<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 1-13919
PAWNMART, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2520896
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
301 COMMERCE STREET, SUITE 3600, FORT WORTH, TEXAS 76102
(Address of principal executive offices)
(817) 335-7296
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes [X]
No [ ]
The number of shares of Common Stock outstanding as of June 14, 1999 was
7,209,445. The number of Series A Redeemable Common Stock Purchase Warrants
outstanding as of June 14, 1999 was 1,667,220. The number Series B Redeemable
Common Stock Purchase Warrants outstanding as of June 14, 1999 was 1,380,000.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
May 1, January 30,
1999 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,024 $ 298
Accounts receivable 58 60
Pawn service charges receivable 536 446
Loans 4,851 4,419
Inventories, net 3,807 3,011
Prepaid expenses and other current assets 210 199
---------- ----------
Total current assets 10,486 8,433
---------- ----------
Property and equipment, net 2,242 2,232
Debt issuance costs, net 637 137
Other assets, net 310 390
---------- ----------
Total assets $ 13,675 $ 11,192
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 685 $ 1,103
Current installments of notes payable 108 342
---------- ----------
Total current liabilities 793 1,445
---------- ----------
Long-term notes payable, net of current installments (note 2) 8,517 4,840
---------- ----------
Total liabilities 9,310 6,285
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares -- --
Common stock, $.01 par value; authorized 20,000,000 shares;
7,230,877 shares issued 72 72
Series A redeemable common stock purchase warrants, $0.125 par
value; 1,614,720 and 1,380,000 warrants issued and outstanding
at May 1, 1999 and January 30, 1999, respectively (note 2) 202 173
Series B redeemable common stock purchase warrants, $0.0625 par
value; 1,380,000 warrants issued and outstanding 86 86
Additional paid-in capital 22,213 22,242
Accumulated deficit (18,138) (17,596)
---------- ----------
4,435 4,977
Less treasury stock, at cost; 21,432 common shares (70) (70)
---------- ----------
Total stockholders' equity 4,365 4,907
---------- ----------
Total liabilities and stockholders' equity $ 13,675 $ 11,192
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PAWNMART, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
May 1, May 2,
1999 1998
---------- ----------
<S> <C> <C>
Revenues:
Merchandise sales $ 2,885 $ 1,842
Pawn service charges 1,419 775
Other 43 33
---------- ----------
Total revenues 4,347 2,650
Cost of sales 2,051 1,227
---------- ----------
Gross profit 2,296 1,423
---------- ----------
Expenses:
Store operating expenses 1,751 1,053
Corporate administrative expenses 688 759
Interest expense 197 809
Depreciation and amortization 202 121
---------- ----------
Total expenses 2,838 2,742
---------- ----------
Net loss (542) (1,319)
Preferred stock dividends -- 692
---------- ----------
Net loss to common stockholders $ (542) $ (2,011)
========== ==========
Loss per common share (note 3):
Basic $ (0.08) $ (0.63)
========== ==========
Diluted $ (0.08) $ (0.63)
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PAWNMART, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
May 1, May 2,
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (542) $ (1,319)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 202 121
Amortization of debt issuance costs 42 85
Amortization of debt discount -- 495
Common stock issued for services -- 200
Changes in operating assets and liabilities:
Accounts receivable 2 (19)
Pawn service charges receivable (90) 26
Inventories, net (796) (130)
Prepaid expenses and other current assets (11) (46)
Other assets 72 249
Accounts payable and accrued liabilities (418) (565)
---------- ----------
Net cash used in operating activities (1,539) (903)
---------- ----------
Cash flows from investing activities:
Net decrease (increase) in pawn loans (432) 268
Purchases of property and equipment (204) (119)
---------- ----------
Net cash provided by (used in) investing activities (636) 149
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 6,076 135
Principal payments on notes payable (2,633) (2,445)
Net proceeds from issuance of common stock and warrants -- 5,583
Payment of debt issuance costs (542) (10)
Preferred stock dividends paid -- (18)
---------- ----------
Net cash provided by financing activities 2,901 3,245
---------- ----------
Net increase in cash and cash equivalents 726 2,491
Cash and cash equivalents at beginning of period 298 151
---------- ----------
Cash and cash equivalents at end of period $ 1,024 $ 2,642
========== ==========
Supplemental disclosures of cash flow information -
Cash paid for interest $ 125 $ 376
========== ==========
</TABLE>
Noncash Financing Activities:
On March 20, 1998, $9,520,000 in convertible subordinated debentures, net of
unamortized debt issuance costs of $443,000, were automatically converted into
2,380,000 outstanding shares of common stock and 3,661,200 shares of preferred
stock were automatically converted into 1,482,766 outstanding shares of common
stock in connection with the completion of the Company's initial public
offering. During the three months ended May 2, 1998, the Company recognized
$674,000 in preferred stock dividends in connection with the amortization of
preferred stock discounts resulting from the preferred stock beneficial
conversion feature. On May 1, 1998, the Company issued 44,445 shares of
unregistered common stock to a corporation in exchange for $200,000 in
professional services associated with marketing and new store site selection
analysis.
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PAWNMART, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
May 1, 1999 and May 2, 1998
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim
financial information and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of
management, all adjustments have been made that are necessary for a fair
presentation of the financial position and results of operations and cash
flows as of and for the periods presented. All such adjustments are of a
normal recurring nature. The results of operations for the three months
ended May 1, 1999 are not necessarily indicative of the results that may
be expected for the entire fiscal year or any other interim period.
The consolidated financial statements include the financial
statements of PawnMart, Inc. (the "Company") and its single purpose,
wholly owned subsidiaries PCI Finance 1994-I, Inc., PCI Finance 1995-I,
Inc., PCI Finance 1996-1, Inc., and PCI Finance 1996-2, Inc. All
significant intercompany balances and transactions have been eliminated
in consolidation. The consolidated financial statements should be read in
conjunction with the consolidated financial statements for the fiscal
year ended January 30, 1999 included in the Company's Form 10-K which has
been previously filed with the Securities and Exchange Commission.
(2) Notes Payable
Revolving Credit Facility-
The Company maintains a $10,000,000 revolving credit facility with
Comerica Bank (the "Credit Facility"). At May 1, 1999, $4,605,000 was
outstanding under the Credit Facility and an additional $1,225,000 was
available to the Company pursuant to the available borrowing base. The
Credit Facility bears interest at either (i) the prevailing prime rate
plus 0.75%, which was 8.50% at May 1, 1999, 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 terms of 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 May 1, 1999. The Company is required to pay an annual
commitment fee of 1/2 of 1% on the average daily unused portion of the
Credit Facility commitment. The Company is prohibited from paying cash
dividends or acquiring treasury stock under the terms of the Credit
Facility.
Subordinated Debt -
On March 11, 1999, the Company commenced a public offering of up to
$10,000,000 in principal amount of 12% Subordinated Notes due December
31, 2004 (the "2004 Notes"). The 2004 Notes are being offered on a "best
efforts" basis by participating National Association of Securities
Dealers, Inc. broker-dealers ("NASD Broker-Dealers"). Interest on the
2004 Notes is payable monthly commencing with the second full calendar
month following issuance. At the option of the Company, the 2004 Notes
may be redeemed prior to December 31, 2004 at stipulated redemption
prices. The Company had issued a total of $3,912,000 and $4,787,000 of
the 2004 Notes as of May 1, 1999 and June 14, 1999, respectively.
In connection with the sale of the 2004 Notes, the Company has agreed
to issue Series A Warrants to participating NASD Broker-Dealers for the
purchase of up to 600,000 shares of the Company's common stock. As of May
1, 1999, 234,720 Series A Warrants had been granted in connection with
the sale of the 2004 Notes.
5
(Continued)
<PAGE> 6
PAWNMART, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Net Loss Per Common Share
Net loss per common share is calculated as required by Financial
Accounting Standards Board's Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" (Statement No. 128). Statement No. 128
requires dual presentation of basic and diluted earnings per share and a
reconciliation between the two amounts. Basic earnings per share excludes
dilution, and diluted earnings per share reflects the potential dilution
that would occur if securities to issue common stock were exercised and
converted into common stock. In loss periods, dilutive common equivalent
shares are excluded as the effect would be antidilutive.
The following table presents a reconciliation between basic and
diluted weighted average common shares outstanding for the three months
ended May 1, 1999 and May 2, 1998, respectively. Since the effect of
using the weighted average number of shares on a diluted basis was
antidilutive to the diluted loss per share calculation for the three
months ended May 1, 1999 and May 2, 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>
Three Months Ended
May 1, May 2,
1999 1998
-------- --------
<S> <C> <C>
Weighted average shares - basic 7,209 3,215
Shares attributable to stock options, warrants and convertible
securities -- 3,281
-------- --------
Weighted average shares - diluted 7,209 6,496
======== ========
</TABLE>
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements appearing in the following discussion that are not historical
facts are forward-looking statements ("forward-looking statements") within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, which are intended
to be covered by the safe harbors created by those sections. Such
forward-looking statements are necessarily estimates reflecting the best
judgment of the Company's management based upon current information and involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors, include, but are not limited to, those set
forth and those appearing from time to time in filings made by the Company with
the Securities and Exchange Commission. These risks, uncertainties and other
factors should not be construed as exhaustive and the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
In addition, the following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and other financial data included in the Company's Form 10-K for the
fiscal year ended January 30, 1999.
GENERAL
PawnMart, Inc. (the "Company") is a specialty finance and retail enterprise
principally engaged in establishing and operating stores which advance money
secured by the pledge of tangible personal property and sell pre-owned
merchandise to the value-conscious consumer. The Company generates income in two
ways: through collection of a monthly service charge from advancing money to
individuals based primarily upon the estimated resale value of pledged personal
property such as jewelry, consumer electronics, tools, musical instruments,
firearms, automobiles and other miscellaneous items and through profit realized
on the retail sale of the unredeemed or other purchased pre-owned merchandise.
As of June 1, 1999, the Company was one of five publicly traded pawnshop
operators in the United States, and it owned and operated 37 stores located in
Alabama, Georgia, North Carolina, South Carolina, and Texas.
Prior to March 1998, the Company owned and operated 19 stores. The
completion of the Company's initial public offering of common stock in March
1998 resulted in net proceeds of $5,583,000 and enhanced the Company's ability
to implement its business strategy. In connection with the completion of the
initial public offering, the Company automatically converted $9,520,000 of its
debt into 2,380,000 outstanding shares of common stock and 3,661,200 shares of
preferred stock into 1,482,766 outstanding shares of common stock. Additionally,
the Company utilized $2,524,000 of the net proceeds to repay certain notes
payable.
In order to fund store expansion during the fiscal year ended January 30,
1999 ("Fiscal 1998"), the Company utilized the remaining proceeds from the
initial public offering and secured a $10 million revolving line of credit with
Comerica Bank. With the above, the Company was able to achieve a 68 percent
increase in the number of its stores by adding 13 stores during the last nine
months of Fiscal 1998. Additionally, the Company added two stores during the
three months ended May 1, 1999 and three stores during the four weeks ended May
29, 1999 bringing it to a total of 37 stores. The Company plans to add 10 to 20
additional stores during the remainder of the fiscal year ending January 29,
2000 ("Fiscal 1999"). The Company's 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.
7
<PAGE> 8
Initial Capital Expenditures and Costs Associated with Expansion
The Company's strategy is to develop or acquire PAWNMART(SM) stores in
selected regional and local markets meeting required store size, configuration,
and site selection requirements. The Company believes that such anticipated
expansion will continue to provide economies of scale in supervision, purchasing
supplies and inventory, administration and marketing by decreasing the overall
average cost of such functions per unit owned. After a suitable 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. The
Company projects 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, the
Company expects to 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.
The Company will generally acquire stores in locations meeting its 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 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, the Company's
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 the
Company's ability to increase pawn loans during the first twelve months of
operations. A new store is generally unprofitable during its first eight to ten
months of operations due to the lack of pawn service charges associated with
pawn loans during that period. The Company's new stores experience substantially
higher levels of revenues and profitability after reaching two years of age. At
June 1, 1999, 18 of the Company's 37 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 the
Company's older stores.
An acquired store will generally mature faster than a new store due to an
established base of customers and the Company's ability to accelerate the
maturation of the store's pawn loan balances. The Company's profitability during
rapid expansion will be significantly impacted by its ability to acquire
existing stores meeting the Company's acquisition criteria. There can be no
assurance that future store revenues and store profitability will not vary from
historical amounts.
Selected elements of the Company's consolidated financial statements are
presented below for the three months ended May 1, 1999 and May 2, 1998,
respectively. The following table, as well as the discussion following, should
be read in conjunction with the Company's consolidated financial statements and
notes thereto and other financial data included in the Company's Form 10-K for
the fiscal year ended January 30, 1999.
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended
Operating statement items as a percent of May 1, May 2,
total revenues: 1999 1998
-------- --------
<S> <C> <C>
Merchandise sales ................................ 66.4% 69.5%
Pawn service charges ............................. 32.6 29.2
Other ............................................ 1.0 1.3
-------- --------
Total revenues ................................ 100.0 100.0
Cost of sales .................................... 47.2 46.3
-------- --------
Gross profit .................................. 52.8 53.7
-------- --------
Store operating expenses ......................... 40.3 39.8
-------- --------
Store contribution ............................ 12.5 13.9
Corporate administrative expenses ................ 15.8 28.6
Interest expense ................................. 4.5 30.5
Depreciation and amortization .................... 4.7 4.6
-------- --------
Net loss ...................................... (12.5)% (49.8)%
======== ========
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended May 1, 1999 Compared to Three Months Ended May 2, 1998
Total revenues increased 64.0% to $4,347,000 during the three months ended
May 1, 1999 (the "Three Month 1999 Period") as compared to $2,650,000 during the
three months ended May 2, 1998 (the "Three Month 1998 Period"). The overall
increase was attributable to a 26.2% increase in comparable store revenues at 19
stores open for twelve full months or more as of May 1, 1999 ("Comparable
Stores") and revenues from 15 stores added during the twelve months ended May 1,
1999 ("New Stores").
Merchandise sales increased 56.6% to $2,885,000 during the Three Month 1999
Period from $1,842,000 during the Three Month 1998 Period due to a 16.8%
increase in merchandise sales from Comparable Stores and merchandise sales from
New Stores. Average inventory per store for Comparable Stores increased 14.7%
from $125,000 at May 1, 1999 from $109,000 at May 2, 1998 primarily due to
continued improvement in the Company's lending operations which have increased
the levels of merchandise available for sale.
Pawn service charges increased 83.1% to $1,419,000 during the Three Month
1999 Period from $775,000 during the Three Month 1998 Period primarily due to a
49.7% increase in pawn service charges from Comparable Stores and pawn service
charges from New Stores. The increased pawn services charges from Comparable
Stores resulted primarily from pawn loans increasing 76.2% from $2,153,000 at
May 2, 1998 to $3,794,000 at May 1, 1999.
Gross profit as a percentage of total revenues decreased 0.9% from 53.7%
during the Three Month 1998 Period to 52.8% during the Three Month 1999 Period
primarily due to impacts attributable to New Stores which were offset by
improvements in the results of Comparable Stores. On a Comparable Store basis,
gross profit as a percentage of total revenues increased 0.3% from 53.7% during
the Three Month 1998 Period to 54.0% during the Three Month 1999 Period. The
Company's annualized inventory turnover rate was 2.4 times during Three Month
1999 Period and the Three Month 1998 Period. On a Comparable Store basis, the
Company's annualized inventory turnover rate increased from 2.4 times during the
Three Month 1998 Period compared to 2.9 times during the Three Month 1999
Period.
Store operating expenses increased 66.3% to $1,751,000 during the Three
Month 1999 Period from $1,053,000 during the Three Month 1998 Period primarily
due to expenses attributable to New Stores. On a Comparable Store basis, store
operating expenses comprised 33.2% of total revenues during the Three Month 1999
Period compared to 39.7% of total revenues during the Three Month 1998 Period.
The overall decrease in Comparable Store operating expenses as a percent of
total revenues resulted from the Company's ability to leverage store operating
expenses due to the 26.2% increase in Comparable Store revenues.
9
<PAGE> 10
Store contribution margin increased 47.3% to $545,000 during the Three
Month 1999 Period compared to $370,000 during the Three Month 1998 Period
primarily due to significant improvements in the profitability of the Company's
Comparable Stores which were offset by the effects of planned start-up losses at
New Stores. Excluding the effects of planned start-up losses, the Comparable
Store contribution margin increased 87.8% to $695,000 during the Three Month
1999 Period compared to $370,000 during the Three Month 1998 Period. The
following table presents an analysis of Comparable Store and New Store
performance for the Three Month 1999 Period compared to the Three Month 1998
Period.
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
May 1, 1999 May 2, 1998
----------------------------------------------------- --------------
Comparable
Comparable New Store/
Stores Stores Consolidated Consolidated
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Merchandise sales ............ $ 2,151 $ 734 $ 2,885 $ 1,842
Pawn service charges ......... 1,160 259 1,419 775
Other ........................ 32 11 43 33
-------------- -------------- -------------- --------------
Total revenues ............ 3,343 1,004 4,347 2,650
Cost of sales ................ 1,537 514 2,051 1,227
-------------- -------------- -------------- --------------
Gross profit .............. 1,806 490 2,296 1,423
Store operating expenses ..... 1,111 640 1,751 1,053
-------------- -------------- -------------- --------------
Store contribution ........ $ 695 $ (150) $ 545 $ 370
============== ============== ============== ==============
</TABLE>
Corporate administrative expenses decreased 9.4% to $688,000 during the
Three Month 1999 Period from $759,000 during the Three Month 1998 Period
primarily due to 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 on May 1, 1998 ("Non-Recurring Professional
Fees") which was offset by increased labor costs associated with (i) the hiring
of manager trainees to support store openings and (ii) the hiring of additional
corporate field and administrative personnel to support planned growth. Since
the Company added 15 stores during the twelve months ended May 1, 1999 and plans
to add additional stores during the fiscal year ending January 29, 2000,
management anticipates corporate administrative expenses to decrease as a
percentage of total revenues.
Interest expense decreased 75.6% to $197,000 during the Three Month 1999
Period from $809,000 during the Three Month 1998 Period. The Three 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 the Company's convertible subordinated debentures ("Non-Cash
Non-Recurring Interest Expense") and $313,000 in interest expense related to
debt that was either converted or repaid upon completion of the Company's
initial public offering ("Non-Recurring Interest Expense"). See note 6 to the
consolidated financial statements included in the Company's Form 10-K for the
year ended January 30, 1999 for a discussion of the accounting treatment
relating to the beneficial conversion feature associated with the Company's
convertible subordinated debentures. Interest expense during the Three Month
1999 Period was related to the Company's Credit Facility (as defined below), the
Company's 2004 Notes (as defined below), and other short-term borrowings.
During the Three Month 1998 Period, the Company recognized $674,000 in
noncash non-recurring preferred stock dividends resulting from the accounting
treatment relating to the beneficial conversion feature associated with its
convertible preferred stock and $18,000 in non-recurring preferred stock
dividends associated with its 12% Series D Convertible Exchangeable Preferred
stock (collectively, the "Non-Recurring Preferred Dividends"). See note 8 to the
consolidated financial statements included in the Company's Form 10-K for the
year ended January 30, 1999 for a discussion of the accounting treatment
relating to the beneficial conversion feature associated with the Company's
convertible preferred stock. All classes of the Company's preferred stock
converted to common stock upon completion of the Company's initial public
offering in March 1998.
10
<PAGE> 11
Net loss to common stockholders during the Three Month 1999 Period was
$542,000, or $0.08 per basic and diluted share, compared to $2,011,000, or $0.63
per basic and diluted share, during the Three Month 1998 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 Three Month 1998 Period would have been
$311,000, or $0.10 per basic and diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the completion of its initial public offering in March 1998, the
Company's operations were financed from funds generated from private debt and
equity offerings and funds generated from operations. In March 1998, the Company
received net proceeds of approximately $5,583,000 from the completion of its
initial public offering. In connection with the completion of the initial public
offering, $9,520,000 in aggregate principal amount of the Company's 14%
convertible subordinated debentures were automatically converted into 2,380,000
outstanding shares of Common Stock and all classes of the Company's preferred
stock were automatically converted into an aggregate of 1,482,766 outstanding
shares of Common Stock. Additionally, the Company utilized $2,524,000 of the net
proceeds to repay certain notes payable.
On October 13, 1998, the Company entered into a $10 million revolving
credit facility with Comerica Bank (the "Credit Facility"). At May 1, 1999,
$4,605,000 was outstanding under the Credit Facility and an additional
$1,225,000 was available to the Company pursuant to the available borrowing
base. The Credit Facility bears interest at either (i) the prevailing prime rate
plus 0.75%, which was 8.50% at May 1, 1999, 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 terms of
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 May 1, 1999. The Company
is required to pay an annual commitment fee of 1/2 of 1% on the average daily
unused portion of the Credit Facility commitment. The Company is prohibited from
paying cash dividends or acquiring treasury stock under the terms of the Credit
Facility.
At May 1, 1999, the Company's primary sources of liquidity were $1,024,000
in cash and cash equivalents, $536,000 in pawn service charges receivable,
$4,851,000 in pawn loans outstanding, $3,807,000 in inventories, and $1,225,000
of available and unused funds under the Company's Credit Facility. The Company
had a current ratio of approximately 13.2 to 1.0 and 5.8 to 1.0 at May 1, 1999
and January 30, 1999, respectively. Net cash used in operating activities was
$1,539,000 during the Three Month 1999 Period and $903,000 during the Three
Month 1998 Period.
The addition of Michael D. Record as President in September 1998 resulted
in a renewed focus on the Company's lending operations. As of May 1, 1999, total
pawn loans were $4,851,000, a 125.3% increase over the prior year, and
Comparable Store pawn loans were $3,794,000, a 76.2% increase over prior year.
The Company expects pawn loan balances to continue to increase during the fiscal
year ending January 29, 2000 and plans to fund such growth with cash flows from
operations, borrowings under the Credit Facility, and capital provided by a
public debt offering of the 2004 Notes (as defined below).
On March 11, 1999, the Company commenced a public offering of up to $10
million in principal amount of 12% Subordinated Notes due December 31, 2004 (the
"2004 Notes"). The 2004 Notes are being offered on a "best efforts" basis by
participating NASD Broker-Dealers. Interest on the 2004 Notes is payable monthly
commencing with the second full calendar month following issuance. At the option
of the Company, the 2004 Notes may be redeemed prior to December 31, 2004 at
stipulated redemption prices. The Company had issued a total of $3,912,000 and
$4,787,000 of the 2004 Notes as of May 1, 1999 and June 14, 1999, respectively.
11
<PAGE> 12
The Company believes its planned roll-out of PAWNMART(SM) stores will be
funded by borrowings under the Credit Facility, cash flows generated from its
established stores, net proceeds from the offering of the 2004 Notes, and future
debt or equity offerings. The Company's store expansion during Fiscal 1999 will
largely be dependent upon the amount of 2004 Notes sold. In the event the
Company is unable to sell the maximum subscription or additional financing
alternatives are not obtained, its planned Fiscal 1999 expansion schedule is
likely to be reduced or modified. No assurance can be made that the Company will
be able to sell the maximum subscription of 2004 Notes or obtain additional
financing.
RECENT ACCOUNTING PRONOUNCEMENTS
The following selected accounting pronouncements were issued during Fiscal
1998, but have not yet become effective, and are listed with the expected impact
on the Company.
FASB 133, Accounting for Derivative Instruments and Hedging Activities -
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivatives embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The statement is effective for fiscal periods beginning after
June 15, 1999. Since the Company does not use derivative instruments, the effect
of the implementation of this new pronouncement is not expected to have any
effect on the financial position or results of operations of the Company.
SOP 98-5, Reporting on the Costs of Start-Up Activities - This Statement of
Position requires that the costs of start-up activities, including
organizational costs, be expensed as incurred. SOP 98-5, effective for fiscal
years beginning after December 15, 1998, requires the initial application to be
recorded as of the beginning of the fiscal year in which the SOP is first
adopted and reported as a cumulative effect of a change in accounting principle.
The implementation of this new pronouncement did not have a significant effect
on the financial position or results of operations of the Company as there were
no capitalized start-up costs recorded at January 31, 1999 which required
write-off.
YEAR 2000 COMPLIANCE
The Year 2000 problem concerns the inability of information systems to
properly recognize date-sensitive information beyond December 31, 1999.
The Company is nearing completion of a project to bring its software and
systems into Year 2000 compliance in time to minimize any significant or
detrimental effects on its operations. The project covers information systems,
operating systems, other non-financial systems equipment and significant
third-party vendors. The Company has 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 May 1, 1999, the first
three levels have been substantially completed, except for third parties as
discussed below. The Company expects to complete the remaining levels by August
31, 1999.
The Company is applying the five level process to both its 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. The Company believes that it has identified the
internal business systems that are susceptible to system failures or processing
errors as a result of the Year 2000 problem.
12
<PAGE> 13
The Company's proprietary operating software system represents its 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 the Company's accounting applications, payroll, and other financial
software systems have represented that their products are Year 2000 compliant.
The Company has upgraded substantially all of its hardware to mitigate Year 2000
problems from affecting its operations and anticipates incurring approximately
$30,000 during the remaining portion of the fiscal year ending January 29, 2000
to bring existing hardware into compliance.
The Company is reviewing the critical third parties which provide services
or goods which are essential to its operations in order to determine the extent
to which the Company is 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 the Company is unable to
obtain satisfactory assurance that a critical third party provider has achieved
Year 2000 compliance, and the Company is unable to replace the provider with an
alternative provider, its operations could be adversely impacted.
Based on the current status of the five level Year 2000 process, the
Company does 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. With this in mind, management is developing contingency plans for
implementation in the event a significant third party vendor does not adequately
address the Year 2000 problem or unexpected problems occur in the Company's
operations. These plans primarily involve using backup sites, alternative
vendors or internal remediation. In the event of a Year 2000 problem, the
Company could likely suffer a number of operational inconveniences and
inefficiencies for both the Company and its customers that could divert
management's time and attention and financial and human resources from its
ordinary business activities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure relates to changes in interest
rates related to its long-term notes payable. The Company's revolving line of
credit with Comerica Bank bears interest at a variable rate that is frequently
adjusted on the basis of market rate changes and is equal to rates available for
debt with similar characteristics. Accordingly, management believes that the
carrying value of such debt approximates its fair value. The 2004 Notes bear
interest at a fixed rate of 12% per annum. As a result, the Company's only
interest rate risk is the opportunity loss associated with this debt should
interest rates decline for debt with similar characteristics. The aggregate
maturities of long-term notes payable as of May 1, 1999 are as follows:
Fiscal Years Ending January,
<TABLE>
<S> <C>
2000 $ 108
2001 -
2002 4,605
2003 -
2004 -
2005 3,912
---------------
Total $ 8,625
===============
</TABLE>
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 instruments.
13
<PAGE> 14
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number
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 Amendment to Warrant Agreement, Dated as of March 20,
1998 Between PawnMart, Inc. and Continental Stock Transfer &
Trust Company (6)
4.7 Indenture, Dated as of March 15, 1999 Between PawnMart, Inc. and
Trust Management, Inc., as Trustee, Relating to PawnMart, Inc.'s
12% Subordinated Notes Due 2004 (6)
4.8 Form of 12% Subordinated Note Due 2004 (included as part of
Exhibit 4.7 hereto)
4.9 Form of Broker-Dealer Selling Agreement (6)
4.10 Form of Subscription Escrow Agreement dated March 15, 1999
Between PawnMart, Inc., Massie Capital, Ltd. and Norwest Bank
Texas, N.A. (7)
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)
27.1 Financial Data Schedule as of May 1, 1999 (Filed in EDGAR version
only) (8)
-----------------------------------
(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).
14
<PAGE> 15
(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 as an Exhibit to the registrant's Registration Statement on
Form S-1, filed on January 15, 1999 (File No. 333-70635).
(6) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 1 to Form S-1, filed on February 24, 1999 (File No.
333-70635).
(7) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 2 to Form S-1, filed on March 10, 1999 (File No.
333-70635).
(8) Filed herewith.
(b) REPORTS ON FORM 8-K -
No reports on Form 8-K were filed by the Company during the quarter ended
May 1, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAWNMART, INC.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
By: /s/ Carson R. Thompson June 15, 1999 By: /s/ Thomas W. White June 15, 1999
----------------------- ------------- ------------------- -------------
Carson R. Thompson Date Thomas W. White Date
Chief Executive Officer, Director Senior Vice President
and Chairman of the Board Chief Financial Officer
</TABLE>
15
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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 Amendment to Warrant Agreement, Dated as of March 20,
1998 Between PawnMart, Inc. and Continental Stock Transfer &
Trust Company (6)
4.7 Indenture, Dated as of March 15, 1999 Between PawnMart, Inc. and
Trust Management, Inc., as Trustee, Relating to PawnMart, Inc.'s
12% Subordinated Notes Due 2004 (6)
4.8 Form of 12% Subordinated Note Due 2004 (included as part of
Exhibit 4.7 hereto)
4.9 Form of Broker-Dealer Selling Agreement (6)
4.10 Form of Subscription Escrow Agreement dated March 15, 1999
Between PawnMart, Inc., Massie Capital, Ltd. and Norwest Bank
Texas, N.A. (7)
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)
27.1 Financial Data Schedule as of May 1, 1999 (Filed in EDGAR version
only) (8)
</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 as an Exhibit to the registrant's Registration Statement on
Form S-1, filed on January 15, 1999 (File No. 333-70635).
(6) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 1 to Form S-1, filed on February 24, 1999 (File No.
333-70635).
(7) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 2 to Form S-1, filed on March 10, 1999 (File No.
333-70635).
(8) Filed herewith.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF PAWNMART, INC. AND SUBSIDIARIES
AS OF AND FOR THE THREE MONTHS ENDED MAY 1, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-END> MAY-01-1999
<CASH> 1,024,000
<SECURITIES> 0
<RECEIVABLES> 5,445,000
<ALLOWANCES> 0
<INVENTORY> 3,807,000
<CURRENT-ASSETS> 10,486,000
<PP&E> 4,322,000
<DEPRECIATION> (2,080,000)
<TOTAL-ASSETS> 13,675,000
<CURRENT-LIABILITIES> 793,000
<BONDS> 8,625,000
0
0
<COMMON> 72,000
<OTHER-SE> 4,293,000
<TOTAL-LIABILITY-AND-EQUITY> 13,675,000
<SALES> 2,885,000
<TOTAL-REVENUES> 4,347,000
<CGS> 2,051,000
<TOTAL-COSTS> 3,802,000
<OTHER-EXPENSES> 890,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 197,000
<INCOME-PRETAX> (542,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (542,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (542,000)
<EPS-BASIC> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
