.
(3) EBITDA is defined as earnings before interest, taxes, depreciation and
amortization. EBITDA is presented because it is a widely accepted financial
indicator of a company's ability to service indebtedness. However, EBITDA
should not be considered as an alternative to income from
14
<PAGE> 19
continuing operations or cash flows from operating activities (as determined
in accordance with generally accepted accounting principles) and should not
be construed as an indication of a company's operating performance or as a
measure of liquidity.
(4) Comparable store contribution margin is defined as gross profit less store
operating expenses. Comparable stores include stores which have been open
for at least twelve months as of October 31, 1998 (19 stores).
(5) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income taxes plus fixed charges. Fixed charges consist
of interest expense incurred (which includes amortization of deferred
financing costs) whether expensed or capitalized and a portion of rental
expense estimated to be attributable to interest. Earnings were insufficient
to cover fixed charges by $1,625,000, $2,828,000, $3,056,000 and $5,436,000
during the fiscal years ended January 29, 1995, January 28, 1996, January
26, 1997, and January 31, 1998, respectively, and $2,356,000 and $2,836,000
during the nine months ended October 26, 1997 and October 31, 1998,
respectively.
15
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Our store growth through January 31, 1998 has been funded primarily through
a series of straight debt offerings, convertible debt offerings, and convertible
preferred stock offerings. With the net proceeds from such offerings, we opened
seven, ten and two stores during the fiscal years ended January 29, 1995,
January 28, 1996 and January 26, 1997, respectively. During the fiscal year
ended January 31, 1998, our management devoted substantially all its resources
to restructuring the balance sheet and capital structure and completing the
initial public offering of our common stock (see "Business -- General"). The
completion of our initial public offering during March 1998 resulted in a
significant financial restructuring of the capital structure which dramatically
improved our consolidated balance sheet and our interest and dividend
requirements.
Since our inception in January 1994, profitability has been significantly
impacted by two factors: interest expense associated with straight debt and
convertible debt and development of the infrastructure necessary to support
rapid growth. We converted or repaid substantially all outstanding indebtedness
as a result of our initial public offering in March 1998. Corporate
administrative expenses have been impacted by costs incurred in the development
of management and financial controls, development of our proprietary software
system, and attracting an experienced management team capable of implementing a
rapid roll-out of PAWNMART(SM) stores. This growth strategy and the investment
in management and financial controls substantially increased interest expense
and general and administrative expenses as a percentage of total revenues.
During the nine months ended October 31, 1998, we added five stores
bringing us to a total of 24 stores. Additionally, we added two stores in
November 1998 and six stores in December 1998 bringing us to a total of 32
stores. Our results of operations and cash flows are significantly impacted by
(i) expansion through development of new stores or acquisitions of existing
stores in locations that meet site selection, store size and configuration
requirements in selected markets and (ii) the maturation cycle of stores. We
believe that material fluctuations in the results of operations from lending
activities and product sales due to seasonality will not occur.
Initial Capital Expenditures and Costs Associated with Expansion
Our strategy is to develop or acquire PAWNMART(SM) stores in selected
regional and local markets meeting required store size, configuration, and site
selection requirements. We believe 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 market has been selected, management
determines whether expansion through development of new stores or through
acquisitions would result in the most favorable impact on profitability and
capital requirements.
After a suitable location has been found and a lease and license are
obtained, a new store can be ready for business within six to eight weeks, with
completion of counters, vaults and security system and transfer of merchandise
from existing stores, and external purchases of pre-owned merchandise. We
project the initial capital expenditures and costs associated with opening a new
PAWNMART(SM) store to total approximately $250,000 with additional capital
expenditures during the 12 months after opening of approximately $150,000 to
fund loan growth and planned start-up losses. Because of these start-up losses
and expenditures necessary to support anticipated growth, we may incur losses
during a 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. We do not capitalize start-up losses and
do not recognize pawn service charges on defaulted loans.
We will generally acquire stores in locations meeting our site selection
criteria if (i) the total capital expenditures required to acquire the existing
store are less than or equal to the total costs to develop a new
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<PAGE> 21
store, (ii) the acquisition does not result in significant goodwill balances,
and (iii) demographic data and due diligence procedures indicate an acceptable
growth potential. Because acquired stores mature more quickly than new stores
and generally result in lower initial capital expenditures, our profitability
and capital requirements are impacted by the number of stores added through
acquisition versus the number of new stores added.
Maturation of Newly Established Stores and Acquired Stores
The revenues and profitability of a new store are primarily impacted by our
ability to increase pawn loans during the first 12 months of operations. A new
store is generally unprofitable during its first six to eight months of
operations due to the lack of pawn service charges associated with pawn loans
during that period. Our new stores experience substantially higher levels of
revenues and profitability after reaching two years of age. At October 31, 1998,
five of our 24 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 in our other stores.
An acquired store will generally mature faster than a new store due to an
established base of customers and our ability to accelerate the maturation of
the store's pawn loan balances. Our profitability during rapid expansion will be
significantly impacted by our ability to acquire existing stores meeting our
acquisition criteria. There can be no assurance that future store revenues and
store profitability will not vary from historical amounts.
Selected elements of our consolidated financial statements are shown below
for the fiscal years ended January 28, 1996, January 26, 1997, and January 31,
1998 and for the nine months ended October 26, 1997 and October 31, 1998.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
--------------------------------------- -------------------------
JANUARY 28, JANUARY 26, JANUARY 31, OCTOBER 26, OCTOBER 31,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Merchandise sales..................... 69.0% 69.9% 70.9% 69.6% 68.6%
Pawn service charges.................. 30.2 29.0 28.1 29.5 30.3
Other................................. 0.8 1.1 1.0 0.9 1.1
----- ----- ----- ----- -----
Total revenues.............. 100.0 100.0 100.0 100.0 100.0
Cost of sales......................... 43.9 47.3 51.0 47.5 46.6
----- ----- ----- ----- -----
Gross profit................ 56.1 52.7 49.0 52.5 53.4
----- ----- ----- ----- -----
Store operating expenses.............. 59.3 46.2 39.7 40.1 44.0
----- ----- ----- ----- -----
Store contribution.......... (3.2) 6.5 9.3 12.4 9.4
Interest expense...................... 16.3 17.2 36.9 19.0 10.8
Depreciation and amortization......... 8.5 6.3 5.0 5.3 5.2
Corporate administrative expenses..... 35.9 21.7 20.8 21.1 28.6
----- ----- ----- ----- -----
Net loss.................... (63.9)% (38.7)% (53.4)% (33.0)% (35.2)%
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Nine Months Ended October 31, 1998 Compared to Nine Months Ended October 26,
1997
Total revenues increased 12.7% to $8,055,000 for the nine months ended
October 31, 1998 (the "Nine Month 1998 Period") as compared to $7,145,000 for
the nine months ended October 26, 1997 (the "Nine Month 1997 Period"). The
overall increase is attributable to a 8.5% increase in comparable store revenues
at stores opened 12 months or more as of October 31, 1998 ("Comparative Stores")
and revenues from five stores added during the Nine Month 1998 Period.
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<PAGE> 22
Merchandise sales increased 11.1% to $5,525,000 during the Nine Month 1998
Period from $4,972,000 during the Nine Month 1997 Period due to a 6.6% increase
in merchandise sales from Comparative Stores and merchandise sales from five
stores added during the Nine Month 1998 Period.
Pawn service charges increased 15.8% to $2,438,000 during the Nine Month
1998 Period from $2,106,000 during the Nine Month 1997 Period primarily due to a
13.7% increase in pawn service charges from Comparative Stores and pawn service
charges from five stores added during the Nine Month 1998 Period.
Gross profit as a percentage of total revenues increased 0.9% from 52.5%
during the Nine Month 1997 Period to 53.4% during the Nine Month 1998 Period
primarily due to improvements in shrinkage and an uninsured theft at one of our
stores during February 1997 which were offset by lower gross margins on
merchandise sales at five stores added during the Nine Month 1998 Period. On a
Comparative Store basis, gross profit as a percentage of total revenues
increased 1.2% from 52.5% during the Nine Month 1997 Period to 53.7% during the
Nine Month 1998 Period. Excluding the uninsured theft at one of the our stores
during February 1997, our annualized inventory turnover rate was 2.2 times
during the Nine Month 1998 Period compared to 2.1 times during the Nine Month
1997 Period. We currently maintain theft insurance at all stores.
Store operating expenses increased 23.7% to $3,544,000 during the Nine
Month 1998 Period from $2,866,000 during the Nine Month 1997 Period primarily
due to increased labor at Comparative Stores to support increased store
activity, increased advertising expenses associated with our marketing programs
and expenses attributable to five stores added during the Nine Month 1998
Period. On a Comparative Store basis, store operating expenses comprised 41.5%
of total revenues during the Nine Month 1998 Period compared to 40.1% of total
revenues during the Nine Month 1997 Period.
Store contribution margin decreased 14.7% to $757,000 during the Nine Month
1998 Period compared to $887,000 during the Nine Month 1997 Period primarily due
to the effects of planned start-up losses at five stores added during the Nine
Month 1998 Period and pre-opening expenses incurred at additional stores
scheduled for opening during the fourth quarter of the fiscal year ending
January 30, 1999 ("Fiscal 1998"). Excluding the effects of planned start-up
losses and pre-opening expenses, store contribution margin increased 6.7% to
$946,000 during the Nine Month 1998 Period compared to $887,000 during the Nine
Month 1997 Period.
Corporate administrative expenses increased 52.8% to $2,308,000 during the
Nine Month 1998 Period from $1,510,000 during the Nine Month 1997 Period
primarily due to (i) the issuance of 44,445 shares of unregistered common stock
in exchange for $200,000 in non-recurring professional fees associated with
marketing and store site selection ("Non-Recurring Professional Fees"), (ii)
increased labor costs associated with the hiring of manager trainees to support
store openings, (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. Since we added five stores during the Nine Month 1998 Period and plan
to add eight additional stores during the fourth quarter of Fiscal 1998, we
anticipate corporate administrative expenses to decrease as a percentage of
total revenues.
Interest expense decreased 36.1% to $866,000 during the Nine Month 1998
Period from $1,356,000 during the Nine Month 1997 Period. The Nine Month 1998
Period includes $495,000 in non-cash non-recurring interest expense resulting
from the accounting treatment relating to the beneficial conversion feature
associated with our convertible subordinated debentures ("Non-Cash Non-Recurring
Interest Expense") and $313,000 in interest expense which was incurred by us
related to debt that was either converted or repaid upon completion of our
initial public offering ("Non-Recurring Interest Expense"). See note 6 to the
consolidated financial statements for the year ended January 31, 1998 included
elsewhere in this Prospectus for a discussion of the accounting treatment
relating to the beneficial conversion feature associated with our convertible
subordinated debentures. The Nine Month 1997 Period included $1,337,000 in
Non-Recurring Interest Expense.
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<PAGE> 23
During the Nine Month 1998 Period, we recognized $674,000 in noncash
non-recurring preferred stock dividends resulting from the accounting treatment
relating to the beneficial conversion feature associated with our convertible
preferred stock and $18,000 in non-recurring preferred stock dividends
associated with our 12% Series Convertible Exchangeable Preferred stock
(collectively, the "Non-Recurring Preferred Dividends"). See note 9 to the
consolidated financial statements for the year ended January 31, 1998 included
elsewhere in this Prospectus for a discussion of the accounting treatment
relating to the beneficial conversion feature associated with our convertible
preferred stock.
Net loss to common stockholders during the Nine Month 1998 Period was
$3,528,000, or $0.56 per basic and diluted share, compared to $2,356,000, or
$1.27 per basic and diluted share, during the Nine Month 1997 Period. Excluding
the Non-Recurring Professional Fees, Non-Cash Non-Recurring Interest Expense,
Non-Recurring Interest Expense, and Non-Recurring Preferred Dividends, net loss
to common stockholders during the Nine Month 1998 Period would have been
$1,828,000, or $0.29 per basic and diluted share, compared to $1,019,000, or
$0.55 per basic and diluted share, during the Nine Month 1997 Period.
Year Ended January 31, 1998 Compared to Year Ended January 26, 1997
Total revenues increased 28.8% to $10,178,000 for the fiscal year ended
January 31, 1998 ("Fiscal 1997") as compared to $7,903,000 for the fiscal year
ended January 26, 1997 ("Fiscal 1996"). $1,812,000 of this increase was due to a
24.1% increase in Comparative Store revenue and $463,000 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 $7,215,000 during Fiscal 1997 from
$5,523,000 during Fiscal 1996. $1,369,000 of this increase was due to a 26.1%
increase in sales gains for Comparative Stores and $323,000 from two stores
opened during Fiscal 1996.
Pawn service charges increased 24.9% to $2,862,000 during Fiscal 1997 from
$2,291,000 during Fiscal 1996 primarily due to pawn loans increasing 8.7% from
$2,227,000 at January 26, 1997 to $2,421,000 at January 31, 1998. $433,000 of
this increase was due to a 19.7% increase in pawn service charge gains for
Comparative Stores and $138,000 from two stores opened during Fiscal 1996. We
expect 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.
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 to turn older inventory, an uninsured theft at one of our stores during
February 1997 and allowances provided for shrinkage and valuation based on
management's evaluation of inventories on hand. Our 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 to turn older inventory.
Operating expenses increased 10.6% to $4,040,000 during Fiscal 1997 from
$3,652,000 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 Comparative Store sales and pawn service charges
discussed above.
Store contribution margin increased 84.8% to $946,000 during Fiscal 1997
compared to $512,000 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.
Interest expense increased 176.4% to $3,761,000 during Fiscal 1997 from
$1,360,000 during Fiscal 1996 primarily due to $1,885,000 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
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<PAGE> 24
associated with our convertible subordinated debentures and increases in the
aggregate outstanding principal amount of convertible subordinated debentures.
See note 6 to the consolidated financial statements for the year ended January
31, 1998 included elsewhere in this Prospectus for a discussion of the
accounting treatment relating to the beneficial conversion feature associated
with our convertible subordinated debentures.
Administrative expenses increased 23.6% to $2,117,000 during Fiscal 1997
from $1,713,000 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 our comprehensive insurance package, (iv) and increased
professional fees associated with human resource development, the preparation of
our 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.
At January 31, 1998, our accumulated net operating loss carryforwards for
tax purposes were approximately $9,724,000. Such amounts are available to offset
future federal taxable income, if any, through 2013.
Year Ended January 26, 1997 Compared to Year Ended January 28, 1996
Total revenues increased 78.6% to $7,903,000 during Fiscal 1996 as compared
to $4,424,000 during the fiscal year ended January 28, 1996 ("Fiscal 1995").
$744,000 of this increase was due to a 23% increase in Comparative Store revenue
for comparative stores and $2,735,000 from 12 stores opened after the fiscal
year ended January 29, 1995 ("Fiscal 1994"). Comparative Store revenue gains
were primarily attributable to store maturation, increased store traffic and
special promotions. The overall increase is primarily attributable to a 81.0%
increase in product sales and a 71.2% increase in pawn service charges.
Merchandise sales increased 81.0% to $5,523,000 during Fiscal 1996 from
$3,052,000 during Fiscal 1995. $511,000 of this increase was due to a 24.2%
increase in sales gains for Comparative Stores and $1,960,000 from 12 stores
opened after Fiscal 1994.
Pawn service charges increased 71.2% to $2,291,000 during Fiscal 1996 from
$1,338,000 during Fiscal 1995 primarily due to pawn loans increasing 53.9% from
$1,447,000 at January 28, 1996 to $2,227,000 at January 26, 1997. $207,000 of
this increase was due to a 19.0% increase in Comparative Store pawn service
charges and $746,000 from 12 stores opened after Fiscal 1994. We expect 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.
Operating expenses increased 39.1% to $3,652,000 during Fiscal 1996 from
$2,626,000 during Fiscal 1995 primarily due to the addition of ten new stores
during Fiscal 1995 and two new stores during Fiscal 1996. Operating expenses as
a percent of total revenues decreased to 46.2% during Fiscal 1996 from 59.3%
during Fiscal 1995 primarily resulting from the large increases in Comparable
Store sales and pawn service charges discussed above.
Store contribution margin increased to $512,000 during Fiscal 1996 compared
to a deficit of $144,000 during Fiscal 1995 primarily due to improvement in
store contribution from the maturation of stores opened prior to January 28,
1996 (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview") and only two stores being opened during
Fiscal 1996 lowering the amount of start-up losses.
Interest expense increased 88.9% to $1,360,000 during Fiscal 1996 from
$720,000 during Fiscal 1995 primarily due to increases in the aggregate
outstanding principal amount of convertible subordinated debentures.
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<PAGE> 25
Administrative expenses increased 7.8% to $1,713,000 during Fiscal 1996
from $1,589,000 during Fiscal 1995 primarily due to increased costs associated
with stock issuances, increased salaries, and other miscellaneous items.
However, administrative expenses decreased to 21.7% of total revenues during
Fiscal 1996 compared to 35.9% during Fiscal 1995 primarily resulting from the
large increases in Comparable Store sales and pawn service charges discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the completion the initial public offering in March 1998, our
operations were financed from funds generated from private debt and equity
offerings and funds generated from operations. We received net proceeds of
approximately $5,583,000 from the completion of the initial public offering. See
"Business -- General". In connection with the completion of the initial public
offering, $9,520,000 in aggregate principal amount of our 14% convertible
subordinated debentures were automatically converted into 2,380,000 shares of
Common Stock and all classes of our preferred stock were automatically converted
into an aggregate of 1,482,766 shares of Common Stock. Additionally, we 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 our
Chief Executive Officer. The completion of the initial public offering and the
resulting financial restructuring have positioned us with a capital structure
that will allow us to implement our planned roll-out of PAWNMART(SM) stores.
At October 31, 1998, our primary sources of liquidity were $178,000 in cash
and cash equivalents, $299,000 in pawn service charges receivable, $2,958,000 in
loans, and $2,610,000 in inventories. We had a current ratio of approximately
6.3 to 1.0 and 1.6 to 1.0 at October 31, 1998 and January 31, 1998,
respectively. Net cash used in operating activities was $2,478,000 during the
Nine Month 1998 Period and $2,934,000 during the Nine Month 1997 Period.
Additionally, we had approximately $2,100,000 available under our Credit
Facility at October 31, 1998.
Our profitability and liquidity are affected by the amount of loans
outstanding, which is controlled in part by our loaning decisions. We are 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 our
aggregate loan balance and, consequently, decrease pawn service charges.
Additionally, small loans in relation to the pledged property's estimated sale
value tend to slightly increase loan redemptions and improve our liquidity.
Conversely, providing larger loans in relation to the estimated sale value of
the pledged property can result in an increase in our pawn service charge
income. Larger average loan balances can also result in a slight increase in
loan forfeitures, which increases the quantity of goods on hand and, unless we
increase inventory turnover, reduces our liquidity. In addition to these
factors, liquidity is also affected by product sales and the pace of store
expansions.
The addition of Michael D. Record as President in September 1998 has
resulted in a renewed focus on our lending operations. During the three months
ended October 31, 1998, pawn loans increased $538,000 or 22.2% due to a $410,000
or 17.2% increase in Comparative Store pawn loans and a $128,000 increase in
pawn loans at stores opened during Fiscal 1998. We expect pawn loan balances to
continue to increase during the fourth quarter of Fiscal 1998 and plan to fund
such growth with cash flows from operations and borrowings under the Credit
Facility.
On October 13, 1998, we entered into the $10 million Credit Facility with
Comerica Bank. The Credit Facility bears interest at either (i) the prevailing
prime rate plus .75%, which was 9.00% at October 31, 1998, or (ii) the
prevailing LIBOR rate plus 3.35%, and matures on October 13, 2001. Amounts
available under the Credit Facility are limited to certain percentages of pawn
loans, inventories, and pawn service charges receivable. The Credit Facility is
collateralized by substantially all of our unencumbered assets. Under the Credit
Facility, we are required to maintain certain financial ratios and comply with
certain technical covenants. We were in compliance with these requirements and
covenants as of October 31, 1998. At October 31, 1998, $1,600,000 was
outstanding under the Credit Facility and an additional $2,100,000 was available
pursuant to the available borrowing base.
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<PAGE> 26
We believe that our planned roll-out of PAWNMART(SM) stores will be funded
by borrowings under the Credit Facility, cash flows generated from our
established stores, and future debt or equity offerings. Although we are
registering up to $10,000,000 Notes pursuant to this Prospectus, we can make no
assurances that the maximum offering amount will be subscribed. In addition to
factors noted under "Risk Factors -- Management of Growth," our store expansion
during fiscal 1999 will largely be dependent upon the number of Notes sold
pursuant to this Offering. In the event we are unable to sell the maximum
subscription or additional financing alternatives are not obtained, our fiscal
1999 expansion schedule could be reduced or modified. If we only sell the
minimum subscription of Notes and are unable to obtain additional financing, we
could be required to cease expansion and significantly reduce corporate
administrative expenses. No assurance can be made that we will be able to sell
the maximum subscription of Notes or obtain additional financing.
YEAR 2000 COMPLIANCE
The Year 2000 problem concerns the inability of information systems to
properly recognize date-sensitive information beyond January 1, 2000.
We have begun a project to bring software and systems into Year 2000
compliance in time to minimize any significant or detrimental effects on our
operations. The project covers information systems, operating systems, other
non-financial systems equipment and significant third-party vendors. We have
adopted a five level process toward Year 2000 compliance: (1) awareness; (2)
assessment (identification of where failures may occur, solutions, workarounds,
and plans to repair or replace); (3) renovation (repair, replace or retire
systems that cannot properly process Year 2000 dates); (4) validation; and (5)
implementation. At October 31, 1998, the first three levels have been
substantially completed, except for third parties as discussed below. We expect
to complete the remaining levels by June 30, 1999.
We are applying the five level process to both our information technology
("IT") systems and non-IT systems. Computer equipment and software commonly
thought of as IT systems include point-of-sale, accounting, data processing,
telephone and other miscellaneous systems. Non-IT systems include alarm systems,
security observation equipment, HVAC units, fax machines, and other
miscellaneous systems. We believe that we have identified the internal business
systems that are susceptible to system failures or processing errors as a result
of the Year 2000 problem.
Our proprietary operating software system represents our only critical
internal business system. The proprietary operating software system has been
upgraded for Year 2000 compliance and is being tested. The vendors which supply
us with our accounting applications, payroll, and other financial software
systems have represented that their products are Year 2000 compliant. We have
upgraded substantially all of our hardware to mitigate Year 2000 problems from
affecting our operations and anticipate incurring approximately $30,000 to bring
existing hardware into compliance.
We are reviewing the critical third parties which provide services or goods
which are essential to our operations in order to determine the extent to which
we are subject to any failure by such third parties to adequately address and
resolve their respective Year 2000 problems. These third parties include
financial institutions, utility suppliers, and providers of communication
services and equipment. In the event that we are unable to obtain satisfactory
assurance that a critical third party provider has achieved Year 2000
compliance, and we are unable to replace the provider with an alternative
provider, our operations could be adversely impacted.
Based on the current status of the five level Year 2000 process, we do not
foresee significant risks associated with the Year 2000 problem. However,
management believes that it is not possible to determine with complete certainty
that all Year 2000 problems have been identified or will be corrected. In the
event of a Year 2000 problem, we could likely suffer a number of operational
inconveniences and inefficiencies for both us and our customers that could
divert management's time and attention and financial and human resources from
its ordinary business activities.
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<PAGE> 27
BUSINESS
GENERAL
Background
PawnMart, Inc. ("we" or 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, we changed our name to PCI Capital Corporation
and conducted business under the trade name "PAWNMART(SM)." On October 21, 1997,
we changed our name to "PawnMart, Inc."
On March 20, 1998, we completed an initial public offering of 1,365,000
shares of Common Stock, 1,380,000 Series A Warrants, and 1,380,000 Series B
Warrants resulting in total net proceeds of approximately $5,583,000. In
connection with the completion of the initial public offering, we automatically
converted $9,520,000 in 14% convertible subordinated debentures into 2,380,000
shares of Common Stock and 3,661,200 shares of preferred stock into 1,482,766
shares of Common Stock. Additionally, we were able to utilize $2,524,000 of the
net proceeds to repay certain notes payable.
At the completion of the initial public offering, we owned and operated 19
stores. Our fiscal 1998 expansion plans called for the addition of 12 to 15
stores. In order to fund this expansion, we utilized the remaining proceeds from
the initial public offering and secured a $10 million revolving line of Credit
Facility with Comerica Bank. The Credit Facility includes a borrowing base
limitation based upon balances of eligible pawn loans, pawn service charges
receivable, and inventories. With the above, we were able to achieve a 68%
growth rate by adding 13 locations in nine months. The completion of our initial
public offering and the finalization of the Credit Facility have enhanced our
ability to implement our business strategy.
Fiscal 1999 Expansion Plans
Our store expansion plans for fiscal 1999 include adding between 20 and 40
stores. The offering of the Notes pursuant to this Prospectus, combined with the
resulting additional borrowing base availability under the Credit Facility, is
expected to provide us with the financial ability to execute the planned store
expansion for fiscal 1999. However, there can be no assurance that we will be
able to achieve such growth. See "Risk Factors."
Our Business
We are 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. We generate 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 December 30, 1998, we were one of five publicly traded pawnshop
operators in the United States, and owned and operated 32 stores located in
Alabama, Georgia, North Carolina, South Carolina and Texas. Our principal office
is located at 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102 and our
telephone number is (817) 335-7296.
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, Illinois, Indiana, Kentucky, Mississippi, Missouri, North
Carolina, Oklahoma, South Carolina, Tennessee, and Texas. The industry is highly
fragmented, with approximately 93% of the approximately 13,000 stores in the
United States owned by "mom and pop" operators and
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<PAGE> 28
approximately 7% 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.
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 slightly higher median household
income and that females comprise a higher percentage of its customer base. 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.
With the completion of the Company's initial public offering and financial
restructuring in March 1998, the Company's strategic objective is to implement a
rapid roll-out of 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:
- Developing or Acquiring Stores That Meet Site Selection, Store Size and
Configuration Requirements in Selected Markets. 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, therefore, believes that by opening new
stores or by acquiring existing 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. By
opening new stores or acquiring existing stores only in accordance with
its specifications, the Company can ensure that each PAWNMART(SM) has a
similar "look and feel."
- 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.
- 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 be utilized for customer acquisition, retention and promotions,
store site selection, and for developing in store promotions.
- 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.
24
<PAGE> 29
- 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
95/98(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.
- 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 management team and board of
directors, employ specialty retailers and pawnbrokers 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, $5,165,000 of products were added to
inventory, of which $4,565,000 was from loans not repaid and $600,000 was
otherwise purchased.
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
25
<PAGE> 30
type of guarantee. Additionally, 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 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 on 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 October 31, 1998 and January 31, 1998,
total merchandise held for resale was $2,610,000 and $1,944,000, respectively,
after reduction for a valuation allowance of $136,000 and $160,000,
respectively.
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 December 30, 1998, the Company has established five 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 December 30, 1998, the Company has a total of 181
employees (of which 18 were in executive, administrative, clerical and
accounting functions), 60 of whom were salaried and 103 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., First Cash, 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.
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
26
<PAGE> 31
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 five 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.
South Carolina Pawnshop Regulations. In South Carolina, the Department of
Consumer Affairs regulates the licensing, reporting and financial responsibility
of pawnbrokers. Pawnbrokers may not make loans in excess of $2,000 and are
required to mail written notices of impending forfeitures to pledgors at least
ten days prior to the forfeiture date for loans greater than $50. The Department
of Consumer Affairs has prescribed stratified loan amounts and the maximum
allowable rates of service charges that
27
<PAGE> 32
pawnbrokers in South Carolina may charge for the lending of money within each
stratified range of loan amounts ranging from 8.4% to 25% per month.
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.
The Texas Pawnshop Act prescribes the stratified loan amounts and the
maximum allowable rates of service charges 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.
PROPERTY
The Company's corporate offices are leased under a five year lease expiring
in May 1999. At December 30, 1998, the Company operated 32 leased store
locations with monthly rental payments ranging from $2,000 to $6,600 per
location and having initial lease terms expiring from January 1999 through
August 2005. All of the Company's leased locations, other than one, include
renewal options. The size of the leased store locations range from approximately
2,700 to 13,000 square feet. With the exception of the
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<PAGE> 33
location in Weatherford, Texas, the Company leases all of these properties from
unaffiliated third parties. See "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 December 30, 1998.
<TABLE>
<CAPTION>
NUMBER OF STORES
----------------
<S> <C>
Georgia:
Atlanta Metropolitan Area................................. 18
Dalton.................................................... 1
Rome...................................................... 1
Calhoun................................................... 1
--
Total Georgia..................................... 21
--
Alabama:
Mobile.................................................... 4
Dothan.................................................... 1
--
Total Alabama..................................... 5
--
North Carolina:
Charlotte................................................. 2
--
Total North Carolina.............................. 2
--
South Carolina:
Greenville Metropolitan Area.............................. 2
--
Total South Carolina.............................. 2
--
Texas:
Burleson.................................................. 1
Weatherford............................................... 1
--
Total Texas....................................... 2
--
Total............................................. 32
==
</TABLE>
The Company considers its 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.
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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The Company furnishes its shareholders with
annual reports containing audited financial statements and such other reports as
deemed appropriate or as may be required by law. Requests for information may be
directed to Carson R. Thompson, Chairman of the Board, PawnMart, Inc., 301
Commerce Street, Suite 3600, Fort Worth, Texas 76102, telephone number (817)
335-7296.
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<PAGE> 34
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Carson R. Thompson(3)(6)........ 59 Chief Executive Officer and Chairman of the Board
Michael D. Record............... 44 President
Thomas W. White................. 29 Senior Vice President and Chief Financial Officer
Randall L. Haden................ 38 Vice President -- Information Services
James E. Berk(1)(4)............. 53 Director
Robert D. Bourland, Jr.(1)(6)... 57 Director
Robert E. Camp(3)(5)(6)......... 55 Director
Mark E. Kane(2)(5).............. 44 Director
Monty R. Standifer(2)(4)........ 58 Director
J. Roger Williams(3)............ 49 Director
</TABLE>
- ---------------
(1) Class I Director whose term expires in 1999.
(2) Class II Director whose term expires in 2000.
(3) Class III Director whose term expires in 2001.
(4) Member of Audit Committee.
(5) Member of Compensation Committee.
(6) Member of Nominating Committee.
The business experience, principal occupations and employment of each of
the directors and executive officers of the Company during at least the past
five years, together with their periods of service as directors and executive
officers of the Company are set forth below.
Carson R. Thompson joined the Company in August 1996 as a Director. In
March 1997, he was named Chairman of the Board and Chief Executive Officer of
the Company. Prior to this, Mr. Thompson had served as President, Chief
Executive Officer and Chairman of The Bombay Company, Inc., a specialty retailer
of home furnishing products. Mr. Thompson joined Tandy Corporation, Fort Worth,
Texas in 1957, and held various management positions before becoming President
in 1981 of Tandy Brands, Inc., a spin-off of Tandy Corporation and a
manufacturer and specialty retailer of various products. From 1982 to 1991, Mr.
Thompson was Chairman and Chief Executive Officer, from 1991 to 1996, he was
Chairman, and from 1996 to 1997, he was President and Chief Executive Officer of
The Bombay Company. Mr. Thompson serves as a director of the University of North
Texas Health Science Center at Fort Worth, and the Osteopathic Health
Foundation, Inc., and is a member of the Board of Advisors of the College of
Business Administration at the University of Oklahoma.
Michael D. Record joined the Company on September 8, 1998 as President. Mr.
Record was previously employed for six years with Cash America International,
Inc., most recently as Vice President of Operations responsible for 118 stores.
Mr. Record has been employed in the pawnshop industry for approximately twenty
years.
Thomas W. White joined the Company on October 15, 1997 as Vice
President -- Finance and Chief Accounting Officer. On January 7, 1999, he was
named Senior Vice President and Chief Financial Officer. Mr. White was
previously employed for six years with the accounting firm of KPMG LLP, most
recently as an assurance manager serving numerous clients within the financial
services, manufacturing and retailing industries.
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<PAGE> 35
Randall L. Haden joined the Company in February 1994 as Vice
President -- Information Services. Since November 1991 until joining the
Company, he was employed by Search Capital Group, Inc., a publicly held consumer
finance company, most recently as Vice President -- Information Services.
James E. Berk joined the Company in 1997 as a Director. From 1997 to 1998,
Mr. Berk was Vice Chairman and Chief Executive Officer of APC, Inc., a specialty
retailer and wholesaler of auto parts. Mr. Berk founded and, from 1993 to 1997,
served as the President, Chief Executive Officer and Chairman of the Board for
Teach & Play Smart, Inc., a privately held specialty retail chain of children's
educational products. Prior to that time, he served as President and Chief
Executive Officer of Bizmart, Inc., a chain of office products superstores, and
President and Chief Operating Officer of The Wholesale Club, a chain of discount
retail stores, and served in various other companies in management capacities.
Robert D. Bourland, Jr. joined the Company in July 1994 as a Director. From
July 1994 to September 1998, he served the Company as President and Chief
Operating Officer. From September 1998 to December 1998, he served the Company
as President -- Franchising. In December 1998, Mr. Bourland resigned as
President -- Franchising and currently serves only as a director. From 1985
until joining the Company, he served as President of Cook's Nook, Inc., a
specialty retailer of gourmet cookware. From 1964 until that time, he served in
various retail management positions with the Radio Shack division of Tandy
Corporation, including serving as Senior Vice President -- Managing Director,
Tandy U.K. and as Tandy's Divisional Vice President responsible for 1,200 Radio
Shack stores. Radio Shack is a specialty retailer of consumer electronic
products.
Robert E. Camp joined the Company in July 1995 as a Director. He founded
and, from 1993 until the present, served as President of Hero's Welcome, Inc., a
privately held retail/mail order business. From 1982 until 1992, Mr. Camp was
the founder and Chief Executive Officer of Simpson & Fisher Companies, Inc., a
specialty retailer of apparel and home furnishing products. Mr. Camp is the
former Chief Executive Officer of Fort Worth based Pier 1 Imports, Inc., a
specialty retailer of home furnishing products, having been with that company
for 18 years.
Mark E. Kane joined the Company in September 1997 as Director. Presently,
he is President and Chief Executive Officer of Compact Discs International, LLC,
an international affiliate of CD Warehouse Inc. that owns the worldwide
development rights for the CD Warehouse Inc. franchise concept. Mr. Kane founded
and, from 1992 to 1997, served as President and Chief Executive Officer of CD
Warehouse Inc., a publicly traded national franchising firm specializing in the
sale of new and pre-owned compact discs.
Monty R. Standifer joined the Company in August 1997 as a Director. Mr.
Standifer has served as Senior Vice President, Chief Financial Officer,
Treasurer and Secretary of Gadzooks, Inc., a specialty retailer of apparel
products, since July 1995. From June 1992 until July 1995, Mr. Standifer served
as Vice President -- Treasurer and Chief Financial Officer of Gadzooks, Inc.
From July 1991 to June 1992, Mr. Standifer served as Senior Vice President and
Chief Financial Officer of AmeriServ Food Company, a food service systems
distributor. Prior to that time, Mr. Standifer was a co-founder of Bizmart,
Inc., a chain of office products superstores, serving as Vice
President -- Finance, Treasurer and Secretary from its founding in October 1987
until July 1991, shortly after the company was sold. Mr. Standifer was
previously employed by Tandy Corporation for 14 years in various financial
management positions.
J. Roger Williams joined the Company in April 1998 as a Director. From 1974
to 1995, he served as President and Chief Executive Officer of Jack Williams
Automall, the multi-line dealership founded by his father, Jack Williams, in
1958. Currently, he serves as Chairman of the Board and Chief Executive Officer
of Roger Williams Automall in Weatherford, Texas, and Chairman of the Board of
Vestry Corporation of Fort Worth, Texas. He also owns and operates Roger
Williams Ranches in Weatherford, Texas.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees: an Audit
Committee, a Compensation Committee and a Nominating Committee. Each of these
committees has one or more members who serve at the discretion of the Board of
Directors. The Audit Committee, currently comprised of
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<PAGE> 36
Messrs. Standifer and Berk, is responsible for reviewing the Company's financial
statements, audit reports, internal financial controls and the services
performed by the Company's independent public accountants, and for making
recommendations with respect to those matters to the Board of Directors. The
Compensation Committee, currently comprised of Messrs. Kane and Camp, is
responsible for reviewing and making recommendations to the Board of Directors
with respect to compensation of executive officers, other compensation matters
and awards under the Company's stock option plan. The Nominating Committee,
currently comprised of Messrs. Thompson, Bourland and Camp, is responsible for
developing a strategy and criteria for new board members and making
recommendations to the Board of Directors that the selection of future board
members should be based thereon.
COMPENSATION OF DIRECTORS
Cash Compensation. No cash compensation has been paid by the Company to its
directors prior to this Offering. Directors are reimbursed for their ordinary
and necessary expenses incurred in attending meetings of the Board of Directors
or a committee thereof.
1997 Stock Option Plan for Directors. Effective as of October 16, 1997, the
1997 PawnMart, Inc. Director Stock Option Plan (the "Directors' Option Plan")
was approved by the Company's Board of Directors and the holders of a majority
of the outstanding shares of the Company's Common Stock.
Stock options will be granted under the Directors' Option Plan 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 the Company's Common Stock or a person who is in
control of such holder ("Eligible Directors").
A maximum of 263,788 shares of Common Stock (subject to certain
anti-dilution adjustments) may be issued to Eligible Directors upon the exercise
of options granted under the Directors' Option Plan. As of the date of this
Prospectus, options for 125,000 shares of Common Stock had been granted and are
outstanding under the Directors' Option Plan. All options have exercise prices
ranging from $4.25 to $4.4375 per share of Common Stock.
Newly appointed Eligible Directors will automatically receive an initial
grant of options to purchase 25,000 shares of Common Stock upon their
appointment to the Board of Directors. All Eligible Directors will receive
annual grants of options to purchase the lesser of 20,000 shares of Common Stock
or $200,000 in market value of underlying Common Stock as of the date following
each annual meeting of the Company's stockholders. The exercise price of options
granted under the Directors' Option Plan will be the closing sales price of the
Common Stock on the date of grant. Options granted pursuant to the Directors'
Option Plan are immediately exercisable. The expiration date is six years from
the date of grant. Payment for shares purchased upon exercising an option is
made in cash or by certified check, bank draft or money order, or by delivery of
previously owned shares of Common Stock held for at least six months (at their
fair market value), or partly in cash and partly in such Common Stock.
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<PAGE> 37
EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation earned by
the Chief Executive Officer of the Company and each executive officer of the
Company whose total annual salary and bonus exceeds $100,000 during the fiscal
years ended January 28, 1996 ("Fiscal 1995"), January 26, 1997 ("Fiscal 1996")
and January 31, 1998 ("Fiscal 1997") (collectively, the "Named Executive
Officers"). As of the date of this Prospectus, the Company has not granted any
stock appreciation rights.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------- ------------
SECURITIES
NAME AND PRINCIPAL FISCAL UNDERLYING ALL OTHER
POSITION DURING FISCAL 1997 YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- --------------------------- ------ --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Carson R. Thompson....................... 1997 80,769 6,000 164,867 --
Chairman of the Board and 1996 -- -- -- --
Chief Executive Officer(1)(2) 1995 -- -- -- --
Robert D. Bourland, Jr................... 1997 90,000 5,400 98,920 --
President, Chief Operating 1996 90,000 17,500 -- --
Officer and Director(1)(3) 1995 90,000 -- -- --
</TABLE>
- ---------------
(1) Mr. Thompson and Mr. Bourland received personal benefits in addition to
salary and bonuses. The aggregate amount of such personal benefits, however,
did not exceed the lesser of $50,000 or 10% of the total of their annual
salary and bonus.
(2) Mr. Thompson joined the Company in March 1997 at an annual salary of
$100,000.
(3) In December 1998, Mr. Bourland resigned his position with the Company and
currently serves as a Director.
The following table summarizes grants of options to purchase shares of
Common Stock under the PawnMart, Inc. 1997 Employee Stock Option Plan made
during Fiscal 1997 to Named Executive Officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION BLACK-SCHOLES GRANT
NAME GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE DATE PRESENT VALUE(3)
- ---- ------------- ------------- ----------- ---------- ---------------------
<S> <C> <C> <C> <C> <C>
Carson R. Thompson........ 164,867 53.8% $3.79 10/15/07 $131,291
Chairman of the Board
and Chief Executive
Officer(1)
Robert D. Bourland, Jr.... 98,920 32.3% $3.79 10/15/07 $ 89,247
President, Chief
Operating Officer and
Director(2)
</TABLE>
- ---------------
(1) The options to purchase shares of Common Stock were granted under the 1997
PawnMart, Inc. Employee Stock Option Plan and vest over a four year period.
(2) The options to purchase shares of Common Stock were granted under the 1997
PawnMart, Inc. Employee Stock Option Plan and vest over a five year period.
(3) The grant date present value has been determined using the Black-Scholes
option pricing model with assumptions for the expected term of 3.29 years,
the risk-free interest rate of 5.61% and no expected dividend yield.
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<PAGE> 38
There were no exercises of stock options by any of the named executive
officers during the Fiscal 1997. The table below lists the number of shares of
Common Stock underlying each option held by the Named Executive Officers as of
January 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END($)(1)
NAME (#) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- -------------------------------------- ---------------------------------
<S> <C> <C>
Carson R. Thompson........ 32,973/131,894 $39,897/$159,592(1)
Robert D. Bourland, Jr.... 0/98,920 $0/$119,693(1)
</TABLE>
- ---------------
(1) The "In-The-Money" value is based on the initial public offering price of
the Company's Common Stock in March 1998 of $5.00 per share less the
exercise price payable for such shares.
EMPLOYMENT AGREEMENTS
On September 7, 1998, the Company entered into an employment agreement with
Mr. Record providing for a minimum beginning annual salary of $120,000 and a
$30,000 signing bonus. The employment agreement, which expires on December 31,
2000, provides Mr. Record with annual salary reviews at the beginning of each
fiscal year and provides for his participation in any Company bonus plans. In
connection with the employment agreement, Mr. Record was granted 125,000 stock
options under the Plan (as defined below) at an exercise price of $3.00. In the
event Mr. Record is terminated "without cause" or as a result of a "change of
control" prior to expiration date of the agreement, Mr. Record is entitled to
one-half of his annual base salary. The employment agreement also includes other
provisions relating to benefits customary in agreements of this nature.
EMPLOYEE STOCK OPTION PLAN
The Board of Directors and the stockholders of the Company have approved
the adoption of the 1997 PawnMart, Inc. Employee Stock Option Plan (the "Plan").
Stock options granted pursuant to the Plan may be either incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"), or non-qualified stock options. The
number of shares of Common Stock reserved for issuance pursuant to the Plan is
1,000,000 shares. As of the date of this Prospectus, options for 858,423 shares
of Common Stock had been granted and are outstanding under the Plan. All options
have exercise prices ranging from $3.00 to $4.25 per share of Common Stock.
The Plan is administered by the Compensation and Human Resources Committee
(the "Committee") of the Board of Directors. Subject to the provisions of the
Plan, the Committee has the exclusive power to grant options, to interpret the
Plan, to grant waivers of restrictions thereunder and to adopt such rules and
regulations as it may deem necessary or appropriate in keeping with the
objectives of the Plan.
Options granted pursuant to the Plan become exercisable on such date or
dates as may be established by the Committee. The exercise price of options
granted under the Plan may not be an amount less than the market value of Common
Stock at the time of grant. The exercise price must be paid in full in cash at
the time an option is exercised or, if permitted by the Committee, by means of
tendering previously owned shares of Common Stock held for at least six months
(at their fair market value), or partly in cash and partly in Common Stock.
In the event of a stock split, stock dividend, combination or
reclassification or certain other corporate transactions, the Committee is
authorized to make appropriate adjustments to the exercise price and number of
shares subject to options granted under the Plan. Subject to certain
limitations, the Board of Directors is authorized to amend, modify or terminate
the Plan to meet any changes in legal requirements or for any other purpose
permitted by law.
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<PAGE> 39
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 30, 1998, certain
information with respect to voting securities, the Common Stock shares,
beneficially owned by (i) each person who is known by the Company to
beneficially own more than five percent of the Company's outstanding shares of
Common Stock, (ii) the directors and certain executive officers of the Company,
individually; and (iii) the directors and all executive officers of the Company
as a group.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED(1)(2)
----------------------
NUMBER OF PERCENT OF
BENEFICIAL OWNER SHARES TOTAL
- ---------------- --------- ----------
<S> <C> <C>
Directors and Executive Officers:
Carson R. Thompson(3)(9).................................. 443,252 5.5%
Michael D. Record(3)(12).................................. 26,000 *
Thomas W. White(3)(13).................................... 9,892 *
Randall L. Haden(3)(10)................................... 52,722 *
Robert E. Camp(4)(14)..................................... 36,487 *
Robert D. Bourland, Jr.(3)(15)............................ 94,094 1.2%
James E. Berk(5)(14)...................................... 28,243 *
Monty R. Standifer(6)(14)................................. 53,243 *
Mark E. Kane(7)(14)....................................... 28,243 *
J. Roger Williams(8)(11).................................. 53,500 *
All directors and executive officers as a group (10
persons).................................................. 825,676 10.3%
</TABLE>
- ---------------
* Less than 1% of the outstanding shares of Common Stock.
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares
beneficially owned by such persons.
(2) The number of shares of Common Stock deemed outstanding includes shares
issuable pursuant to stock options that may be exercised within sixty (60)
days after December 30, 1998.
(3) His address is 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102.
(4) The address for Mr. Camp is Rural Route 1, Box 202, North Hero, Vermont
05474.
(5) The address for Mr. Berk is 5825 Obelin, Suite 100, San Diego, California
92121.
(6) The address for Mr. Standifer is 4121 International Parkway, Carrollton,
Texas 75007.
(7) The address for Mr. Kane is 1017 N. Central Expressway, Suite 200, Plano,
Texas 75075.
(8) The address for Mr. Williams is 1015 Fort Worth Street, Weatherford, Texas
76086.
(9) Includes options exercisable into 65,946 shares of Common Stock.
(10) Includes options and warrants exercisable into 16,649 shares of Common
Stock.
(11) Includes options and warrants exercisable into 49,000 shares of Common
Stock.
(12) Includes options exercisable into 25,000 shares of Common Stock.
(13) Includes options exercisable into 1,649 shares of Common Stock.
(14) Includes options exercisable into 20,000 shares of Common Stock.
(15) Includes options exercisable into 19,784 shares of Common Stock.
35
<PAGE> 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July of 1997, Mr. Thompson acquired an aggregate of 375,000 shares of
12% Series D Convertible Exchangeable Preferred Stock ("Series D Preferred
Stock") for $750,000 in connection with Mr. Thompson's becoming a Chief
Executive Officer of the Corporation. In connection with the completion of the
Company's initial public offering on March 20, 1998, the 375,000 shares of
Series D Preferred Stock were automatically converted into 187,500 shares of
Common Stock at a conversion price of $4.00. In March of 1996, Mr. Thompson
purchased a principal amount of $228,000 of 14% unsecured Convertible
Subordinated Debentures due June 30, 1999 which converted into 57,000 shares of
Common Stock in connection with the completion of the Company's initial public
offering on March 20, 1998. In October 1997, Mr. Standifer acquired an aggregate
of 50,000 shares of Series D Preferred Stock for $100,000 in connection with Mr.
Standifer's becoming a Director of the Company. In connection with the
completion of the Company's initial public offering on March 20, 1998, the
50,000 shares of Series D Preferred Stock were automatically converted into
25,000 shares of Common Stock at a conversion price of $4.00.
In consideration for serving as a Director of the Company, in September
1997, Mr. Berk received 8,243 shares of Common Stock; in April 1996 and August
1997, Mr. Camp received an aggregate amount of 16,487 shares of Common Stock; in
September 1997, Mr. Kane received 8,243 shares of Common Stock; in September
1997, Mr. Standifer received 8,243 shares of Common Stock and in April 1996 and
August 1997, Mr. Thompson received 8,243 and 4,946 shares of Common Stock,
respectively. In connection with his employment with the Company, in August
1997, Mr. Bourland received 16,487 shares of Common Stock. In connection with
joining the Company in October 1997, Mr. White received 8,243 shares of Common
Stock.
During January and February 1998, the Company entered into an aggregate of
$225,000 in unsecured notes payable to its Chief Executive Officer. The notes,
which accrued interest at 12 percent, were paid in full by the Company on March
20, 1998. The Company believes that said arrangement was no less favorable to
the Company than would be available from unrelated third parties.
The Company's Weatherford, Texas store is leased under a five year lease
agreement with a joint venture owned by certain stockholders. The terms of the
lease agreement include monthly rental payments of $4,000 and an initial lease
term which expires on March 31, 1999. The Company believes that said arrangement
is no less favorable to the Company than would be available from unrelated third
parties.
All future transactions between the Company and its officers, directors and
5% stockholders will be on terms no less favorable than could be obtained from
independent, third parties and will be approved by a majority of the
independent, disinterested directors of the Company. Furthermore, any
forgiveness of loans must be approved by a majority of the Company's independent
directors who do not have an interest in the transactions and who have access,
at the Company's expense, to the Company's counsel or independent counsel.
All ongoing transactions were ratified by a majority of the Company's
independent directors who do not have an interest in the transactions and who
had access, at the Company's expense, to the Company's counsel or independent
counsel. All past transactions which are now closed had at least two
disinterested directors at the time of the transactions.
36
<PAGE> 41
DESCRIPTION OF SUBORDINATED NOTES DUE 2004
The 12% Subordinated Notes mature on December 31, 2004, and are limited to
an aggregate principal amount of $10,000,000 issued pursuant to the Notes
Indenture (the "Note Indenture"). The Notes bear interest at the rate of 12% per
annum payable monthly on the fifteenth of each month beginning with the second
full calendar month following issuance, to the person in whose name the Notes
(or any predecessor Notes) are registered at the close of business on the 1st of
each preceding month.
Principal of, and premium, if any, and interest on, the Notes are payable,
and the Notes are exchangeable and transferable, at an office or agency of the
trustee for the Notes or such other office or agency permitted under the Note
Indenture. The Notes are issued only in fully registered form, without coupons,
in denominations of $1,000 or any integral multiple thereof. The Company may
require the holder of a Note to reimburse the Company for any out-of-pocket
costs incurred by the Company with respect to a transfer or exchange of a Note.
The Trustee for the Notes will be Trust Management, Inc., Fort Worth, Texas.
The following is a summary of the Notes. Capitalized terms used but not
otherwise defined in this summary have the meanings assigned thereto in the Note
Indenture.
Subordination. Payment of principal and interest and all other amounts on
the Notes is unsecured and subordinated; subject to the prior payment in full of
all Senior Debt. Upon (i) the maturity of any Senior Debt, whether by lapse of
time, upon redemption or by acceleration or otherwise, or (ii) any default in
the payment of any amount due in respect of principal or interest in respect of
any Senior Debt or (iii) any distribution or payment of assets or securities of
the Company upon any dissolution, winding up, liquidation or reorganization of
the Company, the holders of Senior Debt will be entitled to receive payment in
full of the principal thereof and interest due thereon before the holders of the
Notes are entitled to receive any payment. During the continuance of any default
or event of default under any agreement governing Senior Debt permitting
acceleration of the maturity thereof (other than a default or event of default
relating to payment of principal or interest, either at maturity, upon
redemption, by declaration or otherwise) and upon giving notice thereof, no
payment may be made on the Notes for a period of 179 days after the notice is
given, but payments may thereafter be resumed unless such payments are then
prohibited by the Note Indenture. Only one notice may be given effect within any
period of 360 consecutive days, and no more than one notice may be given with
respect to any continuing default or event of default. If, in any of the
situations referred to above, a payment is made to the trustee for the Notes or
to any holder thereof before all Senior Debt has been paid in full or provision
has been made for such payment to such trustee or such holder, such payment must
be paid over to the holders of Senior Debt or their respective representatives.
The failure to make payment on account of principal of or other interest on the
Notes by reason of such subordination will not prevent the occurrence of any
event of default under the Note Indenture.
Optional Redemption. The Notes may be redeemed at the option of the
Company, in whole or from time to time in part, at any time, on not more than 60
days notice, at the following redemption prices (expressed as percentages of the
principal amounts thereof), together with accrued and unpaid interest (if any)
to the date of redemption (subject to the rights of the holders of Notes to
receive interest due on the related interest payment date): (i) Prior to March
31, 2000 -- 103%; (ii) From April 1, 2000 to March 31, 2001 -- 102%; (iii) From
April 1, 2001 to March 31, 2002 -- 101%; and (iv) Subsequent to March 31,
2002 -- 100%.
Restrictive Covenants. Certain of the covenants in the Note Indenture are
restrictive on the operations and activities of the Company. The covenants
described are subject to a number of important qualifications and limitations.
Limitation on Restricted Payments. The Note Indenture provides that,
subject to certain exceptions, the Company is not permitted to, directly or
indirectly, make certain restricted payments if, at the time of such restricted
payments or after giving effect thereto: (i) a default or an event of default
will have occurred and be continuing under the terms of the Note Indenture, or
(ii) the aggregate amount of all
37
<PAGE> 42
restricted payments subsequent to the Notes Issuance Date (the "Notes Issue
Date") would exceed (A) the aggregate net cash proceeds received by the Company
from an issue or sale of certain of its qualified capital stock, subsequent to
the Notes Issue Date (other than capital stock issued or sold to (x) an employee
stock ownership plan or other trust established by the Company or (y) management
employees); and (B) the amount by which indebtedness of the Company, as
applicable, is reduced on the Company's balance sheet upon the conversion or
exchange of such indebtedness subsequent to the Notes Issue Date for qualified
capital stock of the Company (less the amount of any cash or other property
distributed by the Company upon such conversion or exchange).
Limitation on Sales of Assets. The Note Indenture provides that the Company
is not permitted to, make any asset disposition except in limited circumstances
unless (i) consideration is received by the Company at the time of such asset
disposition at least equal to the fair market value of the shares, property and
assets subject to such asset disposition, (ii) except in certain limited
circumstances, at least 75% of such consideration consists of cash, temporary
cash investments or the assumption of Senior Debt of the Company and the release
thereof from all liability relating thereto, (iii) 100% of the net cash proceeds
from such asset disposition are applied as follows: (A) within the 365 day
period after receipt of any net cash proceeds, or as permitted by the terms of
the Note Indenture (the last day of such period, an "Application Date"), the
Company may apply all or a portion of such net cash proceeds to reinvestment
(whether by acquisition of an existing business or expansion, including, without
limitation, capital expenditures) in one or more certain permitted lines of
business, or any combination thereof, and (B) to the extent such net cash
proceeds are not applied as set forth above in clause (A), the Company will
apply all remaining net cash proceeds of such asset disposition to an offer to
purchase (an "Asset Disposition Purchase Offer") Notes, on the first Business
Day occurring 60 Business Days after the Application Date (the "Asset
Disposition Purchase Date") for cash at a purchase price equal to 100% of the
principal amount of the Notes so purchased plus accrued and unpaid interest
thereon to the Asset Disposition Purchase Date, in accordance with the
procedures set forth in the Note Indenture. Any net cash proceeds which remain
after the acquisition by the Company of Notes in accordance with the procedures
set forth in the Note Indenture will cease to be net cash proceeds.
Notwithstanding the foregoing, the Company will not be required to make an Asset
Disposition Purchase Offer until such time as the aggregate amount of net cash
proceeds from asset dispositions required to be so applied to the purchase of
Notes exceeds $2,000,000, and then the total amount of such net cash proceeds
will be applied to an Asset Disposition Offer. The Company will comply, to the
extent applicable, with the requirements of Section 14(e) of the Exchange Act
and any other securities laws or regulations in connection with the repurchase
of Notes pursuant to any Asset Disposition Purchase Offer. To the extent that
the provisions of any securities laws or regulations conflict with provisions
relating to the Asset Disposition Purchase Offer, the Company will comply with
the applicable securities laws and regulations and will not be deemed to have
breached its obligations described above by virtue thereof.
Limitations on Transactions with Affiliates. The Note Indenture provides
that the Company is not permitted to, directly or indirectly, conduct any
business, enter into or permit to exist any transaction (including, without
limitation, the sale, conveyance, disposition, purchase, exchange or lease of
any property, the lending, borrowing or advancing of any money or the rendering
of any services) with, or for the benefit of, any affiliate of the Company
unless such affiliate transaction (i) is in the best interest of the Company,
(ii) is on terms as favorable to the Company as those that could be obtained at
the time of such transaction for a similar transaction in arm's-length dealings
with a Person who is not such an affiliate and (iii) with respect to each such
transaction involving aggregate payments or value in excess of $500,000, the
transaction is approved by a disinterested majority of the board of directors of
the Company; provided, however, that the foregoing will not prohibit (A) any
restricted payment permitted to be paid under "Limitation on Restricted
Payments", (B) any issuance of securities or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the board of
directors of the Company, (C) loans or advances permitted under the Note
Indenture to employees in the ordinary course of business in accordance with
past practices of the Company, (D) the payment of reasonable fees to independent
directors of the Company or (E) reasonable and customary indemnification
arrangements between the
38
<PAGE> 43
Company and their respective directors and officers (to the extent that such
indemnification arrangements are permitted under applicable law).
Trustee and Escrow Agent. The trustee and escrow agent for the Notes is
Trust Management, Inc., a Texas trust company.
DESCRIPTION OF CREDIT FACILITY
On October 13, 1998, the Company entered into a $10 million revolving
credit facility with Comerica Bank (the "Credit Facility" or "Senior Debt"). The
following description of the Credit Facility is qualified in its entirety by
reference to the original agreement, copies of which have been previously filed
with the Securities and Exchange Commission. The following is a description of
the general terms of the Credit Facility.
SECURITY
Indebtedness of the Company under the Credit Facility is secured by a first
priority security interest in substantially all of the personal property
(including, without limitation, accounts receivable, inventory, equipment and
fixtures, and general intangibles) of the Company, whether now owned or
hereafter acquired.
INTEREST
Indebtedness under the Credit Facility bears interest at a floating rate
equal to, at the Company's option, the Eurodollar Rate (as defined in the credit
agreement) plus 3.35% or Comerica Bank's Prime Rate plus .75%. The Company is
required to pay interest on a monthly basis under the terms of the terms of the
Credit Facility.
BORROWING BASE
Advances under the Credit Facility are limited to 70% of eligible pawn
loans, 70% of eligible pawn service charges receivable, and from 40% to 70% of
eligible inventories.
MATURITY
Loans made pursuant to the Credit Facility may be borrowed, repaid and
reborrowed from time to time until the October 13, 2001, subject to the
satisfaction of certain conditions on the date of any such borrowing.
FEES
The Company is required to pay Comerica Bank a commitment fee equal to .50%
per annum, payable monthly, on the committed undrawn amount of the Credit
Facility. In addition, the Company was required to pay a non-refundable closing
fee in an amount equal to 1% of the total commitment amount of the Credit
Facility.
CONDITIONS TO EXTENSIONS OF CREDIT
The obligation of Comerica Bank to make advances under the Credit Facility
are subject to the satisfaction of certain customary conditions including, but
not limited to, the absence of a default or event of default under the Credit
Facility, all representations and warranties under the Credit Facility being
true and correct in all material respects and the absence of a material adverse
change.
39
<PAGE> 44
COVENANTS
The Credit Facility contains customary covenants of the Company, including,
without limitation, restrictions on (i) the incurrence of debt, (ii) the sale of
assets, (iii) mergers, acquisitions and other business combinations, (iv)
investments, as well as prohibitions on the payment of dividends to, or the
repurchase or redemption of stock from shareholders and (v) various financial
covenants, including covenants requiring the maintenance of a minimum store
contribution percentage for stores open twelve months or more and a minimum net
worth requirement.
EVENTS OF DEFAULT
The Credit Facility contains certain customary events of default, including
without limitation, (i) the non-payment of principal or interest when due,
subject to the applicable grace periods in certain circumstances, (ii)
non-fulfillment of the covenants described above, (iii) certain changes in
control of the ownership of the Company, (iv) certain events of bankruptcy or
insolvency, (v) ERISA funding requirement deficiencies and (vi) material
judgments. If any event of default occurs, Comerica Bank will be entitled to
take all actions permitted to be taken by a secured creditor under the Uniform
Commercial Code and to accelerate the amounts due under the Credit Facility and
may require all such amounts outstanding thereunder to be immediately paid in
full.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock and selected
provisions of its Restated Certificate of Incorporation and By-laws, is a
summary and is qualified in its entirety by the Company's Restated Certificate
of Incorporation and By-laws, as amended, copies of which have been previously
filed with the Securities and Exchange Commission.
GENERAL
The total amount of authorized capital stock of the Company consists of
20,000,000 shares of Common Stock, par value $.01 per share and 10,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The
Company had 7,230,877 shares of Common Stock and no shares of Preferred Stock
issued at October 31, 1998. The Company has approximately 1,000 holders of
record of the Company's Common Stock. The following summary of certain
provisions of the Company's capital stock describes all material provisions of,
but does not purport to be complete and is subject to, and qualified in its
entirety by, the Restated Certificate of Incorporation and the By-laws of the
Company which have been previously filed with the Securities and Exchange
Commission and by the provisions of applicable law.
The Restated Certificate of Incorporation and By-laws contains certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and which may have the
effect of delaying, deferring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
the Board of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Subject to the prior rights of the holders of any
Preferred Stock, the holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available therefor at such time and
in such amounts as the Board of Directors may from time to time determine. The
shares of Common Stock are not convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Each outstanding share of Common Stock is entitled to one vote
on all
40
<PAGE> 45
matters submitted to a vote of stockholders. There is no cumulative voting.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Except as otherwise required by law or the Restated Certificate of
Incorporation, the Common Stock will vote on all matters submitted to a vote of
the stockholders, including the election of directors.
PREFERRED STOCK
The Board of Directors may, without further action by the Company's
stockholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. Upon the affirmative vote of a majority
of the total number of directors then in office, the Board of Directors, without
stockholder approval, may issue shares of Preferred Stock with voting and
conversion rights which could adversely affect the holders of shares of Common
Stock. The Company has no present intention to issue any shares of Preferred
Stock.
SERIES A WARRANTS
Presently, the Company has outstanding Series A Warrants to purchase an
aggregate of 1,380,000 shares of Common Stock at an exercise price of $6.00 per
share. The Series A Warrants are registered in a form pursuant to an agreement
dated March 17, 1998 (the "Series A Warrant Agreement"), between the Company and
Continental Stock Transfer & Trust Company, a New York corporation, as the
Warrant Agent (the "Warrant Agent"). The following discussion of certain terms
and provisions of the Series A Warrants is qualified in its entirety by
reference to the Series A Warrant Agreement.
Each of the Series A Warrants entitles the registered holder to purchase
one share of Common Stock. The Series A Warrants are exercisable at a price
equal to $6.00 subject to certain adjustments. The Series A Warrants are
entitled to the benefit of adjustments in their exercise prices and in the
number of shares of Common Stock or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
The Series A Warrants may be exercised at any time and continuing
thereafter until March 17, 2003, unless such period is extended by the Company.
After the expiration date, Series A Warrant holders shall have no further
rights. Series A Warrants may be exercised by surrendering the certificate
evidencing such Series A Warrant, with the form of election to purchase on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price and any transfer tax, to the Warrant Agent. If
less than all of the Series A Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of Series A
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price.
Series A Warrant holders do not have any voting or any other rights as
shareholders of the Company. The Company has the right at any time to redeem the
Series A Warrants, at a price of $.05 per Series A Warrant, by written notice to
the registered holders thereof, mailed not less than 30 nor more than 60 days
prior to the Redemption Date. The Company may exercise this right only if the
closing bid price for the Common Stock for seven trading days during a 10
consecutive trading day period ending no more than 15 days prior to the date
that the notice of redemption is given, equals or exceeds $9.00 per share,
subject to adjustment. If the Company exercises its right to call Series A
Warrants for redemption, such Series A Warrants may still be exercised until the
close of business on the day immediately preceding the
41
<PAGE> 46
Redemption Date. If any Series A Warrant called for redemption is not exercised
by such time, it will cease to be exercisable, and the holder thereof will be
entitled only to the repurchase price. Notice of redemption will be mailed to
all holders of Series A Warrants of record at least 30 days, but not more than
60 days, before the Redemption Date. The foregoing notwithstanding, the Company
may not call the Series A Warrants at any time that a current registration
statement under the Act is not then in effect. Any redemption of the Series A
Warrants prior to March 17, 1999 shall require the written consent of First
London Securities Corporation, the Company's underwriter during it initial
public offering of Common Stock.
The Series A Warrant Agreement permits the Company and the Warrant Agent
without the consent of Series A Warrant holders, to supplement or amend the
Series A Warrant Agreement in order to cure any ambiguity, manifest error or
other mistake, or to address other matters or questions arising thereafter that
the Company and the Warrant Agent deem necessary or desirable and that do not
adversely affect the interest of any Series A Warrant holder. The Company and
the Warrant Agent may also supplement or amend the Series A Warrant Agreement in
any other respect with the written consent of holders of not less than a
majority in the number of the Series A Warrants then outstanding; however, no
such supplement or amendment may (i) make any modification of the terms upon
which the Series A Warrants are exercisable or may be redeemed; or (ii) reduce
the percentage interest of the holders of the Series A Warrants without the
consent of each Series A Warrant holder affected thereby.
In order for the holder to exercise a Series A Warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of Common Stock underlying the Series A Warrants,
and the issuance of such shares to the holder must be registered, qualified or
exempt under the laws of the state in which the holder resides. If required, the
Company will file a new registration statement with the Commission with respect
to the securities underlying the Series A Warrants prior to the exercise of such
Series A Warrants and will deliver a prospectus with respect to such securities
to all holders thereof as required by Section 10(a)(3) of the Act. See "Risk
Factors -- Necessity to Maintain Current Prospectus and Registration Statement"
and "State Blue Sky Registration Required to Exercise Warrants."
SERIES B WARRANTS
Presently, the Company has outstanding Series B Warrants to purchase an
aggregate of 1,380,000 shares of Common Stock at an exercise price of $8.00 per
share. The Series B Warrants are registered in a form pursuant to an agreement
dated March 17, 1998 (the "Series B Warrant Agreement"), between the Company and
Warrant Agent. The following discussion of certain terms and provisions of the
Series B Warrants is qualified in its entirety by reference to the Series B
Warrant Agreement.
Each of the Series B Warrants entitles the registered holder to purchase
one share of Common Stock. The Series B Warrants are exercisable at a price
equal to $8.00 subject to certain adjustments. The Series B Warrants are
entitled to the benefit of adjustments in their exercise prices and in the
number of shares of Common Stock or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
The Series B Warrants may be exercised at any time and continuing
thereafter until March 17, 2004, unless such period is extended by the Company.
After the expiration date, Series B Warrant holders shall have no further
rights. Series B Warrants may be exercised by surrendering the certificate
evidencing such Series B Warrant, with the form of election to purchase on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price and any transfer tax, to the Warrant Agent. If
less than all of the Series B Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of Series B
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price.
Series B Warrant holders do not have any voting or any other rights as
shareholders of the Company. The Company has the right at any time to redeem the
Series B Warrants, at a price of $.05 per Series B
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<PAGE> 47
Warrant, by written notice to the registered holders thereof, mailed not less
than 30 nor more than 60 days prior to the Redemption Date. The Company may
exercise this right only if the closing bid price for the Common Stock for seven
trading days during a 10 consecutive trading day period ending no more than 15
days prior to the date that the notice of redemption is given, equals or exceeds
$9.00 per share, subject to adjustment. If the Company exercises its right to
call Series B Warrants for redemption, such Series B Warrants may still be
exercised until the close of business on the day immediately preceding the
Redemption Date. If any Series B Warrant called for redemption is not exercised
by such time, it will cease to be exercisable, and the holder thereof will be
entitled only to the repurchase price. Notice of redemption will be mailed to
all holders of Series B Warrants of record at least 30 days, but not more than
60 days, before the Redemption Date. The foregoing notwithstanding, the Company
may not call the Series B Warrants at any time that a current registration
statement under the Act is not then in effect. Any redemption of the Series B
Warrants prior to March 17, 1999 shall require the written consent of First
London Securities Corporation, the Company's underwriter during it initial
public offering of Common Stock.
The Series B Warrant Agreement permits the Company and the Warrant Agent
without the consent of Series B Warrant holders, to supplement or amend the
Series B Warrant Agreement in order to cure any ambiguity, manifest error or
other mistake, or to address other matters or questions arising thereafter that
the Company and the Warrant Agent deem necessary or desirable and that do not
adversely affect the interest of any Series B Warrant holder. The Company and
the Warrant Agent may also supplement or amend the Series B Warrant Agreement in
any other respect with the written consent of holders of not less than a
majority in the number of the Series B Warrants then outstanding; however, no
such supplement or amendment may (i) make any modification of the terms upon
which the Series B Warrants are exercisable or may be redeemed; or (ii) reduce
the percentage interest of the holders of the Series B Warrants without the
consent of each Series B Warrant holder affected thereby.
In order for the holder to exercise a Series B Warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of Common Stock underlying the Series B Warrants,
and the issuance of such shares to the holder must be registered, qualified or
exempt under the laws of the state in which the holder resides. If required, the
Company will file a new registration statement with the Commission with respect
to the securities underlying the Series B Warrants prior to the exercise of such
Series B Warrants and will deliver a prospectus with respect to such securities
to all holders thereof as required by Section 10(a)(3) of the Act. See "Risk
Factors -- Necessity to Maintain Current Prospectus and Registration Statement"
and "State Blue Sky Registration Required to Exercise Warrants."
SERIES C WARRANTS
In connection with this Offering, the Company has agreed to issue to Massie
Capital, Ltd. as additional compensation for the sale of each $1,000 in
principal amount of Notes sold, up to 600,000 Series C Warrants to purchase an
aggregate of 600,000 shares of Common Stock at an exercise price of $6.00 per
share. Massie Capital, Ltd. will distribute up to 400,000 of such Series C
Warrants to participating broker dealers as additional compensation under the
Offering. The Series C Warrants issued in connection with this Offering will be
in a registered form pursuant to an agreement dated March , 1999 (the "Series
C Warrant Agreement"), between the Company and Warrant Agent. The following
discussion of certain terms and provisions of the Series C Warrants is qualified
in its entirety by reference to the Series C Warrant Agreement.
Each of the Series C Warrants entitles the holder thereof to purchase one
share of Common Stock. The Series C Warrants are exercisable at a price equal to
$6.00 subject to certain adjustments. The Series C Warrants are entitled to the
benefit of adjustments in their exercise prices and in the number of shares of
Common Stock or other securities deliverable upon the exercise thereof in the
event of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger.
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<PAGE> 48
The Series C Warrants may be exercised at any time and continuing
thereafter until March 31, 2005, unless such period is extended by the Company.
After the expiration date, Series C Warrant holders shall have no further
rights. Series C Warrants may be exercised by surrendering the certificate
evidencing such Series C Warrant, with the form of election to purchase on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price and any transfer tax, to the Warrant Agent. If
less than all of the Series C Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of Series C
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price.
Series C Warrant holders do not have any voting or any other rights as
shareholders of the Company. The Company has the right at any time to redeem the
Series C Warrants, at a price of $.05 per Series C Warrant, by written notice to
the registered holders thereof, mailed not less than 30 nor more than 60 days
prior to the Redemption Date. The Company may exercise this right only if the
closing bid price for the Common Stock for seven trading days during a 10
consecutive trading day period ending no more than 15 days prior to the date
that the notice of redemption is given, equals or exceeds $9.00 per share,
subject to adjustment. If the Company exercises its right to call Series C
Warrants for redemption, such Series C Warrants may still be exercised until the
close of business on the day immediately preceding the Redemption Date. If any
Series C Warrant called for redemption is not exercised by such time, it will
cease to be exercisable, and the holder thereof will be entitled only to the
repurchase price. Notice of redemption will be mailed to all holders of Series C
Warrants of record at least 30 days, but not more than 60 days, before the
Redemption Date. The foregoing notwithstanding, the Company may not call the
Series C Warrants at any time that a current registration statement under the
Act is not then in effect.
The Series C Warrant Agreement permits the Company and the Warrant Agent
without the consent of Series C Warrant holders, to supplement or amend the
Series C Warrant Agreement in order to cure any ambiguity, manifest error or
other mistake, or to address other matters or questions arising thereafter that
the Company deems necessary or desirable and that do not adversely affect the
interest of any Series C Warrant holder. The Company may also supplement or
amend the Series C Warrant Agreement in any other respect with the written
consent of holders of not less than a majority in the number of the Series C
Warrants then outstanding; however, no such supplement or amendment may (i) make
any modification of the terms upon which the Series C Warrants are exercisable
or may be redeemed; or (ii) reduce the percentage interest of the holders of the
Series C Warrants without the consent of each Series C Warrant holder affected
thereby.
In order for the holder to exercise a Series C Warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of Common Stock underlying the Series C Warrants,
and the issuance of such shares to the holder must be registered, qualified or
exempt under the laws of the state in which the holder resides. If required, the
Company will file a new registration statement with the Commission with respect
to the securities underlying the Series C Warrants prior to the exercise of such
Series C Warrants and will deliver a prospectus with respect to such securities
to all holders thereof as required by Section 10(a)(3) of the Act. See "Risk
Factors -- Necessity to Maintain Current Prospectus and Registration Statement,"
"Warrants to Brokers," and "State Blue Sky Registration Required to Exercise
Warrants."
REPRESENTATIVE WARRANTS
Presently, the Company has outstanding Representative's Warrants to
purchase up to 120,000 shares, 120,000 Series A Warrants and 120,000 Series B
Warrants. The Representatives' Warrants are exercisable for a four-year period
commencing March 17, 1999 at an exercise price of $8.70 per share of Common
Stock, $.15 per warrant for the Series A Warrants, and $.075 per warrant for the
Series B Warrants. In addition, the Company has granted certain registration
rights with respect to registration of the shares of Common Stock and Warrants
underlying the Representative's Warrants (the "Underlying Warrants") and the
shares of Common Stock issuable upon exercise of the Underlying Warrants. The
Company has agreed to pay the Representative upon the exercise or redemption of
the Series A Warrants and Series B Warrants a fee equal to 5% of the gross
proceeds received by the Company from the exercise of the
44
<PAGE> 49
Series A Warrants and Series B Warrants and 5% of the aggregate redemption price
for Series A Warrants and Series B Warrants redeemed. Such fee will be paid to
the Representative or its designee no sooner March 17, 1999. The Company has
agreed to indemnify the First London Securities Corporation, the Company's
underwriter in its initial public offering, against certain liabilities arising
under the Securities Act of 1933.
OTHER WARRANTS
Presently, the Company has outstanding warrants to purchase an aggregate of
219,347 shares of Common Stock at an exercise price of $5.50 per share. The
Company has granted holders of these warrants certain piggy-back registration
rights. These warrants expire January 2, 2002.
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate of Incorporation provides for the Board to be
divided into three classes, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of the Board will be elected each year.
See "Management." Under the Delaware General Corporation Law, directors serving
on a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of the
outstanding voting stock from obtaining control of the Board until the second
annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the effect
of discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company and could increase the likelihood
that incumbent directors will retain their positions.
The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot be
taken by written consent in lieu of a meeting. The Restated Certificate of
Incorporation and the By-laws provide that, except as otherwise required by law,
special meetings of the stockholders can only be called pursuant to a resolution
adopted by a majority of the Board of Directors or by the Chief Executive
Officer of the Company. Stockholders will not be permitted to call a special
meeting or to require the Board to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board or by a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has given to the Company's Secretary timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or deter a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
The Restated Certificate of Incorporation and By-laws provide that the
affirmative vote of holders of at least 66 2/3% of the total votes eligible to
be cast in the election of directors is required to amend, alter, change or
repeal certain of their provisions. This requirement of a super-majority vote to
approve amendments to the Restated Certificate of Incorporation and By-laws
could enable a minority of the Company's stockholders to exercise veto power
over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company will be subject to the "Business Combination" provisions of the
Delaware General Corporation Law. In general, such provisions prohibit a
publicly held Delaware corporation from engaging
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<PAGE> 50
in various "business combination" transactions with any "interested stockholder"
for a period of three years after the date of the transaction in which the
person became an "interested stockholder," unless: (i) the transaction is
approved by the Board of Directors prior to the date the "interested
stockholder" obtained such status; (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
"interested stockholder," owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the number of shares outstanding those shares owned by
(a) persons who are directors and also officers and (b) employee stock plans in
which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or subsequent to such date the "business combination" is
approved by the board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested stockholder." A
"business combination" is defined to include mergers, asset sales and other
transactions resulting in financial benefit to a stockholder. In general, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a corporation's
voting stock. The statute 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.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate of Incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, the Restated Certificate of Incorporation will provide that the
Company shall indemnify directors and officers of the Company to the fullest
extent permitted by such law. The Company has entered into separate
indemnification agreements with its current directors and executive officers
which provides such persons indemnification protection in the event the Restated
Certificate of Incorporation is subsequently amended.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Warrants is
Continental Stock Transfer & Trust Company, a New York corporation.
PLAN OF DISTRIBUTION
The Company is offering up to $10,000,000 in aggregate principal amount of
the Notes. The Notes are being offered by participating soliciting broker
dealers who are members of the National Association of Securities Dealers, Inc.
("NASD"). Such broker dealers shall enter into selling agreements with the
Company to use their best efforts to solicit subscriptions for the Notes but
will make no legal commitment to sell to investors, or to buy as dealers, any
specific amount of the Notes. The Company shall agree to pay each soliciting
broker dealer, in consideration for its services, a sales commission of 6.0% of
the principal amount Notes sold to investors which such broker dealer
identified. Of that amount, a portion may constitute an unallocated due
diligence and marketing fee. The Company has agreed to indemnify the broker
dealers against certain liabilities, including liabilities under applicable
securities laws.
Massie Capital, Ltd., a duly licensed member of the NASD, is serving as
managing broker dealer for the Offering. Massie Capital, Ltd. has agreed to
solicit the participation in the Offering of broker dealers acceptable to the
Company, and to assist participating broker dealers in the distribution of this
Prospectus. For their services as managing broker dealer, Massie Capital, Ltd.
will receive a commission of 2.0% of the principal amount of Notes sold in this
Offering. Massie Capital, Ltd. will also serve as a selling broker dealer, and
in such case, will be entitled to a sales commission of 6.0% of the principal
amount of the Notes sold to investors identified by them. In addition, the
Company has agreed to pay Massie Capital, Ltd. a non-accountable expense
allowance of three percent (3%) of the gross proceeds of this Offering, of which
$35,000 has been paid to date. Massie Capital, Ltd.'s expenses in excess of the
non-accountable expense allowance will be paid by Massie Capital, Ltd. To the
extent that the expenses of Massie Capital,
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<PAGE> 51
Ltd. are less that the amount of the non-accountable expense allowance received,
such excess shall be deemed to be additional compensation to Massie Capital,
Ltd.
The Company has agreed to issue 60 Series C Warrants to Massie Capital,
Ltd. for each $1,000 in principal amount of Notes sold. Massie Capital, Ltd.
will distribute up to 40 of such Series C Warrants to participating broker
dealers as additional compensation under the Offering. Each Series C Warrant
will have an exercise price of $6.00 and will mature on March 31, 2005. See
"Description of Capital Stock -- Series C Warrants."
Investor funds will be held in a subscription escrow account with Trust
Management, Inc., as escrow agent, until a minimum of $250,000 in principal
amount of the Notes are sold. In the event that the minimum amount of the Notes
is not subscribed by June 30, 1999 (or any earlier termination of the Offering),
the Offering will be terminated and the escrowed funds, plus any interest
thereon, will be promptly returned to the subscribing investors by the escrow
agent. Upon the subscription of the minimum amount of Notes, the escrowed funds
(less interest earned thereon which will be paid to the subscribing investors)
will be released to the Company. Any subsequent sales proceeds from the sale of
additional Notes will be immediately available for use by the Company. All
subscriptions are subject to the right of the Company to reject any subscription
in whole or in part.
The Offering will terminate on September 30, 2000, unless sooner terminated
by the Company upon failure to achieve the minimum subscription amount, upon the
sale of all of the Notes or if the Company believes that additional selling
efforts will be unsuccessful. Early termination of the Offering may result in
the Company selling less than $10 million in aggregate principal amount of the
Notes and may expose prior purchasers of Notes to certain risks. See "Risk
Factors -- Inability to Sell Maximum Subscription of Notes."
The Company has agreed to indemnify participating broker dealers against
any costs or liabilities incurred by the broker dealer by reasons of
misstatements or omissions to state material facts in connection with the
statements made in the Registration Statement and the Prospectus. The broker
dealers have agreed in turn to indemnify the Company against any liabilities by
reason of misstatements or omissions to state material facts in connection with
the statements made in the Prospectus, based on information relating to the
broker dealer and furnished in writing by the broker dealer. To the extent that
this section may purport to provide exculpation from possible liabilities
arising from the federal securities laws, in the opinion of the Commission, such
indemnification is contrary to public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of such agreements which are filed as exhibits to the Registration Statement.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulation promulgated thereunder, judicial authority and current administrative
rulings and practice, all of which are subject to change, possibly with
retroactive effect. This discussion does not purport to deal with all aspects of
U.S. Federal income taxation that might be relevant to particular holders in
light of their personal investment circumstances or status, nor does it discuss
the U.S. Federal income tax consequences to certain types of holders subject to
special treatment under the U.S. Federal income tax laws (for example, financial
institutions, insurance companies, dealers in securities, tax-exempt
organizations, or taxpayers holding the Notes as part of a "straddle," "hedge"
or "conversion transaction"). Moreover, the effect of any applicable state,
local, foreign, gift, estate or other tax laws generally is not discussed.
Except as otherwise indicated below, this discussion assumes that the Notes
are held as capital assets (as defined in Section 1221 of the Code) by holders
thereof. Additionally, the discussion assumes that the holder of the Note is (i)
an individual who is a citizen or resident of the United States, (ii) a
corporation,
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<PAGE> 52
partnership or other entity created or organized under the laws of the United
States, or any political subdivision thereof, (iii) an estate the income of
which is subject to U.S. Federal income taxation regardless of its source, (iv)
a trust with respect to which a court within the United States is able to
exercise primary supervision of the administration of such trust and one or more
United States fiduciaries have the authority to control all substantial
decisions of such trust or (v) a person whose worldwide income or gain is
otherwise subject to U.S. Federal income taxation on a net basis. Potential
Federal income tax consequences to persons who are not listed above are not
addressed. Prospective holders are urged to consult their own tax advisors
regarding the Federal, state, local, foreign and other tax consequences and
other tax considerations of the acquisition, ownership and disposition of the
Notes. This discussion is limited to the material U.S. Federal income tax
consequences to initial holders of the Notes.
Stated Interest on Notes. The stated interest on the Notes generally will
be includable in the income of the holder as ordinary income at the time such
interest is received or accrued, in accordance with such holder's method of
accounting for U.S. Federal income tax purposes.
Market Discount on Resale of Notes. A holder of a Note should be aware that
the purchase or resale of a Note may be affected by the "market discount"
provisions of the Code. The market discount rules generally provide that if a
holder of a Note purchases the Note at a market discount (i.e. a discount other
than at original issue), any gain recognized upon the disposition of the Notes
by the holder will be taxable as ordinary interest income, rather than as
capital gain, to the extent such gain does not exceed the accrued market
discount on such Note at the time of disposition. "Market discount" generally
means the excess, if any, of a Note's stated redemption price at maturity over
the price paid by the holder thereof, unless a de minimis exception applies. A
holder who acquires a Note at a market discount also may be required to defer
the deduction of a portion of the amount of interest that the holder paid or
accrued during the taxable year on indebtedness incurred or maintained to
purchase or carry such Note, if any.
Any principal payments on a Note acquired by a holder at a market discount
will be included in gross income as ordinary income (generally, as interest
income) to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of the accrued market discount for purposes of
determining the tax treatment of subsequent payments on, or dispositions of, a
Note is reduced by the amounts so treated as ordinary income.
A holder of a Note acquired at a market discount may elect to include
market discount in gross income, for Federal income tax purposes, as such market
discount accrues, either on a straight-line basis or on a constant interest rate
basis. This current inclusion election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the IRS. If a holder of a Note makes such an election, the foregoing rules
regarding the recognition of ordinary interest income on sales and other
dispositions and the receipt of principal payments with respect to such Note,
and regarding the deferral of interest deductions on indebtedness incurred or
maintained to purchase or carry such Note, will not apply.
Amortizable Bond Premium. A subsequent holder that purchases a Note for an
amount in excess of the sum of all amounts payable on the Note after the
purchase date, other than stated interest, will be considered to have purchased
the Note at a "premium." A holder generally may elect to amortize the premium
over the remaining term of the Note on a constant yield method. The amount
amortized in any year will be treated as a reduction of the holder's interest
income from the Note. Bond premium on a Note held by a holder that does not make
such an election will decrease the gain or otherwise increase the loss otherwise
recognized on the disposition of the Note. The election to amortize premium on a
constant yield method once made applies to all debt obligations held or
subsequently acquired by the electing holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
Sale, Exchange or Retirement of the Notes. In general, subject to the
market discount provisions and amortizable bond premium provisions discussed
above, upon the sale, exchange or redemption of a Note, a holder generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash proceeds and the fair market value of any property received on the sale,
exchange or redemption (except
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<PAGE> 53
to the extent such amount is attributable to accrued interest income not
previously included in income which is taxable as ordinary income) and (ii) such
holders' adjusted tax basis in the Note. A holder's adjusted tax basis in a Note
generally will equal the cost of the Note to such holder. Such capital gain or
loss will be long-term capital gain or loss if the holder's holding period in
the Note is more than one year at the time of sale, exchange or redemption.
Backup Withholding. A holder of a Note may be subject to backup withholding
at the rate of 31% with respect to interest paid on the Notes and the proceeds
from the sale, exchange, redemption or retirement of the Note, unless the holder
is (i) a corporation or comes within other exempt categories and, when required,
demonstrates that fact or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A holder of a note who does not provide the Company with his correct taxpayer
identification number may be subject to penalties imposed by the IRS.
A holder of a Note who is not a U.S. person will generally be exempt from
backup withholding and information reporting requirements, but may be required
to comply with certification and identification procedures in order to obtain an
exemption from backup withholding and information reporting.
Any amount paid as backup withholding will be creditable against the
holder's U.S. Federal income tax liability.
LEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for the
Company by Jordaan & Pennington, P.L.L.C., Dallas, Texas. Certain legal matters
in connection with the sale of the Securities offered hereby will be passed on
for the managing broker dealer by Tom Herbelin, Dallas, Texas. Members of
Jordaan & Pennington, P.L.L.C. own beneficially an aggregate of 90,677 shares of
Common Stock.
EXPERTS
The consolidated financial statements of PawnMart, Inc. and subsidiaries as
of January 31, 1998 and January 26, 1997, and for each of the years in the
three-year period ended January 31, 1998, have been included herein in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
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CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 55
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' equity (deficit),
and cash flows for each of the years in the three-year period ended January 31,
1998. 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 each of the years in the
three-year period ended January 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Fort Worth, Texas
April 20, 1998
F-2
<PAGE> 56
PAWNMART, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JANUARY 26, JANUARY 31, OCTOBER 31,
1997 1998 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS (Note 13)
Current assets:
Cash and cash equivalents................................. $ 143 $ 151 $ 178
Accounts receivable....................................... 23 32 129
Pawn service charges receivable........................... 230 233 299
Loans (note 6)............................................ 2,227 2,421 2,958
Inventories, net (note 6)................................. 1,971 1,944 2,610
Prepaid expenses and other current assets................. 18 98 228
------- -------- --------
Total current assets................................ 4,612 4,879 6,402
------- -------- --------
Property and equipment, net (notes 4 and 6)................. 1,049 802 1,720
Goodwill and other intangible assets, net (note 5).......... 123 63 40
Debt issuance costs, net of accumulated amortization of
$330, $601 and $37 at January 26, 1997, January 31, 1998
and October 31, 1998, respectively (note 6)............... 555 545 106
Other assets................................................ 135 388 139
------- -------- --------
$ 6,474 $ 6,677 $ 8,407
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable, including $80 to a company owned by a
stockholder at January 26, 1997......................... $ 331 $ 404 $ 544
Bank overdraft............................................ 110 -- --
Accrued interest payable.................................. 103 142 6
Accrued payroll and payroll taxes......................... 385 114 81
Deferred rent............................................. 115 105 117
Accrued bonuses........................................... 79 33 34
Other accrued expenses.................................... 284 253 132
Current installments of notes payable, including $50 and
$347 payable to stockholders at January 26, 1997 and
January 31, 1998, respectively (notes 2 and 6).......... 1,057 2,070 109
------- -------- --------
Total current liabilities........................... 2,464 3,121 1,023
------- -------- --------
Long-term notes payable, net of current installments (notes
2 and 6).................................................. 8,288 9,778 1,600
------- -------- --------
Total liabilities................................... 10,752 12,899 2,623
------- -------- --------
Stockholder's equity (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 at January 26, 1997 and
January 31, 1998 (liquidation preference of $.50 per
share)................................................. 20 20 --
Series B Convertible Preferred stock; 1,089,020 and
1,091,858 shares issued at January 26, 1997 and January
31, 1998, respectively (liquidation preference of $2.00
per share)............................................. 11 11 --
Series C Convertible Preferred stock; 26,842 shares
issued and outstanding at January 31, 1998 (liquidation
preference of $2.50 per share)......................... -- -- --
12% Series D Convertible Exchangeable Preferred stock;
542,500 shares issued and outstanding at January 31,
1998 (liquidation preference of $2.00 per share)....... -- 6 --
Common stock, $.01 par value; authorized 20,000,000
shares; 1,844,998, 1,950,424, and 7,230,877 shares
issued at January 26, 1997, January 31, 1998 and October
31, 1998, respectively.................................. 18 19 72
Series A redeemable common stock purchase warrants, $.125
par value; 1,380,000 warrants issued and outstanding at
October 31, 1998........................................ -- -- 173
Series B redeemable common stock purchase warrants, $.125
par value; 1,380,000 warrants issued and outstanding at
October 31, 1998........................................ -- -- 86
Additional paid-in capital................................ 3,276 7,657 22,242
Preferred stock discount.................................. -- (674) --
Accumulated deficit....................................... (7,538) (13,191) (16,719)
------- -------- --------
(4,213) (6,152) 5,854
------- -------- --------
Less treasury stock, at cost: 9,892 common shares and
25,000 Series B Convertible Preferred shares at January
26, 1997, 13,189 common shares and 25,000 Series B
Convertible Preferred shares at January 31, 1998, and
21,432 common shares at October 31, 1998................ (65) (70) (70)
------- -------- --------
Total stockholders' equity (deficit)................ (4,278) (6,222) 5,784
Commitments, contingencies and subsequent events (notes 2,
12 and 13)
------- -------- --------
$ 6,474 $ 6,677 $ 8,407
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 57
PAWNMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
JANUARY 28, JANUARY 26, JANUARY 31, OCTOBER 26, OCTOBER 31,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales................ $ 3,052 $ 5,523 $ 7,215 $ 4,972 $ 5,525
Pawn service charges............. 1,338 2,291 2,862 2,106 2,438
Other............................ 34 89 101 67 92
------- ------- ------- ------- -------
Total revenues........... 4,424 7,903 10,178 7,145 8,055
Cost of sales...................... 1,942 3,739 5,192 3,392 3,754
------- ------- ------- ------- -------
2,482 4,164 4,986 3,753 4,301
------- ------- ------- ------- -------
Expenses:
Store operating (note 12)........ 2,626 3,652 4,040 2,866 3,544
Interest (note 6)................ 720 1,360 3,761 1,356 866
Depreciation..................... 315 435 444 332 374
Amortization..................... 60 60 60 45 45
Corporate administrative (note
8)............................ 1,589 1,713 2,117 1,510 2,308
------- ------- ------- ------- -------
Total expenses........... 5,310 7,220 10,422 6,109 7,137
------- ------- ------- ------- -------
Net loss................. (2,828) (3,056) (5,436) (2,356) (2,836)
Preferred stock dividends (note
9)............................... -- -- 217 -- 692
------- ------- ------- ------- -------
Net loss to common
stockholders........... $(2,828) $(3,056) $(5,653) $(2,356) $(3,528)
======= ======= ======= ======= =======
Loss per common share (note 3(m)):
Basic............................ $ (1.68) $ (1.67) $ (3.01) $ (1.27) $ (0.56)
======= ======= ======= ======= =======
Diluted.......................... $ (1.68) $ (1.67) $ (3.01) $ (1.27) $ (0.56)
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 58
PAWNMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED JANUARY 28, 1996, JANUARY 26, 1997 AND JANUARY 31, 1998 AND NINE
MONTHS ENDED OCTOBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A SERIES B
REDEEMABLE REDEEMABLE
COMMON STOCK COMMON STOCK
PREFERRED STOCK COMMON STOCK PURCHASE WARRANTS PURCHASE WARRANTS ADDITIONAL
------------------- ------------------ ------------------ ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------ --------- ------ --------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 29, 1995...... 2,448,139 $ 25 1,604,766 $16 -- $ -- -- $-- $ 2,036
Issuance of common stock (note
8)........................... -- -- 154,305 1 -- -- -- -- 3
Issuance of preferred stock,
net of $96 issue costs (note
8)........................... 626,487 6 -- -- -- -- -- -- 1,151
Acquisition of 25,000 shares of
Series B Convertible
Preferred stock (note 8)..... -- -- -- -- -- -- -- -- --
Capital contribution for
services (note 8)............ -- -- -- -- -- -- -- -- 20
Net loss....................... -- -- -- -- -- -- -- -- --
---------- ---- --------- --- --------- ---- --------- --- -------
Balance at January 28, 1996...... 3,074,626 31 1,759,071 17 -- -- -- -- 3,210
Issuance of common stock (note
8)........................... -- -- 85,927 1 -- -- -- -- 30
Issuance of preferred stock
(note 8)..................... 14,394 -- -- -- -- -- -- -- 36
Acquisition of 9,892 shares of
common stock (note 8)........ -- -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- -- --
---------- ---- --------- --- --------- ---- --------- --- -------
Balance at January 26, 1997...... 3,089,020 31 1,844,998 18 -- -- -- -- 3,276
Issuance of common stock (note
8)........................... -- -- 105,426 1 -- -- -- -- 30
Acquisition of 3,297 shares of
common stock (note 8)........ -- -- -- -- -- -- -- -- --
Issuance of preferred stock
(notes 8 and 11)............. 572,180 6 -- -- -- -- -- -- 1,147
Recognition of Convertible
Subordinated Debenture
beneficial conversion feature
(note 6)..................... -- -- -- -- -- -- -- -- 2,380
Recognition of preferred stock
beneficial conversion feature
(note 9)..................... -- -- -- -- -- -- -- -- 824
Amortization of preferred stock
beneficial conversion feature
(note 9)..................... -- -- -- -- -- -- -- -- --
Preferred stock dividends
paid......................... -- -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- -- --
---------- ---- --------- --- --------- ---- --------- --- -------
Balance at January 31, 1998...... 3,661,200 37 1,950,424 19 -- -- -- -- 7,657
Issuance of common stock and
warrants (note 2)
(Unaudited).................. -- -- 1,365,000 14 1,380,000 173 1,380,000 86 5,310
Issuance of unregistered common
stock in exchange for
services (Unaudited)......... -- -- 44,445 -- -- -- -- -- 200
Conversion of Convertible
Subordinated Debentures (note
2) (Unaudited)............... -- -- 2,380,000 24 -- -- -- -- 9,053
Conversion of preferred stock
(note 2) (Unaudited)......... (3,652,958) (37) 1,482,766 15 -- -- -- -- 22
Conversion of preferred
treasury stock (Unaudited)... (8,242) -- 8,242 -- -- -- -- -- --
Amortization of preferred stock
beneficial conversion feature
(note 9) (Unaudited)......... -- -- -- -- -- -- -- -- --
Preferred stock dividends paid
(Unaudited).................. -- -- -- -- -- -- -- -- --
Net loss (Unaudited)........... -- -- -- -- -- -- -- -- --
---------- ---- --------- --- --------- ---- --------- --- -------
Balance at October 31, 1998
(Unaudited).................... -- $ -- 7,230,877 $72 1,380,000 $173 1,380,000 $86 $22,242
========== ==== ========= === ========= ==== ========= === =======
<CAPTION>
TOTAL
PREFERRED STOCKHOLDERS'
STOCK ACCUMULATED TREASURY EQUITY
DISCOUNT DEFICIT STOCK (DEFICIT)
--------- ----------- -------- -------------
<S> <C> <C> <C> <C>
Balance at January 29, 1995...... $ -- $ (1,654) $ -- $ 423
Issuance of common stock (note
8)........................... -- -- -- 4
Issuance of preferred stock,
net of $96 issue costs (note
8)........................... -- -- -- 1,157
Acquisition of 25,000 shares of
Series B Convertible
Preferred stock (note 8)..... -- -- (50) (50)
Capital contribution for
services (note 8)............ -- -- -- 20
Net loss....................... -- (2,828) -- (2,828)
----- -------- ---- -------
Balance at January 28, 1996...... -- (4,482) (50) (1,274)
Issuance of common stock (note
8)........................... -- -- -- 31
Issuance of preferred stock
(note 8)..................... -- -- -- 36
Acquisition of 9,892 shares of
common stock (note 8)........ -- -- (15) (15)
Net loss....................... -- (3,056) -- (3,056)
----- -------- ---- -------
Balance at January 26, 1997...... -- (7,538) (65) (4,278)
Issuance of common stock (note
8)........................... -- -- -- 31
Acquisition of 3,297 shares of
common stock (note 8)........ -- -- (5) (5)
Issuance of preferred stock
(notes 8 and 11)............. -- -- -- 1,153
Recognition of Convertible
Subordinated Debenture
beneficial conversion feature
(note 6)..................... -- -- -- 2,380
Recognition of preferred stock
beneficial conversion feature
(note 9)..................... (824) -- -- --
Amortization of preferred stock
beneficial conversion feature
(note 9)..................... 150 (150) -- --
Preferred stock dividends
paid......................... -- (67) -- (67)
Net loss....................... -- (5,436) -- (5,436)
----- -------- ---- -------
Balance at January 31, 1998...... (674) (13,191) (70) (6,222)
Issuance of common stock and
warrants (note 2)
(Unaudited).................. -- -- -- 5,583
Issuance of unregistered common
stock in exchange for
services (Unaudited)......... -- -- -- 200
Conversion of Convertible
Subordinated Debentures (note
2) (Unaudited)............... -- -- -- 9,077
Conversion of preferred stock
(note 2) (Unaudited)......... -- -- -- --
Conversion of preferred
treasury stock (Unaudited)... -- -- -- --
Amortization of preferred stock
beneficial conversion feature
(note 9) (Unaudited)......... 674 (674) -- --
Preferred stock dividends paid
(Unaudited).................. -- (18) -- (18)
Net loss (Unaudited)........... -- (2,836) -- (2,836)
----- -------- ---- -------
Balance at October 31, 1998
(Unaudited).................... $ -- $(16,719) $(70) $ 5,784
===== ======== ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 59
PAWNMART, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
JANUARY 28, JANUARY 26, JANUARY 31, OCTOBER 26, OCTOBER 31,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(2,828) $(3,056) $(5,436) $(2,356) $(2,836)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 375 495 504 377 419
Amortization of debt issuance costs......... 93 228 271 195 114
Amortization of debt discount............... -- -- 1,885 -- 495
Capital contribution for services........... 20 -- -- -- --
Common and preferred stock issued for
services.................................. 4 31 34 29 200
Changes in operating assets and liabilities:
Accounts receivable....................... 18 (13) (9) (15) (97)
Pawn service charges receivable........... (132) (22) (4) (21) (66)
Inventories............................... (930) (481) 27 (257) (666)
Prepaids and other current assets......... (21) 29 (80) (159) (130)
Other assets.............................. (63) (10) (254) (15) 226
Accounts payable.......................... (124) 32 73 (167) 140
Accrued liabilities....................... 233 410 (319) (545) (277)
------- ------- ------- ------- -------
Net cash used in operating
activities........................... (3,355) (2,357) (3,308) (2,934) (2,478)
------- ------- ------- ------- -------
Cash flows from investing activities:
Net increase in pawn loans..................... (875) (781) (193) (198) (537)
Purchases of property and equipment............ (822) (279) (197) (162) (1,291)
------- ------- ------- ------- -------
Net cash used in investing
activities........................... (1,697) (1,060) (390) (360) (1,828)
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of notes payable........ 4,559 4,269 3,172 2,589 2,166
Principal payments on notes payable............ (227) (563) (174) (107) (3,280)
Proceeds from issuance of common stock and
warrants.................................... 1 -- 3 3 5,583
Purchase of treasury stock..................... -- (15) (5) (5) --
Payment of debt issuance costs................. (439) (375) (261) (252) (118)
Net proceeds from issuance of preferred
stock....................................... 1,156 36 1,148 1,153 --
Preferred stock dividends paid................. -- -- (67) (33) (18)
Increase (decrease) in bank overdraft.......... 9 81 (110) -- --
------- ------- ------- ------- -------
Net cash provided by financing
activities........................... 5,059 3,433 3,706 3,348 4,333
------- ------- ------- ------- -------
Net increase in cash and cash equivalents........ 7 16 8 54 27
Cash and cash equivalents at beginning of
period......................................... 120 127 143 143 151
------- ------- ------- ------- -------
Cash and cash equivalents at end of period....... $ 127 $ 143 $ 151 $ 197 $ 178
======= ======= ======= ======= =======
Supplemental disclosures of cash flow
information --
Cash paid for interest......................... $ 653 $ 1,341 $ 1,565 $ 1,132 $ 393
======= ======= ======= ======= =======
</TABLE>
See Consolidated Statement of Stockholders' Equity (Deficit) and notes 2, 6, 8
and 9 for noncash financing activities.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 60
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 $5,583,000. 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, net of unamortized debt issuance costs of $443,000,
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).
(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 years ended
January 26, 1997 and January 28, 1996 consist 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
F-7
<PAGE> 61
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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.
F-8
<PAGE> 62
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, $104,000 and $161,000 for the
fiscal years ended January 31, 1998, January 26, 1997 and January 28, 1996,
respectively.
(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 years ended January 26, 1997 and January 28, 1996 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
F-9
<PAGE> 63
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 antidilutive.
The following table presents a reconciliation between basic and diluted
weighted average common shares outstanding for the years ended January 28, 1996,
January 26, 1997 and January 31, 1998, and for the nine months ended October 26,
1997 and October 31, 1998. 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 28, 1996, January 26, 1997 and January
31, 1998, and for the nine months ended October 26, 1997 and October 31, 1998,
diluted loss per share was calculated using the same weighted average number of
common shares in the basic loss per share calculation.
<TABLE>
<CAPTION>
NINE NINE
YEAR YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JANUARY 28, JANUARY 26, JANUARY 31, OCTOBER 26, OCTOBER 31,
1996 1997 1998 1997 1998
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average shares -- basic.... 1,688 1,825 1,878 1,856 6,272
Shares attributable to stock
options, warrants and convertible
securities........................ 1,296 2,522 3,628 3,508 679
----- ----- ----- ----- -----
Weighted average shares --diluted... 2,984 4,347 5,506 5,364 6,951
===== ===== ===== ===== =====
</TABLE>
(n) Interim Financial Data (Unaudited)
The accompanying consolidated balance sheet as of October 31, 1998, the
accompanying consolidated statements of operations and cash flows for the nine
months ended October 31, 1998 and October 26, 1997, and the accompanying
statement of stockholders' equity (deficit) for the nine months ended October
31, 1998, have been prepared by the Company without an audit. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation for such periods have been made.
Results for interim periods should not be considered as indicative of results
for a full year.
Footnote disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting principles have been
omitted herein with respect to the interim financial data.
(o) Reclassifications
Certain amounts in 1996 and 1997 have been reclassified to conform with the
1998 presentation.
(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>
F-10
<PAGE> 64
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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
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 --
</TABLE>
F-11
<PAGE> 65
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
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>
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
F-12
<PAGE> 66
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In connection with the sale of the 1999 Debentures, the Company issued
warrants to purchase 97,279 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 41,442 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 53,967 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,
$228,358 and $92,696 for the fiscal years ended January 31, 1998, January 26,
1997 and January 28, 1996, 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).
On October 13, 1998, the Company entered into a $10 million revolving
credit facility with Comerica Bank (unaudited -- see note 13).
F-13
<PAGE> 67
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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
----------- -----------
<S> <C> <C>
Deferred tax assets:
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>
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, January 26, 1997 and
January 26, 1996, the Company issued 338, 14,394 shares and 24,237,
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 28, 1996, the Company acquired 25,000
shares of Series B Convertible Preferred stock in exchange for the issuance of
$50,000 in 14% unsecured Convertible Subordinated Debentures due June 30, 1999.
During the fiscal year ended January 28, 1996, three stockholders performed
services for the Company without receiving compensation. The Company has
recorded $20,000 in administrative expenses during the fiscal year ended January
28, 1996, which represents the estimated value of the services contributed by
the stockholders with a corresponding increase to additional paid-in capital.
In January 1994, the Board of Directors authorized the issuance of a
warrant to purchase 32,973 shares of the Company's common stock at an exercise
price of $.03 per share to a former director. On December 29, 1995, the former
director exercised the warrant to purchase 16,487 shares of the Company's common
stock. The remaining warrants expired on January 20, 1996.
During fiscal 1995, the Company granted nonqualified stock options to
purchase an aggregate of 21,433 shares of the Company's common stock, at a price
of $.76 per share, to two former directors and non qualified stock options to
purchase an aggregate of 8,243 shares of the Company's common stock, at a price
of $6.07 per share, to a former director. The options were exercisable over a
period commencing with the date of the agreement and ended April 19, 1997, at
which time all such options expired unexercised.
F-14
<PAGE> 68
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, January 26, 1997 and
January 28, 1996, the Company issued 104,602, 85,927 and 137,818 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, $31,272 and $4,180 during the fiscal
years ended January 31, 1998, January 26, 1997 and January 28, 1996,
respectively.
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 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 29, 1995 in the accompanying consolidated financial
statements and, accordingly, all applicable share and per share amounts have
been restated to reflect these reverse stock splits.
(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
F-15
<PAGE> 69
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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).
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
F-16
<PAGE> 70
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-17
<PAGE> 71
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
On June 12, 1998, the stockholders approved 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 shares to 1,000,000 shares
(unaudited -- see note 13).
(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, $10,282 and $13,871 in compensation expense during the fiscal years
ended January 31, 1998, January 26, 1997 and January 28, 1996, 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,
$1,055,000 and $744,000 for the fiscal years ended January 31, 1998, January 26,
1997 and January 28, 1996, respectively.
Future minimum lease payments under noncancelable operating leases as of
January 31, 1998 are:
<TABLE>
<CAPTION>
RELATED
FISCAL YEARS ENDING 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, January
26, 1997 and January 28, 1996.
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.
F-18
<PAGE> 72
PAWNMART, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(13) UNAUDITED EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT
Stock Options --
On June 12, 1998, the stockholders approved 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 shares to 1,000,000 shares. At
December 30, 1998, the Company had granted a total of 858,423 stock options to
various officers and employees for the purchase of shares of common stock with
exercise prices ranging from $3.00 per share to $4.25 per share.
In June 1998, the Company issued 125,000 stock options to various directors
in connection with the Directors' Option Plan at prices ranging from $4.25 per
share to $4.4375 per share.
Revolving Credit Facility --
On October 13, 1998, the Company entered into a $10 million revolving
credit facility with Comerica Bank (the "Credit Facility"). The Credit Facility
bears interest at either (i) the prevailing prime rate plus .75%, which was
9.00% at October 31, 1998, or (ii) the prevailing LIBOR rate plus 3.35%, and
matures on October 13, 2001. Amounts available under the Credit Facility are
limited to certain percentages of pawn loans, inventories, and pawn service
charges receivable. The Credit Facility is collateralized by substantially all
of the unencumbered assets of the Company. Under the Credit Facility, the
Company is required to maintain certain financial ratios and comply with certain
technical covenants. The Company was in compliance with these requirements and
covenants as of October 31, 1998. At October 31, 1998, $1,600,000 was
outstanding under the Credit Facility.
F-19
<PAGE> 73
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN DULY AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE MANAGING BROKER DEALER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF, ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER THE
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
Use of Proceeds....................... 12
Capitalization........................ 13
Selected Historical Consolidated
Financial Data...................... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 23
Management............................ 30
Security Ownership of Certain
Beneficial Owners and Management.... 35
Certain Relationships and Related
Transactions........................ 36
Description of Subordinated Notes Due
2004................................ 37
Description of Credit Facility........ 39
Description of Capital Stock.......... 40
Plan of Distribution.................. 46
Certain U.S. Federal Income Tax
Considerations...................... 47
Legal Matters......................... 49
Experts............................... 49
Consolidated Financial Statements..... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$10,000,000
12% SUBORDINATED NOTES DUE 2004
[PAWNMART, INC. LOGO]
---------------------
PROSPECTUS
---------------------
MASSIE CAPITAL, LTD.
January 15, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connections
with this Registration Statement, all of which will be borne by the Company. All
of such expenses are estimates, other than the filing fees payable to the
Securities and Exchange Commission.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ *
Accounting Fees and Expenses................................ *
Legal Fees and Expenses (Other Than Blue Sky)............... *
Printing and Engraving...................................... *
Transfer Agent and Registrar Fees........................... *
Blue Sky Taxes, Fees and Expenses........................... *
Miscellaneous Expenses...................................... *
--------
Total Expenses.................................... $ *
========
</TABLE>
- ---------------
* To be completed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") permits a
corporation to indemnify a person who was or is a director, officer, employee,
or agent of a corporation or who serves at the corporation's request as a
director, officer, partner, proprietor, trustee, employee, or agent of another
corporation, partnership, trust, joint venture, or other enterprise (an "outside
enterprise"), who was, is, or is threatened to be named a defendant in a legal
proceeding by virtue of such person's position in the corporation or in an
outside enterprise, but only if the person acted in good faith and reasonably
believed, in the case of conduct in the person's official capacity, that the
conduct was in or, in the case of all other conduct, that the conduct was not
opposed to the corporation's best interest, and, in the case of a criminal
proceeding, the person had no reasonable cause to believe the conduct was
unlawful. A person may be indemnified within the above limitations against
judgments, fines, settlements, and reasonable expenses actually incurred.
Generally, an officer, director, agent, or employee of a corporation or a person
who serves at the corporation's request as an officer, director, agent, or
employee of an outside enterprise may not be indemnified, however, against
judgments, fines, and settlements incurred in a proceeding in which the person
is found liable to the corporation or is found to have improperly received a
personal benefit and may not be indemnified for expenses unless, and only to the
extent that, in view of all the circumstances, the person is fairly and
reasonably entitled to indemnification for such expenses. A corporation must
indemnify a director, officer, employee, or agent against reasonable expenses
incurred in connection with a proceeding in which the person is a party because
of the person's corporate position, if the person was successful, on the merits
or otherwise, in the defense of the proceeding. Under certain circumstances, a
corporation may also advance expenses to such person.
Section 145 of the DGCL also permits a corporation to purchase and maintain
insurance or to make other arrangements on behalf of any of the above persons
against any liability asserted against and incurred by the person in such
capacity, or arising out of the person's status as such a person, whether or not
the corporation would have the powers to indemnify the person against the
liability under applicable law.
The Company's Restated Certificate of Incorporation provides that the
Company's directors will have no personal liability to the Company or its
stockholders for monetary damages for breach of, or an alleged breach of, a
director's fiduciary duty of care. This provision has no effect on director
liability for (i) a breach of the directors' duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith that constitute a
breach of duty of a director or involving intentional misconduct or knowing
violations of law, (iii) approval of any transaction from which a director
derives an improper personal
II-1
<PAGE> 75
benefit, or (iv) an act or omission for which the liability of a director is
expressly provided by an applicable statute. In addition, the Company's Restated
Certificate of Incorporation provides that any additional liabilities permitted
to be eliminated by subsequent legislation will automatically be eliminated
without further stockholder vote, unless additional stockholder approval is
required by such legislation. The Company is generally required to indemnify its
directors, officers, employees, and agents against all judgments, fines,
settlements, legal fees, and other expenses incurred in connection with pending
or threatened legal proceedings because of the person's position with the
Company or another entity that the person serves at the Company's request,
subject to certain conditions, and to advance funds to enable them to defend
against such proceedings. Article X of the Company's Restated Certificate of
Incorporation permits the Company to enter into agreements with its directors,
officers, employees and agents to provide such indemnification as deemed
appropriate. Article X also provides that the Company may extend to its
directors and executive officers such indemnification and additional
indemnification.
The Company has entered into an indemnification agreement with certain of
its directors and officers. The form of indemnity agreement provides that each
such person will be indemnified to the full extent permitted by applicable law
against all expenses (including attorneys' fees), judgments, fines, penalties
and amounts paid in settlement of any threatened, pending or completed action,
suit or proceeding, on account of his services as a director and officer of the
Company or any other company or enterprise in which he is serving at the request
of the Company, or as a guarantor of any debt of the Company. To the extent the
indemnification provided under the agreement exceeds that permitted by
applicable law, indemnification may be unenforceable or may be limited to the
extent it is found by a court of competent jurisdiction to be contrary to public
policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three fiscal years, the Company has sold the securities
listed below pursuant to exemptions under the Securities Act.
1. On July 22, 1994, the Company's Board of Directors authorized
1,925,000 shares of Series B Convertible Preferred Stock ("Series B") to be
issued through a private placement offering to accredited investors. During
the fiscal years ended January 29, 1995 and January 28, 1996, the Company
issued 1,046,000 Series B at a price of $2.00 per share. In connection with
Series B issuances, the Company paid $342,958 in underwriting commissions
and has issued 26,659 Common Stock purchase warrants 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. 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. From June 1995 through April 1996, the Company made a private
placement offering to accredited investors for up to $6,000,000 in
principal amount of 14% unsecured Convertible Subordinated Debentures due
June 30, 1999 ("1999 Debentures"). The total underwriting commissions
associated with the 1999 Debentures were $437,600. As of January 31, 1998,
the Company has sold $4,865,000 in 1999 Debentures. In connection with the
1999 Debentures, the Company has issued 97,279 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.
3. From June 1996 through January 1997, the Company made a private
placement offering to accredited investors for up to $2,000,000 in
principal amount of 14% unsecured Convertible Subordinated Debentures due
June 30, 2000 ("2000 Debentures"). The total underwriting commissions
associated with the 2000 Debentures were $161,600. As of January 31, 1998,
the Company has sold $2,000,000 in 2000 Debentures. In connection with the
2000 Debentures, the
II-2
<PAGE> 76
Company has issued 41,442 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.
4. 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 $231,600. 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 53,967 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.
5. 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 allows 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. At 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.
6. 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.
7. From January 13, 1994 through January 26, 1997, the Company issued
427,139 shares of Common Stock of which 44,514 shares were issued to
certain directors in exchange for Board of Director services, 232,597
shares were issued to certain employees in exchange for employment
services, pay reductions and performance awards, and 150,208 shares were
issued to certain attorneys and consultants in exchange for legal and
consulting services. From January 26, 1997 to 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 shares 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.
8. On December 29, 1995, a former director exercised a warrant to
purchase 16,487 shares of the Company's Common Stock at $.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 and Section 4(2) of
the Securities Act, and
II-3
<PAGE> 77
Rule 506 pursuant to Regulation D, promulgated thereunder, as an offering
only to accredited investors.
9. From October 1994 to March 1995, the Company issued $980,000 in 15%
notes payable, to mature on December 31, 1997, to 14 non-accredited
investors and a class of accredited investors. From February 1995 to May
1995, the Company issued $1,390,000 in 15% notes payable, to mature on
March 31, 1998, to 20 non-accredited investors and a class of accredited
investors. From April 1996 to August 1996, the Company issued $278,000 in
15% notes payable, to mature on March 31, 2000 to 5 non-accredited
investors and a class of accredited investors. 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 an exemption for transactions not
involving any public offering to investors believed by the Company to be
sophisticated business-persons and investors.
11. From January 1995 through November 1996, the Company issued 43,358
Series B shares in connection with its employee stock purchase plan. The
employee stock purchase plan in effect during that time allowed employees
to purchase, through payroll deductions and Company matches approved by the
Board of Directors, shares of Series B at a price of $2.00 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.
12. On May 1, 1998, the Company issued 44,445 unregistered shares of
the Company's common stock to the Buxton Company in exchange for $200,000
in professional services associated with marketing and new store site
selection analysis. The sales of securities were made in reliance upon Rule
701 which provides for an exemption for offers and sales of securities
pursuant to contracts relating to compensation.
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 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 converted into Common Stock upon completion of
the Company's initial public offering in March 1998. See the notes to the
consolidated financial statements included elsewhere in this Registration
Statement for further information relating to the respective conversion
features.
II-4
<PAGE> 78
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.3 -- Form of Underwriting Agreement Between PawnMart, Inc. and
Massie Capital, Ltd.(5)
3.1 -- PawnMart, Inc.'s Restated and Amended Certificate of
Incorporation(1)
3.2 -- PawnMart, Inc.'s Second Amended and Restated Bylaws(1)
4.1 -- Specimen Common Stock Certificate(2)
4.2 -- Specimen Series A Warrant Certificate(2)
4.3 -- Specimen Series B Warrant Certificate(2)
4.4 -- Form of Warrant Agreement, dated as of March 20, 1998
between PawnMart, Inc. and Continental Stock Transfer &
Trust Company(2)
4.5 -- Form of National Association of Securities Dealers, Inc.
broker-dealer warrants(3)
4.6 -- Form of Series C Warrant Agreement, Dated as of
, 1999 Between PawnMart, Inc. and Continental
Stock Transfer & Trust Company(5)
4.7 -- Indenture, Dated as of , 1999 Between
PawnMart, Inc. and Trust Management, Inc., as Trustee,
Relating to PawnMart, Inc.'s 12% Subordinated Notes Due
2004(5)
4.8 -- Form of 12% Subordinated Note Due 2004 (included as part
of Exhibit 4.7 hereto)
5.1 -- Opinion of Jordaan & Pennington, PLLC(6)
10.1 -- Form of Indemnity Agreement with Officers and Directors
of PawnMart, Inc.(2)
10.2 -- 1997 PawnMart, Inc. Employee Stock Option Plan(1)
10.3 -- 1997 PawnMart, Inc. Director Stock Option Plan(2)
10.4 -- Revolving Credit Agreement Dated October 13, 1998 Between
PawnMart, Inc. and Comerica Bank(4)
10.5 -- Employment Agreement, Dated as of September 8, 1998,
Between PawnMart, Inc. and Michael D. Record(5)
12.1 -- Computation of Ratio of Earnings to Fixed Charges(5)
23.1 -- Consent of Jordaan & Pennington, PLLC (included as part
of Exhibit 4.7 hereto)
23.2 -- Consent of KPMG LLP, Independent Auditors(5)
24.1 -- Powers of Attorney of Directors and Officers of PawnMart,
Inc. (included in the signature page)
25.1 -- Form T-1 -- Statement of Eligibility Under the Trust
Indenture Act of 1939 of the Trustee(5)
27.1 -- Financial Data Schedule as of October 31, 1998 (Filed in
EDGAR version only)(4)
</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).
(4) Filed as an Exhibit to the registrant's Form 10-QSB for the quarter ended
October 31, 1998, filed on December 14, 1998 (File No. 1-13919).
(5) Filed herewith.
(6) To be supplied by amendment.
II-5
<PAGE> 79
(a) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising from the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE> 80
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fort Worth, State of
Texas, on January 15, 1999.
PAWNMART, INC.
By: /s/ CARSON R. THOMPSON
----------------------------------
Carson R. Thompson
Chief Executive Officer, Director
and Chairman of the Board
(Principal Executive Officer)
By: /s/ THOMAS W. WHITE
----------------------------------
Thomas W. White
Senior Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
POWERS OF ATTORNEY
Each of the undersigned hereby appoints Carson R. Thompson and Thomas W.
White, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, with full power of substitution, for and in their
name, place and stead of the undersigned, in any and all capacities to sign and
file with the Securities and Exchange Commission under the Securities Act of
1933, as amended, any and all amendments and exhibits to this Registration
Statement and any and all applications, instruments and other documents to be
filed with the Securities and Exchange Commission pertaining to the registration
of the securities covered hereby or the transactions contemplated herein.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ CARSON R. THOMPSON Chief Executive Officer, January 15, 1999
- ----------------------------------------------------- Director and Chairman of
Carson R. Thompson the Board
/s/ MICHAEL D. RECORD President January 15, 1999
- -----------------------------------------------------
Michael D. Record
/s/ THOMAS W. WHITE Senior Vice President and January 15, 1999
- ----------------------------------------------------- Chief Financial Officer
Thomas W. White
/s/ RANDALL L. HADEN Vice President -- Information January 15, 1999
- ----------------------------------------------------- Services
Randall L. Haden
/s/ ROBERT E. CAMP Director January 15, 1999
- -----------------------------------------------------
Robert E. Camp
/s/ JAMES E. BERK Director January 15, 1999
- -----------------------------------------------------
James E. Berk
</TABLE>
II-7
<PAGE> 81
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MONTY R. STANDIFER Director January 15, 1999
- -----------------------------------------------------
Monty R. Standifer
/s/ MARK E. KANE Director January 15, 1999
- -----------------------------------------------------
Mark E. Kane
/s/ ROBERT D. BOURLAND, JR. Director January 15, 1999
- -----------------------------------------------------
Robert D. Bourland, Jr.
/s/ J. ROGER WILLIAMS Director January 15, 1999
- -----------------------------------------------------
J. Roger Williams
</TABLE>
II-8
<PAGE> 82
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.3 -- Form of Underwriting Agreement Between PawnMart, Inc. and
Massie Capital, Ltd.(5)
3.1 -- PawnMart, Inc.'s Restated and Amended Certificate of
Incorporation(1)
3.2 -- PawnMart, Inc.'s Second Amended and Restated Bylaws(1)
4.1 -- Specimen Common Stock Certificate(2)
4.2 -- Specimen Series A Warrant Certificate(2)
4.3 -- Specimen Series B Warrant Certificate(2)
4.4 -- Form of Warrant Agreement, dated as of March 20, 1998
between PawnMart, Inc. and Continental Stock Transfer &
Trust Company(2)
4.5 -- Form of National Association of Securities Dealers, Inc.
broker-dealer warrants(3)
4.6 -- Form of Series C Warrant Agreement, Dated as of
, 1999 Between PawnMart, Inc. and Continental
Stock Transfer & Trust Company(5)
4.7 -- Indenture, Dated as of , 1999 Between
PawnMart, Inc. and Trust Management, Inc., as Trustee,
Relating to PawnMart, Inc.'s 12% Subordinated Notes Due
2004(5)
4.8 -- Form of 12% Subordinated Note Due 2004 (included as part
of Exhibit 4.7 hereto)
5.1 -- Opinion of Jordaan & Pennington, PLLC(6)
10.1 -- Form of Indemnity Agreement with Officers and Directors
of PawnMart, Inc.(2)
10.2 -- 1997 PawnMart, Inc. Employee Stock Option Plan(1)
10.3 -- 1997 PawnMart, Inc. Director Stock Option Plan(2)
10.4 -- Revolving Credit Agreement Dated October 13, 1998 Between
PawnMart, Inc. and Comerica Bank(4)
10.5 -- Employment Agreement, Dated as of September 8, 1998,
Between PawnMart, Inc. and Michael D. Record(5)
12.1 -- Computation of Ratio of Earnings to Fixed Charges(5)
23.1 -- Consent of Jordaan & Pennington, PLLC (included as part
of Exhibit 4.7 hereto)
23.2 -- Consent of KPMG LLP, Independent Auditors(5)
24.1 -- Powers of Attorney of Directors and Officers of PawnMart,
Inc. (included in the signature page)
25.1 -- Form T-1 -- Statement of Eligibility Under the Trust
Indenture Act of 1939 of the Trustee(5)
27.1 -- Financial Data Schedule as of October 31, 1998 (Filed in
EDGAR version only)(4)
</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).
(4) Filed as an Exhibit to the registrant's Form 10-QSB for the quarter ended
October 31, 1998, filed on December 14, 1998 (File No. 1-13919).
(5) Filed herewith.
(6) To be supplied by amendment.
<PAGE> 1
Exhibit 1.3
BEST EFFORTS UNDERWRITING AGREEMENT
PAWNMART, INC.
This UNDERWRITING AGREEMENT made and entered into this _____ day of
_____________, 1999, by and between PawnMart, Inc., a Delaware corporation,
whose address is 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102, (the
"Company") and Massie Capital, Ltd., a _______, whose address is _________ (the
"Underwriter").
Recitals
1. The Company desires to offer and sell up to $10,000,000 in 12%
Subordinated Notes due December 31, 2004 to the public through the Underwriter
and participating broker-dealers.
2. The offering and sale will be made pursuant to a registration
statement and prospectus hereinafter referred to.
3. The Underwriter is willing to assist the Company in connection with
the proposed issuance and sale of these securities on a best efforts basis on
the terms and conditions herein contained.
Agreement
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants, agreements, undertakings, representations, and warranties herein
contained, the Company and the Underwriter agree as follows:
I. Representations and Warranties
The Company represents and warrants to, and agrees with the Underwriter that:
1. The Company is a corporation duly organized and validly existing as
a corporation in good standing under the laws of the State of Delaware.
2. The Company shall issue consistent with the terms and conditions of
the Registration Statement (defined below) up to $10,000,000.00 in 12%
Subordinated Notes due December 31, 2004 ("the Notes") and up to 600,000 Series
C Redeemable Common Stock Purchase Warrants. The Notes shall:
(a) Bear interest at the rate of 12% per annum;
(b) Pay interest monthly on the fifteenth of each month beginning with
the second full calendar month after issuance; and
<PAGE> 2
(c) Pay principal at maturity on December 31, 2004.
3. The Notes will be issued pursuant to the terms and conditions of a
Trust Indenture entered into between the Company and Trust Management, Inc., a
Texas trust company ("Trustee"), as Indenture Trustee.
4. There will be delivered to the counsel to the Underwriter, upon
request at any time prior to the Delivery Date (defined below), certified copies
of the Certificate of Incorporation and the bylaws of the Company, together with
all amendments, if any, certified copies of whatever resolutions the counsel may
request, and copies of all material contracts to which the Company is a party.
There will also be made available to the counsel for inspection minutes of all
meetings of incorporators, directors and stockholders of the Company from the
date of incorporation of the Company to the Delivery Date.
5. A Registration Statement on the appropriate form as prescribed by
the Securities and Exchange Commission (the "Commission"), together with a
related Prospectus with respect to the Notes, has been filed with the Commission
under the Securities Act of 1933, as amended, (the "Act"). The Company will use
its best efforts to cause the Registration Statement and the Prospectus to
become effective as soon as possible after the filing. As used in this
Agreement, the term "Registration Statement" refers to and means the
Registration Statement and any and all amendments to the Registration Statement,
including exhibits and financial statements, when the Registration Statement
becomes effective and, in the event of any amendments after the effective date
of the Registration Statement, the Registration Statement as so amended; and the
term "Prospectus" refers to and means the related Prospectus in final form, and
in the event of any amendment or supplement to the Prospectus after the
effective date of the Registration Statement, also refers to and means the
Prospectus as so amended or supplemented.
6. The Notes shall also be registered or qualified for sale with the
state regulatory agencies of any and all states where the Securities shall be
offered.
7. All expenses of registration and qualification shall be paid by the
Company.
8. Notwithstanding the above, to the extent possible, the Effective
Date of the offering shall be at a date mutually agreed to by the Company and
the Underwriter, subject to the requirements of applicable law.
9. The purchase price of the Notes shall be in minimum denominations of
$1,000.00 and integral multiples thereof with a minimum purchase amount of
$5,000.00 (or $1,000.00 for Individual Retirement Accounts).
10. When the Registration Statement becomes effective, it and the
accompanying Prospectus will comply in all material respects with the
requirements of the Act and with the rules and regulations of the Commission
promulgated under the Act; provided, however, the Company makes
BEST EFFORTS UNDERWRITING AGREEMENT - Page 2
<PAGE> 3
no representations or warranties as to information contained or omitted from the
Registration Statement or the Prospectus in reliance upon written information
furnished to the Company by the Underwriter specifically for inclusion in the
Registration Statement or the Prospectus.
11. The Company has the requisite corporate power and authority to
enter into this Underwriting Agreement.
12. The consolidated financial statements to be filed with the
Registration Statement will reflect all material liabilities of the Company on a
consolidated basis, contingent or otherwise, and will include adequate reserves
for all federal and state tax liabilities incurred to their respective dates.
13. All of the Notes to be sold under and pursuant to this Agreement,
when issued and delivered, will be validly issued and enforceable in accordance
with their terms and conditions and free and clear of all claims and
encumbrances, except as described in the Indenture.
14. The certified public accountants who will certify to the financial
statements to be filed with the Commission as a part of the Registration
Statement and to the financial statements incorporated in the Prospectus, and
who, as experts, may certify or review other information of a financial or
accounting nature contained in the Registration Statement and the Prospectus,
will be independent certified public accountants as required by the Act and the
rules and regulations promulgated under the Act.
15. The Company will deliver to the Underwriter audited consolidated
financial statements as of January 31, 1998 and unaudited consolidated financial
statements as of October 31, 1998. The Company represents that such financial
statements will fairly present in all material respects the financial condition
of the Company, computed in accordance with generally accepted accounting
principles applied on a consistent basis and the rules and regulations of the
Commission relating to financial statements.
16. The Company will furnish the Underwriter, at least one day before
the filing of the Registration Statement, with the consolidated financial
statements included in the Registration Statement and prepared in accordance
with the rules and regulations of the Commission. Such consolidated financial
statements will fairly present the position of the Company in all material
respects on the dates shown and will reflect all material liabilities of the
Company, contingent or otherwise.
17. The certificate or certificates that the Company is required to
furnish to the Underwriter pursuant to the provisions of paragraphs 8, 9 and 10
of Article VIII of this Agreement will be true and correct.
18. All of the foregoing representations, warranties and agreements
shall survive delivery of, and payment for, all of the securities covered by
this Agreement.
BEST EFFORTS UNDERWRITING AGREEMENT - Page 3
<PAGE> 4
II. Retention of the Underwriter
Based upon the foregoing representations, warranties and agreements,
and subject to the terms and conditions herein contained:
1. The Company hereby retains the Underwriter as its agent to sell for
its account the Notes. The Underwriter shall use their best efforts as agent,
promptly following the receipt of written notice of the effective date of the
Registration Statement, to sell the Notes subject to the terms, provisions and
conditions set forth below. There is no assurance that any or all of the Notes
to be offered by the Company will be sold, and the Underwriter is under no
obligation to purchase or take down any of the Notes on its own behalf or on
behalf of others.
2. Underwriter acknowledges that the Company may limit its acceptance
of subscriptions in any manner it deems prudent in order to provide for the
timely use of subscriber funds and may reject any subscriptions for any reason,
and Underwriter agrees that any such rejection of a subscription obtained by the
Underwriter or by the Underwriting Group (as hereinafter defined) shall be
deemed not to be a sale made by the Underwriter or by the Underwriting Group.
Underwriter further acknowledges that (i) all subscription funds will be held in
escrow and if the minimum amount of Notes is not subscribed on or before June
30, 1999 (as defined in the Prospectus), the offering will be terminated and the
escrowed funds, plus any interest earned thereon, will be promptly returned to
the investors by the escrow agent; (ii) upon the subscription of the minimum
amount of the Notes, the escrowed funds will be released to the Company; (iii)
any subsequent subscription funds with respect to the sale of additional Notes
will continue to be deposited in the escrow account and be immediately available
for use by the Company upon the Company's request; (iv) all Subscriber's checks
shall be made payable to the Company's escrow agent, Trust Management, Inc.; and
(v) shall be deposited with the escrow agent in accordance with applicable NASD
regulations. Subscriber's funds will be held in escrow and invested in
compliance with SEC Rule 15c2-4. All subscriber's checks will be transmitted
directly to the escrow agent by noon of the next business day after receipt by
Underwriter.
3. As its compensation, the Underwriter shall receive a commission of
eleven percent (11%) of the full amount of all Notes sold by the Underwriter
(including the Underwriting Group) and for which payment is made to the Company.
Such amount is comprised of a 6% sales commission, a 3% non-accountable expense
allowance and a 2% due diligence fee.
4. The Underwriter may associate with themselves whatever other
underwriters they may desire. The Underwriter may offer the Notes through
registered securities dealers selected by them and to pay such dealers out of
the commissions received by the Underwriter whatever compensation the
Underwriter may determine. The Underwriter, such other underwriters and such
securities dealers shall be collectively referred to herein as the "Underwriting
Group".
5. In addition to the compensation set forth above, the Underwriter
shall also receive, for each $1,000.00 in principal amount of Notes sold to the
public, 60 warrants ("Underwriter's
BEST EFFORTS UNDERWRITING AGREEMENT - Page 4
<PAGE> 5
Warrants") to purchase 60 Series C Redeemable Common Stock Purchase Warrants
(the "Underlying Warrants") exercisable to purchase one share of Common Stock
(the "Underlying Warrant Share"). The Underwriter will distribute up to 40 of
such Underwriter's Warrants to other members of the Underwriting Group as
additional compensation.
6. The Company may terminate this Agreement in the event that the
Underwriting Group is unable to sell at least:
<TABLE>
<CAPTION>
Days After Effective Date Cumulative Gross Proceeds
------------------------- -------------------------
<S> <C>
30 $ 250,000
60 $ 500,000
90 $ 800,000
120 $1,150,000
150 $1,550,000
180 $2,000,000
210 $2,500,000
240 $3,100,000
270 $3,600,000
300 $4,100,000
330 $4,600,000
360 $5,000,000
</TABLE>
7. Underwriter represents that it is appropriately registered as a
broker-dealer with the Commission and in all states in which it conducts or will
conduct business in connection with this offering and is a member in good
standing of the National Association of Securities Dealers, Inc. Underwriter
also agrees not to solicit subscriptions for the Notes that will result in a
violation of the securities laws of the United States, or of any state, or any
rule or regulation thereunder, or of any rules of the NASD or any securities
exchange.
8. Underwriter represents that there is not now pending or threatened
against the Underwriter any action or proceeding of which Underwriter has been
advised, either in any court of competent jurisdiction, before the Commission or
any state securities commission concerning activities as a broker or dealer, nor
has the Underwriter been named as a "cause" in any such action or proceeding.
BEST EFFORTS UNDERWRITING AGREEMENT - Page 5
<PAGE> 6
9. In the event any action or proceeding of the type referred to in
paragraph 8 above shall be instituted or threatened against the Underwriter at
any time, or in the event there shall be filed by or against the Underwriter in
any court pursuant to any federal, state, local or municipal statute a petition
in bankruptcy or insolvency or for reorganization or for the appointment of a
receiver or trustee of assets, or the Underwriter makes an assignment for the
benefit of creditors, the Company shall have the right to terminate this
Agreement.
10. Upon request, the Company will inform the Underwriter as to the
states in which the Company has been advised by counsel that the Notes have been
qualified for sale under the respective state securities laws, but the Company
does not assume any responsibility or obligation as to the Underwriter's right
to sell the Notes in any state. Underwriter understands and agrees that under no
circumstances will Underwriter engage in any activities hereunder in any
jurisdiction (a) in which the company has not informed the Underwriter that the
Notes are qualified for sale under the applicable securities laws, or (b) in
which the Underwriter may not lawfully so engage.
11. Underwriter confirms that its commitment to use its best efforts to
solicit subscriptions for the Notes will not result in a violation of the
securities laws of the United States, including but not limited to the Act or
any rule or regulation thereunder, or the securities laws of any state in which
the Underwriter will conduct business and the rules and regulations thereunder,
or of any rules of any securities exchange to which the Underwriter is subject
or of any restriction imposed upon the Underwriter by the NASD or any such
exchange or governmental authority and agrees to indemnify the Company, its
shareholders, directors, officers, employees or agents for any and all damages,
liabilities and costs (including reasonable attorneys' fees and expenses)
resulting from the same.
12. Underwriter represents that in connection with the offering:
A. Underwriter will comply in all respect with the provisions of this
Agreement.
B. Underwriter shall use its best efforts to obtain the approval of the
NASD pursuant to Article III, Section 44 of the Rules of Fair Practice
of the NASD with respect to the compensation arrangements set forth
herein.
C. Underwriter will comply with any applicable limitations on the
manner of offering as required by the Act, applicable state securities
laws, and the NASD;
D. Prior to making any sale, Underwriter will have reasonable grounds
to believe, after making reasonable inquiry, that each subscriber meets
the requirements of the Act, the NASD and applicable state securities
laws as to the suitability of the investment for such subscriber.
E. Except as otherwise disclosed to the Company, no owner, partner,
director or officer of Underwriter has within the last five years been
subject to any of the following administrative or judicial actions (by
the commission or any state securities commission):
BEST EFFORTS UNDERWRITING AGREEMENT - Page 6
<PAGE> 7
1. Registration Stop Order (Issuance of Securities);
2. Securities related felony conviction;
3. Securities related administrative order;
4. Any administrative order involving fraud or deceit;
5. Securities related injunction;
F. Underwriter has no current effective administrative order revoking a
securities exemption; and
G. Underwriter has not been suspended, censured or expelled by the
NASD.
Underwriter agrees to indemnify and hold the Company, its shareholders,
officers, directors, employees, and agent harmless from any liabilities and
costs (including reasonable attorneys' fees and expenses) associated with claims
arising or alleged to arise out of a breach of the foregoing representations.
13. Underwriter and any members of the Underwriting Group do hereby
undertake to comply with Sections 8, 24, 25 and 36 of Article III of the NASD
Rules of Fair Practice. Furthermore, any and all Selling Group Agreement or
Selected Dealer Agreement shall provide that any member of the Underwriting
Group shall agree to comply with said sections of Article III of the NASD Rules
of Fair Practice.
III. Further Agreements of the Company
The Company agrees, at its expense and without expense to the
Underwriter, as follows:
1. To give and to continue to give and supply whatever consolidated
financial statements and other information that may be required by the
Commission or the proper public bodies in the states in which the Notes may be
qualified.
2. As soon as the Company is informed, to advise the Underwriter and to
confirm the advice in writing:
(a) When the Registration Statement becomes effective;
(b) When any amendment to the Registration Statement filed subsequent
to the effective date of the Registration Statement becomes effective;
BEST EFFORTS UNDERWRITING AGREEMENT - Page 7
<PAGE> 8
(c) Of any request of the Commission for amendments to the Registration
Statement or the related Prospectus, or for additional information;
(d) Of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the initiation of any
proceeding for that purpose;
(e) Of any material adverse change in its financial position or
operating condition and of any development materially affecting the
Company or rendering untrue or misleading any material statement in the
Registration Statement or the Prospectus.
3. To make every reasonable effort to prevent the issuance of any stop
order suspending the effectiveness of the Registration Statement, and, if a stop
order is entered at any time, to use its best efforts to obtain withdrawal of
the order at the earliest possible moment.
4. To deliver to the Underwriter, without charge, (a) prior to the
effective date of the Registration Statement, copies of each preliminary
prospectus filed with the Commission bearing in red ink the statement required
by the rules of the Commission, (b) on and from time to time after the effective
date of the Registration Statement, copies of the Prospectus and of any amended
or supplemented Prospectus, and (c) as soon as they are available and from time
to time after they are available, copies of each Prospectus prepared for the
purpose of permitting compliance with Section 10 of the Act and of any amended
or supplemented Prospectus. The number of copies to be delivered in each case
shall be the number the Underwriter may reasonably request.
5. To furnish, without cost, to the Underwriter one executed copy of
the Registration Statement, including all exhibits and amendments, and a
reasonable number of copies of the Registration Statement and amendments.
6. For the period after the effective date of the Registration
Statement during which the Prospectus is required by law to be used, but not
after the Delivery Date, except in accordance with Article XII hereof, if any
change occurs so that the Prospectus includes an untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements
in the Prospectus, in the light of the circumstances under which they are made,
not misleading, forthwith to prepare and furnish to the Underwriter, without
cost, supplements to the Prospectus or an amended Prospectus correcting the
untrue statement or supplying the omission.
7. If revision of the Prospectus pursuant to the provisions of Section
10 of the Act becomes necessary, to review the Prospectus, to file copies of the
Prospectus with the Commission, and to furnish copies of the revised Prospectus
to the Underwriter in whatever reasonable quantity they request.
8. To use its best efforts to cause the Notes to be qualified for sale
on terms consistent with those stated in the effective Registration Statement
under the Blue Sky laws in whatever states may be agreed upon.
BEST EFFORTS UNDERWRITING AGREEMENT - Page 8
<PAGE> 9
9. Until the Delivery Date hereunder or the earlier termination hereof,
except with the approval of the Underwriter, not to:
(a) Undertake or authorize any change in its capital structure or
authorize or issue or permit any public offering of any shares of
capital stock or additional Notes, except as provided in this
Agreement;
(b) Authorize, create, issue, or sell any funded obligations, notes or
other evidences of indebtedness greater than $1,000,000, except in the
ordinary course of business and maturing not more than one year from
the date of this Agreement and except as provided in this Agreement; or
(c) Consolidate or merge with or into any other corporation or create
any mortgage or lien upon any of its properties or assets except in the
ordinary course of its business and except as provided in this
Agreement.
10. To provide to Underwriter any reasonable additional information or
documentation deemed by the Underwriter to be necessary in the performance of
the Underwriter's due diligence.
11. To provide Underwriter:
(i) at least twenty-four (24) hours prior to dissemination to
Noteholders, a facsimile of any letter, notice or other similar
communication, provided that the foregoing in no way obligates the
Company to await Underwriter approval of such letter, notice or similar
communication prior to dissemination, and
(ii) from time to time, access to review operations and such other
public information concerning the Company as Underwriter may reasonably
request.
IV. Indemnity Provisions
1. The Company shall indemnify, defend and hold the Underwriter
(including any underwriter, dealer or securities dealer associated with the
Underwriter), and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act, free and harmless from and against any and all
losses, claims, demands, liabilities, and expenses (including reasonable legal
or other expense incurred by each Underwriter and controlling person in
connection with defending any claims or liabilities, whether or not resulting in
any liability to the Underwriter (or to any controlling person), which the
Underwriter or controlling person may incur under the Act or at common law or
otherwise, but only to the extent that the losses, claims, demands, liabilities,
and expenses arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
in the Prospectus, or in any amendment or amendments to the Registration
Statement or the Prospectus, or in any application or other papers executed by
any underwriter or dealer with the written approval of the Company for filing in
any
BEST EFFORTS UNDERWRITING AGREEMENT - Page 9
<PAGE> 10
state or states in order to qualify the securities covered by this Agreement
under the securities laws of those state (the "Blue Sky Application"), or arise
out of or are based upon any omission or alleged omission to state in these
documents a material fact required to be stated in them or necessary to make the
statements in them not misleading, provided, however, that this indemnity
agreement shall not apply to any losses, claims, demands, liabilities, or
expenses arising out of or based upon any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement or the
Prospectus or in any amendment or amendments to them or in any Blue Sky
Application, or arising out of or based upon the omission or alleged omission to
state in these documents a material fact required to be stated in them or
necessary to make the statements in them not misleading, which statement or
omission was made in reliance upon information furnished to the Company by the
Underwriter in writing expressly for use in the Registration Statement or the
Prospectus or in any amendment or amendments to them, or was made by the
Underwriter in a Blue Sky Application not in reliance upon information furnished
by the Company.
2. The foregoing indemnity of the Company in favor of the Underwriter
shall not be deemed to protect the Underwriter against any liability to the
Company or its Noteholders to which the Underwriter would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of their duties, or by reason of their reckless disregard of their
obligations and duties under this Agreement.
3. The Underwriter shall give the Company an opportunity to participate
in the defense or preparation of the defense of any action brought against the
Underwriter or controlling person of the Underwriter to enforce any claim or
liability, and the Company may so participate. The Company's agreement under the
foregoing indemnity is expressly conditioned upon notice of any action being
sent by the Underwriter or controlling person, as the case may be, to the
Company, by letter or facsimile (addressed as provided herein), promptly after
the commencement of the action against the Underwriter or controlling person.
Such notice must either be accompanied by copies of papers served or filed in
connection with the action or by a statement of the nature of the action to the
extent known to the Underwriter. Failure to notify the Company within a
reasonable time of an action shall relieve the Company of its respective
liabilities under the foregoing indemnity, but failure to notify the Company
shall not relieve the Company from any liability that the Company may have to
the Underwriter or controlling person other than on account of the indemnity
agreement contained in this Article IV.
4. The Underwriter likewise shall indemnify, defend and hold harmless
the Company against any and all losses, claims, expenses, and liabilities to
which it may become subject arising out of or based upon any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or the Prospectus, or in any amendment or amendments to the
Registration Statement or the Prospectus, or in any Blue Sky Application, or
arising out of or based upon the omission or alleged omission to state in these
documents a material fact required to be stated in them or necessary to make the
statements in them not misleading, resulting from the use of written information
furnished to the Company by the Underwriter expressly for use in the
BEST EFFORTS UNDERWRITING AGREEMENT - Page 10
<PAGE> 11
preparation of the Registration Statement or the Prospectus, or in any amendment
or amendments to the Registration Statement or the Prospectus, or in any Blue
Sky Application.
5. The Company shall give the Underwriter an opportunity to participate
in the defense or preparation of the defense of any action brought against the
Company to enforce any claim or liability, and the Underwriter shall have the
right so to participate. The agreement of the Underwriter under the foregoing
indemnity is expressly conditioned upon notice of any action being sent by the
Company to the Underwriter, by letter or by facsimile (addressed as provided in
this Agreement), promptly after the commencement of the action against the
Company. The notice must either be accompanied by copies of papers served or
filed in connection with the action or by a statement of the nature of the
action to the extent known to the Company. Failure to notify the Underwriter of
any action shall relieve the Underwriter of its liability under the foregoing
indemnity, but failure to notify the Underwriter shall not relieve the
Underwriter from any liability which the Underwriter may have to the Company or
its stockholders otherwise than on account of the indemnity agreement contained
in this Article IV.
6. The provisions of this Article IV shall not in any way prejudice any
right or rights that the Underwriter may have against the Company, or that the
Company may have against the Underwriter, under any statute other than the Act,
at common law or otherwise.
7. The indemnity agreements contained in this Article IV shall survive
the Delivery Date and shall inure to the benefit of successors of the Company
and successors of the Underwriter, and shall be valid irrespective of any
investigation made by or on behalf of the Underwriter or the Company.
V. Payment of Expenses
The Company shall, at its own expense and without expense to the
Underwriter, pay all costs and expenses incident to this Agreement (except for
the Underwriter's legal fees), including, but without limitation, all expenses
in connection with the preparation, printing and filing of the Registration
Statement and the Prospectus as well as all amendments to them together with all
exhibits; pay all filing fees and costs, original issue taxes, trustee's fees,
charges, or disbursements connected with the issue and delivery of the Notes;
and pay all reasonable expenses incurred in connection with the qualification of
the Notes under the securities or blue sky laws of the states previously
referred to.
VI. Public Offering
1. The Underwriter shall make a public offering on a best efforts basis
of the Notes covered hereby as soon after the effective date of the Registration
Statement as is advisable in accordance with and as set forth in the
Registration Statement. The public offering may be made either in the
BEST EFFORTS UNDERWRITING AGREEMENT - Page 11
<PAGE> 12
open market or through securities dealers (acting as principals) selected by the
Underwriter, or partly in each manner, as determined by the Underwriter in their
sole discretion. The Underwriter may pay these dealers out of the commissions
received by the Underwriter for the Notes sold by the dealers whatever
compensation the Underwriter and such dealers may determine.
VII. Payments on Default
If any of the conditions, representations or warranties set forth in
Article VIII of this Agreement are not fulfilled in any material respect, or if
for any reason the Company fails to comply with the terms of this Agreement in
any material respect (other than in connection with a breach of the Agreement by
the Underwriter), and if the Underwriter elects to terminate this Agreement
pursuant to Article XI hereto, then, in addition to paying the Company's own
expenses as provided in Article V hereof, the Company shall reimburse the
Underwriter for its actual accountable out-of-pocket expenses.
VIII. Conditions Precedent to Underwriter's Obligations
The obligations hereunder of the Underwriter are conditioned upon:
1. The approval of counsel for the Underwriter of the form and content
of the Registration Statement and the Prospectus, of the organization and
present legal status of the Company, and of the legality and validity of the
Notes to be offered hereunder, which approval shall not be unreasonably
withheld.
2. The Company's performance in all material respects of all the
obligations required by it to be performed hereunder and the truth, completeness
and accuracy of all statements and representations in all material respects
contained herein or of any consolidated financial statements furnished
hereunder.
3. From the date hereof until the Delivery Date, and during the term
hereof, no material adverse change occurring in the properties and assets of the
Company, other than changes occurring in the ordinary course of business.
4. No claim being made or legal action being instituted against the
Company, which if adversely determined would have a material adverse effect on
the financial condition of the Company, taken as a whole, and no reasonable
basis for a claim or an action of this nature being discovered.
5. The Registration Statement becoming effective no later than June 30,
1999, or whatever later date that may be agreed upon, and no amendment to the
Registration Statement being filed to which the Underwriter reasonably have
objected after having received reasonable notice; and no stop order suspending
the effectiveness of the Registration Statement being issued and no proceedings
for that purpose being threatened or instituted.
BEST EFFORTS UNDERWRITING AGREEMENT - Page 12
<PAGE> 13
6. Prior to the Delivery Date, the Company not sustaining any loss on
account of fire, flood, accident, or calamity of a character that materially
adversely affects its business or property, regardless of whether the loss is
insured; no litigation being instituted or threatened against the Company of a
character required to be disclosed in the Registration Statement that is not
disclosed and that shall materially adversely affect the Company, its business
or its property; and no substantial adverse change occurring in the operations
or financial condition or credit of the Company or in any conditions affecting
the prospects of the business of the Company.
7. The Company having furnished to the Underwriter on the Delivery Date
an opinion or opinions of Jordaan & Pennington, PLLC, counsel to the Company,
dated the Delivery Date and stating in effect that:
(a) The Company has been duly incorporated and, on the Delivery Date,
is validly existing corporation in good standing under the laws of the
State of Delaware with an authorized and issued capital stock as set
forth in the Registration Statement, and the shares of the Company
shown in the Registration Statement to be issued and outstanding have
been duly and validly issued and are outstanding;
(b) The Company is duly registered and qualified to conduct its
business and is in good standing in each jurisdiction or place where
the nature of its properties or the conduct of its business requires
such registration and qualification, except where the failure so to
register and qualify does not have material adverse effect on the
financial condition of the Company.
(c) The Notes conform in all material respects to the description of
the Notes contained in the Registration Statement and the Prospectus,
subject to the qualifications set forth in those documents, and the
holders of the Notes shall be entitled to the rights and preferences
set forth in the certificates for the Notes;
(d) The Company has the requisite corporate power and authority to
enter into and perform their respective obligations under the
Agreement. The Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the
Company and is enforceable against the Company in accordance with its
terms, subject to the Underwriter obtaining the approval of the
National Association of Securities Dealers, Inc. to the compensation
and other arrangements set forth therein, except to the extent that the
rights to indemnification thereunder may be limited by federal or state
securities laws and policies embodied therein, or to the extent that
such obligations are subject to or affected or limited by (i)
applicable liquidation, conservatorship, bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium or other laws
affecting creditors' rights or in the collection of debtors obligations
generally from time to time in effect or (ii) general principles of
equity (whether enforceability is considered in a proceeding in equity
or at law), including the qualification that the availability of the
remedy of specific performance or injunctive relief or other equitable
remedies is subject to the discretion of the court before which any
such preceding therefor may be brought and including standards of good
faith, fair
BEST EFFORTS UNDERWRITING AGREEMENT - Page 13
<PAGE> 14
dealing and reasonableness that may be applied by a court to the
exercise or certain rights and remedies;
(e) The Registration Statement and the Prospectus comply as to form in
all material respects with the requirements of the Act and the rules
and regulations of the Commission under the Act (except that no opinion
need be expressed as to financial statements and financial data); and
(f) That counsel has no knowledge or information concerning pending or
threatened litigation or any unasserted claims or assessments by any
third party, or parties, against the Company that is not disclosed in
the Registration Statement that are required to be disclosed in the
Registration Statement.
8. The Company having furnished to the Underwriter on the Delivery Date
a certificate or certificates verified by the President or a Vice President and
by the Treasurer of the Company, certifying that:
(a) The respective signers of the certificate or certificates have
examined the answers to each item of the Registration Statement and the
information contained in the Prospectus, and, to the best of their
knowledge, information and belief, those answers and that information,
as of the effective date of the Registration Statement, were true and
correct and did not omit to state any material fact required to be
stated or necessary in order to make the statements not misleading; and
since the effective date of the Registration Statement no event has
occurred that should have been set forth in an amendment to the
Registration Statement or in a supplement or amendment to the
Prospectus that has not been so set forth in an amendment or
supplement;
(b) The respective signers of the certificate or certificates do not
know of any litigation or proceeding instituted or threatened against
the Company of a character required to be disclosed in the Registration
Statement that is not disclosed in the Registration Statement;
(c) The respective signers of the certificate or certificates do not
know of any contract or arrangement that is required to be summarized
or disclosed in the Registration Statement or filed as an exhibit to
the Registration Statement that has not been summarized or disclosed or
filed;
(d) To the best of their knowledge, information and belief, the
respective signers know of no substantial adverse change in the general
affairs of the Company, or in the financial position of the Company
during the period from the date of the latest financial statements
contained in the Registration Statement to the Delivery Date, except
for the changes disclosed or indicated in the Registration Statement;
and
BEST EFFORTS UNDERWRITING AGREEMENT - Page 14
<PAGE> 15
(e) To the best of their knowledge, information and belief (i) the
representations and warranties contained in Article I of this Agreement
are true and correct at the Delivery Date; (ii) no stop order
suspending the effectiveness of the Registration Statement has been
issued prior to the Delivery Date and no proceedings for that purpose,
prior to that date, has been initiated or threatened by the Commission;
(iii) every reasonable request by the Commission for additional
information to be included in the Registration Statement or the
Prospectus or otherwise has or will be complied with; (iv) prior to the
Delivery Date, the Company has not sustained a loss on account of fire,
flood, accident, or calamity of a character that materially adversely
affects its property or business.
9. The Company having furnished to the Underwriter copies of the
Certificate of Incorporation and of each amendment to the Certificate of
Incorporation, if any, of the Company, which are officially certified by a
proper state official; one copy of the bylaws of the Company certified by the
Secretary or an Assistant Secretary of the Company as being currently in effect;
and a certificate of good standing issued by the proper state official or
officials of each state in which the Company transacts business.
10. The Company having furnished to the Underwriter whatever
certificates, in addition to those specifically mentioned in this Agreement,
that the Underwriter may request as to the accuracy, on the Date of Delivery, of
the representations and warranties of the Company in this Agreement, as to the
performance by the Company of its obligations under this Agreement, and as to
the other concurrent or precedent conditions to the obligations of the
Underwriter under this Agreement.
All of the opinions, letters, evidence, and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in full compliance
with the provisions hereof only if they are in form satisfactory to counsel to
the Underwriter.
In the event of the failure of any of the above conditions in any
material respect, the Underwriter may be relieved of any and all obligations
hereunder or may waive this right and demand full performance hereunder.
IX. Delivery Date
The Delivery Date, as referred to in this Agreement, shall be a date
agreed upon by the Company and the Underwriter and failing agreement, then the
Delivery Date shall be the Effective Date of the offering of the Notes.
1. The representations and warranties in this Agreement shall survive
the Delivery Date and shall continue in full force and effect regardless of any
investigation made by the party relying upon any representation or warranty.
2. This Agreement shall inure to the benefit of, and be binding upon,
the Company and the Underwriter (including specifically any dealer that the
Underwriter associates with pursuant hereto),
BEST EFFORTS UNDERWRITING AGREEMENT - Page 15
<PAGE> 16
and their successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person other than the persons
mentioned in the preceding sentence any legal or equitable right, remedy or
claim under or with respect hereto, or any provisions contained herein. This
agreement and all of its conditions and provisions are for the sole and
exclusive benefit of the foregoing persons and for the benefit of no other
person, except that the warranties, indemnities and agreements of the Company
contained herein also shall be for the benefit of any persons, if any, who
control the Underwriter within the meaning of Section 15 of the Act, and except
that the indemnification by the Underwriter shall be for the benefit of the
directors of the Company and the officers of the Company who have signed the
Registration Statement.
3. This Agreement sets forth the entire agreement between the parties
hereto, and no representation, warranty, understanding, or agreement not
specifically set forth herein shall be implied from this Agreement.
4. The proceeds received by the Underwriter from the sale of the Notes
shall be remitted to the Trustee(s) not later than noon of the following
business day, less the selling commission payable by the Company to the
Underwriter.
5. The Underwriter shall comply with all of the rules and regulations
of the Commission and the state regulatory agencies where the Notes shall be
offered. If at any time during the term of this Agreement, the Underwriter
should, for any reason, be disqualified or precluded from offering to the public
these Notes, then the Company shall have the option to terminate this Agreement
upon three (3) days written notice to the Underwriter, in which event this
Agreement shall be void and of no further force and effect, except that the
Underwriter shall be entitled to the commissions earned and to their accountable
out-of-pocket expenses.
6. This Agreement, unless sooner terminated as herein provided, shall
continue until all Notes registered under the Registration Statement are either
sold or withdrawn by the Company from registration, whichever event first
occurs.
X. Underwriter's Right to Terminate
Notwithstanding any of the terms and provisions hereof, this Agreement
may be terminated by the Underwriter based on a material breach of this
Agreement by the Company. Underwriter shall give fifteen (15) days prior written
notice to the Company of such breach, and the Company shall have the opportunity
to cure such breach. In the event of such termination, the Underwriter shall be
entitled to any commissions to which it was entitled as of the date of
termination as well as any and all accountable out-of-pocket expenses. In the
event that the Underwriter reasonably determines that the Notes are not
marketable, notwithstanding its best efforts to sell the Notes, the Underwriter
may terminate this Agreement with thirty (30) days prior written notice.
BEST EFFORTS UNDERWRITING AGREEMENT - Page 16
<PAGE> 17
XI. Post-Effective Amendments
1. The Company shall prepare and file under the Act any required
post-effective amendments to the Registration Statement and related Prospectus
or new Registration Statements and new related Prospectuses.
2. If any post-effective amendments or new Registration Statements
become effective, the Company shall furnish to the Underwriter opinions by the
same counsel and to the same effect as those required by Article VIII of this
Agreement, except that such opinions shall relate to the post-effective
amendments and new Prospectuses or to the new Registration Statements and new
Prospectuses and to the Notes that are being offered. The Company further agrees
with respect to these post-effective amendments and new Prospectuses and with
respect to these new Registration Statements and new Prospectuses to observe all
of the terms and conditions of this Agreement as set forth in Article III,
subdivisions 1, 2, 3, 4, 5, 6, and 7 and Article IV.
XII. Notice
Any notice required or permitted to be given under or pursuant to this
Agreement may be given in writing by depositing the notice in the United States
mail, postage prepaid, by hand-delivery or by courier, or by facsimile,
addressed as follows:
To the Underwriter:
Massie Capital, Ltd.
4100 International Plaza, Suite 2-115
Fort Worth, Texas 76109
FAX - (817) 731-3598
To the Company:
PawnMart, Inc.
301 Commerce Street, Suite 3600
Fort Worth, Texas 76102
FAX - (817) 335-6430
Attention: Carson R. Thompson, Chief Executive Officer
Copy to:
Jordaan & Pennington, PLLC
300 Crescent Court, Suite 1605
Dallas, Texas 75201
Attn: Jakes Jordaan
FAX - (214) 871-6560
BEST EFFORTS UNDERWRITING AGREEMENT - Page 17
<PAGE> 18
Notice shall be deemed given to a party hereunder when actually
received by such party.
XIII. Miscellaneous
1. This Agreement may be modified only by writing signed by the parties
hereto.
2. This Agreement shall be governed and construed in accordance with
the laws of the state of Texas.
3. This Agreement may be signed in various counterparts, which together
shall constitute one and the same instrument.
4. For purposes of any lawsuit or other proceeding in respect to this
Agreement, the undersigned hereby submits and consents to the jurisdiction of
any court of competent jurisdiction sitting in the State of Texas, Dallas
County.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day, month and year first written above.
PawnMart, Inc.
---------------------------------------
Carson R. Thompson
Chief Executive Officer
Massie Capital, Ltd.
---------------------------------------
Name:
---------------------------------
Title:
---------------------------------
BEST EFFORTS UNDERWRITING AGREEMENT - Page 18
<PAGE> 1
EXHIBIT 4.6
SERIES C WARRANT AGREEMENT
THIS WARRANT AGREEMENT ("Agreement") is made and entered into as of the ___ day
of __________, 1999, by and between PawnMart, Inc., a Delaware corporation
("Company"), and Continental Stock Transfer & Trust Company, a New York
corporation, as warrant agent ("Warrant Agent").
WHEREAS, the Company proposes to offer and sell a maximum of $10,000,000
principal amount of 12% Subordinated Notes Due 2004 (the "Notes") and, in
connection with the offering of the Notes, plans to issue up to 600,000 Series C
Redeemable Common Stock Purchase Warrants (the "Series C Warrants" or
"Warrants") pursuant to a Registration Statement on Form S-1 (the "Prospectus"),
File Number _______________, filed with the Securities and Exchange Commission;
and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the Company,
and the Warrant Agent is willing so to act, in connection with the issuance,
registration, registration of transfer, exchange and exercise of the Series C
Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
1. Appointment of Warrant Agent. The Company hereby appoints the Warrant Agent
to act as agent for the Company in accordance with the instructions hereinafter
set forth in this Agreement, and the Warrant Agent hereby accepts such
appointment.
2. Form of Warrants. The text and the terms of the Warrants, and the form of
election to purchase shares of Common Stock appearing on the reverse side
thereof shall be substantially as set forth in Exhibit A attached hereto and
made a part hereof. The Warrants shall be executed on behalf of the Company by
the manual or facsimile signature of the Chairman, Vice Chairman of the Company
or President or Chief Executive Officer and by the manual or facsimile signature
of the secretary or assistant secretary of the Company under its corporate seal,
affixed or in facsimile.
The Warrants shall be dated by the Warrant Agent as of the initial date of
issuance thereof, and upon transfer or exchange, the Warrant shall be dated as
of such subsequent issuance date.
The Warrants shall expire at 5:00 p.m. (New York time) on March 31, 2005. If
such date shall, in the State of New York, be a holiday or a day in which banks
are authorized to close, then the Warrants shall expire the next following day
which in the State of New York is not a holiday or a day on which banks are
authorized to close.
3. Registration and Countersignature. The Warrant Agent shall maintain books for
the transfer and registration of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective registered holders, and upon subsequent issuance, such
Warrants shall be registered in the names of the respective succeeding
registered holders. The Warrants shall be countersigned by the Warrant Agent (or
by any successor to the Warrant Agent then acting as warrant agent under this
Agreement) and shall not be valid for any purpose unless so countersigned.
Warrants may be so countersigned, however, by the Warrant Agent (or by its
successor as warrant agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signature appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery. Until a Warrant is transferred
on the books of the Warrant Agent, the Company and the Warrant Agent may treat
any registered holder of Warrants as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary.
4. Registration of Transfers and Exchanges. The Warrant Agent shall transfer any
outstanding Warrants on the books to be maintained by the Warrant Agent for that
purpose, upon surrender thereof for transfer, properly endorsed or accompanied
by appropriate instructions for transfer with proper documentary stamps affixed
thereto, if requested. Upon any such transfer, a new Warrant shall be issued to
the transferee, and the surrendered Warrant shall be canceled by the Warrant
Agent. Warrants so canceled shall be delivered by the Warrant Agent to the
Company from time to time. Warrants may be exchanged at the option of the holder
thereof when surrendered at the
1
<PAGE> 2
office of the Warrant Agent, for another Warrant, or other Warrants of different
denominations, of like tenor and representing in the aggregate the right to
purchase a like number of shares of Common Stock. The Warrant Agent is hereby
irrevocably authorized to countersign and deliver the Warrants in accordance
with the provisions of this Paragraph 4, and the Company, whenever required by
the Warrant Agent, will supply the Warrant Agent with Warrants duly executed on
behalf of the Company for such purpose.
5. Exercise of Warrants. Subject this Agreement, each registered holder of
Warrants shall have the right, which right may be exercised as in such Warrants
as expressed, to purchase from the Company, and the Company shall issue and sell
to such registered holder of Warrants, the number of fully paid and
nonassessable shares of Common Stock specified in such Warrants, upon surrender
to the Company at the office of the Warrant Agent, with the form of election to
purchase on the reverse side thereof duly completed and signed, and upon payment
to the Warrant Agent for the account of the Company of the Exercise Price for
the number of shares of Common Stock in respect of which such Warrants are then
exercised. Payment of such Exercise Price may be made in cash or by certified
check, bank draft, or postal or express money order, payable in United States
dollars, to the order of the Company. Subject to the provisions of Paragraph 8
hereof, upon such surrender of Warrants and payment of the Exercise Price as
aforesaid, the Company, acting through the Warrant Agent, shall issue and cause
to be delivered with all reasonable dispatch to or upon the written order of the
registered holder of such Warrants and in such name or names as such registered
holder may designate, a certificate or certificates for the number of full
shares of Common Stock so purchased upon the exercise of such Warrants. Such
certificates shall be deemed to have been issued, and any person so designated
to be named therein shall be deemed to have become a holder of record of such
Common Stock, as of the date of surrender of such Warrants and payment of the
Exercise Price, as aforesaid; provided, however, that if, at the date of
surrender of such Warrants and the payment of such Exercise Price, the transfer
books for the Common Stock purchasable upon the exercise of such Warrants shall
be closed, the certificates for the Common Stock in respect of which such
Warrants are then exercised shall be issuable as of the date on which such books
shall next be opened, and until such date the Company shall be under no duty to
deliver any certificate for such shares; provided further, however, that the
transfer books aforesaid, unless otherwise required by law, shall not be closed
at any one time for a period longer than 20 days. The right of purchase
represented by the Warrants shall be exercisable, at the election of the
registered holders thereof, either as an entirety or, from time to time, for
only part of the Common Stock specified therein, and in the event that any
Warrant is exercised in respect of less than all of the Common Stock specified
therein at any time prior to the date of expiration of the Warrants, a new
Warrant or Warrants will be issued for the remaining number of Common Stock
specified in the Warrant so surrendered, and the Warrant Agent is hereby
irrevocably authorized to countersign and to deliver the required new Warrants
pursuant to the provisions of this Paragraph 5 and of Paragraph 3 of this
Agreement, and the Company, whenever required by the Warrant Agent, will supply
the Warrant Agent with Warrants duly executed on behalf of the Company for such
purposes.
Notwithstanding anything contained herein to the contrary, no Warrant may be
exercised if the issuance of Common Stock in connection therewith would
constitute a violation of the registration provisions of federal or state
securities laws.
Upon 30 days prior written notice to all holders of the Warrants, the Company
shall have the right to reduce the exercise price and/or extend the term of the
Warrants in compliance with the requirements of Rule 13e-4 to the extent
applicable.
The "Exercise Price" of the Warrants shall mean the exercise price specified in
the Warrants until the occurrence of a recapitalization or reclassification
that, pursuant to the provisions hereof, shall require an increase or decrease
in the exercise price of the Warrants, and thereafter shall mean said price as
adjusted from time to time in accordance with the provisions hereof. No such
adjustment shall be made unless such adjustment would change the then purchase
price per share by ten cents ($.10) or more; provided, however, that all
adjustments not so made shall be deferred and made when the aggregate thereof
would change the then purchase price per share by ten cents ($.10) or more. No
adjustment made pursuant to any provision hereof shall have the effect of
increasing the total consideration payable upon exercise of any of the Warrants.
6. Adjustments in Certain Cases. In case the Company shall at any time prior to
the exercise or termination of any of the Warrants effect a recapitalization or
reclassification of such character that its Common Stock shall be changed into
or become exchangeable for a larger or smaller number of shares, then, upon the
effective date thereof, the number of shares of Common Stock that the holders of
the Warrants shall be entitled to purchase upon exercise thereof shall be
increased or decreased, as the case may be, in direct proportion to the increase
or decrease in such number of shares of Common Stock by reason of such
recapitalization or reclassification, and the purchase price per
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<PAGE> 3
share of such recapitalized or reclassified Common Stock shall, in the case of
an increase in the number of shares, be proportionately decreased and, in the
case of a decrease in the number of shares, be proportionately increased.
In case the Company shall at any time prior to the exercise or termination of
any of the Warrants distribute to holders of its Common Stock cash, evidences of
indebtedness, or other securities or assets, other than as dividends or
distributions payable out of current or accumulated earnings, then, in any such
case, the holders of the Warrants shall be entitled to receive, upon exercise
thereof, with respect to each share of Common Stock issuable upon such exercise,
the amount of cash or evidences of indebtedness or other securities or assets
that such holder would have been entitled to receive with respect to the Common
Stock as a result of the happening of such event, had the Warrants been
exercised immediately prior to the record date or other date fixing shareholders
to be affected by such event (without giving effect to any restriction upon such
exercise).
In case the Company shall at any time prior to the exercise or termination of
any of the Warrants consolidate or merge with any other corporation or transfer
all or substantially all of its assets to any other corporation preparatory to a
dissolution, then the Company shall, as a condition precedent to such
transaction, cause effective provision to be made so that the holders of the
Warrants, upon the exercise thereof after the effective date of such
transaction, shall be entitled to receive the kind and amount of shares,
evidences of indebtedness, and/or other property receivable on such transaction
by a holder of the number of shares of Common Stock as to which the Warrants
were exercisable immediately prior to such transaction (without giving effect to
any restriction upon such exercise); and, in any such case, appropriate
provision shall be made with respect to the rights and interests of the holders
thereof to the effect that the provisions of the Warrants shall thereafter be
applicable (as nearly as may be practicable) with respect to any shares,
evidences of indebtedness, or other securities or assets thereafter deliverable
upon exercise of the Warrants.
Whenever the number of shares of Common Stock or other types of securities or
assets purchasable upon exercise of any of the Warrants shall be adjusted as
provided herein, the Company shall forthwith obtain and file with its corporate
records a certificate or letter from a firm of independent public accountants of
recognized standing setting forth the computation and the adjusted number of
shares of Common Stock or other securities or assets purchasable hereunder
resulting from such adjustments, and a copy of such certificate or letter shall
be mailed to each of the registered holders of the Warrants. Any such
certificate or letter shall be conclusive evidence as to the correctness of the
adjustment or adjustments referred to therein and shall be available for
inspection by the holders of the Warrants on any day during normal business
hours.
In the event that at any time as a result of an adjustment made pursuant hereto
the holders of the Warrants shall become entitled to purchase upon exercise
thereof shares, evidences of indebtedness, or other securities or assets (other
than Common Stock), then, wherever appropriate, all references herein to Common
Stock shall be deemed to refer to and include such shares, evidences of
indebtedness, or other securities or assets, and thereafter the number of such
shares, evidences of indebtedness, or other securities or assets shall be
subject to adjustment from time to time in a manner and upon terms as nearly
equivalent as practicable to the provisions hereof.
7. Redemption. The Series C Warrants may be redeemed at the option of the
Company, at a redemption price of $.05 per Warrant, upon not less than 30 days
nor more than 60 days prior written notice, if the closing price of the Common
Stock, as reported by the principal exchange on which the Common Stock is
traded, the Nasdaq SmallCap Market or the National Quotation Bureau,
Incorporated, as the case may be, for seven days during any 10 consecutive
trading day period ending not more than 15 days prior to the date the notice of
redemption is mailed equals or exceeds $9.00 per share, subject to adjustment
under certain circumstances and provided there is a current registration
statement under the Securities Act of 1933, as amended, with respect to the
issuance and sale of Common Stock upon the exercise of the Warrants. On and
after the date fixed for redemption, the Registered Holder shall have no rights
with respect to the Warrants except to receive the $.05 per Warrant upon
surrender of this Warrant Certificate.
8. Payment of Taxes. The Company will pay all documentary stamp taxes, if any,
attributable to the initial issuance of securities upon the exercise of the
Warrants; provided, however, that the Company shall not be required to pay any
tax or taxes that may be payable in respect of any transfer involved in the
issuance or delivery of any securities in a name other than that of the
registered holder of Warrants in respect of which such securities are issued
and, in such case, neither the Company nor the Warrant Agent shall be required
to issue or deliver any certificate representing such securities or any Warrant
until the person requesting the same has paid to the Company or the Warrant
Agent the amount of such tax or has established to the Company's satisfaction
that such tax has been paid.
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<PAGE> 4
9. Mutilated or Missing Warrants. In case any of the Warrants shall be
mutilated, lost, stolen or destroyed, the Warrant Agent may countersign and
deliver in exchange and substitution for and upon cancellation of the mutilated
Warrant or in lieu of and substitution for the Warrant lost, stolen or
destroyed, a new Warrant of like tenor and representing an equivalent right or
interest, but only upon receipt of evidence satisfactory to the Warrant Agent of
such loss, theft or destruction of such Warrants and indemnity, if requested,
also satisfactory to them. Applicants for such substitute Warrants shall also
comply with such other reasonable regulations and pay such other reasonable
charges as the Company or the Warrant Agent may prescribe.
10. Reservation of Common Stock. Prior to the issuance of any Warrants, there
shall have been reserved, and the Company shall at all times keep reserved out
of the authorized and unissued Common Stock, a number of shares of Common Stock
sufficient to provide for the exercise of the rights of purchase represented by
the Warrants, and the transfer agent for the Common Stock and every subsequent
transfer agent for any of the Company's Common Stock issuable upon the exercise
of any of the rights of purchase aforesaid are hereby irrevocably authorized and
directed at all times to reserve such number of authorized and unissued Common
Stock as shall be requisite for such purpose. The Company agrees that all Common
Stock issued upon exercise of the Warrants shall be, at the time of delivery of
the certificates representing such Common Stock, validly issued and outstanding,
fully paid and non-assessable. The Company will keep a copy of this Agreement on
file with the transfer agent for the Common Stock and with every subsequent
transfer agent for the Company's Common Stock issuable upon the exercise of the
right of purchase represented by the Warrants. The Warrant Agent is hereby
irrevocably authorized to requisition from time to time from such transfer agent
stock certificates required to honor outstanding Warrants that have been
exercised. The Company will supply such transfer agent with duly executed stock
certificates for such purpose. All Warrants surrendered in the exercise of the
rights thereby evidenced shall be canceled by the Warrant Agent and shall
thereafter be delivered to the Company, and such canceled Warrants shall
constitute sufficient evidence of the number of shares of Common Stock that have
been issued upon the exercise of such Warrants. All Warrants surrendered for
transfer, exchange or partial exercise shall be canceled by the Warrant Agent
and delivered to the Company. Promptly after the date of expiration of the
Warrants, the Warrant Agent shall certify to the Company the total aggregate
amount of Warrants then outstanding and, thereafter, no Common Stock shall be
subject to reservation in respect of such Warrants.
11. Disposition of Proceeds on Exercise of Warrants. Unless otherwise instructed
by the Company in writing, the Warrant Agent shall account promptly to the
Company with respect to Warrants exercised and shall promptly deposit in an
account for the benefit of the Company, in a bank designated by the Company, all
moneys received by the Warrant Agent for the purchase of Common Stock through
the exercise of such Warrants.
12. Merger or Consolidation or Change of Name of Warrant Agent. Any corporation
or company that may succeed to the business of the Warrant Agent by merger or
consolidation or otherwise to which the Warrant Agent shall be a party, or any
corporation or company or otherwise succeeding to the business of the Warrant
Agent shall be the successor to the Warrant Agent hereunder without the
execution or filing of any paper or any further act on the part of any of the
parties hereto; provided, however, that such corporation would be eligible for
appointment as a successor Warrant Agent under the provisions of Paragraph 14 of
this Agreement. In case at the time such successor to the Warrant Agent shall
succeed to the agency created by this Agreement or in case at any time the name
of the Warrant Agent shall be changed, and any of the Warrants shall have been
countersigned but not delivered, any such successor to the Warrant Agent may
adopt the countersignature of the original Warrant Agent and deliver such
Warrants so countersigned; and in case at the time any of the Warrants shall not
have been countersigned, the successor to the Warrant Agent may countersign such
Warrants, either in the name of the predecessor Warrant Agent or in the name of
the successor Warrant Agent; and in all such cases, such Warrants shall have the
full force provided in the Warrants and in this Agreement.
In case at any time the name of the Warrant Agent shall be changed and at such
time any of the Warrants shall have been countersigned but not delivered, the
Warrant Agent may adopt the countersignature under its prior name and deliver
Warrants so countersigned; and if at that time any of the Warrants shall not
have been countersigned, the Warrant Agent may countersign such Warrants either
in its prior name or in its changed name; and in all such cases, such Warrants
shall have the full force provided in the Warrants and this Agreement.
13. Duties of the Warrant Agent.
(a) The Warrant Agent undertakes the duties and obligations imposed by this
Agreement upon the following terms and conditions, by all of which the Company
shall be bound:
4
<PAGE> 5
(i) The statements contained herein and in the Warrants shall be taken
as statements of the Company, and the Warrant Agent assumes no
responsibility for the correctness of any of the same, except such
as describe the Warrant Agent or action or actions taken or to be
taken by it. The Warrant Agent assumes no responsibility with
respect to the distribution of the Warrants, except as herein
otherwise provided.
(ii) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this
Agreement or in the Warrants to be complied with by the Company.
(iii) The Warrant Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder, either
itself, or by or through its attorneys, agents or employees.
(iv) The Warrant Agent may consult at any time with counsel satisfactory
to it (who may be counsel for the Company), and the Warrant Agent
shall incur no liability or responsibility to the Company or to any
holder of any Warrant in respect of any action taken, suffered or
omitted by it hereunder in good faith and in accordance with the
opinion or advice of such counsel, provided the Warrant Agent shall
have exercised reasonable care in the selection and continued
employment of such counsel.
(v) The Warrant Agent shall incur no liability or responsibility to the
Company or to any holder of any Warrant for any action taken in
reliance upon any notice, resolution, waiver, consent, order,
certificate or other paper, document or instrument reasonably
believed by it to have been signed, sent or presented by the proper
party or parties.
(vi) The Company agrees to pay the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the execution of
this Agreement; to reimburse the Warrant Agent for all expenses,
taxes, governmental charges and other charges of any kind and nature
incurred by the Warrant Agent in the execution of this Agreement;
and to indemnify the Warrant Agent and save it harmless from and
against any and all liabilities, including judgments, costs and
reasonable attorneys' fees for anything done or omitted by the
Warrant Agent in the execution of this Agreement, except as a result
of the Warrant Agent's negligence or bad faith.
(vii) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding, or to take any other action likely
to involve expense, unless the Company or one or more registered
holders of Warrants shall furnish the Warrant Agent with reasonable
security and indemnity. All rights of action under this Agreement or
under any of the Warrants or in the production thereof at any trial
or other proceeding relative thereto, and any such action, suit or
proceeding instituted by the Warrant Agent shall be brought in its
name as Warrant Agent, and any recovery of judgment shall be for the
benefit of the registered holders of the Warrants, as their
respective rights or interests may appear.
(viii) The Warrant Agent and any shareholder, director, officer, partner or
employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of the Company or become pecuniarily
interested in any transaction in which the Company may be
interested, or contract with or lend money to or otherwise act as
fully and freely as though it were not the Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from
acting in any other capacity for the Company or for any other legal
entity.
(ix) The Warrant Agent shall act hereunder solely as agent, and its
duties shall be determined solely by the provisions hereof. The
Warrant Agent shall not be liable for anything that it may do or
refrain from doing in connection with this Agreement, except for
liabilities that arise out of its negligence or bad faith.
(x) The Warrant Agent shall keep copies of this Agreement available for
inspection by holders of the Warrants during normal business hours
at its principal office in New York.
14. Change of Warrant Agent. The Warrant Agent may resign and be discharged from
its duties under this Agreement by giving notice in writing to the Company and
by giving notice by mailing to holders of the Warrants at their addresses as
such addresses appear on the Warrant register of such resignation, specifying a
date when such resignation shall take effect, which date shall not be less than
30 days after the mailing of said notice. The Warrant Agent may be removed at
the discretion of the Company by like notice to the Warrant Agent from the
Company and by like mailing of notice to the holders of the Warrants. If the
Warrant Agent shall resign or be removed or otherwise become incapable of
acting, the Company shall appoint a successor to the Warrant Agent. If the
Company
5
<PAGE> 6
shall fail to make such appointment within a period of 30 days after such
removal, or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Warrant Agent or by the registered
holder of a Warrant (who shall, with such notice, submit his Warrant for
inspection by the Company), then the registered holder of any Warrant may apply
to any court of competent jurisdiction for the appointment of a successor to the
Warrant Agent. After appointment, any successor Warrant Agent shall be vested
with the same powers, rights, duties and responsibilities as if it had been
originally named as Warrant Agent without further act or deed, but the former
Warrant Agent shall deliver and transfer to the successor Warrant Agent any
property at the time held by it hereunder, and execute and deliver any further
assurance, conveyance act or deed necessary for the purpose. Not later than the
effective date of any such appointment, the Company shall give notice thereof to
the predecessor Warrant Agent and each transfer agent for the Common Stock, and
shall forthwith give notice to the holders of the Warrants in the manner
prescribed in this section. Failure to file or mail any notice provided for in
this Section 14, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Warrant Agent or the
appointment of any successor Warrant Agent, as the case may be.
15. Identity of Transfer Agent. Forthwith upon the appointment of any transfer
agent other than the Warrant Agent for the Common Stock of the Company issuable
upon the exercise of the rights of purchase represented by the Warrants, the
Company will file with the Warrant Agent a statement setting forth the name and
address of such transfer agent.
16. Notices. Any notice pursuant to this Agreement to be given or made by the
Warrant Agent or by the registered holder of any Warrant to the Company shall be
deemed to have been sufficiently given or made if sent by certified mail, return
receipt requested, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
To the Company: PawnMart, Inc.
301 Commerce Street, Suite 3600
Fort Worth, Texas 76102
Attention: Chief Financial Officer
To the Warrant Agent: Continental Stock Transfer & Trust Company
2 Broadway, 19th Floor
New York, New York 10004
Attention:
--------------------------------
Any notice pursuant to this Agreement to be given or made by the Company or by
the registered holder of any Warrant to the Warrant Agent shall be deemed to
have been sufficiently given or made if sent by certified mail, return receipt
requested, postage prepaid, addressed (until another address is filed in writing
by the Warrant Agent with the Company) to the Warrant Agent as set forth above.
17. Standard of Conduct. Notwithstanding any implication to the contrary
elsewhere herein, whenever the Company or the Warrant Agent are required or
permitted to make any judgment or to take any action, no such judgment or action
shall be made or taken in bad faith or in any arbitrary or capricious fashion.
18. Supplements and Amendments. The Company and the Warrant Agent may, from time
to time, supplement or amend this Agreement without the approval of any of the
holders of the Warrants in order to cure any ambiguity or to correct or
supplement any provision contained herein that may be defective or inconsistent
with any other provision herein, or to make any other provisions in regard to
matters or questions arising hereunder that the Company and the Warrant Agent
may deem necessary or desirable, that shall not be inconsistent with the
provisions of the Warrants, and that shall not materially adversely affect the
rights of the holders of the Warrants.
19. Successors. All of the covenants and provisions hereof by or for the benefit
of the Company or the Warrant Agent shall bind and inure to the benefit of their
respective successors and assigns hereunder.
20. Merger or Consolidation of the Company. The Company will not merge or
consolidate with or into any other corporation, unless the corporation resulting
from such merger or consolidation (if not the Company) shall expressly assume,
by supplemental agreement satisfactory in form to the Warrant Agent and executed
and delivered to the Warrant Agent, the due and punctual performance and
observance of each and every covenant and condition of this Agreement to be
performed and observed by the Company.
6
<PAGE> 7
21. Texas Contract. This Agreement and each Warrant issued hereunder shall be
deemed to be a contract made under the laws of the State of Texas and for all
purposes shall be construed in accordance with the laws of said state.
22. Benefits of this Agreement. Nothing in this Agreement shall be construed to
give any person or corporation, other than the Company, the Warrant Agent and
the registered holders of the Warrants, any legal or equitable right, remedy or
claim under this Agreement, but this Agreement shall be for the sole and
exclusive benefit of the Company and the Warrant Agent and their respective
successors and of the holders of the Warrant Certificates.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
PAWNMART, INC.
By:
Its:
ATTEST:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
By:
Its:
ATTEST:
7
<PAGE> 8
EXHIBIT A
8
<PAGE> 9
NO. W _____________ VOID AFTER _______________, 2004
_________ WARRANTS
SERIES C REDEEMABLE COMMON STOCK PURCHASE WARRANT
CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK
PAWNMART, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED the holder hereof or registered assigns
(the "Registered Holder") is the owner of the number of Series C Redeemable
Common Stock Purchase Warrants (the "Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and nonassessable share of Common Stock,
$.01 par value, of PawnMart, Inc., a Delaware corporation (the "Company"), at
any time between _______________, 1999 (the "Initial Warrant Exercise Date"),
and the Expiration Date (as hereinafter defined) upon the presentation and
surrender of this Warrant Certificate with the Election to Purchase on the
reverse hereof duly executed, at the corporate office of Continental Stock
Transfer & Trust Company, a New York corporation, as Warrant Agent, or its
successor (the "Warrant Agent"), accompanied by payment of $6.00 subject to
adjustment (the "Purchase Price"), in lawful money of the United States of
America in cash or by check made payable to the Warrant Agent for the account of
the Company.
This Warrant Certificate and each Warrant represented hereby are issued pursuant
to and are subject in all respects to the terms and conditions set forth in the
Warrant Agreement (the "Warrant Agreement"), dated _______________, 1999, by and
between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant Agreement, the
Purchase Price and the number of shares of Common Stock subject to purchase upon
the exercise of each Warrant represented hereby are subject to modification or
adjustment.
Each Warrant represented hereby is exercisable at the option of the Registered
Holder, but no fractional interests will be issued. In the case of the exercise
of less than all the Warrants represented hereby, the Company shall cancel this
Warrant Certificate upon the surrender hereof and shall execute and deliver a
new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant
Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York time) on March 31,
2005. If such date shall in the State of New York be a holiday or a day on which
the banks are authorized to close, then the Expiration Date shall mean 5:00 p.m.
(New York time) the next following day which in the State of New York is not a
holiday or a day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to the
exercise of this Warrant unless a registration statement under the Securities
Act of 1933, as amended (the "Act"), with respect to such securities is
effective or an exemption thereunder is available. The Company has covenanted
and agreed that it will file a registration statement under the Federal
securities laws, use its best efforts to cause the same to become effective, use
its best efforts to keep such registration statement current, if required under
the Act, while any of the Warrants are outstanding, and deliver a prospectus
which complies with Section 10(a)(3) of the Act to the Registered Holder
exercising this Warrant. This Warrant shall not be exercisable by a Registered
Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
of Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
9
<PAGE> 10
Prior to the exercise of any Warrant represented hereby, the Registered Holder
shall not be entitled to any rights of a stockholder of the Company, including,
without limitation, the right to vote or to receive dividends or other
distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed
at the option of the Company, at the redemption price of $.05 per Warrant, on
not less than 30 nor more than 60 days written notice ("Notice of Redemption")
if the closing price for the Common Stock for seven trading days during a 10
consecutive trading day period ending not more than 15 days prior to the date
notice of redemption is mailed equals or exceeds $9.00 per share (150% of the
initial offering price to the public) subject to adjustment under certain
circumstances and provided there is then a current registration statement under
the Securities Act of 1933, as amended, with respect to the issuance and sale of
Common Stock upon the exercise of the Warrants. On and after the date fixed for
redemption, the Registered Holder shall have no rights with respect to the
Warrants except to receive the $.05 per Warrant upon surrender of this Warrant
Certificate.
Under certain circumstances, the Representatives (as that term is defined in the
Warrant Agreement) or their designees collectively shall be entitled upon the
exercise or redemption of the Warrants to receive a fee equal to 5% of the gross
proceed received by the Company from the exercise of the Warrants and 5% of the
aggregate redemption for the Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the Company and
the Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company or the Warrant Agent) for all purposes and shall not be affected
by any notice to the contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance with
the laws of the State of Delaware without giving effect to the conflicts of laws
principles thereof.
This Warrant Certificate is not valid unless countersigned by the Warrant Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly
executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: ____, 1999
PAWNMART, INC.
By:
Name:
Title:
By:
Name:
Title:
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY
AS WARRANT AGENT
By:
Name:
Title:
10
<PAGE> 11
ELECTION TO PURCHASE
(To be signed only upon exercise of Warrant)
TO: PawnMart, Inc.
301 Commerce Street, Suite 3600
Fort Worth, Texas 76102
The undersigned, the Holder of Series C Warrant Certificate Number____ (the
"Warrant"), representing ______________ Series C Warrants of PawnMart, Inc. (the
"Company"), which Warrant Certificate is being delivered herewith, hereby
irrevocably elects to exercise the purchase right provided by the Warrant
Certificate for, and to purchase thereunder, _____________ shares of Common
Stock of the Company, and herewith makes payment of $____________ therefor, and
requests that the certificates for such securities be issued in the name of, and
delivered to, _____________ whose address is __________, all in accordance with
the Warrant Agreement and the Warrant Certificate.
Dated:
(Signature must conform in all
respects to name of Holder as
specified on the face of the
Warrant Certificate)
-----------------------------------
-----------------------------------
(Address)
11
<PAGE> 12
(FORM OF ASSIGNMENT)
(To be exercised by the registered holder if such holder
desires to the Warrant Certificate.)
FOR VALUE RECEIVED ______________________________________________ hereby sells,
assigns and transfers unto
(Print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint___________________________
___________________________ Attorney, to transfer the within Warrant Certificate
on the books of the within-named Company, and full power of substitution.
Dated: Signature:
- --------------------- --------------------------------------
(Signature must conform in all
respects to name of holder as
specified on the fact of the
Warrant Certificate)
--------------------------------------
(Insert Social Security or
Other Identifying Number of
Assignee)
12
<PAGE> 1
EXHIBIT 4.7
================================================================================
PAWNMART, INC.
12% Subordinated Notes due 2004
INDENTURE
Dated as of _________________, 1999
TRUST MANAGEMENT, INC.,
a Texas trust company,
Trustee
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE 1
<S> <C>
Definitions and Incorporation by Reference........................ 1
SECTION 1.1. Definitions........................................ 1
SECTION 1.2. Other Definitions.................................. 10
SECTION 1.3. Incorporation by Reference of Trust Indenture Act.. 11
SECTION 1.4. Rules of Construction.............................. 11
ARTICLE 2
The Securities.................................................... 11
SECTION 2.1. Form and Dating.................................... 11
SECTION 2.2. Execution and Authentication....................... 12
SECTION 2.3. Registrar and Paying Agent......................... 12
SECTION 2.4. Deposit of Moneys; Paying Agent To Hold
Money in Trust..................................... 13
SECTION 2.5. Securityholder Lists............................... 13
SECTION 2.6. Transfer and Exchange.............................. 13
SECTION 2.7. Certificated Securities............................ 14
SECTION 2.8. Replacement Securities............................. 14
SECTION 2.9. Outstanding Securities............................. 14
SECTION 2.10. Temporary Securities............................... 15
SECTION 2.11. Cancellation....................................... 15
SECTION 2.12. Defaulted Interest................................. 15
SECTION 2.13. Record Date........................................ 16
SECTION 2.14. CUSIP Numbers...................................... 16
ARTICLE 3
Redemption........................................................ 16
SECTION 3.1. Notices to Trustee................................. 16
SECTION 3.2. Selection of Securities To Be Redeemed............. 17
SECTION 3.3. Notice of Redemption............................... 17
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 3.4. Effect of Notice of Redemption...................... 18
SECTION 3.5. Deposit of Redemption Price......................... 18
SECTION 3.6. Securities Redeemed in Part......................... 18
ARTICLE 4
Covenants.......................................................... 18
SECTION 4.1. Payment of Securities............................... 18
SECTION 4.2. SEC Reports......................................... 19
SECTION 4.3. Limitation on Restricted Payments................... 19
SECTION 4.4. Limitation on Sales of Assets....................... 21
SECTION 4.5. Limitation on Transactions with Affiliates.......... 25
SECTION 4.6. Compliance Certificate.............................. 25
SECTION 4.7. Further Instruments and Acts........................ 25
SECTION 4.8. Maintenance of Properties; Insurance................ 26
SECTION 4.9. Corporate Existence................................. 26
SECTION 4.10. Taxes............................................... 26
SECTION 4.11. Conflicting Agreements.............................. 26
ARTICLE 5
Successor Company.................................................. 26
ARTICLE 6
Defaults and Remedies.............................................. 27
SECTION 6.1. Events of Default................................... 27
SECTION 6.2. Acceleration........................................ 29
SECTION 6.3. Other Remedies...................................... 29
SECTION 6.4. Waiver of Past Defaults............................. 29
SECTION 6.5. Control by Majority................................. 30
SECTION 6.6. Limitation on Suits................................. 30
SECTION 6.7. Rights of Holders To Receive Payment................ 30
SECTION 6.8. Collection Suit by Trustee.......................... 30
SECTION 6.9. Trustee May File Proofs of Claim.................... 31
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 6.10. Priorities.......................................... 31
SECTION 6.11. Undertaking for Costs............................... 31
SECTION 6.12. Waiver of Stay or Extension Laws.................... 31
ARTICLE 7
Trustee............................................................ 32
SECTION 7.1. Duties of Trustee................................... 32
SECTION 7.2. Rights of Trustee................................... 33
SECTION 7.3. Individual Rights of Trustee........................ 34
SECTION 7.4. Trustee's Disclaimer................................ 34
SECTION 7.5. Notice of Defaults.................................. 34
SECTION 7.6. Reports by Trustee to Holders....................... 34
SECTION 7.7. Compensation and Indemnity.......................... 34
SECTION 7.8. Replacement of Trustee.............................. 35
SECTION 7.9. Successor Trustee by Merger......................... 36
SECTION 7.10. Eligibility; Disqualification....................... 36
SECTION 7.11. Preferential Collection of Claims
Against Company..................................... 36
ARTICLE 8
Discharge of Indenture; Defeasance................................. 37
SECTION 8.1. Discharge of Liability on Securities; Defeasance.... 37
SECTION 8.2. Conditions to Defeasance............................ 37
SECTION 8.3. Application of Trust Money.......................... 39
SECTION 8.4. Repayment to Company................................ 39
SECTION 8.5. Indemnity for Government Obligations................ 39
SECTION 8.6. Reinstatement....................................... 39
ARTICLE 9
Subordination...................................................... 39
SECTION 9.1. Securities Subordinated to Senior Indebtedness...... 39
SECTION 9.2. No Payment on Securities in Certain Circumstances... 40
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 9.3. Securities Subordinated to Prior Payment
of All Senior Indebtedness on Dissolution,
Liquidation or Reorganization of Company...................... 41
SECTION 9.4. Securityholders To Be Subrogated to Rights
of Holders of Senior Indebtedness............................. 42
SECTION 9.5. Obligations of the Company Unconditional...................... 42
SECTION 9.6. Trustee and Paying Agent Entitled To Assume
Payments Not Prohibited in Absence of Notice.................. 43
SECTION 9.7. Application by Trustee of Monies
Deposited With It............................................. 43
SECTION 9.8. Subordination Rights Not Impaired by Acts or Omissions
of Company or Holders of Senior Indebtedness.................. 43
SECTION 9.9. Securityholders Authorize Trustee To
Effectuate Subordination of Securities........................ 44
SECTION 9.10. Right of Trustee and Paying Agent To
Hold Senior Indebtedness...................................... 44
SECTION 9.11. Article 9 Not To Prevent Events of Default.................... 44
SECTION 9.12. No Fiduciary Duty Created to Holders
of Senior Indebtedness........................................ 44
ARTICLE 10
Amendments and Waivers....................................................... 45
SECTION 10.1. Without Consent of Holders.................................... 45
SECTION 10.2. With Consent of Holders....................................... 45
SECTION 10.3. Compliance with Trust Indenture Act........................... 46
SECTION 10.4. Revocation and Effect of Consents and Waivers................. 46
SECTION 10.5. Notation on or Exchange of Securities......................... 47
SECTION 10.6. Trustee To Sign Amendments.................................... 47
SECTION 10.7. Payment for Consent........................................... 47
ARTICLE 11
Miscellaneous................................................................ 47
SECTION 11.1. Trust Indenture Act Controls.................................. 47
SECTION 11.2. Notices....................................................... 47
SECTION 11.3. Communication by Holders with Other Holders................... 48
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 11.4. Certificate and Opinion as to Conditions Precedent............ 48
SECTION 11.5. Statements Required in Certificate or Opinion................. 49
SECTION 11.6. Rules by Trustee, Paying Agent and Registrar.................. 49
SECTION 11.7. Legal Holidays................................................ 49
SECTION 11.8. Governing Law................................................. 49
SECTION 11.9. No Recourse Against Others.................................... 50
SECTION 11.10. Successors.................................................... 50
SECTION 11.11. Multiple Originals............................................ 50
SECTION 11.12. Table of Contents; Headings................................... 50
SECTION 11.13. Severability.................................................. 50
Exhibit A - Form of Security
Schedule I - Indebtedness To Be Outstanding Immediately After the Issue Date
</TABLE>
<PAGE> 7
PAWNMART, INC.
Reconciliation and tie between Trust Indenture Act of 1939 ("TIA") and Indenture
dated as of __________________, 1999.*
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- --------- ---------
<S> <C>
310(a)(1) ......................................... 8.10
(a)(2) ......................................... 8.10
(a)(3) ......................................... N.A.
(a)(4) ......................................... N.A.
(a)(5) ......................................... 8.10
(b) ......................................... 8.8, 8.10
(c) ......................................... N.A.
311(a) ......................................... 8.11
(b) ......................................... 8.11
(c) ......................................... N.A.
312(a) ......................................... 2.5
(b) ......................................... 11.3
(c) ......................................... 11.3
313(a) ......................................... 8.6
(b)(1) ......................................... N.A.
(b)(2) ......................................... 8.6
(c) ......................................... 11.2
(d) ......................................... 8.6
314(a) ......................................... 4.2, 11.2
(b) ......................................... 4.21
(c)(1) ......................................... 11.4
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
TIA Indenture
Section Section
- --------- ---------
<S> <C>
(c)(2) ......................................... 11.4
(c)(3) ......................................... N.A.
(d) ......................................... N.A.
(e) ......................................... 11.5
315(a) ......................................... 8.1
(b) ......................................... 8.5; 11.2
(c) ......................................... 8.1
(d) ......................................... 8.1
(e) ......................................... 7.11
316(a) ......................................... 2.7
(last
sentence)
(a)(1)(A) ......................................... 7.5
(a)(1)(B) ......................................... 7.4
(a)(2) ......................................... N.A.
(b) ......................................... 7.7
(c) ......................................... 7.7
317(a)(1) ......................................... 7.8
(a)(2) ......................................... 7.9
(b) ......................................... 2.4
318(a) ......................................... 11.1
</TABLE>
N.A. means Not Applicable.
- ------------------------
* This reconciliation and tie shall not, for any purpose, be deemed to be
part of the Indenture. This reconciliation and tie shall only apply
subsequent to qualification of this Indenture under the TIA.
<PAGE> 9
INDENTURE dated as of _______________________, 1999, between PAWNMART,
INC., a Delaware corporation (the "Company"), and TRUST MANAGEMENT, INC., a
Texas trust company (the "Trustee").
Each party agrees as follows for the benefit of the other party and for
the equal and ratable benefit of the Holders of the Company's 12% Subordinated
Notes Due 2004 (the "Securities"):
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.1. DEFINITIONS.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any direct or indirect sale, lease, transfer,
conveyance or other disposition (or series of related sales, leases, transfers,
conveyances or dispositions) of property or other assets (each referred to for
the purposes of this definition as a "disposition") by the Company (including
any disposition by means of a merger, consolidation or similar transaction),
other than (i) a disposition of the Company's accounts receivable, lease
receivables or inventory (other than the disposition of inventory pursuant to a
Sale/Leaseback Transaction) at Fair Market Value in the Ordinary Course of
Business, (ii) a disposition of property or assets, whether in a single
transaction or a series of related transactions which constitute a single plan
of disposition, that have an aggregate Fair Market Value not in excess of
$____________, (iii) an operating lease entered into in the ordinary course of
business with respect to property, plant or equipment that in the judgment of
the Board of Directors constitutes excess capacity or (iv) a "like-kind
exchange" of an asset in exchange for an asset of a third party, so long as, in
the judgment of the Company's Board of Directors, the asset received by the
Company in such exchange (x) has a Fair Market Value at least equal to the fair
market value of the asset transferred by the Company and (y) is usable in a
Permitted Line of Business to at least the same extent as the asset transferred
by the Company. An Asset Disposition shall include the requisition of title to,
seizure of or forfeiture of any property or assets, or any actual or
constructive total loss or an agreed or compromised total loss of any property
or assets. The term "Asset Disposition" when used with respect to the Company
shall not include any disposition pursuant to Article 5 which constitutes a
disposition of all or substantially all the assets of the Company.
"Authorized Denominations" shall mean denominations of $1,000, or integral
multiples thereof.
INDENTURE - PAGE 1
<PAGE> 10
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years from the date of determination to the dates of each
successive scheduled principal payment of such Indebtedness or redemption and
(b) the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Board Resolution" means a duly adopted resolution of the Board of
Directors in full force and effect at the time of determination and certified as
such by the Secretary or an Assistant Secretary of the Company.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP; the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests (including partnership interests) in (however designated) equity of
such Person, excluding any debt securities convertible into such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a
successor replaces it and, thereafter, means the successor and, for purposes of
any provision contained herein and required by the TIA, each other obligor on
the indenture securities.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" of a Person means Redeemable Stock of such Person as
to which the maturity, conversion or exchange or redemption at the option of the
Holder thereof occurs, or may occur, on or prior to the first anniversary of the
Stated Maturity of the Securities.
"Exchange Act" means the Securities Exchange Act of 1934.
"Fair Market Value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length free market transaction, for
cash, between a willing seller and a willing buyer, neither of whom is under
undue pressure or compulsion to complete the transaction;
INDENTURE - PAGE 2
<PAGE> 11
provided, that the foregoing shall not prohibit sales of inventory at a discount
or on terms which are typical in the industry to which such inventory relates.
Fair Market Value shall be determined, except as otherwise provided herein, (i)
if such property or asset has a Fair Market Value less than $____________, by
two officers of the Company in an Officers' Certificate delivered to the Trustee
or (ii) if such property or asset has a Fair Market Value in excess of
$____________, by the Board of Directors as a whole and evidenced by a Board
Resolution, dated within 30 days of the relevant transaction, of the Board of
Directors delivered to the Trustee.
"Fresh Start Accounting" means Fresh Start Accounting as described in
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code" (Am. Inst. of Certified Public Accountants 1990), as
then in effect, or any comparable statement then in effect.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as approved by a significant segment of the accounting profession.
All ratios and computations based on GAAP contained in this Indenture shall be
computed in conformity with GAAP consistently applied, except as otherwise
expressly provided in this Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness or other obligation of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to
keepwell, to purchase assets, goods, securities or services, to take-or-pay or
to maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Indebtedness or
other obligation of the payment thereof or to protect such obligee against loss
in respect thereof (in whole or in part); provided, however, that the term
"Guarantee" shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Holder" or "Securityholder" means the Person in whose name a Security is
registered on the Registrar's books.
"Incur" means to, directly or indirectly, create, issue, assume,
Guarantee, incur (by conversion, exchange or otherwise) extend, assume, or
otherwise become liable for, contingently or otherwise; provided, however, that
any Indebtedness or Capital Stock of a Person existing at the time such Person
becomes a Subsidiary (whether by merger, consolidation, acquisition or
otherwise) will be deemed to be incurred by such Subsidiary at the time it
becomes a Subsidiary. The terms "Incurrence," "Incurred" and "Incurring" shall
each have a correlative meaning.
INDENTURE - PAGE 3
<PAGE> 12
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of indebtedness of
such Person for borrowed money;
(ii) the principal of and premium (if any) in respect of obligations of
such Person evidenced by bonds, debentures, notes or other similar
instruments;
(iii) all Capital Lease Obligations of such Person;
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except any obligation to pay
any portion of such purchase price that becomes due only if the
earnings attributable to such property or services satisfy
predetermined minimum amounts subsequent to the purchase of such
property or services and the amount of such obligation cannot be
determined on the date of such purchase);
(v) all obligations of such Person in respect of letters of credit,
banker's acceptances or other similar instruments or credit
transactions (including reimbursement obligations with respect
thereto), other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through
(iv) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if
and to the extent drawn upon, such drawing is reimbursed no later than
the third Business Day following receipt by such Person of a demand for
reimbursement following payment on any such letter of credit;
(vi) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Disqualified Stock
(but excluding any accrued dividends);
(vii) all Indebtedness of other Persons secured by any asset of such
Person, whether or not such Indebtedness is assumed by such Person;
provided, however, that the amount of such Indebtedness shall be the
lesser of (A) the Fair Market Value of such asset at such date of
determination and (B) the amount of such Indebtedness of such other
Persons; and
(viii) all Indebtedness of other Persons to the extent Guaranteed by
such Person.
For purposes of this definition, the maximum fixed redemption, repayment or
repurchase price of any Disqualified Stock that does not have a fixed
redemption, repayment or repurchase price shall be calculated in accordance with
the terms of such Stock as if such Stock were redeemed, repaid or repurchased on
any date on which Indebtedness shall be required to be determined pursuant to
the Indenture; provided, however, that if such Stock is not then permitted to be
redeemed, repaid or repurchased, the redemption, repayment or repurchase price
shall be the book value of such Stock as reflected in the most recent financial
statements of such Person. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of
INDENTURE - PAGE 4
<PAGE> 13
all unconditional obligations as described above and the maximum liability, upon
the occurrence of the contingency giving rise to the obligation, of any
contingent obligations at such date.
"Indenture" means this instrument as originally executed or as it may from
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof, including, for
all purposes of this instrument and any such supplemental indenture, the
provisions of the TIA that are deemed to be a part of and govern this
instrument, and any such supplemental indenture, respectively.
"Indenture Obligations" means the obligations of the Company (and any other
obligor hereunder or under the Securities) to pay principal of, and premium, if
any, and interest (including, without limitation, any default interest) on, the
Securities when due and payable, whether at maturity, by acceleration, call for
redemption or repurchase, in each case as required hereunder, and all other
amounts due or to become due under or in connection with this Indenture and the
Securities and the performance of all other obligations to the Trustee and the
Holders under this Indenture and the Securities, according to the terms hereof
and thereof.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of such Person) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of others)
such Person, or any purchase or acquisition of all or substantially all the
business or assets of, Capital Stock, Indebtedness, any other evidence of
beneficial ownership or other similar instruments issued by, such Person. In
determining the amount of any Investment in respect of any property or asset
other than cash, such property or asset shall be valued at its Fair Market Value
at the time of such Investment (unless otherwise specified in this definition).
"Issue Date" means the first date on which Securities are issued pursuant
to this Indenture.
"Net Cash Proceeds" from an Asset Disposition means the sum of (i) cash
payments received (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise,
but only as and when received, but excluding any other consideration received in
the form of assumption by the acquiring person of Indebtedness or other
obligations relating to such properties or assets or received in any other
non-cash form) therefrom and (ii) the Fair Market Value of all securities issued
to the Company in connection therewith, in each case net of (A) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred,
and all Federal, state, provincial, foreign and local taxes required to be paid
or accrued as a liability under GAAP as a consequence of such Asset Disposition,
(B) all payments made on any Indebtedness which is secured by any property or
assets subject to such Asset Disposition, or which must by its terms, or in
order to obtain a necessary consent to such Asset Disposition, or by applicable
law, be repaid out of the proceeds from such
INDENTURE - PAGE 5
<PAGE> 14
Asset Disposition and (C) the deduction of appropriate amounts to be provided by
the seller as a reserve, in accordance with GAAP, against any liabilities
associated with the property or assets disposed of in such Asset Disposition and
retained by the Company after such Asset Disposition; provided, that, in the
event that any consideration for such Asset Disposition (which would otherwise
constitute Net Cash Proceeds) is required to be held in escrow pending
determination of whether a purchase price adjustment shall be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to the Company from escrow; provided, further, that
any non-cash consideration received in connection with such Asset Disposition,
which is subsequently converted to cash, shall be deemed to be Net Cash Proceeds
at such time and shall thereafter be applied in accordance with Section 4.4. The
term "Net Cash Proceeds" from an issuance or sale of Capital Stock means the
cash proceeds of such issuance or sale, net of attorneys' fees, accountants'
fees, underwriters' or placement agents' fees, discounts or commissions and
brokerage, consultant and other fees actually incurred in connection with such
issuance or sale and net of taxes paid or payable as a result thereof.
"Officer" means the Chairman of the Board and Chief Executive Officer, the
President and Chief Operating Officer, the Vice President and Chief
Administrative Officer, any other Vice President, the Treasurer or the Secretary
of the Company.
"Officers' Certificate" means a certificate signed by two Officers at least
one of whom shall be the principal executive officer, principal accounting
officer or principal financial officer of the Company.
"Opinion of Counsel" means a written opinion, in form acceptable to the
Trustee, from legal counsel who is acceptable to the Trustee. The counsel may be
an employee of or counsel to the Company or the Trustee.
"Ordinary Course of Business" means sales or assignments of inventory or
accounts receivable or the performance of services at Fair Market Value or the
collection of accounts receivable in the ordinary course of business and does
not include any sale, assignment or collection after the voluntary or
involuntary bankruptcy of the Company, including, without limitation, those
events of the type described in Section 6.1(8) and (9). The ordinary course of
business shall include [(i) sales of inventory to customers, (ii) returns of
merchandise to customers and (iii) pawn loans to customers].
"Pari passu," as applied to the ranking of any Indebtedness of a Person in
relation to other Indebtedness of such Person, means that each such Indebtedness
either (i) is not subordinate in right of payment to any Indebtedness or (ii) is
subordinate in right of payment to the same Indebtedness as is the other; and is
so subordinate to the same extent, and is not subordinate in right of payment to
each other or to any Indebtedness as to which the other is not so subordinate.
"Permitted Investment" means an Investment by the Company in (i)
receivables owing to the Company, if created or acquired in the ordinary course
of business and payable or dischargeable in accordance with customary trade
terms; provided, however, that nothing in this paragraph shall
INDENTURE - PAGE 6
<PAGE> 15
limit in any way the ability of the Company to settle, compromise or otherwise
deal with such receivables in the ordinary course of business; (ii) payroll,
travel and similar advances to cover matters that are expected at the time of
such advances ultimately to be treated as expenses for accounting purposes and
that are made in the ordinary course of business; (iii) loans or advances, in
the aggregate principal amount of $____________ outstanding from time to time,
to employees of the Company made in the ordinary course of business consistent
with past practices of the Company; (iv) stock, obligations or securities
received in settlement of debts created in the ordinary course of business and
owing to the Company or in satisfaction of judgments; (v) joint ventures,
whether in the form of cash or through a contribution of assets (the nature of
which, if other than cash, to be determined in good faith by the Board of
Directors, whose determination shall be evidenced by a Board Resolution
delivered to the Trustee) in an amount not to exceed $___________________ at any
one time; (vi) any other property, asset or Person if made pursuant to any
written agreement of the Company in effect on the Issue Date; and (vii)
Investments made as a result of the receipt of non-cash consideration from an
Asset Disposition that was made pursuant to and in compliance with the
provisions of Section 4.4 or a disposition of assets pursuant to and in
compliance with the provisions of Article 5 hereof.
"Permitted Line of Business" means (i) the line or lines of business in
which the Company is engaged on the Issue Date and (ii) a line or lines of
business similar or related to the line or lines of business described in the
foregoing clause (i).
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security which is due or overdue or is to become
due at the relevant time.
"Redeemable Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable) or otherwise (including, without limitation,
upon the happening of any event) (i) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise, (ii) is convertible into or
exchangeable for Indebtedness or Disqualified Stock or (iii) is redeemable at
the option of the Holder thereof, in whole or in part.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances,
replaces, renews, repays or extends (including pursuant to any defeasance or
discharge mechanism) (collectively, "refinances," "refinancing" and "refinanced"
shall have a correlative meaning) any Indebtedness, including Indebtedness that
refinances Refinancing Indebtedness; provided, that (i) the Refinancing
Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the
Indebtedness being refinanced, (ii) the Refinancing Indebtedness has an Average
Life at the time such Refinancing Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being refinanced and (iii)
such Refinancing Indebtedness is Incurred in an aggregate principal amount (or
if issued with original issue discount, an aggregate issue price) that is equal
INDENTURE - PAGE 7
<PAGE> 16
to or less than the sum of (A) the aggregate principal amount (or if issued with
original issue discount, the aggregate accreted value) then outstanding of the
Indebtedness being refinanced and (B) any premiums, fees and other expenses paid
by the Company, as the case may be, in connection with such refinancing;
provided, further, that the covenants relating to the Refinancing Indebtedness
are no more restrictive in the aggregate than those of the Indebtedness being
refinanced and, if the Indebtedness being refinanced is subordinated to the
Securities, the Refinancing Indebtedness is at least as subordinated to the
Securities as the Indebtedness being refinanced.
"SEC" means the Securities and Exchange Commission.
"Securities" means the Securities issued under this Indenture.
"Securities Act" means the Securities Act of 1933.
"Senior Indebtedness" means the principal of, interest (including, without
limitation, interest at the contract rate relating to such Senior Indebtedness
accruing after any proceeding or event referred to in clauses (8) and (9) of
Section 6.1) on. For purposes of Section 4.4, the amount of consideration
received by the Company for the assumption of Senior Indebtedness by any
purchaser of the Company's property, assets or shares shall be equal to the face
value of such Senior Indebtedness.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the payment of principal of such
security is due and payable, excluding any provision providing for the
repurchase of such security at the option of the Holder thereof upon the
happening of any contingency beyond the control of the issuer unless such
contingency has occurred.
"Temporary Cash Investments" means any of the following: (i) investments in
U.S. Government Obligations maturing within 90 days of the date of acquisition
thereof, (ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 90 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America or any State thereof having capital, surplus and
undivided profits aggregating in excess of $____________ and whose long-term
debt is rated "A" or higher according to Moody's Investors Service, Inc. (or
such equivalent rating by at least one "nationally recognized statistical rating
organization" (as defined in Rule 436 under the Securities Act)), (iii)
repurchase obligations with a term of not more than 7 days for underlying
securities of the types described in clause (i) entered into with a bank meeting
the qualifications described in clause (ii) and (iv) investments in commercial
paper, maturing not more than 90 days after the date of acquisition, issued by a
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America with a rating at the time as of
which any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard and Poor's
Corporation.
INDENTURE - PAGE 8
<PAGE> 17
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date of this Indenture; provided, however,
that in the event the Trust Indenture Act of 1939 is amended after such date,
"TIA" means, to the extent required by any such amendment, the Trust Indenture
Act of 1939, as so amended.
"Trustee" means the party named as such in this Indenture until a successor
replaces it in accordance with the provisions of this Indenture and, thereafter,
means the successor.
"Trust Officer" means the Chairman of the Board, the President or any other
officer or assistant officer of the Trustee assigned by the Trustee to
administer its corporate trust matters.
"Uniform Commercial Code" means the Uniform Commercial Code as in effect
from time to time in, unless the context otherwise specifies.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
INDENTURE - PAGE 9
<PAGE> 18
SECTION 1.2. OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
---- ----------
<S> <C>
"Affiliate Transaction"......................................... 4.5
"Application Date".............................................. 4.4(a)
"Asset Disposition Purchase Amount"............................. 4.4(a)
"Asset Disposition Purchase Date"............................... 4.4(a)
"Asset Disposition Purchase Notice"............................. 4.4(d)
"Asset Disposition Purchase Offer".............................. 4.4(a)
"Asset Disposition Purchase Price".............................. 4.4(a)
"Asset Disposition Trigger"..................................... 4.4(b)
"Bankruptcy Law"................................................ 6.1
"covenant defeasance option".................................... 8.1(b)
"Custodian"..................................................... 6.1
"Defaulted Interest"............................................ 2.10
"Event of Default".............................................. 6.1
"legal defeasance option"....................................... 8.1(b)
"Legal Holiday"................................................. 11.7
"Notice of Default"............................................. 6.1
"Paying Agent".................................................. 2.3
"Payment"....................................................... 9.2
"Registrar"..................................................... 2.3
"Restricted Payment"............................................ 4.3
"Surviving Entity".............................................. Article 5
</TABLE>
INDENTURE - PAGE 10
<PAGE> 19
SECTION 1.3. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT. This
Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC.
"indenture securities" means the Securities.
"indenture security holder" means a Holder.
"indenture to be qualified" means this Indenture.
"indenture trustee" or "institutional trustee" means the Trustee.
"obligor" on the indenture securities means the Company and any other
obligor on the Securities.
All other TIA terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule have the
meanings assigned to them by such definitions.
SECTION 1.4. RULES OF CONSTRUCTION. Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned to it
in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular; and
(6) the principal amount of any noninterest bearing or other discount
security at any date shall be the principal amount thereof that would be
shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP.
ARTICLE 2
THE SECURITIES
SECTION 2.1. FORM AND DATING. The Securities and the Trustee's certificate
of authentication shall be substantially in the form of Exhibit A, which is
hereby incorporated in
INDENTURE - PAGE 11
<PAGE> 20
and expressly made a part of this Indenture. The Securities may have notations,
legends or endorsements required by law, stock exchange rule, agreements to
which the Company is subject, if any, or usage (provided that any such notation,
legend or endorsement is in a form acceptable to the Company). The Company shall
furnish any such legend not contained in Exhibit A to the Trustee in writing.
Each Security shall be dated the date of its authentication. The terms of the
Securities set forth in Exhibit A are part of the terms of this Indenture.
SECTION 2.2. EXECUTION AND AUTHENTICATION. Two Officers shall sign the
Securities for the Company by manual or facsimile signature. The Company's seal
shall be impressed, affixed, imprinted or reproduced on the Securities and may
be in facsimile form.
If an Officer whose signature is on a Security no longer holds that office
at the time the Trustee authenticates the Security, the Security shall be valid
nevertheless.
A Security shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Security. The signature
shall be conclusive evidence that the Security has been authenticated under this
Indenture.
The Trustee may appoint an authenticating agent reasonably acceptable to
the Company to authenticate the Securities. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as any Registrar (as defined below), Paying Agent (as defined below)
or agent for service of notices and demands.
SECTION 2.3. REGISTRAR AND PAYING AGENT. The Company shall maintain an
office or agency where Securities may be presented for registration of transfer
or for exchange (the "Registrar") and an office or agency where Securities may
be presented for payment (the "Paying Agent"). The Registrar shall keep a
register of the Securities and of their transfer and exchange. The Company may
have one or more co-registrars and one or more additional paying agents. The
term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent or co-registrar not a party to this Indenture, which
shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee of the name and address of any such agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.7. The
Company may act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and Paying Agent in
connection with the Securities.
INDENTURE - PAGE 12
<PAGE> 21
SECTION 2.4. DEPOSIT OF MONEYS; PAYING AGENT TO HOLD MONEY IN TRUST. Prior
to 11:00 a.m. Dallas, Texas time on each due date of the principal and interest
on any Security, the Company shall deposit with the Paying Agent a sum
sufficient to pay such principal and interest when so becoming due. The Company
shall require each Paying Agent (other than the Trustee) to agree in writing
that the Paying Agent shall hold in trust for the benefit of Securityholders or
the Trustee all money held by the Paying Agent for the payment of principal of
or interest on the Securities and shall notify the Trustee of any default by the
Company in making any such payment. If the Company acts as Paying Agent, it
shall segregate the money held by it as Paying Agent and hold it as a separate
trust fund. The Company at any time may require a Paying Agent to pay all money
held by it to the Trustee and to account for any funds disbursed by the Paying
Agent. Upon complying with this Section, the Paying Agent shall have no further
liability for the money delivered to the Trustee.
SECTION 2.5. SECURITYHOLDER LISTS. The Trustee shall preserve in as current
a form as is reasonably practicable the most recent list available to it of the
names and addresses of Securityholders. If the Trustee is not the Registrar, the
Company shall furnish to the Trustee, in writing at least five Business Days
before each interest payment date and at such other times as the Trustee may
request in writing, a list in such form and as of such date as the Trustee may
reasonably require of the names and addresses of Securityholders.
SECTION 2.6. TRANSFER AND EXCHANGE. The Securities shall be issued in
registered form and shall be transferable only upon the surrender of a Security
for registration of transfer. When a Security is presented to the Registrar or a
co-registrar with a request to register a transfer, the Registrar shall register
the transfer as requested if the requirements of Section 8-401(1) of the Uniform
Commercial Code are met. When Securities are presented to the Registrar or a
co-registrar with a request to exchange them for an equal principal amount of
Securities of other denominations, the Registrar shall make the exchange as
requested if the same requirements are met. To permit registration of transfers
and exchanges, the Company shall execute and the Trustee shall authenticate
Securities at the Registrar's or co-registrar's request. No service charge shall
be made for any registration of transfer or exchange of Securities, but the
Company may require payment of a sum sufficient to pay all taxes, assessments or
other governmental charges in connection with any transfer or exchange pursuant
to this Section.
Prior to the due presentation for registration of transfer of any Security,
the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar
may deem and treat the person in whose name a Security is registered as the
absolute owner of such Security for the purpose of receiving payment of
principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
The Company shall not be required to (i) issue, register the transfer of or
exchange Securities during a period beginning at the opening of business 15 days
before the day of the mailing of a notice of redemption of Securities and ending
at the close of business on the day of such mailing, or (ii) register, in whole
or in part, except the unredeemed portion of any Security being redeemed in
part.
INDENTURE - PAGE 13
<PAGE> 22
All Securities issued upon any transfer or exchange pursuant to the terms
of this Indenture will evidence the same debt and will be entitled to the same
benefits under this Indenture as the Securities surrendered upon such transfer
or exchange.
SECTION 2.7. CERTIFICATED SECURITIES. The Company will issue certificated
Securities. In connection with the execution and delivery of such certificated
Securities, the Company shall execute and the Trustee shall, upon receipt of a
written order of the Company signed by two officers, authenticate and deliver
one or more certificated Securities in an equal aggregate principal amount.
SECTION 2.8. REPLACEMENT SECURITIES. If a mutilated Security is surrendered
to the Registrar or if the Holder of a Security claims that the Security has
been lost, destroyed or wrongfully taken, the Company shall issue and the
Trustee shall authenticate a replacement Security if the requirements of Section
8-405 of the Uniform Commercial Code are met and the Holder satisfies any other
reasonable requirements of the Trustee or the Company. If required by the
Trustee or the Company, such Holder shall furnish an indemnity bond sufficient
in the judgment of the Company and the Trustee to protect the Company, the
Trustee, the Paying Agent, the Registrar and any co-registrar from any loss
which any of them may suffer if a Security is replaced. The Company and the
Trustee may charge the Holder for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the Company.
SECTION 2.9. OUTSTANDING SECURITIES. Securities outstanding at any time are
all Securities authenticated by the Trustee except for those canceled by it,
those delivered to it for cancellation and those described in this Section as
not outstanding. A Security does not cease to be outstanding because the Company
or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.8, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in accordance with this
Indenture, on a redemption date or a maturity date money sufficient to pay all
principal of, and premium, if any, and interest payable on, that date with
respect to the Securities (or portions thereof) to be maturing, as the case may
be, then on and after that date such Securities (or portions thereof) cease to
be outstanding and interest on them ceases to accrue.
In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company thereof or by any other Affiliate controlled by the Company shall
be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Securities which the Trustee actually knows
are so owned shall be so disregarded.
INDENTURE - PAGE 14
<PAGE> 23
In determining whether the Holders of the required principal amount of
Securities have (i) directed the time, method or place of conducting any
proceeding for any remedy available to the Trustee hereunder, or exercising any
trust or power conferred upon the Trustee; (ii) consented to the waiver of any
past Event of Default (as set forth in Section 6.1 of this Indenture) and its
consequences; or (iii) consented to the postponement of any interest payment,
Securities owned by Affiliates of the Company shall be disregarded and
considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Securities which the Trustee actually knows
are so owned shall be so disregarded. The Company shall notify the Trustee in
writing when it or any of its Affiliates purchases or otherwise acquires
Securities, of the aggregate principal amount of such Securities so purchased or
otherwise acquired.
SECTION 2.10. TEMPORARY SECURITIES. Until definitive Securities are ready
for delivery, the Company may prepare and the Trustee shall authenticate
temporary Securities. Temporary Securities shall be substantially in the form of
definitive Securities but may have variations that the Company considers
appropriate for temporary Securities. Without unreasonable delay, the Company
shall prepare and the Trustee shall authenticate definitive Securities and
deliver them in exchange for temporary Securities.
SECTION 2.11. CANCELLATION. The Company at any time may deliver Securities
to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Securities surrendered to them for registration of
transfer, exchange or payment. The Trustee and no one else shall cancel all
Securities surrendered for registration of transfer, exchange, payment or
cancellation and, upon request, deliver such canceled Securities to the Company.
The Company may not issue new Securities to replace Securities it has redeemed,
paid or delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST. Any interest on any Security which is
payable, but is not punctually paid or duly provided for, on the dates and in
the manner provided in the Securities and this Indenture (herein called
"Defaulted Interest") shall forthwith cease to be payable to the Holder on the
relevant record date by virtue of having been such Holder, and such Defaulted
Interest may be paid by the Company, at its election in each case, as provided
in clause (i) or (ii) below:
(i) The Company may elect to make payment of any Defaulted Interest to the
Persons in whose names the Securities are registered at the close of
business on a special record date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company shall
notify the Trustee in writing of the amount of Defaulted Interest proposed
to be paid on each Security and the date of the proposed payment, and at
the same time the Company shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such
Defaulted Interest or shall make arrangements satisfactory to the Trustee
for such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to
such Defaulted Interest as in this clause provided. Thereupon the Trustee
shall fix a special
INDENTURE - PAGE 15
<PAGE> 24
record date for the payment of such Defaulted Interest which shall be not
more than 15 days and not less than 10 days prior to the date of the
proposed payment and not less than 10 days after the receipt by the Trustee
of the notice of the proposed payment. The Trustee shall promptly notify
the Company of such special record date and, in the name and at the expense
of the Company, shall cause notice of the proposed payment of such
Defaulted Interest and the special record date therefor to be given to each
Holder, not less than 10 days prior to such special record date. Notice of
the proposed payment of such Defaulted Interest and the special record date
therefor having been so mailed, such Defaulted Interest shall be paid to
the Persons in whose names the Securities are registered at the close of
business on such special record date.
(ii) The Company may make payment of any Defaulted Interest on the
Securities in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities may be
listed, if any at all, and upon such notice as may be required by such
exchange, if, after notice given by the Company to the Trustee of the
proposed payment pursuant to this clause, such manner of payment shall be
deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section 2.12, each Security
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Security shall carry the rights to interest accrued
and unpaid, and to accrue, which were carried by such other Security.
SECTION 2.13. RECORD DATE. The Company may set a record date for purposes
of determining the identity of Securityholders entitled to vote or to consent to
any action by vote or consent authorized or permitted by Sections 6.4 and 6.5.
Unless this Indenture provides otherwise, such record date shall be the later of
30 days prior to the first solicitation of such consent or the date of the most
recent list of Securityholders furnished to the Trustee pursuant to Section 2.5
prior to such solicitation.
SECTION 2.14. CUSIP NUMBERS. The Company in issuing the Securities may use
CUSIP numbers (if then generally in use), and, if so, the Trustee shall use
CUSIP numbers in notices of redemption as of convenience to Holders; provided,
that any such notice may state that no representation is made as to the
correctness of such numbers either as printed on the Securities or as contained
in any notice of a redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers.
ARTICLE 3
REDEMPTION
SECTION 3.1. NOTICES TO TRUSTEE. If the Company elects to redeem Securities
pursuant to paragraph 5 of the Securities, it shall notify the Trustee in
writing of the redemption date, the
INDENTURE - PAGE 16
<PAGE> 25
principal amount of Securities to be redeemed and the paragraph of the
Securities pursuant to which the redemption will occur.
The Company shall give each notice to the Trustee provided for in this
Section at least 45 days (or such lesser time as is acceptable to the Trustee)
but not more than 60 days before the redemption date unless the Trustee consents
to a shorter period. Such notice shall be accompanied by an Officers'
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions herein. If fewer than all the
Securities are to be redeemed, the record date relating to such redemption shall
be selected by the Company and given to the Trustee, which record date shall be
not less than 15 days after the date of notice to the Trustee.
SECTION 3.2. SELECTION OF SECURITIES TO BE REDEEMED. If fewer than all the
Securities are to be redeemed, the Trustee shall select the Securities to be
redeemed pro rata or by lot or, at the discretion of the Trustee, by a method
that complies with applicable legal and securities exchange requirements, if
any, and that the Trustee considers fair and appropriate and in accordance with
methods generally used at the time of selection by fiduciaries in similar
circumstances. The Trustee shall make the selection from outstanding Securities
not previously called for redemption. The Trustee may select for redemption
portions of the principal of Securities that have denominations larger than
$1,000. Securities and portions of them the Trustee selects shall be in
Authorized Denominations. Provisions of this Indenture that apply to Securities
called for redemption also apply to portions of Securities called for
redemption. The Trustee shall notify the Company promptly of the Securities or
portions of Securities to be redeemed.
SECTION 3.3. NOTICE OF REDEMPTION. At least 15 days but not more than 60
days before a date for redemption of Securities, the Company shall mail, or
cause to be mailed, a notice of redemption by first-class mail to each Holder of
Securities to be redeemed.
The notice shall identify the Securities to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be redeemed, the
identification and principal amounts of the particular Securities to be
redeemed;
INDENTURE - PAGE 17
<PAGE> 26
(6) that, unless the Company defaults in making such redemption payment,
interest on Securities (or portions thereof) called for redemption ceases
to accrue on and after the redemption date;
(7) the paragraph of the Securities pursuant to which the Securities called
for redemption are being redeemed; and
(8) that no representation is made as to the correctness or accuracy of the
CUSIP number, if any, listed in such notice or printed on the Securities.
At the Company's request, the Trustee shall give the notice of redemption
in the Company's name and at the Company's expense. In such event, the Company
shall provide the Trustee with the information required by this Section.
SECTION 3.4. EFFECT OF NOTICE OF REDEMPTION. Once notice of redemption is
mailed, Securities called for redemption become due and payable on the
redemption date and at the redemption price stated in the notice. Upon surrender
to the Paying Agent, such Securities shall be paid at the redemption price
stated in the notice, plus accrued interest to the redemption date (subject to
the right of Holders of record on the relevant record date to receive interest
due on the related interest payment date). Failure to give notice or any defect
in the notice to any Holder shall not affect the validity of the notice to any
other Holder.
SECTION 3.5. DEPOSIT OF REDEMPTION PRICE. Prior to 11:00 a.m. Dallas, Texas
time on the redemption date, the Company shall deposit with the Paying Agent
(or, if the Company is the Paying Agent, shall segregate and hold in trust)
money sufficient to pay the redemption price of and accrued interest (subject to
the right of Holders of record on the relevant record date to receive interest
due on the related interest payment date) on all Securities to be redeemed on
that date other than Securities or portions of Securities called for redemption
which have been delivered by the Company to the Trustee for cancellation.
SECTION 3.6. SECURITIES REDEEMED IN PART. Upon surrender of a Security that
is redeemed in part, the Company shall execute and the Trustee shall
authenticate for the Holder (at the Company's expense) a new Security equal in
principal amount to the unredeemed portion of the Security surrendered.
ARTICLE 4
COVENANTS
SECTION 4.1. PAYMENT OF SECURITIES. The Company shall promptly pay the
principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent (other than the Company acting as paying agent) holds in accordance with
this Indenture money sufficient to pay all principal and interest then due.
INDENTURE - PAGE 18
<PAGE> 27
The Company shall pay interest on overdue principal at the rate specified
therefor in the Securities, and it shall pay interest on overdue installments of
interest at the same rate to the extent lawful.
SECTION 4.2. SEC REPORTS. The Company shall file the annual report and
other documents, reports and information required by Section 13 or 15(d) of the
Exchange Act with the SEC and, upon such filing, the Company shall promptly
furnish such reports, documents and information to the Trustee. The Company
shall use its best efforts to remain subject to the periodic reporting
requirements of Section 13 of the Exchange Act. In the event the Company is no
longer subject to the periodic reporting requirements of Section 13 or 15(d) of
the Exchange Act, the Company shall file with the SEC and furnish to the Trustee
and to the Securityholders the annual reports and other documents, reports and
information as if it were subject to such reporting requirements; provided,
however, that the Company shall not be so obligated to file such reports,
documents and information with the SEC if the SEC does not permit or accept such
filings, in which event such reports, documents and information shall be
provided to the Trustee and the Holders at the times the Company would have been
required to provide such reports, documents and information had it continued to
have been subject to such reporting requirements. The Company also shall comply
with the other provisions of TIA Section 314(a).
Delivery of such reports, information and documents to the Trustee is for
informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Company's
compliance with any of its covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).
SECTION 4.3. LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not,
directly or indirectly, (i) declare or pay any dividend on, or make any
distribution on or in respect of, its Capital Stock (including any payment in
connection with any merger or consolidation involving the Company), except
dividends or distributions payable solely in its Capital Stock (other than
Disqualified Stock) or in options, warrants or other rights to purchase such
Capital Stock and except dividends or distributions payable solely to the
Company , (ii) purchase, redeem, retire or otherwise acquire for value any
Capital Stock of the Company held by Persons other than the Company in excess of
$2,000,000 or (iii) make any Investment (other than a Permitted Investment) in
any Person (any such dividend, distribution, purchase, redemption, repurchase,
defeasance, other acquisition, retirement or Investment being herein referred to
as a "Restricted Payment"), if at the time of and after giving effect to the
proposed Restricted Payment:
(1) a Default or Event of Default shall have occurred and be continuing (or
would result therefrom); or
(2) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination
shall be evidenced by a Board Resolution furnished to the Trustee) declared
or made since the Issue Date, would exceed, without duplication, the sum
of:
INDENTURE - PAGE 19
<PAGE> 28
(A) the aggregate Net Cash Proceeds received by the Company from the
issue or sale of its Capital Stock, including Capital Stock of the Company
issued upon conversion of convertible debt or the exercise of options,
warrants or rights to purchase Capital Stock of the Company, but excluding
Disqualified Stock, subsequent to the Issue Date (other than an issuance or
sale to (i) an employee stock ownership plan or other trust established by
the Company or (ii) management employees); and
(B) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange subsequent to the
Issue Date of any Indebtedness of the Company convertible or exchangeable
for Capital Stock (other than Disqualified Stock) of the Company (less the
amount of any cash or other property distributed by the Company upon such
conversion or exchange).
(b) The provisions of Section 4.3(a) shall not prohibit:
(i) any purchase or redemption of Capital Stock of the Company made in
exchange for, or out of the proceeds of a substantially concurrent sale of,
Capital Stock of the Company (other than Disqualified Stock and other than
an employee stock ownership plan or other trust established by the Company)
or out of proceeds of an equity contribution made substantially
concurrently with such purchase or redemption; provided, however, that (A)
such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale
shall be excluded from the calculation of amounts under Section
4.3(a)(2)(A);
(ii) any payment in cash in lieu of the issuance of fractional shares of
Capital Stock to any Holder of Capital Stock warrants of the Company
outstanding on the Issue Date pursuant to the exchange of such warrants for
other Capital Stock of the Company upon the exercise of such warrants
pursuant to the terms thereof; provided, however, that such payment shall
be excluded in the calculation of the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with
Section 4.3(a); provided, however, that at the time of payment of such
dividend, no other Default shall have occurred and be continuing (or result
therefrom); provided, further, however, that such dividend shall be
included in the calculation of the amount of Restricted Payments from and
after the date of declaration of such dividend; or
(iv) so long as no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof, the redemption or
repurchase of Capital Stock of the Company, options in respect thereof or
related rights pursuant to and in accordance with the repurchase provisions
of any employee stock option or any stock purchase or other
INDENTURE - PAGE 20
<PAGE> 29
agreement between the Company and any of its management employees;
provided, however, that such redemptions or repurchases pursuant to this
Section 4.3(b)(iv) from and after the Issue Date shall not in the aggregate
exceed $2,000,000, plus the amount of any net cash proceeds to the Company
from sales of Capital Stock of the Company to management employees
subsequent to the Issue Date.
SECTION 4.4. LIMITATION ON SALES OF ASSETS. (a) The Company shall not make
any Asset Disposition unless (i) the Company receives consideration at the time
of such Asset Disposition at least equal to the Fair Market Value of the shares,
property and assets subject to such Asset Disposition, (ii) at least 75% of such
consideration consists of cash, Temporary Cash Investments or the assumption of
Senior Indebtedness of the Company and the release of the Company from all
liability under such Senior Indebtedness, (iii) in connection with any Asset
Disposition with an aggregate consideration greater than $2,000,000, the Company
delivers an Officers' Certificate to the Trustee certifying that such Asset
Disposition complies with clauses (i) and (ii) and that such Asset Disposition
was approved by a majority of the Board of Directors including a majority of the
disinterested members of the Board of Directors, as evidenced by a Board
Resolution delivered to the Trustee and (iv) 100% of the Net Cash Proceeds of
such Asset Disposition are applied as follows: (A) within 365 days of receipt
thereof (the last day of such period, the "Application Date"), the Company may
apply all or a portion of such Net Cash Proceeds to reinvestment (whether by
acquisition of an existing business or expansion, including, without limitation,
capital expenditures) in one or more Permitted Lines of Business, or any
combination thereof, and (B) to the extent any or all of such Net Cash Proceeds
are not applied as set forth above in clause (A), the Company shall apply all
remaining Net Cash Proceeds of such Asset Disposition (the "Asset Disposition
Purchase Amount") to an offer to purchase (an "Asset Disposition Purchase
Offer") Securities, on the first Business Day occurring 60 Business Days after
the Application Date (the "Asset Disposition Purchase Date") for cash at a
purchase price (such price, the "Asset Disposition Purchase Price") equal to
100% of the principal amount of the Securities so purchased plus accrued and
unpaid interest thereon to the Asset Disposition Purchase Date, in accordance
with the procedures set forth in Section 4.4(c). Any such Net Cash Proceeds
which remain after the acquisition by the Company of Securities tendered (and
not withdrawn) by Securityholders pursuant to such Asset Disposition Purchase
Offer in accordance with the procedures (including proration in the event of
oversubscription) set forth in Section 4.4(c) shall cease to be Net Cash
Proceeds.
(b) Notwithstanding the foregoing, the Company shall not be required to
make an Asset Disposition Purchase Offer until such time as the aggregate amount
of Net Cash Proceeds from Asset Dispositions required to be so applied to the
purchase of Securities pursuant to Section 4.4(a) exceeds $2,000,000 (the "Asset
Disposition Trigger"), and then the total amount of such Net Cash Proceeds shall
be required to be applied to an Asset Disposition Offer.
(c) Within 30 Business Days of the occurrence of an Asset Disposition
Trigger, (i) the Company shall notify the Trustee in writing of the Asset
Disposition Trigger and shall make the Asset Disposition Purchase Offer to
purchase Securities in an aggregate principal amount equal to the Asset
Disposition Purchase Amount at the Asset Disposition Purchase Price on or
INDENTURE - PAGE 21
<PAGE> 30
before the Asset Disposition Purchase Date, (ii) the Company shall mail a copy
of the Asset Disposition Purchase Offer to each Securityholder and (iii) the
Company shall cause a notice of the Asset Disposition Purchase Offer to be sent
to the Dow Jones News Service or similar business news service in the United
States of America. The Asset Disposition Purchase Offer shall remain open from
the time such offer is made until the Asset Disposition Purchase Date. The
Company shall purchase all Securities properly tendered pursuant to the Asset
Disposition Purchase Offer and not withdrawn in accordance with the procedures
set forth in the Asset Disposition Purchase Notice (as defined below). The
Trustee shall be under no obligation to ascertain, and the Trustee shall not be
deemed to have knowledge of, the occurrence of an Asset Disposition Trigger or
to give notice with respect thereto other than as provided above upon receipt of
notice of the occurrence of an Asset Disposition Trigger and an Asset
Disposition Purchase Offer from the Company. The Trustee may conclusively
assume, in the absence of receipt of notice of the occurrence of an Asset
Disposition Trigger and an Asset Disposition Purchase Offer from the Company,
that no Asset Disposition Trigger has occurred. The Asset Disposition Purchase
Offer shall include a form of Asset Disposition Purchase Notice to be completed
by the Securityholder and shall state or provide:
(1) the nature of the Asset Dispositions resulting in the Asset Disposition
Trigger, the date or dates such Asset Dispositions occurred and the amount
of the Asset Disposition Purchase Amount;
(2) that the Asset Disposition Purchase Offer is being made pursuant to
this Section 4.4(c) and that Securities in an aggregate principal amount
equal to the Asset Disposition Purchase Amount, selected in accordance with
this Indenture (if more than such amount shall be tendered) on a pro rata
basis (with such adjustments as may be deemed appropriate by the Company so
that only Securities in Authorized Denominations shall be purchased) from
among all the Securities properly tendered pursuant to the Asset
Disposition Purchase Offer, will be accepted for payment;
(3) the date by which the Asset Disposition Purchase Notice pursuant to
this Section 4.4(c) must be given;
(4) the Asset Disposition Purchase Date;
(5) the Asset Disposition Purchase Price;
(6) the name and address of the Paying Agent;
(7) that Securities must be surrendered to the Paying Agent at the office
of the Paying Agent to collect payment;
(8) information concerning the business of the Company which the Company in
good faith believes will enable such Holders to make an informed decision
(which at a minimum shall include (i) the most recently filed Annual Report
on Form 10-K (including audited
INDENTURE - PAGE 22
<PAGE> 31
consolidated financial statements) of the Company, the most recent
subsequently filed Quarterly Report on Form 10-Q and any Current Report on
Form 8-K of the Company filed subsequent to such Quarterly Report, other
than Current Reports describing Asset Dispositions otherwise described in
the offering materials (or corresponding successor reports) and (ii) a
description of material developments in the Company's business subsequent
to the date of the latest of such Reports.
(9) that the Asset Disposition Purchase Price for any Security as to which
an Asset Disposition Purchase Notice has been duly given and not withdrawn
(subject to proration if Securities with an aggregate principal amount
greater than the Asset Disposition Purchase Amount are so tendered) will be
paid promptly upon the later to occur of the third Business Day following
the Asset Disposition Purchase Date and the time of surrender of such
Security as described in clause (7);
(10) the procedures the Holder must follow to accept the Asset Disposition
Purchase Offer; and
(11) the procedures for withdrawing an Asset Disposition Purchase Notice.
(d) A Holder may accept an Asset Disposition Purchase Offer by delivering
to the Paying Agent at the office of the Paying Agent a written notice (an
"Asset Disposition Purchase Notice") at any time prior to the close of business
in the location of the office of the Paying Agent on the Asset Sale Purchase
Date, stating:
(1) that such Holder elects to have a Security purchased pursuant to the
Asset Disposition Purchase Offer;
(2) the principal amount of the Security that the Holder elects to have
purchased by the Company, which amount must be in an Authorized
Denomination, and the certificate numbers of the Securities to be delivered
by such securityholder for purchase by the Company; and
(3) that such Security shall be purchased on the Asset Disposition Purchase
Date pursuant to the terms and conditions specified in this Indenture.
The delivery of such Security (together with all necessary endorsements, as
determined by the Company) to the Paying Agent at the office of the Paying Agent
prior to, on or after the Asset Disposition Purchase Date shall be a condition
to the receipt by the Holder of the Asset Disposition Purchase Price therefor;
provided, that such Asset Disposition Purchase Price shall be so paid pursuant
to this Section 4.4(d) only if the Security so delivered to the Paying Agent
shall conform in all respects to the description thereof set forth in the
related Asset Disposition Purchase Notice. If at the expiration of the Asset
Disposition Purchase Offer the aggregate principal amount of Securities
surrendered by Holders exceeds the Asset Disposition Purchase Amount, the
Company or the Trustee shall select the Securities to be purchased on a pro rata
basis (with such
INDENTURE - PAGE 23
<PAGE> 32
adjustments as may be deemed appropriate by the Company so that only Securities
in Authorized Denominations shall be purchased). Holders whose Securities are
purchased only in part will be issued new Securities equal in principal amount
to the unpurchased portion of the Securities surrendered.
The Company shall purchase from the Holder thereof, pursuant to an Asset
Disposition Purchase Offer made in accordance with this Section 4.4, a portion
of a Security if the principal amount of such portion is an Authorized
Denomination. Provisions of this Indenture that apply to the purchase of all of
a Security also apply to the purchase of a portion of such Security.
The Paying Agent shall promptly notify the Company of the receipt by it of
any Asset Disposition Purchase Notice or written notice of withdrawal thereof.
Upon receipt by the Paying Agent of the Asset Disposition Purchase Notice,
the Holder of the Security in respect of which such Asset Disposition Purchase
Notice was given shall (unless such Asset Disposition Purchase Notice is
withdrawn as specified in the following paragraph) thereafter be entitled to
receive solely the Asset Disposition Purchase Price with respect to such
Security (subject to proration if Securities with an aggregate principal amount
greater than the Asset Disposition Purchase Amount are properly tendered). Such
Asset Disposition Purchase Price shall be paid to such Securityholder by the
Paying Agent promptly upon the later of (a) the third Business Day following the
Asset Disposition Purchase Date (provided the conditions in this Section 4.4(d)
have been satisfied) and (b) the first Business Day following the time of
delivery of the Security to the Paying Agent at the office of the Paying Agent
by the Holder thereof in the manner required by this Section 4.4(d).
An Asset Disposition Purchase Notice may be withdrawn before or after
delivery by the Holder to the Paying Agent at the office of the Paying Agent of
the Security to which such Asset Disposition Purchase Notice relates, by means
of a written notice of withdrawal delivered by the Holder to the Paying Agent at
the office of the Paying Agent to which the related Asset Disposition Purchase
Notice was delivered at any time prior to the close of business on the Asset
Disposition Purchase Date specifying, as applicable:
(1) the certificate number of the Security in respect of which such notice
of withdrawal is being submitted;
(2) the principal amount of the Security (which shall be an Authorized
Denomination) with respect to which such notice of withdrawal is being
submitted; and
(3) the principal amount, if any, of such Security (which shall be an
Authorized Denomination) that remains subject to the original Asset
Disposition Purchase Notice and that has been or will be delivered for
purchase by the Company.
No later than the date upon which written notice of an Asset Disposition
Purchase Offer is delivered to the Trustee, the Company shall cause to be
irrevocably deposited with the
INDENTURE - PAGE 24
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Paying Agent, subject to the provisions of Section 2.4, in cash or Temporary
Cash Investments an amount sufficient to pay the aggregate Asset Disposition
Purchase Price, to be held for payment in accordance with the provisions of this
Section.
(e) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section by virtue thereof.
SECTION 4.5. LIMITATION ON TRANSACTIONS WITH AFFILIATES. (a) The Company
shall not, directly or indirectly, conduct any business, enter into or permit to
exist any transaction (including, without limitation, the sale, conveyance,
disposition, purchase, exchange or lease of any property, the lending the
borrowing or advancing of any money or the rendering of any services) with, or
for the benefit of, any Affiliate of the Company (an "Affiliate Transaction")
unless (i) the terms of such Affiliate Transaction are set forth in writing,
(ii) such Affiliate Transaction is in the best interest of the Company, (iii)
such Affiliate Transaction is on terms as favorable to the Company as those that
could be obtained at the time of such Affiliate Transaction for a similar
transaction in arm's length dealings with a Person who is not such an Affiliate
and (iv) with respect to each Affiliate Transaction involving aggregate payments
or value in excess of $500,000, the Company delivers to the Trustee an Officers'
Certificate certifying that such Affiliate Transaction was approved by a
majority of the Board of Directors, including a majority of the disinterested
members of the Board of Directors, as evidenced by a Board Resolution, and that
such Affiliate Transaction complies with clauses (ii) and (iii), such Board
Resolution to be dated within 30 days of such Affiliate Transaction.
(b) The provisions of Section 4.5(a) shall not prohibit (i) any Restricted
Payment permitted to be paid pursuant to Section 4.3, (ii) any issuance of
securities, or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) loans or advances
permitted under this Indenture to employees in the ordinary course of business
in accordance with past practices of the Company, (iv) the payment of reasonable
fees to directors of the Company who are not employees of the Company or (v)
reasonable and customary indemnification arrangements between the Company and
their respective directors and officers pursuant to which the Company agrees to
indemnify such directors and officers against losses and expenses incurred by
such directors and officers in connection with their service to the Company (to
the extent that such indemnification arrangements are permitted under applicable
law).
SECTION 4.6. COMPLIANCE CERTIFICATE. The Company shall deliver to the
Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default and whether or not the signers know of any Default that
occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with TIA Section 314(a)(4).
INDENTURE - PAGE 25
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SECTION 4.7. FURTHER INSTRUMENTS AND ACTS. Upon request of the Trustee, the
Company will execute and deliver such further instruments and do such further
acts as may be reasonably necessary or proper to carry out more effectively the
purpose of this Indenture.
SECTION 4.8. MAINTENANCE OF PROPERTIES; INSURANCE. The Company shall, at
all times:
(a) maintain all property and assets necessary in its business in good
working order and condition (ordinary wear and tear excepted), in
compliance with applicable regulations, laws or restrictions and supplied
with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all
as in the judgment of the Company may be necessary so its business may be
properly and advantageously conducted at all times; and
(b) maintain with recognized national or international insurance companies,
or through self-insurance programs, insurance on such of its property and
assets, and against such liabilities in at least such amounts, against at
least such risks and with such deductibles or self-insured retentions as in
each case are customarily insured against in the same general area by
companies engaged in the same or a similar business and consistent with the
past practices of the Company, and furnish to the Trustee an Officers'
Certificate specifying the nature of the insurance carried and adequacy
thereof at such times as it shall deliver to the Trustee an Officers'
Certificate pursuant to Section 4.6.
SECTION 4.9. CORPORATE EXISTENCE. Subject to Article 5, the Company shall
do or cause to be done all things necessary to preserve and keep in full force
and effect its corporate existence, in accordance with the respective
organizational documents of the Company and the rights (charter and statutory),
registrations, licenses and franchises of the Company.
SECTION 4.10. TAXES. The Company shall pay, prior to delinquency, all
taxes, assessments and governmental levies, except as the same are being
contested in good faith and by appropriate proceedings or where the failure to
pay would not have a material adverse effect on the Company.
SECTION 4.11. CONFLICTING AGREEMENTS. The Company shall not enter into any
agreement or instrument that by its terms expressly prohibits the Company from
making any payments on the Securities required by the terms hereof and thereof.
INDENTURE - PAGE 26
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ARTICLE 5
SUCCESSOR COMPANY
The Company shall not enter into any transaction or series of transactions
to consolidate, amalgamate or merge with or into any other Person or sell,
convey, assign, transfer, lease or otherwise dispose of all or substantially all
its property and assets to any Person unless (i) if the Company is a party to
such transaction and is not the surviving entity (the "Surviving Entity"), the
Person formed by such consolidation or amalgamation or into which the Company is
merged or that acquires, by sale, conveyance, assignment, transfer, lease or
other disposition, all or substantially all the properties and assets of the
Company as an entirety, shall be a corporation organized and validly existing
under the laws of the United States or any State thereof or the District or
Columbia and shall expressly assume by a supplemental indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company pursuant to the Securities and the Indenture; (ii)
immediately before and after giving effect to such transaction or series of
transactions on a pro forma basis (and treating any Indebtedness which becomes
an obligation of the Company or the Surviving Entity as a result of such
transaction or series of transactions as having been incurred by the Company or
such Surviving Entity at the time of such transaction or series of transactions)
no Default or Event of Default shall have occurred and be continuing; and (iii)
the Company shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating (A) that such consolidation, amalgamation,
merger or transfer and such supplemental indenture (if any) and written
instrument (if any) comply with this Indenture and (B) that upon execution and
delivery of such supplemental indenture or written instrument the Company or
such Surviving Entity shall be bound by the terms of this Indenture as thereby
amended and this Indenture as thereby amended shall be enforceable against the
Company or such Successor Entity in accordance with its terms.
Upon any transaction involving the Company in which the Company is not the
Surviving Entity, such Surviving Entity shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under this
Indenture, but the Company in the case of a transfer or lease shall not be
released from the obligation to pay the principal of, and premium, if any, or
interest on, the Securities.
ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.1. EVENTS OF DEFAULT. An "Event of Default" occurs if:
(1) the Company fails to make any payment of interest on any Security when
the same shall become due and payable, and such failure continues for a
period of 30 days;
(2) the Company (i) fails to make the payment of the principal of or
premium, if any, on any Security when the same becomes due and payable at
its Stated Maturity, upon acceleration, redemption or declaration, or
otherwise or (ii) fails to redeem or purchase Securities when and to the
extent required pursuant to this Indenture or the Securities;
(3) the Company fails to comply with Article 5;
INDENTURE - PAGE 27
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(4) the Company fails to comply with Section 4.2, 4.3, 4.4, 4.5 or 4.11
(other than a failure to purchase Securities when required under Section
4.4) and such failure continues for 30 days after the notice specified
below, or the Company fails to give the notice specified below;
(5) the Company fails to comply with any of its agreements in the
Securities or this Indenture (other than those referred to in (1), (2), (3)
or (4) above) and such failure continues for a period of 60 days after the
notice specified below or the Company fails to give the notice specified
below;
(6) Principal of or interest on any Indebtedness of the Company for
borrowed money is not paid when due within any applicable grace period or
any Indebtedness of the Company is accelerated by the Holders thereof, in
each case, if the total amount so unpaid when due within any applicable
grace period or accelerated exceeds $2,000,000;
(7) one or more judgments or decrees aggregating in excess of $5,000,000 is
rendered against the Company and is not discharged and either: (A) an
enforcement proceeding has been commenced by any creditor upon such
judgment or decree; or (B) there is a period of 60 days following the entry
of such judgment or decree during which such judgment or decree is not
discharged, waived or the execution thereof stayed;
(8) the Company pursuant to or within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in an
involuntary case;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property; or
(D) makes a general assignment for the benefit of its creditors;
or takes any comparable action under any foreign laws relating to
insolvency;
(9) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case;
(B) appoints a Custodian of the Company or for any substantial part of
its property; or
(C) orders the winding up or liquidation of the Company; or any similar
relief is granted under any foreign laws and the order or decree remains
unstayed and in effect for 60 days.
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The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by reason of the provisions of Article 9 of this Indenture or by operation of
law or pursuant to any judgment, decree or order of any court or any order, rule
or regulation of any administrative or governmental body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
A Default under clause (4) or (5) above is not an Event of Default until
the Trustee or the Holders of at least 25% in principal amount of the Securities
notify the Company of the Default and the Company does not cure such Default
within the time specified after receipt of such notice. Such notice must specify
the Default, demand that it be remedied and state that such notice is a "Notice
of Default".
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any event which with the giving of notice and the lapse of time would become an
Event of Default under clause (4), (5), (6) or (7) above, its status and what
action the Company is taking or proposes to take with respect thereto.
SECTION 6.2. ACCELERATION. If an Event of Default (other than an Event of
Default specified in Section 6.1(8) or (9) with respect to the Company) occurs
and is continuing, the Trustee by notice to the Company, or the Holders of at
least 25% in principal amount of the Securities by notice to the Trustee (who
shall promptly notify the Company), may declare the principal of and accrued
interest on all the Securities to be due and payable. Upon such a declaration,
such principal and interest shall be due and payable immediately. If an Event of
Default specified in Section 6.1(8) or (9) occurs, the principal of and interest
on all the Securities shall ipso facto become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any
Securityholders. The Holders of a majority in principal amount of the Securities
by notice to the Trustee may rescind an acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default have been cured or waived except nonpayment of principal or
interest that has become due solely because of acceleration. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
SECTION 6.3. OTHER REMEDIES. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any of
the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
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SECTION 6.4. WAIVER OF PAST DEFAULTS. The Holders of a majority in
principal amount of the Securities by notice to the Trustee may waive an
existing Default or Event of Default and its consequences except (i) a Default
or Event of Default in the payment of the principal (other than principal due by
reason of acceleration) of or interest on a Security or (ii) a Default in
respect of a provision that under Section 9.2 cannot be amended or waived
without the consent of each Securityholder affected. When a Default or Event of
Default is waived, it is deemed cured, but no such waiver shall extend to any
subsequent or other Default or impair any consequent right.
SECTION 6.5. CONTROL BY MAJORITY. The Holders of a majority in principal
amount of the Securities may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or by exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture or, subject to Section 7.1,
that the Trustee determines is unduly prejudicial to the rights of other
Securityholders or would involve the Trustee in personal liability; provided,
however, that the Trustee may take any other action deemed proper by the Trustee
that is not inconsistent with such direction. Prior to taking any action
hereunder, the Trustee shall be entitled to indemnification satisfactory to it
in its sole discretion against all losses and expenses caused by taking or not
taking such action.
SECTION 6.6. LIMITATION ON SUITS. A Securityholder may not pursue any
remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an Event of
Default is continuing;
(2) the Holders of at least 25% in principal amount of the Securities make
a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee security or indemnity
reasonably satisfactory to it against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Securities do not
give the Trustee a direction inconsistent with the request during such
60-day period.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over another
Securityholder.
INDENTURE - PAGE 30
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SECTION 6.7. RIGHTS OF HOLDERS TO RECEIVE PAYMENT. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal of and interest on the Securities held by such Holder, on or after the
respective due dates expressed in the Securities, or to bring suit for the
enforcement of any such payment on or after such respective dates, shall not be
impaired or affected without the consent of such Holder.
SECTION 6.8. COLLECTION SUIT BY TRUSTEE. If an Event of Default in payment
of interest or principal specified in Section 6.1(1) or (2) occurs and is
continuing, the Trustee may recover judgment in its own name and as trustee of
an express trust against the Company for the whole amount of principal and
interest remaining unpaid (together with interest on such unpaid interest to the
extent lawful) and the amounts provided for in Section 7.7.
SECTION 6.9. TRUSTEE MAY FILE PROOFS OF CLAIM. The Trustee may file such
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee and the Securityholders allowed in
any judicial proceedings relative to the Company, its creditors or its property
and, unless prohibited by law or applicable regulations, may vote on behalf of
the Holders in any election of a trustee in bankruptcy or other Person
performing similar functions, and any Custodian in any such judicial proceeding
is hereby authorized by each Holder to make payments to the Trustee and, in the
event that the Trustee shall consent to the making of such payments directly to
the Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and its counsel, and any other amounts due the Trustee under Section 7.7.
SECTION 6.10. PRIORITIES. If the Trustee collects any money or property
pursuant to this Article 6, it shall pay out the money or property in the
following order:
FIRST: to the Trustee for amounts due under Section 7.7;
SECOND: to Securityholders for amounts due and unpaid on the Securities
for principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Securities for
principal and interest, respectively; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section. At least 15 days before such record
date, the Company shall mail to each Securityholder and the Trustee a notice
that states the record date, the payment date and amount to be paid.
SECTION 6.11. UNDERTAKING FOR COSTS. In any suit for the enforcement of any
right or remedy under this Indenture or in any suit against the Trustee for any
action taken or omitted by it as Trustee, a court in its discretion may require
the filing by any party litigant in the suit of an undertaking to pay the costs
of the suit, and the court in its discretion may assess reasonable costs,
INDENTURE - PAGE 31
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including reasonable attorneys' fees, against any party litigant in the suit,
having due regard to the merits and good faith of the claims or defenses made by
the party litigant. This Section does not apply to a suit by the Trustee, a suit
by a Holder pursuant to Section 6.7 or a suit by Holders of more than 10% in
principal amount of the Securities.
SECTION 6.12. WAIVER OF STAY OR EXTENSION LAWS. The Company (to the extent
it may lawfully refrain from doing so) shall not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture; and
the Company (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and shall not hinder, delay or impede
the execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law had been enacted.
ARTICLE 7
TRUSTEE
SECTION 7.1. DUTIES OF TRUSTEE. (a) If an Event of Default has occurred and
is continuing, the Trustee shall exercise the rights and powers vested in it by
this Indenture and use the same degree of care and skill in their exercise as a
prudent Person would exercise or use under the circumstances in the conduct of
such Person's own affairs.
(b) Except during the continuance of an Event of Default known to the
Trustee:
(1) the Trustee undertakes to perform such duties and only such duties as
are specifically set forth in this Indenture and no implied covenants or
obligations shall be read into this Indenture against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may conclusively
rely, as to the truth of the statements and the correctness of the opinions
expressed therein, upon certificates or opinions furnished to the Trustee
and conforming to the requirements of this Indenture. However, in the case
of any such certificates or opinions which by any provision hereof are
specifically required to be furnished to the Trustee, the Trustee shall
examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture (but need not confirm or
investigate the accuracy of mathematical calculations or other facts stated
therein).
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own wilful misconduct, except
that: (1) this paragraph does not limit the effect of paragraph (b) of this
Section; (2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer unless it is proved that the Trustee was negligent
in ascertaining the pertinent facts; and (3) the Trustee shall not be liable
with respect to any action it takes or omits to take in good faith in accordance
with a direction received by it pursuant to Section 6.5.
INDENTURE - PAGE 32
<PAGE> 41
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur financial liability in the performance of
any of its duties hereunder or in the exercise of any of its rights or powers,
if it shall have reasonable grounds to believe that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
(h) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Section and to the provisions of the TIA.
SECTION 7.2. RIGHTS OF TRUSTEE. (a) The Trustee may rely and shall be
protected in acting or in refraining from acting on any document believed by it
to be genuine and to have been signed or presented by the proper person. The
Trustee need not investigate any fact or matter stated in the document, but the
Trustee, in its discretion, may make such further inquiry or investigation into
such facts or matters as it may see fit and, if the Trustee shall determine to
make such further inquiry or investigation, it shall be entitled, upon
reasonable notice to the Company, to examine the books, records and premises of
the Company, personally or by agent or attorney and to consult with the officers
and representatives of the Company, including the Company's accountants and
attorneys.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for the
misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute wilful
misconduct or negligence.
(e) The Trustee may consult with counsel, and the advice or opinion of
counsel with respect to legal matters relating to this Indenture and the
Securities shall be full and complete
INDENTURE - PAGE 33
<PAGE> 42
authorization and protection from liability in respect to any action taken,
omitted or suffered by it hereunder in good faith and in accordance with the
advice or opinion of such counsel.
(f) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request, order or direction of
any of the Holders pursuant to the provisions of this Indenture, unless such
Holders shall have offered to the Trustee security or indemnity reasonably
satisfactory to it against the costs, expenses and liabilities which may be
incurred by it in compliance with such request, order or direction.
SECTION 7.3. INDIVIDUAL RIGHTS OF TRUSTEE. The Trustee in its individual or
any other capacity may become the owner or pledgee of Securities and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee. Any Paying Agent, Registrar, co-registrar or
co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
SECTION 7.4. TRUSTEE'S DISCLAIMER. The Trustee shall not be responsible for
and makes no representation as to the validity or adequacy of this Indenture or
the Securities, it shall not be accountable for the Company's use of the
proceeds from the Securities, and it shall not be responsible for any statement
of the Company in the Indenture or in any document issued in connection with the
sale of the Securities or in the Securities other than the Trustee's certificate
of authentication.
SECTION 7.5. NOTICE OF DEFAULTS. If a Default occurs and is continuing and
if it is known to a Trust Officer of the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Security,
the Trustee may withhold the notice if and so long as a committee of its Trust
Officers in good faith determines that withholding the notice is in the
interests of Securityholders.
SECTION 7.6. REPORTS BY TRUSTEE TO HOLDERS. If required by TIA Section
313(a), as promptly as practicable after each May 15 beginning with the May 15
following the date of this Indenture, and in any event prior to July 15 in each
year, the Trustee shall mail to each Securityholder a brief report dated as of
May 15 that complies with TIA Section 313(a). The Trustee also shall comply with
TIA Section 313(b).
A copy of each report at the time of its mailing to Securityholders shall
be filed with the SEC and each stock exchange (if any) on which the Securities
are listed. The Company agrees to notify promptly the Trustee whenever the
Securities become listed on any stock exchange and of any delisting thereof.
SECTION 7.7. COMPENSATION AND INDEMNITY. The Company shall pay to the
Trustee from time to time such compensation as shall be agreed to in writing
between the Company and the Trustee for its services. The Trustee's compensation
shall not be limited by any law on compensation of a trustee of an express
trust. The Company shall reimburse the Trustee upon
INDENTURE - PAGE 34
<PAGE> 43
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, sale or otherwise in connection with this
Indenture, in addition to the compensation for its services. Such expenses shall
include the reasonable compensation and expenses, disbursements and advances of
the Trustee's agents, counsel, accountants and experts and court costs. The
Company shall indemnify the Trustee, its officers, directors, employees and
agents, against any and all loss, liability damage, claim or expense (including
reasonable attorneys' fees and expenses), including taxes (other than taxes
based on the income of the Trustee) incurred by it in connection with the
acceptance or administration of this trust and the performance of its duties
hereunder. The Trustee shall notify the Company promptly of any claim for which
it may seek indemnity. Failure by the Trustee to so notify the Company shall not
relieve the Company of its obligations hereunder. The Company shall defend the
claim and the Trustee may have separate counsel and the Company shall pay the
fees and expenses of such counsel. The Company need not reimburse any expense or
indemnify against any loss, liability or expense incurred by the Trustee through
the Trustee's own wilful misconduct, negligence or bad faith.
The Trustee's right to receive payment of any amounts due under this
Section 7.7 shall not be subordinate to any other liability or indebtedness of
the Company (even though the Securities may be subordinate to such other
liability or indebtedness).
The Company's payment obligations pursuant to this Section shall survive
the discharge of this Indenture. When the Trustee incurs expenses after the
occurrence of a Default specified in Section 6.1(8) or (9) with respect to the
Company, the expenses are intended to constitute expenses of administration
under Bankruptcy Law.
SECTION 7.8. REPLACEMENT OF TRUSTEE. The Trustee may resign at any time by
so notifying the Company. The Holders of a majority in principal amount of the
Securities may remove the Trustee by so notifying the Trustee and may appoint a
successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or its
property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders of a
majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
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A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon the resignation or removal
of the retiring Trustee shall become effective, and the successor Trustee shall
have all the rights, powers and duties of the Trustee under this Indenture. The
successor Trustee shall mail a notice of its succession to Securityholders. The
retiring Trustee shall promptly transfer all property held by it as Trustee to
the successor Trustee, subject to the lien provided for in Section 7.7.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
25% in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this Section,
the Company's obligations under Section 7.7 shall continue for the benefit of
the retiring Trustee.
SECTION 7.9. SUCCESSOR TRUSTEE BY MERGER. If the Trustee consolidates with,
merges or converts into, or transfers all or substantially all its corporate
trust business or assets to, another corporation or banking association, the
resulting, surviving or transferee corporation or banking association without
any further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion or
consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Securities shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor trustee, and deliver such Securities so authenticated; and in
case at that time any of the Securities shall not have been authenticated, any
successor to the Trustee may authenticate such Securities either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in
all such cases such certificates shall have the full force which it is anywhere
in the Securities or in this Indenture provided that the certificate of the
Trustee shall have.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION. The Trustee shall at all times
satisfy the requirements of TIA Section 310(a). The Trustee shall have a
combined capital and surplus of at least $1,000,000 as set forth in its most
recent published annual report of condition. No obligor upon the Securities or
Person directly controlling, controlled by or under common control with such
obligor shall serve as Trustee upon the Securities. The Trustee shall comply
with TIA Section 310(b); provided, however, that there shall be excluded from
the operation of TIA Section 310(b)(1) any indenture or indentures under which
other securities or certificates of interest or participation in other
securities of the Company are outstanding if the requirements for such exclusion
set forth in TIA Section 310(b)(1) are met.
INDENTURE - PAGE 36
<PAGE> 45
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY. The
Trustee shall comply with TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE 8
DISCHARGE OF INDENTURE; DEFEASANCE
SECTION 8.1. DISCHARGE OF LIABILITY ON SECURITIES; DEFEASANCE. (a) When (i)
the Company delivers to the Trustee all outstanding Securities (other than
Securities replaced pursuant to Section 2.8) for cancellation or (ii) all
outstanding Securities have become due and payable, whether at maturity or as a
result of the mailing of a notice of redemption pursuant to Article 3 of this
Indenture, and the Company irrevocably deposits with the Trustee funds
sufficient to pay at maturity or upon redemption all outstanding Securities,
including interest thereon (other than Securities replaced pursuant to Section
2.8), and if in either case the Company pays all other sums payable hereunder by
the Company, then this Indenture shall, subject to Sections 8.1(c) and 8.6,
cease to be of further effect. The Trustee shall acknowledge satisfaction and
discharge of this Indenture on demand of the Company accompanied by an Officers'
Certificate and an Opinion of Counsel and at the cost and expense of the
Company.
(b) Subject to Sections 8.1(c), 8.2 and 8.6, the Company at any time may
terminate (i) all its obligations under the Securities and this Indenture
("legal defeasance option") or (ii) its obligations under Sections 4.2 (to the
extent that the failure to comply with Section 4.2 shall not violate the TIA),
4.3, 4.4 and 4.5. Article 5 and the related operation of Sections 6.1(3), (4)
and (5) and the operation with respect to Sections 6.1(6), (7), (8) and (9)
("covenant defeasance option"). The Company may exercise its legal defeasance
option notwithstanding its prior exercise of its covenant defeasance option.
If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default. If the Company
exercises its covenant defeasance option, payment of the Securities may not be
accelerated because of an Event of Default specified in Sections 6.1(3), (4) or
(5) or an Event of Default specified in Sections 6.1(7), (8) or (9).
Upon satisfaction of the conditions set forth herein and upon request of
the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b), the Company's obligations in
Sections 2.3, 2.4, 2.5, 2.6, 2.8, 7.7, 7.8, 8.4, 8.5 and 8.6 shall survive until
the Securities have been paid in full. Thereafter, the Company's obligations in
Sections 7.7, 8.4, 8.5 and 8.6 shall survive.
SECTION 8.2. CONDITIONS TO DEFEASANCE. The Company may exercise its legal
defeasance option or its covenant defeasance option only if:
INDENTURE - PAGE 37
<PAGE> 46
(1) the Company irrevocably deposits in trust with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on
the Securities to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a nationally
recognized firm of independent accountants expressing their opinion that
the payments of principal and interest when due and without reinvestment on
the deposited U.S. Government Obligations plus any deposited money without
investment will provide cash at such times and in such amounts as will be
sufficient to pay principal and interest when due on all the Securities to
maturity or redemption, as the case may be;
(3) 123 days pass after the deposit is made and during the 123-day period
no Default specified in Section 6.1(8) or (9) with respect to the Company
occurs which is continuing at the end of the period;
(4) no Default has occurred and is continuing on the date of such deposit
and after giving effect thereto;
(5) the deposit does not constitute a default under any other agreement
binding on the Company;
(6) the Company delivers to the Trustee an Opinion of Counsel to the effect
that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(7) in the case of the legal defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel stating that (i) the Company
has received from the Internal Revenue Service a ruling or (ii) since the
date of this Indenture there has been a change in the applicable Federal
income tax law, in either case to the effect that, and based thereon such
Opinion of Counsel shall confirm that, the Securityholders will not
recognize income, gain or loss for Federal income tax purposes as a result
of such defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred;
(8) in the case of the covenant defeasance option, the Company shall have
delivered to the Trustee an Opinion of Counsel to the effect that the
Securityholders will not recognize income, gain or loss for Federal income
tax purposes as a result of such covenant defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; and
(9) the Company delivers to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities as contemplated by this Article
8 have been complied with.
INDENTURE - PAGE 38
<PAGE> 47
Before or after a deposit, the Company may make arrangements satisfactory
to the Trustee for the redemption of Securities at a future date in accordance
with Article 3.
SECTION 8.3. APPLICATION OF TRUST MONEY. The Trustee shall hold in trust
money or U.S. Government Obligations deposited with it pursuant to this Article
8. It shall apply the deposited money and the money from U.S. Government
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of principal of and interest on the Securities.
SECTION 8.4. REPAYMENT TO COMPANY. The Trustee and the Paying Agent shall
promptly turn over to the Company upon request any excess money or securities
held by them at any time.
Subject to any applicable abandoned property law, the Trustee and the
Paying Agent shall pay to the Company upon written request any money held by
them for the payment of principal or interest that remains unclaimed for two
years; provided, however, that the Trustee and the Paying Agent before being
required to make any payment may, but need not, at the expense of the Company
cause to be published once in a newspaper of general circulation in the City of
Dallas or mail to each Holder entitled to such money notice that such money
remains unclaimed and that after a date specified therein, which shall be at
least 30 days from the date of such publication or mailing, any unclaimed
balance of such money then remaining will be paid to the Company. After payment
to the Company, Securityholders entitled to the money must look to the Company
for payment as general creditors.
SECTION 8.5. INDEMNITY FOR GOVERNMENT OBLIGATIONS. The Company shall pay
and shall indemnify the Trustee against any tax, fee or other charge imposed on
or assessed against deposited U.S. Government Obligations or the principal and
interest received on such U.S. Government Obligations.
SECTION 8.6. REINSTATEMENT. If the Trustee or Paying Agent is unable to
apply any money or U.S. Government Obligations in accordance with this Article 8
by reason of any legal proceeding or by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, the Company's obligations under this Indenture and the
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to this Article 8 until such time as the Trustee or Paying Agent is
permitted to apply all such money or U.S. Government Obligations in accordance
with this Article 8.
ARTICLE 9
SUBORDINATION
SECTION 9.1. SECURITIES SUBORDINATED TO SENIOR INDEBTEDNESS. The Company,
for itself and its successors, and each Holder, by its acceptance of Securities,
agrees that, notwithstanding anything to the contrary in Sections 6.1 and 6.2
hereof, the payment of the principal of, interest on or any other amounts due on
the Securities is subordinated in right of payment, to the extent and
INDENTURE - PAGE 39
<PAGE> 48
in the manner provided in this Article 9, to the prior payment in full of all
Senior Indebtedness. Each Holder by its acceptance of the Securities authorizes
and directs the Trustee on its behalf to take such action as may be necessary or
appropriate to effectuate, as between the holders of Senior Indebtedness and
such Holder, the subordination provided in this Article 9.
The expressions "prior payment in full," "payment in full" and "paid in
full" and any other similar term or phrase when used in this Article 9 with
respect to Senior Indebtedness shall mean the payment in full of such Senior
Indebtedness in cash or provision for such payment in cash or otherwise in a
manner satisfactory to the holders of the Senior Indebtedness.
This Article 9 shall constitute a continuing offer to all persons who, in
reliance upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, and such provisions are made for the benefit of the holders of
Senior Indebtedness, and such holders are made obligees hereunder and they
and/or each of them may enforce such provisions to the extent and in the manner
provided herein.
SECTION 9.2. NO PAYMENT ON SECURITIES IN CERTAIN CIRCUMSTANCES. (a) No
direct or indirect payment (in cash, property, securities, by set-off or
otherwise) shall be made or agreed to be made on account of the principal of,
premium (if any) or interest on the Securities, or in respect of any redemption,
retirement, defeasance, purchase or other acquisition of any of the Securities,
and no Holder of any Security shall be entitled to receive any such payment (any
of the foregoing payments or actions being referred to in this Section 9.2 as a
"Payment"), on or after the occurrence of any default in the payment of
principal or interest then due and payable in respect of any Senior Indebtedness
(either at maturity, upon redemption, by acceleration or otherwise), unless and
until such default has been waived or cured or all amounts then due and payable
for principal of and interest on all Senior Indebtedness shall have been paid in
full or provision therefor in cash, in cash equivalents, or in accordance with
the terms of such Senior Indebtedness and the agreements, if any, under which
such Senior Indebtedness was issued or created, shall have been made.
(b) The Company may not make any Payment if a default or event of default
under any agreement governing Senior Indebtedness (other than a default or event
of default relating to payment of principal or interest, either at maturity,
upon redemption, by declaration or otherwise) has occurred and is continuing
that permits the holders of such Senior Indebtedness to accelerate its maturity
(whether or not such acceleration has occurred).
Notwithstanding the provisions of this Section 9.2(b), the Company may make
Payments on the Securities when:
(1) all defaults and events of default referred to in such notice are
cured or waived; or
INDENTURE - PAGE 40
<PAGE> 49
(2) 179 days pass after such notice is given, with respect to such
defaults and/or events of default so long as this Article 9
(including, without limitation, Section 9.2(a)) otherwise permits a
Payment at that time.
(c) In the event that notwithstanding the provisions of this Section 9.2
the Company shall make any Payment to the Trustee or any Holder of the
Securities on account of the principal of or interest on the Securities after
receiving notice (as aforesaid) of the happening of a default or event of
default on Senior Indebtedness, then, unless and until such default or event of
default shall have been cured or waived or shall have ceased to exist, such
payment (subject to the provisions of Sections 9.6 and 9.7) shall be held by the
Trustee or such Holder, in trust for the benefit of, and subject to Sections 9.6
and 9.7, shall be paid forthwith over and delivered to, the holders of Senior
Indebtedness (pro rata as to each of such holders on the basis of the respective
amounts of Senior Indebtedness then in default held by them) for application to
the payment of all Senior Indebtedness remaining unpaid to the extent necessary
to pay all Senior Indebtedness in full in accordance with its terms, after
giving effect to any concurrent payment or distribution to or for the holders of
Senior Indebtedness.
The Company shall give prompt written notice to the Trustee of any default
in the payment of principal of or interest on any Senior Indebtedness or a
default which results in the acceleration of such Senior Indebtedness or under
any agreement pursuant to which Senior Indebtedness has been issued.
SECTION 9.3. SECURITIES SUBORDINATED TO PRIOR PAYMENT OF ALL SENIOR
INDEBTEDNESS ON DISSOLUTION, LIQUIDATION OR REORGANIZATION OF COMPANY. Upon any
distribution or payment of assets or securities of the Company upon any
dissolution, winding up, liquidation or reorganization of the Company of any
kind or character (whether voluntary or involuntary, in bankruptcy, insolvency
or receivership proceedings or upon an assignment for the benefit of creditors
or otherwise):
(a) the holders of all Senior Indebtedness shall first be entitled to
receive payment in full (or to have such payment duly provided for) of the
principal thereof and interest due thereon and other amounts due in connection
therewith before the Holders are entitled to receive any payment or distribution
of any assets (other than Capital Stock of the Company) on account of the
principal of or interest on the Securities;
(b) any payment or distribution of assets of the Company of any kind or
character, whether in cash, property or securities, to which the Holders or the
Trustee on behalf of the Holders would be entitled except for the provisions of
this Article 9, including any such payment or distribution which may be payable
or deliverable by reason of the payment of any other Indebtedness of the Company
being subordinated to the payment of the Securities, shall be paid by the
liquidating trustee or agent or other person making such payment or distribution
directly to the holders of Senior Indebtedness (pro rata as to each such holder
or trustee on the basis of the respective amounts of unpaid Senior Indebtedness
held or represented by each), to the extent necessary to make payment in full of
all Senior Indebtedness remaining unpaid except that Holders of the Securities
shall be entitled to receive securities that are subordinated to Senior
Indebtedness to at least the same degree as the Securities; and
INDENTURE - PAGE 41
<PAGE> 50
(c) in the event that notwithstanding the foregoing, any payment or
distribution of assets of the Company of any kind or character, whether in cash,
property or securities, including any such payment or distribution which may be
payable or deliverable by reason of the payment of any other Indebtedness of the
Company being subordinated to the payment of the Securities, shall be received
by the Trustee or the Holders or any Paying Agent (or, if the Company is acting
as its own Paying Agent, money for any such payment or distribution shall be
segregated or held in trust) on account of principal of or interest on the
Securities before all Senior Indebtedness is paid in full, such payment or
distribution (subject to the provisions of Sections 9.6 and 9.7) shall be
received and held in trust for and shall be paid forthwith over and delivered to
the holders of the Senior Indebtedness remaining unpaid or unprovided for (pro
rata as to each of such holders on the basis of the respective amounts of Senior
Indebtedness held by them), for application to the payment of such Senior
Indebtedness until all such Senior Indebtedness shall have been paid in full,
after giving effect to any concurrent payment or distribution or provision
thereof or to or for the holders of such Senior Indebtedness, except that
Holders of the Securities shall be entitled to receive securities that are
subordinated to Senior Indebtedness to at least the same extent as the
Securities.
The Company shall give prompt written notice to the Trustee of any
dissolution, winding up, liquidation or reorganization of the Company or any
assignment for the benefit of the Company's creditors.
SECTION 9.4. SECURITYHOLDERS TO BE SUBROGATED TO RIGHTS OF HOLDERS OF
SENIOR INDEBTEDNESS. Subject to the payment in full of all Senior Indebtedness
pursuant to this Article 9, the Holders of Securities shall be subrogated
equally and ratably to the rights of the holders of Senior Indebtedness to
receive payments or distributions of assets of the Company applicable to the
Senior Indebtedness until all amounts owing on the Securities shall be paid in
full, and for the purpose of such subrogation no such payments or distributions
to the holders of Senior Indebtedness by or on behalf of the Company or by or on
behalf of the Holders by virtue of this Article 9 which otherwise would have
been made to the Holders shall, as among the Company, its creditors other than
holders of the Senior Indebtedness and the Holders, be deemed to be payment by
the Company to or on account of the Senior Indebtedness, it being understood
that the provisions of this Article 9 are and are intended solely for the
purpose of defining the relative rights of the Holders, on the one hand, and the
holders of Senior Indebtedness, on the other hand.
SECTION 9.5. OBLIGATIONS OF THE COMPANY UNCONDITIONAL. Nothing contained in
this Article 9 or elsewhere in this Indenture or in any Security is intended to
or shall impair, as among the Company, its creditors other than holders of the
Senior Indebtedness and the Holders, the obligation of the Company, which is
absolute and unconditional, to pay to the Holders the principal amount of and
other interest (including, to the extent lawful ,any interest on overdue
installments of interest) on the Securities as and when the same shall become
due and payable in accordance with their terms, or is intended to or shall
affect the relative rights of the Holders and creditors of the Company other
than the holders of Senior Indebtedness, nor shall anything herein or therein
prevent
INDENTURE - PAGE 42
<PAGE> 51
the Trustee or any Holders from exercising all remedies otherwise permitted by
applicable law upon Default under this Indenture, subject to the rights, if any,
under this Article 9 of the holders of Senior Indebtedness in respect of cash,
property or securities of the Company received upon the exercise of any such
remedy. Upon any distribution of assets of the Company referred to in this
Article 9, the Trustee, subject to the provisions of Sections 7.1 and 7.2, and
the Holders shall be entitled to rely upon any order or decree made by any court
of competent jurisdiction in which such dissolution, winding up, liquidation,
reorganization or similar proceedings are pending, or a certificate of the
liquidating trustee or agent or other person making any distribution to the
Trustee or to the Holders, for the purpose of ascertaining the persons entitled
to participate in such distribution, the holders of Senior Indebtedness and
other Indebtedness of the Company, the amount thereof or payable thereon, the
amount or amounts paid or distributed thereon and all other facts pertinent
thereto or to this Article 9.
SECTION 9.6. TRUSTEE AND PAYING AGENT ENTITLED TO ASSUME PAYMENTS NOT
PROHIBITED IN ABSENCE OF NOTICE. The Trustee and Paying Agent shall not at any
time be charged with knowledge of the existence of any facts which would
prohibit the making of any payment to or by the Trustee or the Paying Agent or
the taking of any other action under this Article 9 by the Trustee unless and
until the Trustee or the Paying Agent shall have received written notice thereof
from the Company or from one or more holders of Senior Indebtedness prior to the
receipt of any such written notice, the Trustee and Paying Agent, subject to the
provisions of Sections 7.1 and 7.2, shall be entitled in all respects
conclusively to assume that no such facts exist.
SECTION 9.7. APPLICATION BY TRUSTEE OF MONIES DEPOSITED WITH IT. Subject to
Article 8, any deposit of monies by the Company with the Trustee or any Paying
Agent (whether or not in trust) for the payment of the principal of or interest
on any Securities shall be subject to the provisions of Sections 9.1, 9.2, 9.3
and 9.4, except that, prior to the date on which by the terms of this Indenture
any such monies may become payable for any purpose (including, without
limitation, the payment of either the principal of or the other interest on any
Security), the Trustee shall not have received with respect to such monies the
notice provided for in Section 9.6, then the Trustee or the Paying Agent shall
have full power and authority to receive such monies and to apply the same to
the purpose for which they were received. This Section shall be construed solely
for the benefit of the Trustee and Paying Agent and nothing herein shall be
construed to relieve any Holders from the duties imposed upon them under Section
9.3(c) with respect to monies received in violation of the provisions of this
Article 9. The foregoing shall not apply if the Company acts as its own Paying
Agent.
SECTION 9.8. SUBORDINATION RIGHTS NOT IMPAIRED BY ACTS OR OMISSIONS OF OR
HOLDERS OF SENIOR INDEBTEDNESS. No right of any present or future holders of any
Senior Indebtedness to enforce subordination as provided herein shall at any
time in any way be prejudiced or impaired by any act or failure to act on the
part of the Company or by any act or failure to act, in good faith, by any such
holder, or by any noncompliance by the Company with the terms of this Indenture,
regardless of any knowledge thereof which any such holder may have or be
otherwise charged with. The holders of Senior Indebtedness may extend, renew,
modify or amend the terms of the Senior Indebtedness or any security therefor
and release, sell or exchange such security and otherwise deal
INDENTURE - PAGE 43
<PAGE> 52
freely with the Company, all without affecting the liabilities and obligations
of the parties to the Indenture or the Holders. No provision in any supplemental
indenture which modifies this Article 9 or otherwise affects the superior
position of the holders of the Senior Indebtedness shall be effective against
the holders of the Senior Indebtedness who have not consented thereto.
SECTION 9.9. SECURITYHOLDERS AUTHORIZE TRUSTEE TO EFFECTUATE SUBORDINATION
OF SECURITIES. Each Holder by its acceptance of Securities authorizes and
expressly directs the Trustee on its behalf to take such action as may be
necessary or appropriate to effectuate the subordination provided in this
Article 9 and to protect the rights of the Holders pursuant to this Indenture
and appoints the Trustee its attorney-in-fact for such purpose, including, in
the event of any dissolution, winding up, liquidation or reorganization of the
Company (whether in bankruptcy, insolvency, receivership, reorganization or
similar proceedings or upon an assignment for the benefit of creditors or any
other similar remedy or otherwise) tending towards liquidation of the business
and assets of the Company, the immediate filing of a claim for the unpaid
balance of its Securities in the form required in said proceedings and causing
said claim to be approved. If the Trustee does not file a proper claim or proof
of debt in the form required in such proceeding prior to 30 days before the
expiration of the time to file such claim or claims, then the holders of Senior
Indebtedness are hereby authorized to file an appropriate claim for and on
behalf of the Holders. In the event of any such proceeding, until the Senior
Indebtedness is paid in full in accordance with Section 9.3 (or adequate
provision made for such payment), without the consent of the holders of a
majority in aggregate principal amount outstanding of Senior Indebtedness, no
Holder shall waive, settle or compromise any such claim or claims relating to
the Securities that such Holder now or hereafter may have against the Company.
SECTION 9.10. RIGHT OF TRUSTEE AND PAYING AGENT TO HOLD SENIOR
INDEBTEDNESS. The Trustee and the Paying Agent, in their individual capacities,
shall be entitled to all of the rights set forth in this Article 9 in respect of
any Senior Indebtedness at any time held by either of them to the same extent as
any other holder of Senior Indebtedness, and nothing in this Indenture shall be
construed to deprive the Trustee or the Paying Agent of any of its rights as
such holder.
SECTION 9.11. ARTICLE 9 NOT TO PREVENT EVENTS OF DEFAULT. The failure to
make a payment on account of principal of or other interest (including any
interest on overdue installments of interest and defaulted interest) on the
Securities by reason of any provision of this Article 9 shall not be construed
as preventing the occurrence of an Event of Default under Section 6.1. Nothing
contained in this Article 9 shall limited the right of the Trustee or the
Holders to take any action to accelerate the maturity of the Securities pursuant
to Section 6.2 or to pursue any rights or remedies hereunder or under applicable
law, subject to the rights, if any, under this Article 9 of the holders, from
time to time, of Senior Indebtedness.
SECTION 9.12. NO FIDUCIARY DUTY CREATED TO HOLDERS OF SENIOR INDEBTEDNESS.
The Trustee shall not be deemed to owe any fiduciary duty to the holders of
Senior Indebtedness by virtue of the provisions of this Article 9, and shall not
be liable to any such holders (other than for its willful misconduct or gross
negligence) if it shall pay over to deliver to the Holders or the Company or any
other person, money or assets in compliance with the terms of this Indenture.
INDENTURE - PAGE 44
<PAGE> 53
ARTICLE 10
AMENDMENTS AND WAIVERS
SECTION 10.1. WITHOUT CONSENT OF HOLDERS. The Company and the Trustee may
amend this Indenture or the Securities without notice to or consent of any
Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or in place of
certificated Securities; provided, however, that the uncertificated
Securities are issued in registered form for purposes of Section 163(f) of
the Code or in a manner such that the uncertificated Securities are
described in Section 163(f)(2)(B) of the Code;
(4) to add Guarantees with respect to the Securities or to secure the
Securities;
(5) to add to the covenants of the Company for the benefit of the Holders
or to surrender any right or power herein conferred upon the Company;
(6) to comply with any requirements of the SEC in connection with
qualifying this Indenture under the TIA;
(7) to provide for the acceptance of appointment hereunder by a successor
Trustee; or
(8) to make any change that does not adversely affect the rights of any
Securityholder.
provided that the Company has delivered to the Trustee an Opinion of Counsel and
an Officer's Certificate stating that such amendment or supplement complies with
the provisions of this Section 10.1.
After an amendment under this Section becomes effective, the Company shall
mail to Securityholders a notice briefly describing such amendment. The failure
to give such notice to all Securityholders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
SECTION 10.2. WITH CONSENT OF HOLDERS. The Company and the Trustee may
amend this Indenture or the Securities without notice to any Securityholder but
with the written consent of the Holders of at least a majority in principal
amount of the Securities. In addition, the Holders of at least a majority in
principal amount of the Securities by written notice to the Trustee may waive
future compliance by the Company with any provision of this Indenture or the
Securities. However, without the consent of each Securityholder affected, an
amendment or waiver may not:
INDENTURE - PAGE 45
<PAGE> 54
(1) reduce the percentage of principal amount of Securities whose Holders
must consent to an amendment or waiver;
(2) reduce the rate of or extend the time for payment of interest on any
Security;
(3) reduce the principal of or extend the Stated Maturity of any Security;
(4) reduce the premium payable upon the redemption of any Security or
change the time at which any Security may be redeemed in accordance with
Article 3;
(5) make any Security payable in money other than that stated in the
Security;
(6) impair the right of any Securityholder to institute suit for
enforcement of any payment on or with respect to any Security; or
(7) make any change in Section 6.4 or 6.7 or the second sentence of this
Section which adversely affects the rights of any Securityholder.
It shall not be necessary for the consent of the Holders under this Section
to approve the particular form of any proposed amendment or waiver, but it shall
be sufficient if such consent approves the substance thereof.
After an amendment or waiver under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such amendment
or waiver. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment or waiver under
this Section.
SECTION 10.3. COMPLIANCE WITH TRUST INDENTURE ACT. Every amendment to this
Indenture or the Securities shall comply with the TIA as then in effect.
SECTION 10.4. REVOCATION AND EFFECT OF CONSENTS AND WAIVERS. A consent to
an amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that
evidences the same debt as the consenting Holder's Security, even if notation of
the consent or waiver is not made on the Security. However, any such Holder or
subsequent Holder may revoke the consent or waiver as to such Holder's Security
or portion of the Security if the Trustee receives the notice of revocation
before the date the amendment or waiver becomes effective. After an amendment or
waiver becomes effective, it shall bind every Securityholder.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Securityholders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Securityholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give
INDENTURE - PAGE 46
<PAGE> 55
such consent or to revoke any consent previously given or to take any such
action, whether or not such Persons continue to be Holders after such record
date. No such consent shall be valid or effective for more than 120 days after
such record date.
SECTION 10.5. NOTATION ON OR EXCHANGE OF SECURITIES. If an amendment
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee at the written direction of
the Company shall place an appropriate notation on the Security regarding the
changed terms and return it to the Holder. Alternatively, if the Company or the
Trustee so determines, the Company in exchange for the Security shall issue and
the Trustee shall authenticate a new Security that reflects the changed terms.
Failure to make the appropriate notation or to issue a new Security shall not
affect the validity of such amendment.
SECTION 10.6. TRUSTEE TO SIGN AMENDMENTS. The Trustee shall sign any
amendment authorized pursuant to this Article 10 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.1) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that (i) such
amendment is authorized or permitted by this Indenture and that all conditions
precedent to the execution, delivery and performance of such amendment have been
satisfied; and (ii) the Indenture together with such amendment complies with the
TIA.
SECTION 10.7. PAYMENT FOR CONSENT. Neither the Company nor any Affiliate of
the Company shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 11
MISCELLANEOUS
SECTION 11.1. TRUST INDENTURE ACT CONTROLS. If and to the extent that any
provision of this Indenture limits, qualifies or conflicts with the duties
imposed by, or with another provision (an "incorporated provision") included in
this Indenture by operation of, Sections 310 to 318, inclusive, of the TIA, such
imposed duties or incorporated provision shall control.
SECTION 11.2. NOTICES. Any notice or communication shall be in writing and
delivered in person, by telecopier or mailed by first-class mail addressed as
follows:
INDENTURE - PAGE 47
<PAGE> 56
if to the Company:
PawnMart, Inc.
301 Commerce Street, Suite 3600
Fort Worth, Texas 76102
Telecopy No. (817) 335-6430
Attention of Chief Financial Officer
if to the Trustee:
TRUST MANAGEMENT, INC.
210 West Sixth Street, Suite 605
Fort Worth, Texas 76102
Telecopy No. (817) 335-8434
Attention of Corporate Trust Administration
The Company or the Trustee by notice to the other may designate additional
or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed to
the Securityholder at the Securityholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any defect
in it shall not affect its sufficiency with respect to other Securityholders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
SECTION 11.3. COMMUNICATION BY HOLDERS WITH OTHER HOLDERS. Securityholders
may communicate pursuant to TIA Section 312(b) with other Securityholders with
respect to their rights under this Indenture or the Securities. The Company, the
Trustee, the Registrar and anyone else shall have the protection of TIA Section
312(c).
SECTION 11.4. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT. Upon any
request or application by the Company to the Trustee to take or refrain from
taking any action under this Indenture, the Company shall furnish to the
Trustee:
(1) an Officers' Certificate in form and substance reasonably satisfactory
to the Trustee stating that, in the opinion of the signers, all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with; and
INDENTURE - PAGE 48
<PAGE> 57
(2) an Opinion of Counsel in form and substance reasonably satisfactory to
the Trustee stating that, in the opinion of such counsel, all such
conditions precedent have been complied with.
SECTION 11.5. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION. Each
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion has
read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(4) a statement as to whether or not, in the opinion of such individual,
such covenant or condition has been complied with.
SECTION 11.6. RULES BY TRUSTEE, PAYING AGENT AND REGISTRAR. The Trustee may
make reasonable rules for action by or a meeting of Securityholders. The
Registrar and the Paying Agent may make reasonable rules for their functions.
SECTION 11.7. LEGAL HOLIDAYS. A "Legal Holiday" is a Saturday, a Sunday or
a day on which banking institutions are not required to be open in the State of
Texas. If a payment date is a Legal Holiday, payment shall be made on the next
succeeding day that is not a Legal Holiday, and no interest shall accrue for the
intervening period. If a regular record date is a Legal Holiday, the record date
shall not be affected.
SECTION 11.8. GOVERNING LAW. THIS INDENTURE AND THE SECURITIES SHALL BE
GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS
BUT WITHOUT GIVING EFFECT TO APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE
EXTENT THAT THE APPLICATION OF THE LAWS OF ANOTHER JURISDICTION WOULD BE
REQUIRED THEREBY. THE PARTIES HERETO SUBMIT TO THE JURISDICTION OF COURTS
LOCATED IN THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR
RELATING TO THIS INDENTURE.
SECTION 11.9. NO RECOURSE AGAINST OTHERS. A director, officer, employee or
stockholder, as such, of the Company or the Trustee shall not have any liability
for any obligations of the Company or the Trustee, respectively, under the
Securities or this Indenture or for any claim
INDENTURE - PAGE 49
<PAGE> 58
based on, in respect of or by reason of such obligations or their creation. By
accepting a Security, each Securityholder shall waive and release all such
liability. The waiver and release shall be part of the consideration for the
issue of the Securities.
SECTION 11.10. SUCCESSORS. All agreements of the Company in this Indenture
and the Securities shall bind its successors. All agreements of the Trustee in
this Indenture shall bind its successors.
SECTION 11.11. MULTIPLE ORIGINALS. The parties may sign any number of
copies of this Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement. One signed copy is enough to prove this
Indenture.
SECTION 11.12. TABLE OF CONTENTS; HEADINGS. The table of contents,
cross-reference sheet and headings of the Articles and Sections of this
Indenture have been inserted for convenience of reference only, are not intended
to be considered a part hereof and shall not modify or restrict any of the terms
or provisions hereof.
SECTION 11.13. SEVERABILITY. In case any provision in this Indenture or in
the Securities shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
INDENTURE - PAGE 50
<PAGE> 59
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
PAWNMART, INC.
By:
--------------------------------
Name:
Title:
TRUST MANAGEMENT, INC., as Trustee
By:
--------------------------------
Name:
Title:
INDENTURE - PAGE 51
<PAGE> 60
EXHIBIT A
[FORM OF FACE OF SECURITY]
$
CUSIP NO.
------------
12% Subordinated Note due 2004
Note No.
----------
PAWNMART, INC., a Delaware corporation, promises to pay to ______________,
or registered assigns, the principal sum of __________________ Dollars on
December 31, 2004.
Interest Payment Dates: the fifteenth day of each month, beginning with the
second full calendar month following issuance.
Record Dates: the first day of each month.
Additional provisions of this Security are set forth on the other side of
this Security.
Dated:
PAWNMART, INC.
[Seal]
By:
--------------------------------------
President and Chief Executive Officer
--------------------------------------
Senior Vice President and
Chief Financial Officer
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
TRUST MANAGEMENT, INC.,
as Trustee, certifies that this is one of the Securities referred to in the
Indenture.
By:
------------------------------
Authorized Signatory
<PAGE> 61
[FORM OF REVERSE SIDE OF SECURITY]
12% Subordinated Note Due December 31, 2004
1. INTEREST
PAWNMART, INC., a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being herein
called the "Company"), promises to pay interest on the principal amount of this
Security at the rate per annum shown above. The Company will pay interest
monthly on the fifteenth day of each month (each an "Interest Payment Date") of
each year, commencing on the second full calendar month following issuance.
Interest on the Securities will accrue from and including the most recent date
to which interest has been paid or, if no interest has been paid, from the date
of this Security. Interest will be computed on the basis of a 360-day year of
twelve 30-day months. The Company shall pay interest on overdue principal at the
rate borne by the Securities plus 1% per annum, and it shall pay interest on
overdue installments of interest at the same rate to the extent lawful.
2. METHOD OF PAYMENT
The Company will pay interest on the Securities (except defaulted interest)
to the Persons who are registered holders of Securities at the close of business
on the first day of each month immediately preceding the Interest Payment Date
even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company will pay principal and interest in money
of the United States of America that at the time of payment is legal tender for
payment of public and private debts. However, the Company may pay principal and
interest by check payable in such money mailed to a Holder's registered address.
3. PAYING AGENT AND REGISTRAR
Initially, TRUST MANAGEMENT, INC., a Texas trust company ("Trustee"), will
act as Paying Agent and Registrar. The Company may appoint and change any Paying
Agent, Registrar or co-registrar without notice. The Company may act as Paying
Agent, Registrar or co-registrar.
4. INDENTURE
The Company issued the Securities under an Indenture dated as of
_______________, 1999 ("Indenture"), between the Company and the Trustee. The
terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are obligations of the Company limited to $10,000,000.00
aggregate principal amount (subject to Section 2.8 of the Indenture). The
Indenture imposes certain limitations on the Company, including, subject to
certain exceptions, limitations on the Incurrence of Indebtedness, the payment
of dividends on, and redemption of, the Capital Stock of the Company, the sale
by the Company of assets, transactions with Affiliates and consolidations and
mergers and transfer of all or substantially all the Company's assets.
<PAGE> 62
5. OPTIONAL REDEMPTION
The Company may redeem the Securities in whole at any time or in part at
any time and from time to time at the redemption prices set forth below
(expressed as percentages of the principal amount thereof), plus accrued and
unpaid interest (if any) to the date of redemption (subject to the right of
Holders of record on the relevant record date to receive interest due on the
related Interest Payment Date):
If redeemed pursuant to this Paragraph 5
during the 12-month period ending March 31
of the years set forth below:
<TABLE>
<CAPTION>
Year Percentage
---- -----------
<S> <C>
2000 103 %
2001 102 %
2002 101 %
2003 100 %
2004 100 %
</TABLE>
6. NOTICE OF REDEMPTION
Notice of redemption will be mailed by first class mail at least 30 days
but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his registered address. Securities in denominations
larger than $1,000 may be redeemed in part but only in Authorized Denominations.
If money sufficient to pay the redemption price of and accrued interest on all
Securities (or portions thereof) to be redeemed on the redemption date is
deposited with the Paying Agent on or before the redemption date and certain
other conditions are satisfied, on and after such date interest ceases to accrue
on such Securities (or such portions thereof) called for redemption.
7. SUBORDINATION
The Company's payment of the principal of and interest on the Securities is
subordinated and subject to the prior payment in full of the Company's Senior
Indebtedness as more fully set forth in the Indenture. Each Holder of Securities
by his acceptance hereof covenants and agrees that all payments of the principal
and interest on the Securities by the Company shall be subordinated in
accordance with Article 9 of the Indenture and each holder accepts and agrees to
be bound by such provisions.
8. DENOMINATIONS; TRANSFER; EXCHANGE
The Securities are in registered form without coupons in Authorized
Denominations. A Holder may transfer or exchange Securities in accordance with
the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements or transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption
(except, in the case of a Security to be redeemed in part, the portion of the
Security not to be redeemed) or any Securities for a period of 15 days before a
selection of Securities to be redeemed or 15 days before an interest payment
date.
9. PERSONS DEEMED OWNERS
The registered Holder of this Security may be treated as the owner of it
for all purposes.
10. UNCLAIMED MONEY
If money for the payment of principal or interest remains unclaimed for two
years, the Trustee or Paying Agent shall pay the money back to the Company at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Company and not to the Trustee for payment.
<PAGE> 63
11. DISCHARGE AND DEFEASANCE
Subject to certain conditions, the Company at any time may terminate some
of or all its obligation under the Securities and the Indenture if the Company
deposits with the Trustee money or U.S Government Obligations for the payment of
principal and interest on the Securities to redemption or maturity, as the case
may be.
12. AMENDMENT, WAIVER
Subject to certain exceptions set forth in the Indenture, (i) the Indenture
or the Securities may be amended with the written consent of the Holders of at
least a majority in principal amount outstanding of the Securities and (ii) any
default or noncompliance with any provision may be waived with the written
consent of the Holders of a majority in principal amount outstanding of the
Securities. Subject to certain exceptions set forth in the Indenture, without
the consent of any Securityholder, the Company and the Trustee may amend the
Indenture or the Securities to cure any ambiguity, omission, defect or
inconsistency, to comply with Article 5 of the Indenture, to provide for
uncertificated Securities in addition to or in place of certificated Securities,
to add Guarantees with respect to the Securities, to secure the Securities, to
add additional covenants or surrender rights and powers conferred on the
Company, to comply with any request of the SEC in connection with qualifying the
Indenture under the Act or to make any change that does not adversely affect the
rights of any Securityholder.
13. DEFAULTS AND REMEDIES
Under the Indenture, Events of Default include (i) default for 30 days in
payment of interest on the Securities; (ii) default in payment of principal on
the Securities at maturity, upon acceleration, redemption or otherwise, or
failure by the Company to purchase Securities when required; (iii) failure by
the Company to comply with other agreements in the Indenture or the securities,
in certain cases subject to notice and lapse of time; (iv) certain accelerations
(including failure to pay within any grace period after final maturity) of other
Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds
$___________________ at the time; (v) certain events of bankruptcy or insolvency
with respect to the Company; and (vi) certain judgments or decrees for the
payment of money in excess of $___________________ . If an Event of Default
occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the Securities may declare all the Securities to be due and
payable immediately. Certain events of bankruptcy or insolvency are Events of
Default which will result in the Securities being due and payable immediately
upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Securities unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Securities
may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Securityholders notice of any continuing Default (except a Default
in payment of principal or interest) if it determines that withholding notice is
in the interest of the Holders.
14. TRUSTEE DEALINGS WITH THE COMPANY
Subject to certain limitations imposed by the Act, the Trustee under the
Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may otherwise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
15. NO RECOURSE AGAINST OTHERS
A director, officer, employee or stockholder, as such, of the Company or
the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by
<PAGE> 64
reason of such obligations or their creation. By accepting a Security, each
Securityholder waives and releases all such liability. The waiver and release
are part of the consideration for the issue of the Securities.
16. AUTHENTICATION
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
17. ABBREVIATIONS
Customary abbreviations may be used in the name of a Securityholder or an
assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with rights of survivorship and not as
tenants in common), COST (= custodian), and U/G/M/A (= Uniform Gift to Minors
Act).
18. CUSIP NUMBERS
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
19. GOVERNING LAW
THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS BUT WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
The Company will furnish to any Securityholder upon written request and
without charge to the Securityholder a copy of the Indenture which has in it the
text of this Security in larger type. Requests may be made to:
PawnMart, Inc.
301 Commerce Street, Suite 3600
Fort Worth, Texas 76102
Attention of Chief Financial Officer
<PAGE> 65
-----------------------------------------------------------
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this Security on the
books of the Company. The agent may substitute another to act for him.
-----------------------------------------------------------
Date: Your Signature:
------------------- --------------------------------
(Sign exactly as your name appears on the other side of this Security)
-----------------------------------------------------------
<PAGE> 66
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.4 of the Indenture, check the box: [ ]
If you want to elect to have only part of this Security purchased by the
Company pursuant to Section 4.4 of the Indenture, state the amount:
$
------------------------------
Date: Your Signature:
------------------- --------------------------------
(Sign exactly as your name appears
on the other side of the Security)
Signature Guarantee:
----------------------------------------------
(Signatures must be guaranteed by an
"eligible guarantor institution" meeting the
requirements of the Registrar, which
requirements include membership or
participation in the Security Transfer Agent
Medallion Program ("STAMP") or such other
"signature guarantee program" as may be
determined by the Registrar in addition to,
or in substitution for, STAMP, all in
accordance with the Securities Exchange Act
of 1934.)
<PAGE> 67
Schedule I to 12% Subordinated Indenture
Indebtedness To Be Outstanding
----------------------
Immediately After the Issue Date
----------------------
<PAGE> 1
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
This agreement, made effective as of September 7, 1998, is by and between
PawnMart, Inc., hereinafter referred to collectively as the "Company", with its
principal office at 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102,
and Michael D. Record, hereinafter referred to as "Executive".
Whereas Company wishes to assure itself of the services of Executive and
Executive is willing to serve in the employ of the Company on a full-time basis
and upon the other terms and conditions hereinafter provided; therefore, in
consideration of the mutual covenants herein contained, the parties hereby agree
as follows:
1. EMPLOYMENT
The Company agrees to employ Executive, and Executive agrees to enter the employ
of the Company, upon the terms and conditions provided herein.
2. POSITION AND RESPONSIBILITIES
During the term of this Agreement, the Executive shall serve as President of the
Company. Executive shall perform in a professional manner all assigned duties
relating to store operations and such other reasonable duties and
responsibilities as the Chief Executive Officer of the Company may assign to the
Executive from time to time, but not limited to, the following:
A. The Executive shall abide by and comply with the operating and human
resources policies of the Company in accordance with this Agreement;
and
B. The Executive shall avoid any actions that might damage, harm or
discredit the reputation of the Company, its shareholders, or Board of
Directors.
3. TERM OF EMPLOYMENT
Executive's employment under this Agreement shall commence as of September 8,
1998.
4. COMPENSATION
A. Salary
Executive shall be paid a gross salary of $10,000 per month, in equal
bi-weekly installments for services of the Executive.
B. Annual Review
Salary is subject to review and adjustment at the beginning of FY
1999, and is also subject to review and adjustment at the beginning of
each Fiscal year thereafter. All salary adjustments shall be
consistent with the Company's salary policy as of the time of review.
C. Bonuses and Incentive Compensation
Executive shall receive a $30,000.00 signing bonus to be paid over a
period of six (6) months in thirteen (13) equal bi-weekly installments
of $2,307.69.
Executive shall be eligible to participate in Company's Bonus Plan
upon Company's achievement of an acceptable level of profitability and
the development of the Bonus Plan.
<PAGE> 2
D. Stock Options
Executive shall receive an initial grant of 125,000 stock options,
with an exercise price of $3.00 per share. Of the initial grant,
33,300 will be considered ISO's. The grant of stock options will vest
as follows:
33,300 options immediately vested, with the remaining 91,700
options vesting over a four (4) year period at 22,925 options per
year. No additional option grants will be planned until the
beginning of FY 2000.
All salary, bonus, and other payments are subject to applicable FIT and FICA
withholding taxes.
5. REIMBURSEMENT OF EXPENSES
The Company shall pay or reimburse Executive for all reasonable and customary
travel and other expenses incurred by him in performing his obligations under
this Agreement. All expense reimbursements will require the approval of the Vice
President - Finance.
6. BENEFIT PLANS
Executive shall be eligible to participate in all Company sponsored benefit
programs as described in the Company's human resources policies and procedures
and related summary plan descriptions.
7. CHANGE OF CONTROL
A change of control event shall occur when:
A. The ownership of the Company changes by an amount of 50% or more in a
twelve (12) month period of time; or
B. The composition of the Board of Directors changes by 50% or more
during a twelve (12) month period of time.
8. TERMINATION
This Agreement shall terminate upon either of the following events:
A. Executive Voluntary Termination
1. Thirty (30) days after written notice of resignation to the Chief
Executive Officer by Executive or sooner than thirty (30) days if
waived by the Chief Executive Officer; or
2. Executive's retirement;
B. Executive Involuntary Termination "for cause"
1. Executive's termination "for cause" shall mean
A. Gross, habitual or willful failure to comply with Company
policies and procedures, or failure to perform duties and
such performance is not corrected within thirty (30) days
after written notice by the Company or the Chief Executive
Officer; or
B. Misconduct, including but not limited to conviction of a
crime or entry of a plea of nolo contendre with regard to a
crime involving moral turpitude or dishonesty, repeated
insubordination or refusal to comply with any reasonable
requests of the Board relating to the scope or performance
of duties, or conduct that in the good
<PAGE> 3
faith and reasonable determination of the Board demonstrates
gross unfitness to serve.
2. Employment with the Company may be terminated "for cause" at any
time by the Company upon no more than two (2) weeks notice.
3. If employment is terminated "for cause" the Company will make no
further salary payments except those earned, up to and including
the date of termination.
9. SEVERANCE PROVISION
Upon termination of this Agreement, Executive shall be entitled to the following
severance benefits:
A. Voluntary Resignation
No severance will be paid.
B. Involuntary termination "without cause"
Executive's termination from the Company "without cause" prior to
December 31, 2000, will result in Company paying to Executive an
amount equal to one-half (1/2) of Executive's annual base salary.
Executive shall receive one-half (1/2) of his annual base salary
compensation at the time of a change in control event as a severance
payment.
Executive's heirs, estate or assigns shall receive one-twelfth (1/12)
of his annual base salary compensation at the time of his death.
Executive shall receive one-fourth (1/4) of his annual base salary
compensation following ninety (90) days of continuous disability and
upon certification by a licensed medical doctor that Executive can no
longer perform his occupation.
Executive shall receive a pro rata distribution of any performance
bonus payment that would have otherwise been paid to Executive
following the completion of the Company's fiscal year.
C. Involuntary termination "for cause"
If Executive's employment is terminated for cause, Company will make
no further salary payments except those earned up to and including the
date of termination.
10. METHOD OF SEVERANCE PAYMENT
Severance payments due hereunder shall be in either one lump sum amount or equal
bi-weekly payments, less taxes, as determined by the Company. For the receipt of
this severance payment, Executive shall acknowledge and sign a Separation and
Release of All Claims document.
11. ARBITRATION
Should any dispute about terms and conditions of this contract arise and the
employment thereunder, at the election of either party said dispute shall be
resolved by binding and non-appealable arbitration utilizing the rules of the
American Arbitration Society and applicable Texas statutes. Notice for demand or
arbitration shall be in writing by certified mail within 10 days of event giving
rise for set arbitration. Cost of arbitration will be determined by arbitrators.
<PAGE> 4
12. MISCELLANEOUS
Any notices to be given herewith by either party to the other may be effected
either by personal delivery in writing or by mail, registered or certified,
postage prepaid with return receipt requested. Notices delivered personally
shall be considered communicated as of the actual receipt; mail notices shall be
considered communicated as of two (2) days after mailing.
This Agreement represents the entire agreement between the parties and
supersedes any and all other agreements, either oral or written, between the
parties hereto with respect to employment of the Executive and the Company. This
Agreement contains all of the covenants and agreements between the parties with
respect to such employment in any manner whatsoever. This Agreement shall be
binding upon the successors and assigns of the parties hereto.
Each party to this Agreement acknowledges that no representations have been made
or shall be made which are not contained herewith and that any other agreement,
assurance or statement shall be invalid and not binding. This Agreement may not
be amended orally and may only be modified in writing, signed by both Executive
and the Company.
This Agreement shall be binding upon and shall enure to the benefit of the
Executive and the Company and their respective heirs, successors and assigns.
Should any provision of this Agreement be held by a court of competent
jurisdiction to be invalid, void, or unenforceable, the remaining provisions
shall nevertheless continue in full force and effect without being impaired or
invalidated in any way.
This Agreement shall be governed by and construed in accordance with the laws of
the State of Texas.
IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date
above written.
PAWNMART, INC.
BY: /s/ Michael D. Record BY: /s/ Carson R. Thompson
September 7, 1998 September 7, 1998
- ----------------------------- -----------------------------
Date Date
<PAGE> 1
EXHIBIT 12.1
PAWNMART, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Fiscal Years Ended Nine Months Ended
---------------------------------------------------------- --------------------------
January 29, January 28, January 26, January 31, October 26, October 31,
1995 1996 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Fixed Charges:
Interest Expense $ 62 $ 720 $ 1,360 $ 3,761 $ 1,356 $ 866
Rent Expense Interest Factor 143 248 352 371 279 305
---------- ---------- ---------- ---------- ---------- ----------
205 968 1,712 4,132 1,635 1,171
========== ========== ========== ========== ========== ==========
Earnings:
Pretax Loss From Operations (1,625) (2,828) (3,056) (5,436) (2,356) (2,836)
Fixed Charges Per Above 205 968 1,712 4,132 1,635 1,171
---------- ---------- ---------- ---------- ---------- ----------
Losses As Adjusted $ (1,420) $ (1,860) $ (1,344) $ (1,304) $ (721) $ (1,665)
========== ========== ========== ========== ========== ==========
Ratio of Earnings to Fixed Charges (6.91) (1.92) (0.79) (0.32) (0.44) (1.42)
========== ========== ========== ========== ========== ==========
Fixed Charges Exceeded Earnings By $ 1,625 $ 2,828 $ 3,056 $ 5,436 $ 2,356 $ 2,836
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PawnMart, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Fort Worth, Texas
January 15, 1999
<PAGE> 1
EXHIBIT 25.1
Securities Act of 1933 File No. 333-
---------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE
PURSUANT TO SECTION 305(b)(2) [X]
TRUST MANAGEMENT, INC.
(Exact name of trustee as specified in its charter)
TEXAS
(Jurisdiction of incorporation or organization if not a U.S. national bank)
75-1333672
(I.R.S. Employer Identification Number)
210 W. 6TH STREET, SUITE 605, FT. WORTH, TEXAS
(Address of principal executive offices)
76102
(Zip code)
ROBERT C. FINLEY, PRESIDENT
210 W 6TH STREET, SUITE 605
FT. WORTH, TEXAS 76102
(817) 335-2933
(Name, address and telephone number of agent for service)
PAWNMART, INC.
(Exact name of obligor as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
75-2520896
(I.R.S. Employer Identification Number)
301 COMMERCE STREET, SUITE 3600 FORT WORTH, TEXAS 76102
(Address of principal executive offices)
76102
(Zip code)
<PAGE> 2
12% SUBORDINATED NOTES DUE DECEMBER 31, 2004
(Title of indenture securities)
The application relates to all of the securities registered pursuant to the
delayed offering registration statement.
ITEM 1. GENERAL INFORMATION
(a) Trust Management, Inc.(the "Trustee") is subject to the examining or
supervisory authority of the following authorities:
Texas Department of Banking
(b) The Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH THE OBLIGOR.
PawnMart, Inc. (the "Obligor"), is not affiliated with the Trustee.
ITEM 3. VOTING SECURITIES OF THE TRUSTEE.
As of January 15, 1999, the Trustee has no outstanding voting securities.
ITEM 4. TRUSTEESHIPS UNDER OTHER INDENTURES.
The Trustee is not a trustee under any other indenture under which any other
securities, or certificates of interest or participation in any other
securities, of the Obligor are outstanding.
ITEM 5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR
OR UNDERWRITERS.
Neither the Trustee, nor any of the directors or executive officers of the
Trustee is a director, officer, partner, employee, appointee, or representative
of the Obligor or of any underwriter for the Obligor.
ITEM 6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS
OFFICIALS.
As of January 15, 1999, neither the Obligor, nor any of its directors, partners
or executive officers beneficially owned any voting securities of the Trustee.
ITEM 7. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE UNDERWRITERS OR THEIR
OFFICIALS.
As of January 15, 1999, no underwriter for the Obligor, nor any director,
partner or executive officer of any such underwriter, beneficially owned any
voting securities of the Trustee.
ITEM 8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
As of January 15, 1999, the Trustee did not beneficially own any securities of
the Obligor, nor did the Trustee hold any such securities as collateral security
for obligations in default.
<PAGE> 3
ITEM 9. SECURITIES OF THE UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
As of January 15, 1999, the Trustee did not beneficially own any securities of
any underwriter for the Obligor, nor did the Trustee hold any such securities as
collateral security for obligations in default.
ITEM 10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF
CERTAIN AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
As of January 15, 1999, the Trustee did not beneficially own or hold as
collateral security for any obligations in default any voting securities of any
person who, to the Trustee's knowledge, (1) owned 10% or more of the voting
securities of the Obligor, or (2) is an affiliate, other than a subsidiary, of
the Obligor.
ITEM 11. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON
OWNING 50 PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
As of January 15, 1999, the Trustee did not beneficially own or hold as
collateral security for any obligations in default any securities of any person,
who to the trustee's knowledge, owned 50% or more of the voting securities of
the Obligor.
ITEM 12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
As of January 15, 1999, the Obligor was not indebted to the Trustee.
ITEM 13. DEFAULTS BY THE OBLIGOR.
(a) There has been no default with respect to the securities under this
indenture.
(b) The Trustee is not a trustee under another indenture under which any
other securities, or certificates of interest or participation in any
other securities, of the Obligor are outstanding, nor a trustee for
more than one outstanding series of securities under the indenture.
ITEM 14. AFFILIATIONS WITH THE UNDERWRITERS.
No underwriter of the Obligor is an affiliate of the Trustee.
ITEM 15. FOREIGN TRUSTEE.
This item is not applicable.
ITEM 16. LIST OF EXHIBITS.
16.1 Certificate of Amendment to the Charter of Trust Management, Inc.
16.2 Certificate of Authority of Trust Management, Inc. to commence
business.
16.3 Authorization of Trust Management, Inc. to exercise corporate trust
powers.
16.4 By-Laws of Trust Management, Inc.
<PAGE> 4
16.5 Not applicable.
16.6 Consent of Trustee.
16.7 Latest Report of Condition of Trust Management, Inc.
16.8 Not applicable.
16.9 Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Trust Management, Inc., a corporation organized and existing under the laws of
the State of Texas, has duly caused this statement of eligibility to be signed
on its behalf by the undersigned, thereunto duly authorized, all in the city of
Fort Worth, and State of Texas, on the 15th day of January, 1999.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert C. Finley
------------------------------------
Robert C. Finley, President
NOTE
The answers to this statement insofar as such answers relate to what persons
have been underwriters for any securities of the obligor within three years
prior to the date of filing this statement, or what persons are owners of 10% or
more of the voting securities of the obligor, or affiliates, are based upon
information furnished to the Trustee by the obligor. While the Trustee has no
reason to doubt the accuracy of any such information, it cannot accept any
responsibility therefor.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Trust Management, Inc., a corporation organized and existing under the laws of
the State of Texas, has duly caused this statement of eligibility to be signed
on its behalf by the undersigned, thereunto duly authorized, all in the City of
Ft. Worth, and State of Texas, on the 15th day of January, 1999.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert C. Finley
-------------------------------------
Robert C. Finley, President
<PAGE> 5
EXHIBIT 16.1
Certificate of Amendment of Trust Management, Inc.
<PAGE> 6
[LETTERHEAD]
OFFICE OF THE SECRETARY OF STATE
CERTIFICATE OF AMENDMENT
OF
TRUST MANAGEMENT, INC.
------------------------------------------------------------------------------
FORMERLY: A.B. CULBERTSON AND COMPANY
CHARTER NO. 120580
The undersigned, as Secretary of State of the State of Texas, hereby certifies
that duplicate originals of Articles of Amendment to the Articles of
Incorporation of the above corporation duly signed and verified pursuant to the
provisions of the Texas Business Corporation Act, have been received in this
office and are found to conform to law.
ACCORDINGLY the undersigned, as such Secretary of State, and by virtue of the
authority vested in him by law, hereby issues this Certificate of Amendment to
the Articles of Incorporation and attaches hereto a duplicate original of the
Articles of Amendment.
Dated August 10, 1970.
/s/ Martin Dies Jr.
--------------------------------
Secretary of State
[SEAL]
<PAGE> 7
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION OF
A. B. CULBERTSON AND COMPANY
Pursuant to the provisions of Article 4.04 of the Texas Business Corporation
Act, the undersigned corporation adopts the following Articles of Amendment to
its Articles of Incorporation:
ARTICLE ONE
The name of the corporation is A. B. CULBERTSON AND COMPANY.
ARTICLE TWO
The following amendment to the Articles of Incorporation changing the name of
the corporation was adopted by the shareholders of the corporation on August 5,
1970.
Article One of the Articles of Incorporation, as heretofore amended, is hereby
amended so as to read and provide as follows:
The name of the corporation is TRUST MANAGEMENT, INC.
ARTICLE THREE
The number of shares of the corporation outstanding at the time of such adoption
was 32,500; and the number of shares entitled to vote thereon was 32,500.
ARTICLE FOUR
The holders of all of the shares outstanding and entitled to vote on said
amendment have signed a consent in writing adopting said amendment.
DATED the 6th day of August, 1970.
A. B. CULBERTSON AND COMPANY
By /s/ Charles E. Martin
----------------------------
Its Vice President
And /s/ Blanche A. Austin
---------------------------
Its Secretary
<PAGE> 8
EXHIBIT 16.2
Certificate of Authority of Trust Management, Inc.
to commence business.
<PAGE> 9
[SEAL]
THE STATE OF TEXAS
SECRETARY OF STATE
IT IS HEREBY CERTIFIED, that
Articles of Incorporation
of
TRUST MANAGEMENT, INC.
were filed in this office and a certificate of
incorporation was issued on
June 30, 1954;
IT IS FURTHER CERTIFIED, that no certificate
of dissolution has been issued, and the corporation
is still in existence.
[SEAL] IN TESTIMONY WHEREOF, I have hereunto
signed my name officially and caused to
be impressed hereon the Seal of State at
my office in the City of Austin, this
6th day of April, A.D. 1988
[ILLEGIBLE]
-------------------------------------
Secretary of State
<PAGE> 10
EXHIBIT 16.3
Authorization of Trust Management, Inc.
to exercise corporate trust powers.
<PAGE> 11
STATE OF TEXAS
DEPARTMENT OF BANKING
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
CERTIFICATE OF AUTHORITY
95-37
-----------------
charter number
This is to certify that
TRUST MANAGEMENT. INC.
---------------------------------
corporate name
[SEAL]
is duly authorized under the laws of the State of Texas to
conduct business as Trust Company
210 W. 6th St., Suite 605
---------------------------------
Fort Worth, Tarrant County
---------------------------------
Texas
In witness whereof, I have hereunto set my hand at the City of Austin,
Travis County, in the State of Texas, on this the 15th day of June,
1992.
/s/ Randall S. James
------------------------------------------------------
Randall S. James, Banking Commissioner of Texas
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 12
EXHIBIT 16.4
Bylaws of Trust Management, Inc.
<PAGE> 13
REVISED BYLAWS OF
TRUST MANAGEMENT, INC.
Contents
Article 1: Offices
1.01 Registered Office and Agent
1.02 Other Offices
Article 2: Shareholders
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Special Meetings
2.04 Notice
2.05 Order of Business at Meetings
2.06 Quorum
2.07 Majority Vote; Withdrawal of Quorum
2.08 Method of Voting
2.09 Election of Directors; Non-cumulative Voting
2.10 Voting List
2.11 Record Date; Closing Transfer Books
2.12 Action Without Meeting
2.13 Telephone Meetings
Article 3: Directors
3.01 Management
3.02 Place of Meetings
3.03 Regular Meetings; Notice
3.04 Special Meetings; Notice
3.05 Quorum; Majority Vote
3.06 Number; Qualification; Election; Term
3.07 Change in Number
3.08 Removal
3.09 Vacancies
3.10 Procedure
3.11 Compensation
3.12 Interested Directors, Officers, and shareholders
3.13 Action Without Meeting
3.14 Telephone Meetings
3.15 Deadlock
Article 4: Notice
4.01 Method
4.02 Waiver
Article 5: Officers and Agents
5.01 Number; Qualification; Election
5.02 Term and Compensation
<PAGE> 14
5.03 Removal
5.04 Vacancies
5.05 Authority
5.06 President
5.07 Vice President
5.08 Secretary
5.09 Treasurer
5.10 Excess Compensation
Article 6: Certificates and Shareholders
6.01 Certificates
6.02 Issuance
6.03 Payment for Shares
6.04 No Pre-Emptive Rights
6.05 Lien
6.06 Replacement of Lost, Stolen, or Destroyed Certificates
6.07 Transfer of Shares
6.08 Registered Shareholders
Article 7: Indemnification
7.01 Indemnification of Directors, Officers, Employees, etc.
7.02 Limitations on Indemnification
7.03 Indemnity for successful Defense
7.04 Advancement of Expenses
7.05 indemnification Not Exclusive
7.06 Liability Insurance
7.07 Notification of shareholders
Article 8: General Provisions
8.01 Dividends and Reserves
8.02 Books and Records
8.03 Annual Statement
8.04 Checks and Notes
8.05 Fiscal Year
8.06 Seal
8.07 Resignation
8.08 Interested Directors, Officers, and Shareholders
8.09 Purchase Own Shares
8.10 Construction
8.11 Amendment of Bylaws
8.12 Table of Contents; Headings
<PAGE> 15
Article 1: Offices
1.01 REGISTERED OFFICE AND AGENT. The registered office of the corporation
shall be located in Fort Worth, Tarrant County, Texas.
1.02 OTHER OFFICES. The corporation may also have offices at such
other places both within and without the State of Texas as the board of
directors may from time to time determine or the business of the corporation
may require.
Article 2: Shareholders
2.01 PLACE OF MEETINGS. All meetings of the shareholders for the election
of directors shall be held at such time and place, within or without the state
of Texas, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
2.02 ANNUAL MEETING. An annual meeting of the shareholders shall be held
each year on the second Tuesday in September. If such day is a legal holiday,
then the meeting shall be on the next secular day following. At the meeting, the
shareholders shall elect directors and transact such other business as may
properly be brought before the meeting.
2.03 SPECIAL MEETINGS. Unless otherwise prescribed by statute or by the
articles of incorporation, or by these bylaws, special meetings of the
shareholders, for any purpose or purposes, may be called by the president, the
board off directors, or the holders of not less than one-tenth of all the shares
entitled to vote at the meetings. Business transacted at a special meeting shall
be confined to the objects stated in the notice of the meeting.
2.04 NOTICE. Written or printed notice stating the place, day and hour of
the meeting, and, in case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than ten nor more than
fifty days before the date of the meeting, either personally or by mail, by or
at the direction of the president, the secretary, or the officer or person
calling the meeting, to each shareholder of record entitled to vote at the
meeting. If mailed, the notice shall be deemed to be delivered when deposited in
the United States mail addressed to the shareholder at his address as it appears
on the stock transfer books of the corporation, with postage thereon prepaid.
2.05 ORDER OF BUSINESS AT MEETINGS. The order of business at annual
meetings and so far as practicable at other meetings of shareholders shall be as
follows unless changed by the board of directors:
(a) Call to order
(b) Proof of due notice of meeting
(c) Determination of quorum and examination of proxies
(d) Announcement of availability of voting list
(e) Announcement of distribution of annual statement
(f) Reading and disposing of minutes of last meeting of shareholders
(g) Reports of officers and committees
(h) Appointment of voting inspectors
(i) Unfinished business
(j) New business
(k) Nomination of directors
(l) Opening of polls for voting
<PAGE> 16
(m) Recess
(n) Reconvening; closing of polls
(o) Report of voting inspectors
(p) Other business
(q) Adjournment
2.06 QUORUM. The holders of a majority of the shares issued and outstanding
and entitled to vote, present in person or represented by proxy, shall be
requisite and shall constitute a quorum at all meetings of the shareholders for
the transaction of business except as otherwise provided by statute, by the
articles of incorporation or by these bylaws. If a quorum is not present or
represented at a meeting of the shareholders, the shareholders entitled to vote,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum is present or represented. At the adjourned meeting at
which a quorum is present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified.
2.07 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is present at any
meeting, the vote of the holders of a majority of the shares having voting
power, present in person or represented by proxy, shall decide any question
brought before the meeting, unless the question is one upon which, by express
provision of the statutes or of the articles of incorporation or of these
bylaws, a different vote is required in which case the express provision shall
govern and control the decision of the question. The shareholders present at a
duly organized meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
2.08 METHOD OF VOTING. Each outstanding share, regardless of class, shall
be entitled to one vote on each matter submitted to a vote at a meeting of
shareholders except to the extent that the voting rights of the shares of any
class or classes are limited or denied by the Articles of Incorporation and
except as otherwise provided by Article 5.13 of the Texas Business Corporation
Act. At any meeting of the shareholders, every shareholder having the right to
vote may vote either in person, or by proxy executed in writing by the
shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid
after eleven months from the date of its execution, unless otherwise provided in
the proxy. Each proxy shall be revocable unless expressly provided therein to be
irrevocable and unless otherwise made irrevocable by law. Each proxy shall be
filed with the secretary of the corporation prior to or at the time of the
meeting. Voting for directors shall be in accordance with Section 2.09 of these
bylaws. Any vote may be taken by voice or by show of hands unless someone
entitled to vote objects, in which case, written ballots shall be used.
2.09 ELECTION OF DIRECTORS; NON-CUMULATIVE VOTING. Directors shall be
elected by plurality vote. Cumulative voting shall not be permitted.
2.10 VOTING LIST. At least ten days before each meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, with the address of each and the number of voting shares
held by each, shall be prepared by the officer or agent having charge of the
stock transfer books. For a period of ten days prior to the meeting, the list
shall be kept on file at the registered office of the corporation and shall be
subject to inspection by any shareholder at any time during usual business
hours. The list shall also be produced and kept open at the time and place of
the meeting during the whole time thereof, and shall be subject to the
inspection of any shareholder during the whole time of the meeting.
<PAGE> 17
2.11 RECORD DATE; CLOSING TRANSFER BOOKS. For the purpose of determining
shareholders entitled to notice of or to vote at any meeting of shareholderS or
any adjournment thereof, or entitled to receive payment of any dividend, or in
order to make a determination of shareholders for any other proper purpose, the
board of directors of the corporation may provide that the stock transfer books
shall be closed for a stated period but not to exceed, in any case, fifty days.
If the stock transfer books are closed for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of shareholders, such
books shall be closed for at least ten days immediately preceding such meeting.
In lieu of closing the stock transfer books, the board of directors may fix in
advance a date as the record date for any such determination of shareholders,
such date in any case to be not more than fifty days and, in case of a meeting
of shareholders, not less than ten days prior to the date on which the
particular action, requiring such determination of shareholders, is to be taken.
If the stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or shareholders entitled to receive payment of a dividend, the
date of which notice of the meeting is mailed or the date on which the
resolution of the board of directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided herein, such determination shall apply to
any adjournment thereof except when the determination has been made through the
closing of stock transfer books, and the stated period of closing has expired.
2.12 ACTION WITHOUT MEETING. Any action required by statute to be taken at
a meeting of the shareholders, or any action which may be taken at a meeting of
the shareholders, may be taken without a meeting if a consent in writing,
setting forth the action so taken, shall be signed by all of the shareholders
entitled to vote with respect to the subject matter thereof, and the consent
shall have the same force and effect as a unanimous vote of the shareholders.
Any signed consent, or a signed copy thereof, shall be placed in the minute book
of the corporation.
2.13 TELEPHONE MEETINGS. Subject to the provisions of these bylaws, for
notice of meetings, shareholders may participate in and hold a meeting of the
shareholders by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this section shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
Article 3: Directors
3.01 MANAGEMENT. The business and affairs of the corporation shall be
managed by the board of directors who may exercise all powers of the corporation
and do all lawful acts and things as are not (by statute or by the articles of
incorporation or by these bylaws)directed or required to be exercised or done by
the shareholders.
3.02 PLACE OF MEETINGS. Meetings of the board of directors, regular or
special, may be held either within or without the State of Texas.
3.03 REGULAR MEETINGS; NOTICE. Regular meetings of the board of directors
may be held without notice at such time and place as shall from time to time be
determined by the board.
<PAGE> 18
3.04 SPECIAL MEETINGS; NOTICE. Special meetings of the board of directors
may be called by the president on three days' notice to each director, either
personally or by mail or by telegram. Special meetings shall be called by the
secretary or by two directors in like manner and on like notice. Except as
otherwise expressly provided by statute, or by the articles of incorporation, or
by these bylaws, neither the business to be transacted at, nor the purpose of,
any special meeting need be specified in a notice or waiver of notice.
3.05 QUORUM; MAJORITY VOTE. At all meetings of the board of directors a
majority of the number of directors fixed by these bylaws then holding office
shall constitute a quorum for the transaction of business. The act of a majority
of the directors present at any meeting at which a quorum is present shall be
the act of the board of directors, except as otherwise specifically provided by
statute or by the articles of incorporation or by these bylaws. If a quorum is
not present at a meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum is present.
3.06 NUMBER; QUALIFICATION; ELECTION; TERM. The board of directors shall
consist of at least three. Directors need not be shareholders or residents of
the State of Texas. The directors shall be elected at the annual meeting of the
shareholders, except as hereafter provided. Each director elected shall hold
office until his successor shall be elected and shall qualify.
3.07 CHANGE IN NUMBER. The number of directors may be increased or
decreased from time to time by amendment to these bylaws but no decrease shall
have the effect of shortening the term of any incumbent director. Any
directorship to be filled by reason of an increase in the number of directors
shall be filled by election at an annual meeting or at a special meeting of
shareholders called for that purpose.
3.08 REMOVAL. Any or all director(s) may be removed either with or without
cause at any special or annual meeting of shareholders, by the affirmative vote
of a majority of shares of the shareholders present in person or by proxy at the
meeting and entitled to vote for the election of such director if notice of
intention to act upon the matter shall have been given in the notice calling
such meeting.
3.09 VACANCIES. Any vacancy occurring in the board of directors (by death,
resignation, removal, or otherwise) may be filled by an affirmative vote of a
majority of the remaining directors though less than a quorum of the board of
directors. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. Any vacancy created by an increase
in the number of directors shall be filled by election at an annual meeting or a
special meeting of the shareholders called for that purpose.
3.10 PROCEDURE. The board of directors shall keep regular minutes of its
proceedings. The minutes shall be placed in the minute book of the corporation.
3.11 COMPENSATION. By resolution of the board of directors, the directors
may be paid their expenses, if any, of attendance at each meeting of the board
of directors and may be paid a fixed sum for attendance at each meeting of the
board of directors. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
<PAGE> 19
3.12 INTERESTED DIRECTORS, OFFICERS, AND SHAREHOLDERS.
(a) VALIDITY. Any contract or other transaction between the
corporation and any of its directors, officers, or shareholders (or any
corporation or firm which any of them are directly or indirectly interested)
shall be valid for all purposes notwithstanding the presence of the director,
officer, or shareholder at the meeting authorizing the contract or transaction,
or his participation in the meeting or authorization.
(b) DISCLOSURE, APPROVAL. The foregoing shall, however, apply only if
the interest of each interested director, officer, or shareholder is known or
disclosed:
(1) To the board of directors and it nevertheless
authorizes or ratifies the contract or transaction by a majority of the
directors present, each interested director to be counted in determining whether
a quorum is present but not in calculating the majority necessary to carry the
vote; or
(2) To the shareholders and they nevertheless authorize or
ratify the contract or transaction by a majority of the shares present, each
interested person to be counted for quorum and voting purposes.
(c) NON-EXCLUSIVE. This provision shall not be construed to
invalidate any contract or transaction which would be valid in the absence of
this provision.
3.13 ACTION WITHOUT MEETING. Any action required by statute to be taken at
a meeting of the directors, or any action which may be taken at a meeting of the
directors, may be taken without a meeting if a consent in writing, setting forth
the action so taken shall be signed by all of the directors entitled to vote
with respect to the subject matter thereof, and the consent shall have the same
force and effect as a unanimous vote of the directors. Any signed consent, or a
signed copy thereof, shall be placed in the minute book of the corporation.
3.14 TELEPHONE MEETINGS. subject to the provisions of these bylaws, for
notice of meetings, members of the board of directors or members of any
committee designated by such board, may participate in and hold a meeting of the
board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this section shall
constitute presence in person at such meeting, except where a person
participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
3.15 DEADLOCK. If the directors are deadlocked on an issue, the
shareholders shall intervene and their vote shall control as to the disputed
issue.
Article 4: Notice
4.01 METHOD. Whenever by statute or the articles of incorporation, or these
bylaws, notice is required to be given to a director or shareholder, and no
provision is made as to how the notice shall be given, it shall not be construed
to mean personal notice, but the notice may be given (a) in writing,
<PAGE> 20
by mail, postage prepaid, addressed to the director or shareholder at the
address appearing on the books of the corporation, or (b) in any other method
permitted by law. Any notice required or permitted to be given by mail shall be
deemed given at the time when the same is thus deposited in the United States
mails.
4.02 WAIVER. Whenever by statute or the articles of incorporation or these
bylaws, notice is required to be given to a shareholder or director, a waiver
thereof in writing signed by the person or persons entitled to the notice,
whether before or after the time stated in the notice, shall be equivalent to
the giving of the notice. Attendance of a director at a meeting shall constitute
a waiver of notice of the meeting, except where a director attends for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
Article 5: Officers and Agents
5.01 NUMBER; QUALIFICATION; ELECTION.
(a) The corporation shall have:
(1) a president, a vice president, a secretary, and a
treasurer; and
(2) such other officers and assistant officers and agents
as the board of directors may think necessary.
(b) No officer or agent need be a shareholder, a director, or a
resident of Texas.
(c) Officers named in Section 5.01(a)(1) shall be elected by the
board of directors on the expiration of an officer's term or whenever a vacancy
exists. Officers and agents named in Section 5.01(a) (2)may be elected by the
board at any meeting.
5.02 TERM AND COMPENSATION. Unless otherwise specified by the board at the
time of election or appointment, or in an employment contract approved by the
board, each officer's and agent's term shall end at the first meeting of
directors after the next annual meeting of shareholders. He shall serve until
the end of his term or, if earlier, his death, resignation, or removal. The
compensation of officers and agents shall be fixed from time to time by the
board of directors.
5.03 REMOVAL. Any officer or agent elected or appointed by the board of
directors may be removed by the board of directors whenever in its judgment the
best interests of the corporation will be served thereby. The removal shall be
without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
5.04 VACANCIES. Any vacancy occurring in any office of the corporation (by
death, resignation, removal or otherwise) may be filled by the board of
directors.
5.05 AUTHORITY. Officers and agents shall have such authority and perform
such duties in the management of the corporation as are provided in these bylaws
or as may be determined by resolution of the board of directors not inconsistent
with these bylaws.
<PAGE> 21
5.06 PRESIDENT. The president shall be the chief executive officer of the
corporation. He shall preside at all meetings of the shareholders and the board
of directors, shall have general and active management of the business and
affairs of the corporation, and shall see that all orders and resolutions of the
board are carried into effect. He shall perform such other duties and have such
other authority and powers as the board of directors may from time to time
prescribe.
5.07 VICE PRESIDENT. The vice president shall, in the absence or disability
of the president, perform the duties and have the authority and exercise the
powers of the president. He shall perform such other duties and have such other
authority and powers as the board of directors may from time to time prescribe
or as the president may from time to time delegate.
5.08 SECRETARY.
(a) The secretary shall attend all meetings of the board of directors
and all meetings of the shareholders and record all votes and the minutes of all
proceedings in a book to be kept for that purpose and shall perform like duties
for the executive committee when required.
(b) He shall give, or cause to be given, notice of all meetings of
the shareholders and special meetings of the board of directors.
(c) He shall keep the seal of the corporation and, when authorized by
the board of directors or the executive committee, may affix the same to any
instrument, and may attest the signature of any officer to any instrument, but
neither the presence of the seal nor the attestation by the secretary shall be
necessary to the validity of any instrument otherwise valid.
(d) He shall be under the supervision of the president. He shall
perform the duties of treasurer if no treasurer is elected. He shall perform
such other duties and have such other authority and powers as the board of
directors may from time to time prescribe or as the president may from time to
time delegate.
5.09 TREASURER.
(a) The treasurer shall have the custody of the corporate funds and
securities and shall keep full and accurate accounts of receipts and
disbursements of the corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the corporation in such depositories as
may be designated by the board of directors.
(b) He shall disburse the funds of the corporation as may be ordered
by the board of directors, taking proper vouchers for disbursements, and shall
render to the president and directors, at the regular meetings of the board, or
whenever they may require it, an account of all of his transactions as treasurer
and of the financial condition of the corporation.
(c) If required by the board of directors, he shall give the
corporation a bond in such form, in such sum, and with such surety or sureties
as shall be satisfactory to the board for the faithful performance of the duties
of his office and for the restoration to the corporation, in case of his death,
resignation, retirement, or removal from office, of all books, papers, vouchers,
<PAGE> 22
money, and other property of whatever kind in his possession or under his
control belonging to the corporation.
(d) He shall perform such other duties and have such other authority
and powers as the board of directors may from time to time prescribe or as the
president may from time to time delegate.
5.10 EXCESS COMPENSATION. Any payments made to an officer of the
corporation such as a salary, commission, bonus, interest, or rent, or
entertainment expense incurred by him, which is disallowed in whole or in part
as a deductible expense by the Internal Revenue service, will be reimbursed by
such officer to this corporation to the full extent of such disallowance. It
will be the duty of the Board of Directors to enforce payment of each such
amount disallowed. In lieu of payment by the officer, subject to the
determination of the directors, proportionate amounts may be withheld from his
future compensation payments until the amount owed to the corporation has been
recovered.
Article 6: Certificates and Shareholders
6.01 CERTIFICATES. Certificates in the form determined by the board of
directors shall be delivered representing all shares to which shareholders are
entitled. Certificates shall be consecutively numbered and shall be entered in
the books of the corporation as they are issued. Each certificate shall state on
the face thereof the holder's name, the number and class of shares, the par
value of shares, or a statement that the shares are without par value, and such
other matters as may be required by law. They shall be signed by the president
or vice president and such other officer or officers as the board of directors
shall designate, and may be sealed with the seal of the corporation or a
facsimile thereof. If any certificate is countersigned by a transfer agent, or
an assistant transfer agent, or registered by a registrar (either of which is
other than the corporation or an employee of the corporation), the signature of
the officer may be facsimile. Each certificate representing shares shall state
upon the face thereof: (A) that the corporation is organized under the laws of
the state of Texas; (B) the name of the person to whom issued; (C) the number
and class of shares and the designation of the series, if any, which such
certificate represents; and (D) the par value of each share represented by such
certificate, or a statement that the shares are without par value.
6.02 ISSUANCE. Shares (both treasury and authorized but unissued) may be
issued for such consideration (not less than par value) and to such persons as
the Board of Directors may determine from time to time. Shares may not be issued
until the full amount of the consideration, fixed as provided by law, has been
paid.
6.03 PAYMENT FOR SHARES. The consideration paid for the issuance of shares
shall consist of money paid, labor done (including services actually performed
for the corporation), or property (tangible or intangible) actually received.
Neither promissory notes nor the promise of future services shall constitute
payment or part payment for shares off the corporation. In the absence of fraud
in the transaction, the judgment of the Board of Directors as to the value of
the consideration received for shares shall be conclusive. When such
consideration has been paid to the corporation, the shares shall be deemed to
have been issued, the shareholder entitled to receive such issue shall be a
shareholder with respect to such shares, and the shares shall be considered
fully paid and nonassessable. The consideration received for shares shall be
allocated
<PAGE> 23
by the board of directors in accordance with law between stated capital and
capital surplus accounts.
6.04 NO PRE-EMPTIVE RIGHTS. No shareholder or other person shall have any
pre-emptive right whatsoever.
6.05 LIEN. For any indebtedness of a shareholder to the corporation, the
corporation shall have a first and prior lien on all shares of its stock owned
by such shareholder and on all dividends or other distributions declared
thereon.
6.06 REPLACEMENT OF LOST, STOLEN, OR DESTROYED CERTIFICATES.
The board of directors may direct a new certificate or certificates to be
issued in place of any certificate previously issued by the corporation alleged
to have been lost or destroyed, upon the making of an affidavit of that fact by
the person claiming the loss or destruction. In so doing the board of directors
may, in its discretion and as a condition precedent to the issuance require a
bond (with a surety or sureties satisfactory to the corporation) in such sum as
it may direct, as indemnity against any claim, or expense resulting from any
claim, that may be made against the corporation with respect to the certificate
alleged to have been lost or destroyed. When a certificate has been lost,
apparently destroyed, or wrongfully taken, and the holder of record fails to
notify the corporation within a reasonable time after such holder has notice of
it, and the corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the holder of record is
precluded from making any claim against the corporation for the transfer or for
a new certificate.
6.07 TRANSFER OF SHARES. Shares of stock shall be transferable only on the
books of the corporation by the holder thereof in person or by his duly
authorized attorney. Upon surrender, to the corporation or its transfer agent,
of a certificate representing shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, the corporation or
its transfer agent shall issue a new certificate to the person: entitled
thereto, cancel the old certificate, and record the transaction upon its books.
6.08 REGISTERED SHAREHOLDERS. The corporation shall be entitled to treat
the holder of record of any share or shares of stock as the holder in fact
thereof and, accordingly, shall not be bound to recognize any equitable or other
claim to or interest in any share or shares on the part of any other person,
whether or not it has express or other notice thereof, except as otherwise
provided by law.
Article 7: Indemnification
7.01 INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, ETC.
Subject to the limitations set forth in section 7.02, the corporation shall
indemnify any person who was, is, or is threatened to be made a named defendant
or respondent in a proceeding, whether civil, criminal, administrative,
arbitrative, or investigative, including any appeal in such proceeding and any
inquiry or investigation that could lead to such proceeding, by reason of the
fact that that person is or was a director, officer, employee, or agent of the
corporation, or, while occupying such position with the corporation, is or was
serving at the request of the corporation in a similar functionary position of
another corporation, partnership, joint venture, trust, employee benefit plan or
<PAGE> 24
other enterprise. Indemnification shall be against all expenses, including,
without limitation, attorneys' fees, court costs, expert witness fees,
judgments, decrees, fines, penalties, settlements, and reasonable expenses
actually incurred by the person in connection with the proceeding, except that
in any action brought by or on behalf of the corporation, indemnification shall
be limited to reasonable expenses actually incurred by the person in connection
with the proceeding.
7.02 LIMITATIONS ON INDEMNIFICATION
(a) If a person is found liable to the corporation or is found
liable on the basis that personal benefit was improperly received by such
person, whether or not the benefit resulted from an action taken in the person's
official capacity, the indemnification (1) is limited; to) reasonable expenses
actually incurred by the person in connection with the proceeding; and (2) shall
not be made in respect of any proceeding in which the person shall have been
found liable for willful or intentional misconduct in the performance of his
duty to the corporation.
(b) Indemnification under section 7.61 of these Bylaws shall be
available only after a determination has been made that the person:
(1) acted in good faith;
(2) reasonably believed:
(i) In the case of conduct in an official
capacity, his conduct was in the best interests of the corporation; and
(ii) In all other cases, that his conduct was at
least not opposed to the best interests of the corporation; and
(3) In the case of any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful.
The termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or on a plea of nolo contendere or its equivalent, shall
not of itself be determinative that the person failed to act in accordance with
these requirements. A person shall be deemed to have been found liable in
respect of any claim, issue or matter only after the person shall have been so
adjudged by a court of competent jurisdiction after exhaustion of all appeals
therefrom.
(c) The determination of indemnification required by Subsection
(b) must be made:
(1) By majority vote of a quorum of directors who at
the time of the vote are not named as defendants or respondents in the
proceeding;
(2) If such a quorum cannot be obtained, by a majority
vote of a committee of the board off directors, designated to act in the matter
by majority vote of all directors, consisting solely of two or more directors
who at the time of the vote are not named defendants or respondents in the
proceeding;
<PAGE> 25
(3) By special legal counsel selected by the board of
directors or by a committee of the boards by vote as set forth in Paragraphs (1)
or (2) of this, Subsection, (c), or, if such a quorum cannot be obtained and
such a committee cannot be established, by a majority vote of all directors; or
(4) By the shareholders in a vote that excludes the
shares held by those directors who are named defendants or respondents in the
proceeding.
(d) The determination as to reasonableness of expenses shall
be made in the same manner as the determination that indemnification is
permissible, except that if the determination that indemnification is
permissible is made by special legal counsel, determination as to reasonableness
of expenses shall be made in the manner specified in Paragraph (3) of Subsection
(c), for the selection of special legal counsel.
(e) The provision for mandatory indemnification set forth in
Section 7.01, subject to the limitations set forth in this Section 7.02, shall
be deemed to constitute authorization of indemnification in the manner required
by law.
7.03 INDEMNITY FOR SUCCESSFUL DEFENSE
Notwithstanding any limitation set forth in Sections 7.01 and 7.02
above, the corporation shall indemnify any person to which Section 7.01 applies
against reasonable expenses, including, without limitation, attorney's fees,
court costs and expert witness fees, incurred by such person in connection with
any proceeding, described in Section 7.01, in which such person is or was a
named defendant or respondent if such person has been wholly successful, on the
merits or otherwise, in the defense of the proceeding.
7.04 ADVANCEMENT OF EXPENSES
Reasonable expenses incurred by a director, officer, employee, or
agent of the corporation who was, is, or is threatened to be made a named
defendant or respondent in a proceeding, described in section 7.01, may be paid
or reimbursed by the corporation in advance of the final disposition as
authorized by the board of directors. Before authorizing the advance, the board
of directors must determine that the facts then known to the board of directors
would not preclude indemnification under these bylaws.
In addition, the board must receive:
(1) A written affirmation by the director, officers employee, or agent of
that person's good faith belief that he meets the standard of conduct, defined
in section 7.02 herein, which is necessary under these bylaws for
indemnification; and
(2) A written undertaking by or on behalf of the director, officer,
employee, or agent to repay the expenses if it is ultimately determined that he
has not met the standard of conduct, defined in section 7.02 herein, which is
necessary under these bylaws for indemnification.
<PAGE> 26
7.05 INDEMNIFICATION NOT EXCLUSIVE
The indemnification provided by this Article shall not be deemed exclusive
of any other power to indemnify or right to indemnification that the corporation
or any person referred to in this Article may have or acquire under the laws of
the State of Texas.
7.06 LIABILITY INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
described in Section 7.01 against any liability asserted against and incurred by
that person whether or not the corporation would have the power to indemnify him
against that liability under the provisions of this Article.
7.07 NOTIFICATION OF SHAREHOLDERS
Any indemnification or advance of expenses in accordance with this Article
7 shall be reported in writing to the shareholders with or before the notice or
waiver of notice of the next shareholder's meeting or with or before the next
submission to shareholders of a consent to action without a meeting.
Article 8: General Provisions
8.01 DIVIDENDS AND RESERVES.
(a) DECLARATION AND PAYMENT. Subject to statute and the articles of
incorporation, dividends may be declared by the board of directors at any
regular or special meeting and may be paid in cash, in property, or in, shares
of the corporation. The declaration and payment shall be at the discretion of
the board of directors.
(b) RECORD DATE. The board of directors may fix in advance a record
date for the purpose of determining shareholders entitled to receive payment of
any dividend, the record date to be not more than fifty days prior to the
payment date of the dividend, or the board of directors may close the stock
transfer books for that purpose for a period of not more than fifty days prior
to the payment date of the dividend. In the absence of any action by the board
of directors, the date upon which the board off directors adopts the resolution
declaring the dividend shall be the record date.
(c) RESERVES. By resolution the board of directors may create such
reserve or reserves out off the earned surplus of the corporation as the
directors from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends, or to repair or maintain any property
of the corporation, or for any other purpose they think beneficial to the
corporation. The directors may modify or abolish any such reserve in the manner
in which it was created.
8.02 BOOKS AND RECORDS. The corporation shall keep correct and complete
books and records of account and shall keep minutes of the proceedings of its
shareholders and board of directors, and shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving the names and addresses of all
shareholders and the number and class of the shares held by each.
8.03 ANNUAL STATEMENT. The board of directors shall present at each annual
meeting of shareholders a full and clear statement of the business and condition
of the corporation ration, including a reasonably detailed balance sheet, income
statement, and surplus statement.
<PAGE> 27
8.04 CHECKS AND NOTES. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person or
persons as the board of directors may from time to time designate.
8.05 FISCAL YEAR. The fiscal year of the corporation shall be selected
by resolution of the board of directors.
8.06 SEAL. The corporation seal (of which there may be one or more
exemplars) shall contain the name of the corporation and the name of the state
of incorporation. The seal may be used by impressing it or reproducing a
facsimile of it, or otherwise.
8.07 RESIGNATION. Any director, officer, or agent may resign by giving
written notice to the president or the secretary. The resignation shall take
effect at the time specified therein. Unless otherwise specified therein, the
acceptance of a resignation shall not be necessary to make it effective.
8.08 INTERESTED DIRECTORS, OFFICERS, AND SHAREHOLDERS.
(A) If paragraph (B) below is satisfied, no contract or other
transaction between the corporation and any off its directors, officers, or
shareholders (or any corporation or firm in which any of them is directly or
indirectly interested) shall be invalid solely because of this relationship or
because of the presence of such director, officer, or shareholder at the meeting
authorizing such contract or transaction, or such person's participation in such
meeting or authorization.
(B) Paragraph (A) above shall apply only if:
(1) The contract or transaction is fair to the corporation
as of the time it is authorized or ratified by the board of directors, a
committee of the board, or the shareholders; or
(2) The material facts of the relationship or interest of
each such director, officer, or shareholder are known or disclosed; (a) to the
shareholders and they nevertheless authorize or ratify the contract or
transaction by a majority of the shares present, each such interested person to
be counted for quorum and voting purposes; or (b) to the board of directors and
it nevertheless authorizes or ratifies the contract or transaction by a majority
of the directors present, each such interested director to be counted in
determining whether a quorum is present but not in calculating the majority
necessary to carry the vote.
(C) The provisions contained in paragraph (A) and (B) above shall not
be construed to invalidate a contract or transaction which would be valid in the
absence of such provisions.
8.09 PURCHASE OWN SHARES. The corporation may, directly or indirectly,
purchase its own shares to the extent of the aggregate of unrestricted capital
surplus available therefor and unrestricted reduction surplus available there
for.
8.10 CONSTRUCTION. Whenever the context so requires, the masculine shall
include the feminine and neuter, and the singular shall include the plural, and
conversely. If any portion of these bylaws shall be invalid or inoperative,
then, so far as is reasonable and possible:
<PAGE> 28
(a) The remainder of these bylaws shall be considered valid and
operative, and
(b) Effect shall be given to the intent manifested by the portion
held invalid or inoperative.
8.11 AMENDMENT OF BYLAWS. These bylaws may be altered amended, or repealed
at any meeting of the board of directors at which a quorum is present, by the
affirmative vote of a majority of the directors present at the meeting, provided
notice of the proposed alteration, amendment, or repeal is contained in the
notice of the meeting.
8.12 TABLE OF CONTENTS; HEADINGS. The table of contents and headings used
in these bylaws have been inserted for convenience only and do not constitute
matter to be construed, in interpretation.
- End of Bylaws -
<PAGE> 29
EXHIBIT 16.6
Consent of Trustee.
<PAGE> 30
CONSENT OF TRUSTEE
We hereby consent that reports of examinations by Federal, State,
Territorial, or District authorities may be furnished by such authorities to the
Commission upon request therefor.
TRUST MANAGEMENT, INC.
(Trustee)
By: /s/ Robert C. Finley
-----------------------------------
Robert C. Finley
President
<PAGE> 31
EXHIBIT 16.7
Latest Report of Condition of Trust Management, Inc.
<PAGE> 32
[THE STATE OF TEXAS SEAL]
DEPARTMENT OF BANKING
TRUST COMPANY
QUARTERLY REPORT OF CONDITION AND INCOME
===============================================================================
NAME AND ADDRESS:
Trust Management, Inc.
210 West Sixth St., Suite 605
Fort Worth, Texas 76102
- -------------------------------------------------------------------------------
CHARTER NUMBER: REPORTING PERIOD: JANUARY 1 THROUGH
95-37 09/30/98
------------------------------
(Month, Day, Year)
===============================================================================
THIS REPORT OF CONDITION AND INCOME MUST BE SIGNED BY AN AUTHORIZED OFFICER(S)
AND ATTESTED BY NOT LESS THAN THREE DIRECTORS OTHER THAN THE OFFICER(S)
SIGNING THE REPORT.
I, THE UNDERSIGNED OFFICER, DO HEREBY DECLARE THAT THIS REPORT OF CONDITION AND
INCOME HAS BEEN PREPARED IN CONFORMANCE WITH OFFICIAL INSTRUCTIONS AND IS TRUE
AND CORRECT.
===============================================================================
/s/ DEANNE P. SHARP 11-12-98
Signature of Officer Authorized to Sign Report Date Signed
- -------------------------------------------------------------------------------
DeAnne P. Sharp, Sr. Vice President (817)335-2933
Name and Title of Officer Authorized to Sign Report Area Code/Phone Number
===============================================================================
WE, THE UNDERSIGNED DIRECTORS, ATTEST THE CORRECTNESS OF THIS REPORT OF
CONDITION AND INCOME AND DECLARE THAT IT HAS BEEN EXAMINED BY US AND TO THE BEST
OF OUR KNOWLEDGE AND BELIEF HAS BEEN PREPARED IN CONFORMANCE WITH OFFICIAL
INSTRUCTIONS AND IS TRUE AND CORRECT.
===============================================================================
/s/ ROBERT C. FINLEY /s/ DEE S. FINLEY, JR. /s/ JAMES M. WHITTON
Signature of Director Signature of Director Signature of Director
===============================================================================
Robert C. Finley Dee S. Finley, Jr. James M. Whitton
1 of 10 Texas Department of Banking
<PAGE> 33
<TABLE>
<CAPTION>
====================================================================================================
SECTION A NAME AND ADDRESS
BALANCE SHEET Trust Management, Inc.
AS OF 210 West Sixth St., Suite 605
09/30/98 Fort Worth, Texas 76102
-----------------------
(Month, Day, Year)
=====================================================================================================
ASSETS Mil Thou Hun
=====================================================================================================
<S> <C> <C> <C> <C>
1. Cash 3 701 1
- -----------------------------------------------------------------------------------------------------
1a. Mutual Funds 1a
- -----------------------------------------------------------------------------------------------------
1b. Money Market Mutual Funds 846 752 1b
- -----------------------------------------------------------------------------------------------------
2. Investment Securities (Schedule A1, Column B, Line 5) 100 000 2
- -----------------------------------------------------------------------------------------------------
3. Corporate Stock 211 385 3
- -----------------------------------------------------------------------------------------------------
4. Trading Account Securities 4
- -----------------------------------------------------------------------------------------------------
5. Loans (Net) 5
- -----------------------------------------------------------------------------------------------------
6. Premises, furniture & fixtures, & other assets representing premises 45 771 6
- -----------------------------------------------------------------------------------------------------
7. Real Estate Owned other than premises 7
- -----------------------------------------------------------------------------------------------------
8. Other Assets (Schedule A2, Line 16) 165 116 8
- -----------------------------------------------------------------------------------------------------
9. TOTAL ASSETS (sum of 1 through 8) 1 372 725 9
=====================================================================================================
LIABILITIES & EQUITY CAPITAL
=====================================================================================================
10. Accounts Payable 3 707 10
- -----------------------------------------------------------------------------------------------------
11. Accrued Taxes 11
- -----------------------------------------------------------------------------------------------------
12. Accrued Interest 2 770 12
- -----------------------------------------------------------------------------------------------------
13. Mortgage indebtedness 13
- -----------------------------------------------------------------------------------------------------
14. Other liabilities for borrowed money 14
- -----------------------------------------------------------------------------------------------------
15. Subordinated notes and debentures 15
- -----------------------------------------------------------------------------------------------------
16. Other liabilities (Schedule A3, Line 7) 22 822 16
- -----------------------------------------------------------------------------------------------------
17. TOTAL LIABILITIES (sum of 10 through 16) 46 870 17
- -----------------------------------------------------------------------------------------------------
18. EQUITY CAPITAL & RESERVES (Schedule A4, Column E, Line 11) 1 325 855 18
- -----------------------------------------------------------------------------------------------------
19. TOTAL LIABILITIES & EQUITY CAPITAL (sum of 17 and 18) 1 372 725 19
=====================================================================================================
</TABLE>
2 of 10 Texas Department of Banking
<PAGE> 34
<TABLE>
<CAPTION>
====================================================================================================
SCHEDULE A1 - INVESTMENT SECURITIES A. B.
Market Value Book Value
====================================================================================================
Type of Investments Mil Thou Hun Mil Thou Hun
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1. U. S. Government obligations 100 000 100 000 1
- ----------------------------------------------------------------------------------------------------
2. U. S. Government agencies obligations 2
- ----------------------------------------------------------------------------------------------------
3. State, county & municipal obligations 3
- ----------------------------------------------------------------------------------------------------
4. Other bonds, notes and debentures 4
- ----------------------------------------------------------------------------------------------------
5. TOTAL INVESTMENT SECURITIES (sum of 1 through 4) 100 000 100 000 5
====================================================================================================
====================================================================================================
SCHEDULE A2 - OTHER ASSETS Mil Thou Hun
====================================================================================================
<S> <C> <C> <C> <C>
1. Accounts receivable 91 556 1
- ----------------------------------------------------------------------------------------------------
2. Due from affiliates or subsidiaries (Net) 2
- ----------------------------------------------------------------------------------------------------
3. Interest earned or accrued but not collected 29 743 3
- ----------------------------------------------------------------------------------------------------
4. Prepaid expenses 6 462 4
- ----------------------------------------------------------------------------------------------------
5. Cash items not in the process of collection 5
- ----------------------------------------------------------------------------------------------------
6. Deferred tax assets (Net) 6
- ----------------------------------------------------------------------------------------------------
7. Accrued interest purchased on securities 7
- ----------------------------------------------------------------------------------------------------
8. Margin accounts 8
- ----------------------------------------------------------------------------------------------------
9. Purchased computer software 7 752 9
- ----------------------------------------------------------------------------------------------------
10. Direct lease financing 10
- ----------------------------------------------------------------------------------------------------
11. Investment in unconsolidated subsidiaries & associated companies 11
- ----------------------------------------------------------------------------------------------------
12. Cash surrender value of life insurance policies 12
- ----------------------------------------------------------------------------------------------------
13. Furniture and equipment rented to others 13
- ----------------------------------------------------------------------------------------------------
14. Goodwill 29 603 14
- ----------------------------------------------------------------------------------------------------
15. All other (itemize amounts over 25% of line 16) 15
- ----------------------------------------------------------------------------------------------------
16. TOTAL OTHER ASSETS (sum of 1 through 15) 165 116 16
====================================================================================================
====================================================================================================
SCHEDULE A3 - OTHER LIABILITIES Mil Thou Hun
====================================================================================================
<S> <C> <C> <C> <C>
1. Due to affiliates or subsidiaries (Net) 1
- ----------------------------------------------------------------------------------------------------
2. Dividends declared but not yet paid 2
- ----------------------------------------------------------------------------------------------------
3. Expenses accrued and unpaid 14 951 3
- ----------------------------------------------------------------------------------------------------
4. Minority interest in consolidated subsidiaries 4
- ----------------------------------------------------------------------------------------------------
5. Deferred income taxes 7 871 5
- ----------------------------------------------------------------------------------------------------
6. All other (itemize amounts over 25% of line 7) 6
- ----------------------------------------------------------------------------------------------------
7. TOTAL OTHER LIABILITIES (sum of 1 through 6) 22 822 7
====================================================================================================
</TABLE>
3 of 10 Texas Department of Banking
<PAGE> 35
<TABLE>
<CAPTION>
====================================================================================================================================
SCHEDULE A A. B. C. D. E.
CHANGES IN EQUITY CAPITAL PREFERRED STOCK COMMON STOCK SURPLUS UNDIVIDED PROFITS TOTAL
(YEAR-TO-DATE) (PAR VALUE) (PAR VALUE) AND CAPITAL EQUITY CAPITAL
RESERVES
====================================================================================================================================
(Indicate decreases and losses
in parenthesis) Mil Thou Hun Mil Thou Hun Mil Thou Hun Mil Thou Hun Mil Thou Hun
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Balance end of previous year 39 972 660 028 550 044 1 250 044 1
- ------------------------------------------------------------------------------------------------------------------------------------
2. Adjustments (itemize below) 2
- ------------------------------------------------------------------------------------------------------------------------------------
3. Adjusted balance end of
previous year 3
- ------------------------------------------------------------------------------------------------------------------------------------
4. Net Income (loss) 75 811 75 811 4
- ------------------------------------------------------------------------------------------------------------------------------------
5. Sale, conversion, acquisition,
or retirement of Capital net:
- ------------------------------------------------------------------------------------------------------------------------------------
5a. Transactions with own
holding company or affiliates 5a
- ------------------------------------------------------------------------------------------------------------------------------------
5b. Other 5b
- ------------------------------------------------------------------------------------------------------------------------------------
6. Charges incident to mergers
and absorptions (net) 6
- ------------------------------------------------------------------------------------------------------------------------------------
7. LESS: Cash dividends declared
on Common Stock 7
- ------------------------------------------------------------------------------------------------------------------------------------
8. LESS: Cash dividends declared
on Preferred Stock 8
- ------------------------------------------------------------------------------------------------------------------------------------
9. Stock dividends issued 9
- ------------------------------------------------------------------------------------------------------------------------------------
10. Other: increases (decreases)
(Itemize below) 100 000 (100 000) 10
- ------------------------------------------------------------------------------------------------------------------------------------
11. Balances end of Current Period 39 972 760 028 525 855 1 325 855 11
====================================================================================================================================
</TABLE>
MEMORANDA
1. Itemize adjustments shown in item 2:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2. Itemize other increases or decreases shown in Item 10.
To reclassify funds from Undivided Profits and Capital Reserves to Surplus in
order that Restricted Capital be no less than $800,000.00 at September 30, 1998.
4 of 10 Texas Department of Banking
<PAGE> 36
<TABLE>
<CAPTION>
==========================================================================================================================
SECTION B - INCOME AND EXPENSES Mil Thou Hun
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Operating Income
- --------------------------------------------------------------------------------------------------------------------------
1a. Interest and fees on loans 1a
- --------------------------------------------------------------------------------------------------------------------------
1b. Interest on balances with depositor institutions 265 907 1b
- --------------------------------------------------------------------------------------------------------------------------
1c. Interest on U.S. Treasury securities 11 375 1c
- --------------------------------------------------------------------------------------------------------------------------
1d. Interest on obligations of other U.S. Government agencies and corporations 10 177 1d
- --------------------------------------------------------------------------------------------------------------------------
1e. Interest on obligations of States and political subdivisions of the United States 1e
- --------------------------------------------------------------------------------------------------------------------------
1f. Interest on other bonds, notes, and debentures 1f
- --------------------------------------------------------------------------------------------------------------------------
1g. Dividends on corporate stock 8 561 1g
- --------------------------------------------------------------------------------------------------------------------------
1h. Income from lease financing 1h
- --------------------------------------------------------------------------------------------------------------------------
1i. Income from fiduciary activities (Section D, Line 5) 266 427 1i
- --------------------------------------------------------------------------------------------------------------------------
1j. Other service charges, commissions, and fees 7 329 1j
- --------------------------------------------------------------------------------------------------------------------------
1k. Other income (Schedule B1, Line 8) 1k
- --------------------------------------------------------------------------------------------------------------------------
1l. TOTAL OPERATING INCOME (sum of 1a through 1k) 569 776 1l
- --------------------------------------------------------------------------------------------------------------------------
2. Operating Expenses 2
- --------------------------------------------------------------------------------------------------------------------------
2a. Salaries and wages 227 970 2a
- --------------------------------------------------------------------------------------------------------------------------
2b. Employee benefits 25 952 2b
- --------------------------------------------------------------------------------------------------------------------------
2c. Audits and examinations 12 000 2c
- --------------------------------------------------------------------------------------------------------------------------
2d. Marketing 2d
- --------------------------------------------------------------------------------------------------------------------------
2e. Interest on borrowed money 2e
- --------------------------------------------------------------------------------------------------------------------------
2f. Interest on subordinated notes and debentures 2f
- --------------------------------------------------------------------------------------------------------------------------
2g. Occupancy expense (Net of Rental Income) 23 314 2g
- --------------------------------------------------------------------------------------------------------------------------
2h. Furniture and equipment expense 16 835 2h
- --------------------------------------------------------------------------------------------------------------------------
2i. Provision for possible loan losses 2i
- --------------------------------------------------------------------------------------------------------------------------
2j. Other operating expenses (Schedule B2, Line 14) 152 469 2j
- --------------------------------------------------------------------------------------------------------------------------
2k. TOTAL OPERATING EXPENSES (sum of 2a through 2j) 458 540 2k
- --------------------------------------------------------------------------------------------------------------------------
3. Income before income taxes and securities gains (1l minus 2k) 111 236 3
- --------------------------------------------------------------------------------------------------------------------------
4. Securities gains (losses) 4
- --------------------------------------------------------------------------------------------------------------------------
5. Applicable income taxes 35 425 5
- --------------------------------------------------------------------------------------------------------------------------
6. Net income (3 plus or minus 4 and 5) 75 811 6
- --------------------------------------------------------------------------------------------------------------------------
7. Extraordinary items (net of tax effect) 7
- --------------------------------------------------------------------------------------------------------------------------
8. NET OPERATING INCOME (6 plus or minus 7) 75 811 8
==========================================================================================================================
</TABLE>
5 of 10 Texas Department of Banking
<PAGE> 37
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SCHEDULE B1 - OTHER OPERATING INCOME MIL THOU HUN
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Investment advisory services (trust accounts) 1
- ----------------------------------------------------------------------------------------------
2. Investment advisory services (non-trust accounts) 2
- ----------------------------------------------------------------------------------------------
3. Income from affiliates (Schedule D1, Line 6) 3
- ----------------------------------------------------------------------------------------------
4. Trading account (Net) 4
- ----------------------------------------------------------------------------------------------
5. Equity in net income of unconsolidated subsidiaries 5
- ----------------------------------------------------------------------------------------------
6. Data processing (non-affiliate) 6
- ----------------------------------------------------------------------------------------------
7. All other (non-affiliate) 7
- ----------------------------------------------------------------------------------------------
8. TOTAL OTHER OPERATING INCOME (sum of 1 through 7) 8
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
SCHEDULE B2 - OTHER OPERATING EXPENSES MIL THOU HUN
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Directors and committee fees 3 300 1
- ----------------------------------------------------------------------------------------------
2. Insurance 4 856 2
- ----------------------------------------------------------------------------------------------
3. Legal fees 9 394 3
- ----------------------------------------------------------------------------------------------
4. Losses on the sale of assets (excluding securities) 4
- ----------------------------------------------------------------------------------------------
5. Amortization of intangible assets 7 260 5
- ----------------------------------------------------------------------------------------------
6. Franchise taxes 4 332 6
- ----------------------------------------------------------------------------------------------
7. Travel & entertainment 2 357 7
- ----------------------------------------------------------------------------------------------
8. Broker/Dealer (non-affiliate) 8
- ----------------------------------------------------------------------------------------------
9. Investment advisory services (non-affiliate) 9
- ----------------------------------------------------------------------------------------------
10. Referral fees (non-affiliate) 10
- ----------------------------------------------------------------------------------------------
11. Data processing (non-affiliate) 17 313 11
- ----------------------------------------------------------------------------------------------
12. Affiliate service(s) (Schedule D2, Line 7) 12
- ----------------------------------------------------------------------------------------------
13. All other (non-affiliate) 103 657 13
- ----------------------------------------------------------------------------------------------
14. TOTAL OTHER OPERATING EXPENSES (sum of 1 through 13) 152 469 14
- ----------------------------------------------------------------------------------------------
</TABLE>
Texas Department of Banking
6 of 10
<PAGE> 38
<TABLE>
<CAPTION>
====================================================================================================================================
SECTION C A. B. C. D. E. F.
REPORT OF TRUST EMPLOYEE BENEFIT PERSONAL ESTATES EMPLOYEE ALL OTHER TOTALS
ASSETS TRUSTS TRUSTS BENEFIT AGENCIES
AGENCIES
====================================================================================================================================
BIL MIL THOU BIL MIL THOU BIL MIL THOU BIL MIL THOU BIL MIL THOU BIL MIL THOU
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Noninterest Bearing Deposits 1
- ------------------------------------------------------------------------------------------------------------------------------------
2. Interest Bearing Deposits 182 182 2
- ------------------------------------------------------------------------------------------------------------------------------------
3. U.S.G.'s & Agency Obligations 2 663 2 663 3
- ------------------------------------------------------------------------------------------------------------------------------------
4. State, Co. & Muni. Obligations 4
- ------------------------------------------------------------------------------------------------------------------------------------
5. Money Market Mutual Funds 2 466 2 466 5
- ------------------------------------------------------------------------------------------------------------------------------------
6. Other Short Term Obligations 585 585 6
- ------------------------------------------------------------------------------------------------------------------------------------
7. Other Notes & Bonds 7
- ------------------------------------------------------------------------------------------------------------------------------------
8. Common & Preferred Stocks 8
- ------------------------------------------------------------------------------------------------------------------------------------
9. Real Estate Mortgages 9
- ------------------------------------------------------------------------------------------------------------------------------------
10. Real Estate 10
- ------------------------------------------------------------------------------------------------------------------------------------
11. Miscellaneous Assets 4 4 11
- ------------------------------------------------------------------------------------------------------------------------------------
12. Total Discretionary Assets 5 900 5 900 12
(sum of 1 through 11)
- ------------------------------------------------------------------------------------------------------------------------------------
13. Total # of Discretionary 37 37 13
Accounts
- ------------------------------------------------------------------------------------------------------------------------------------
14. Total Non-Discretionary Assets 79 749 79 749 14
- ------------------------------------------------------------------------------------------------------------------------------------
15. Total # of Non-Discretionary 3,496 3,496 15
Accounts
- ------------------------------------------------------------------------------------------------------------------------------------
16. TOTAL ASSETS 79 749 5 900 85 649 16
(sum of 12 and 14)
- ------------------------------------------------------------------------------------------------------------------------------------
17. TOTAL # OF ACCOUNTS 3,496 37 3,533 17
(sum of 13 and 15)
====================================================================================================================================
18. MEMORANDA 18
TOTAL LIABILITIES
====================================================================================================================================
</TABLE>
Texas Department of Banking
7 of 10
<PAGE> 39
Do not use more than one line per fund or repeat the institution name if it is
included in the name of the fund. If more than 10 funds are being reported,
please reproduce additional copies of this schedule and number pages
accordingly.
<TABLE>
<CAPTION>
================================================================================================================================
A. B. C. D.
SCHEDULE C1 Classification Type of Total Number of
COLLECTIVE INVESTMENT Code Fund Code Fund Assets Participating Accounts
FUNDS in Fund
================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Name of Fund Bil Mil Thou
- --------------------------------------------------------------------------------------------------------------------------------
1. 1
- --------------------------------------------------------------------------------------------------------------------------------
2. 2
- --------------------------------------------------------------------------------------------------------------------------------
3. 3
- --------------------------------------------------------------------------------------------------------------------------------
4. 4
- --------------------------------------------------------------------------------------------------------------------------------
5. 5
- --------------------------------------------------------------------------------------------------------------------------------
6. 6
- --------------------------------------------------------------------------------------------------------------------------------
7. 7
- --------------------------------------------------------------------------------------------------------------------------------
8. 8
- --------------------------------------------------------------------------------------------------------------------------------
9. 9
- --------------------------------------------------------------------------------------------------------------------------------
10. 10
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================================================================
Classification Codes (Enter only one code Type of Fund
in Column A for each fund) (Enter only one code in Column B for each fund)
================================================================================================================================
<S> <C> <C> <C> <C> <C>
01. Personal Trust 01 Equity 07 Mortgage
- --------------------------------------------------------------------------------------------------------------------------------
02. Employee Benefit 02 Diversified or Balanced 08 Foreign Equity
- --------------------------------------------------------------------------------------------------------------------------------
03. Keogh (HR 10) 03 Fixed Income 09 Foreign Fixed Income
- --------------------------------------------------------------------------------------------------------------------------------
04. Charitable Trust 04 Municipal Bond 10 Index Equity
- --------------------------------------------------------------------------------------------------------------------------------
05. Other 05 Real Estate Equity 11 Index Fixed Income
- --------------------------------------------------------------------------------------------------------------------------------
06 Short Term Investment 12 Other
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================================================================
SCHEDULE C2 A. B.
CORPORATE TRUSTS Number of Principal Amount of
Accounts Outstanding Securities
================================================================================================================================
Type of Account Bil. Mil. Thou.
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Corporate Securities Trusteeships 37 73 586
- --------------------------------------------------------------------------------------------------------------------------------
2. Tax Exempt & Other Municipal Securities Trusteeships
- ---------------------------------------------------------------------------------
3. Stock or Bond Transfer Agent or Registrar
- ---------------------------------------------------------------------------------
4. Mutual Fund Transfer Agent
- ---------------------------------------------------------------------------------
5. Separate Dividend & Interest/Coupon Paying Agent
- ---------------------------------------------------------------------------------
6. All Other Corporate Agencies
- --------------------------------------------------------------------------------------------------------------------------------
7. TOTALS 37 73 586
================================================================================================================================
</TABLE>
8 of 10 Texas Department of Banking
<PAGE> 40
<TABLE>
<CAPTION>
SECTION D (CONFIDENTIAL
FIDUCIARY INCOME INFORMATION)
================================================================================
INCOME FROM FIDUCIARY ACTIVITIES Mil Thou Hun
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Gross Fees, Commissions & Other Fiduciary Income
- --------------------------------------------------------------------------------
1a. Employee Benefit Trust Accounts 172 716 1a
- --------------------------------------------------------------------------------
1b. Personal Trust & Estate Accounts 1b
- --------------------------------------------------------------------------------
1c. Employee Benefit Agency Accounts 1c
- --------------------------------------------------------------------------------
1d. Other Agency Accounts 1d
- --------------------------------------------------------------------------------
1e. Corporate Trust & Agency Accounts 93 711 1e
- --------------------------------------------------------------------------------
1f. All Other Fiduciary Income 1f
- --------------------------------------------------------------------------------
1g. Gross Fiduciary Income (sum of 1a through 1f) 266 427 1g
- --------------------------------------------------------------------------------
2. Settlements, Surcharges & Other Losses
- --------------------------------------------------------------------------------
2a. Employee Benefit Trust Accounts - Discretionary Accounts 2a
- --------------------------------------------------------------------------------
2b. Personal Trust & Estate Accounts - Discretionary Accounts 2b
- --------------------------------------------------------------------------------
2c. Employee Benefit Agencies - Discretionary Accounts 2c
- --------------------------------------------------------------------------------
2d. Other Agency Accounts - Discretionary Accounts 2d
- --------------------------------------------------------------------------------
2e. Employee Benefit Trust Accounts - Non-Discretionary Accounts 2e
- --------------------------------------------------------------------------------
2f. Personal Trust & Estate Accounts - Non-Discretionary Accounts 2f
- --------------------------------------------------------------------------------
2g. Employee Benefit Agencies - Non-Discretionary Accounts 2g
- --------------------------------------------------------------------------------
2h. Other Agency Accounts - Non-Discretionary Accounts 2h
- --------------------------------------------------------------------------------
2i. Corporate Trust & Agency Accounts 2i
- --------------------------------------------------------------------------------
2j. All Other Activities 2j
- --------------------------------------------------------------------------------
2k. Gross Settlements, Surcharges & Other Losses (sum of 2a through 2j) 2k
- --------------------------------------------------------------------------------
3. Recoveries to Previously Reported Losses 3
- --------------------------------------------------------------------------------
4. Net Settlements, Surcharges & Other Losses (2k minus 3) 4
- --------------------------------------------------------------------------------
5. FIDUCIARY INCOME (LOSS) (1g minus 4) 5
================================================================================
Gross Settlements, Surcharges & Other Losses by Type
================================================================================
6. Investment 6
- --------------------------------------------------------------------------------
7. Administrative 7
- --------------------------------------------------------------------------------
8. Operational 8
- --------------------------------------------------------------------------------
9. Gross Settlements, Surcharges & Other Losses (sum of 6 through 8)
(line 9 must equal 2k) 9
================================================================================
</TABLE>
9 of 10 Texas Department of Banking
<PAGE> 41
<TABLE>
<CAPTION>
SCHEDULE D1 CONFIDENTIAL
================================================================================
Income for Services Provided TO Affiliate(s) Mil Thou Hun
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Investment advisory services 1
- --------------------------------------------------------------------------------
2. Referral fees 2
- --------------------------------------------------------------------------------
3. Asset management/custodial 3
- --------------------------------------------------------------------------------
4. Data processing 4
- --------------------------------------------------------------------------------
5. All Other 5
- --------------------------------------------------------------------------------
6. Total Affiliate Services (sum of 1 through 5) 6
================================================================================
================================================================================
SCHEDULE D2 CONFIDENTIAL
================================================================================
Expenses for Services Provided BY Affiliate(s) Mil Thou Hun
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Broker/Dealer 1
- --------------------------------------------------------------------------------
2. Investment advisory services 2
- --------------------------------------------------------------------------------
3. Referral fees 3
- --------------------------------------------------------------------------------
4. Asset management/custodial 4
- --------------------------------------------------------------------------------
5. Data processing 5
- --------------------------------------------------------------------------------
6. All Other 6
- --------------------------------------------------------------------------------
7. Total Affiliate Services (sum of 1 through 6) 7
================================================================================
================================================================================
MEMORANDA CONFIDENTIAL
================================================================================
Number of Mil Thou Hun
Accounts
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Non-Fiduciary Advisory/Management Accounts 1
================================================================================
</TABLE>
10 of 10 Texas Department of Banking
