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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended January 30, 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)
DELAWARE 75-2520896
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
301 COMMERCE STREET, SUITE 3600, FORT WORTH, TEXAS 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 335-7296
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
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COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANTS NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANTS NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates as of April
1, 1999 was approximately $14,944,000. Shares of common stock held by each
officer and director have been excluded in that such persons may be deemed to
be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of Common Stock outstanding as of April 1, 1999 was
7,209,445. The number of Series A Redeemable Common Stock Purchase Warrants
outstanding as of April 1, 1999 was 1,380,000. The number Series B Redeemable
Common Stock Purchase Warrants outstanding as of April 1, 1999 was 1,380,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to the Annual
Meeting of Stockholders for the fiscal year ended January 30, 1999, are
incorporated by reference in Part III of this Form 10-K.
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PAWNMART, INC.
Form 10-K Annual Report
for the Fiscal Year Ended January 30, 1999
Table of Contents
<TABLE>
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PART I
<S> <C> <C>
Item 1 Business................................................................................... 1
Item 2 Properties................................................................................. 7
Item 3 Legal Proceedings.......................................................................... 8
Item 4 Submission of Matters to a Vote of Security Holders........................................ 8
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters ..................... 8
Item 6 Selected Financial Data.................................................................... 9
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations ..... 10
Item 7A Quantitative and Qualitative Disclosures About Market Risk ................................ 20
Item 8 Consolidated Financial Statements.......................................................... 20
Item 9 Changes In and Disagreements With Accountants on Accounting and Financial Disclosure....... 40
PART III
Item 10 Directors and Executive Officers of the Registrant......................................... 40
Item 11 Executive Compensation..................................................................... 40
Item 12 Security Ownership of Certain Beneficial Owners and Management ............................ 40
Item 13 Certain Relationships and Related Transactions............................................. 40
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......................... 40
Signatures ........................................................................................... 42
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains certain statements that are
"forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans," or "anticipates" or
the negative thereof, or other variations thereon, or comparable terminology,
or by discussions of strategy. Such statements include, but are not limited to,
the discussions of the Company's operations, liquidity, and capital resources.
Forward-looking statements are included under the captions "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations Liquidity and Capital Resources," and "Item 1. Business." Although
the Company believes that the expectations reflected in forward-looking
statements are reasonable, there can be no assurances that such expectations
will prove to be accurate. Generally, these statements relate to business
plans, strategies, anticipated strategies, levels of capital expenditures,
liquidity and anticipated capital funding needed to effect the business plan.
All phases of the Company's operations are subject to a number of
uncertainties, risks and other influences, many of which are outside the
control of the Company and cannot be predicted with any degree of accuracy.
Factors such as changes in regional or national economic conditions, changes in
governmental regulations, unforeseen litigation, changes in interest rates or
tax rates, significant changes in the prevailing market price of gold, future
business decisions and other uncertainties may cause results to differ
materially from those anticipated by some of the statements made in this
report. In light of the significant uncertainties inherent in the
forward-looking statements made in this Annual Report on Form 10-K, the
inclusion of such statements should not be regarded as a representation by the
Company or any other person that the objectives and plans of the Company will
be achieved. Security holders are cautioned that such forward-looking
statements involve risks and uncertainties. Such risks, uncertainties and other
factors, include, but are not limited to, those set forth herein under the
caption "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" and appearing elsewhere in this Annual Report on
Form 10-K and appearing from time to time in filings made by the Company with
the Securities and Exchange Commission. The forward-looking statements
contained in this report speak only as of the date of this Annual Report on
Form 10-K and the Company expressly disclaims any obligation or undertaking to
release any updates or revisions to any such statement to reflect any change in
the Company's expectations or any change in events, conditions or circumstance
on which any such statement is based.
GENERAL
PawnMart, Inc. (the "Company") was incorporated under the laws of the
State of Delaware on January 13, 1994 and began operations under the name
"Pawnco, Inc." On June 14, 1994, the Company changed its name to PCI Capital
Corporation and conducted business under the trade name "PAWNMART(SM)." On
October 21, 1997, the Company changed its name to "PawnMart, Inc." As of April
1, 1999, the Company was one of five publicly traded pawnshop operators in the
United States, and owned and operated 33 stores located in Alabama, Georgia,
North Carolina, South Carolina and Texas. The Company's principal office is
located at 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102 and its
telephone number is (817) 335-7296.
The Company is a 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.
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From its inception in January 1994 through March 1998, the Company opened
19 stores with the capital provided by a series of private placements of
preferred stock and debt securities. In March 1998, the Company completed an
initial public offering of 1,365,000 shares of Common Stock, $0.01 par value
("Common Stock"), 1,380,000 Series A Redeemable Common Stock Purchase Warrants
("Series A Warrants"), and 1,380,000 Series B Redeemable Common Stock Purchase
Warrants ("Series B Warrants") resulting in total net proceeds of approximately
$5,583,000. 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.
The Company's expansion plans for the fiscal year ended January 30, 1999
("Fiscal 1998") called for the addition of 12 to 15 stores. In order to fund
this expansion, 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. The completion of the initial public offering and the
finalization of the revolving line of credit have enhanced the Company's
ability to implement its business strategy.
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, North
Carolina, Oklahoma, South Carolina, Tennessee, and Texas. The industry is
highly fragmented, with approximately 94 percent of the approximately 13,000
stores in the United States owned by "mom and pop" operators and approximately
6 percent owned by five public companies.
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. 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.
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. 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 appeal to 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.
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:
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o 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 finance and
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."
o Market Positioning Strategy. The Company's strategy is to operate
attractive stores that are clean, well-lit and conveniently located,
with merchandise displayed in an organized and easy-to-shop manner,
similar to national discount stores. The Company's store design and
layout specifically target both its borrowing and retail customers.
o Utilize Targeted Database Marketing. The Company has developed a
targeted database marketing segmentation system that identifies the
customers for both pawn and product sales from proprietary data
collected at the store level. Given this customer information, the
Company has developed a marketing strategy that seeks to leverage its
understanding of customer demographics, motivations and purchasing
behavior. This demographic data will be utilized for customer
acquisition, retention and promotions, store site selection, and for
developing in-store promotions.
o Expand in Metropolitan Areas in States with Favorable Pawn
Regulations. The Company's roll-out strategy is to generate operating
efficiencies in supervision, administration, purchasing and marketing
by first expanding in the metropolitan areas surrounding its existing
stores, and thereafter, in metropolitan areas in states with
favorable pawn regulations.
o Utilize Information Technology. The Company has developed
PAWNLINK(TM), a proprietary software system, which is connected to a
"wide area network" that allows for real-time point of sale
connectivity. PAWNLINK(TM) is a user friendly, menu driven software
package that operates in a Windows 95/98TM environment. PAWNLINK(TM)
interfaces with the Company's centralized database, assists in
determining the amount of funds to advance on any particular pawn
item, and provides in-store assistance with operational and sales
management, inventory control and accounting.
o Operational Excellence. The Company believes that its success will be
substantially dependent on its ability to achieve excellence in
operating its stores. In this regard, the Company intends to
capitalize upon the operational expertise of its experienced
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.
STORE OPERATIONS
Lending Operations
The Company is a specialty finance and 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 pawn 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.
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At the time a pawn transaction is entered into, a pawn loan agreement,
commonly referred to as a pawn ticket, is delivered to the borrower that sets
forth, among other items, the name and address of the pawnshop and the pledgor,
the pledgor's identification number from his or her driver's license or other
approved identification, the date, the identification and description of the
pledged goods, including applicable serial numbers, the amount financed, the
finance and service charge, the maturity date, the total amount that must be
paid to redeem the pledged goods on the maturity date and the annual percentage
rate.
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. The statutory service charges on
loans at the Company's stores range from 12% to 300% on an annualized basis
depending upon individual state regulations and the amount of the pawn loan.
Pawn service charges contributed to 30.5%, 28.1%, and 29.0% of the Company's
total revenues during Fiscal 1998, the fiscal year ended January 31, 1998
("Fiscal 1997"), and the fiscal year ended January 26, 1997 ("Fiscal 1996"),
respectively. At January 30, 1999, the Company had approximately 40,000
outstanding pawn loans totaling $4,419,000, for an average of $110 per advance.
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 pawn 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 pawn 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 pawn loan is
not repaid or from individual customers or other sources. Merchandise sales
contributed to 68.5%, 70.9%, and 69.9% of the Company's total revenues during
Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. The Company realized
gross profit margins on merchandise sales of 31.0%, 28.0%, and 32.3% during
Fiscal 1998, Fiscal 1997, and Fiscal 1996, respectively. During Fiscal 1998,
$6,701,000 of products were added to inventory, of which $4,465,000 was from
pawn loans not repaid and $2,236,000 was purchased from customers, vendors and
through other acquisitions.
The Company provides its customers with a 30-day guarantee on pre-owned
products, providing the customer with an exchange or cash refund. The Company
believes that most pawnshops do not offer this type of guarantee. 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 ranging from 10% to 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 January 30, 1999 and January
31, 1998, total merchandise held for resale was $3,011,000 and $1,944,000,
respectively, after reduction for a valuation allowance of $141,000 and
$160,000, respectively.
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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 10 stores. At April 1, 1999, the
Company had established six operating districts, each of which was managed by a
District Manager.
Trade Name
The Company operates its stores under the trade name "PAWNMART(SM)." The
Company has registered the "PAWNMART(SM)" marks and descriptive logos and
phrases with the United States Patent and Trademark Office.
Personnel
As of April 1, 1999, the Company had a total of 193 employees (of which 15
were in executive, administrative, clerical and accounting functions), 106 of
whom were salaried and 87 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. The Company
maintains a performance-based compensation plan for all store employees, based
on, among other factors, profitability and special promotional contests. None
of the Company's employees are covered by collective bargaining agreements. The
Company considers its employee relations to be satisfactory.
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 Financial
Services, 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.
In addition, the Company faces competition in the acquisition of existing
stores. Several competing pawnshop companies have implemented expansion and
acquisition programs. There can be no assurance that the Company will be more
successful than its competitors in pursuing acquisition opportunities and
leases for attractive start-up locations. Increased competition could also
increase prices for attractive acquisition candidates.
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 approximately every 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.
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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 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.
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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.
ITEM 2. PROPERTIES
The Company's corporate offices are leased under a five year lease
expiring on May 31, 1999. At April 1, 1999, the Company operated 33 leased
store locations with monthly rental payments ranging from $1,260 to $6,800 per
location and having initial lease terms expiring from May 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 1,500
to 13,000 square feet. With the exception of the location in Weatherford,
Texas, the Company leases all of these properties from unaffiliated third
parties. See "Item 13. 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 April 1, 1999.
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<TABLE>
<CAPTION>
Number of Stores
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Georgia:
Atlanta Metropolitan Area........................................................................... 19
Dalton.............................................................................................. 1
Rome................................................................................................ 1
Calhoun............................................................................................. 1
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Total Georgia.................................................................................. 22
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Alabama:
Mobile............................................................................................. 4
Dothan............................................................................................. 1
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Total Alabama................................................................................. 5
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North Carolina:
Charlotte.......................................................................................... 2
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Total North Carolina........................................................................... 2
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South Carolina:
Greenville Metropolitan Area....................................................................... 2
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Total South Carolina........................................................................... 2
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Texas:
Burleson............................................................................................ 1
Weatherford........................................................................................ 1
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Total Texas.................................................................................... 2
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Total.......................................................................................... 33
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</TABLE>
The Company considers is equipment, furniture and fixtures and leased
buildings to be in good condition. The Company's leases typically require the
Company to pay all maintenance costs, insurance costs and property taxes.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits encountered in the ordinary
course of its business. Certain of these matters are covered to an extent by
insurance. In the opinion of management, the resolution of these matters will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during
the fourth quarter of Fiscal 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On March 17, 1998, the Company's Common Stock began trading on the Nasdaq
SmallCap Market ("NASDAQ") under the symbol of "PMRT" and on the Boston Stock
Exchange under the symbol of "PWT". The following table sets forth the high and
low sales prices per share of Common Stock as reported by NASDAQ during Fiscal
1998:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
First Quarter................ $5.88 $4.00
Second Quarter............... 4.50 3.13
Third Quarter................ 3.50 1.50
Fourth Quarter............... 3.81 1.31
</TABLE>
8
<PAGE> 11
As of April 1, 1999, the Company had approximately 1,000 stockholders of
record. To date, the Company has not declared or paid any cash dividends on its
Common Stock, and the present policy of the Board of Directors is to retain any
earnings to provide for the Company's growth. The Company's revolving line of
credit agreement and subordinated note indenture prohibit the payment of any
cash dividends. Any future determination to pay dividends will be at the
discretion of the Board of Directors, and dependent upon the Company's
consolidated financial position, results of operations, capital requirements
and such other factors as the Board of Directors deems relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates
indicated, selected historical financial data of the Company. The information
should be read in conjunction with "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Item 8.
Consolidated Financial Statements" and the notes thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------------
January 30, January 31, January 26, January 28, January 29,
1999 1998 1997 1996 1995
----------- ---------- ---------- ---------- -----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Pawn Service Charges .................................. $ 3,636 $ 2,862 $ 2,291 $ 1,338 $ 363
Merchandise Sales ..................................... 8,170 7,215 5,523 3,052 941
Other Income .......................................... 129 101 89 34 2
---------- ---------- ---------- ---------- ----------
Total Revenues ................................... 11,935 10,178 7,903 4,424 1,306
Cost of Sales ......................................... 5,634 5,192 3,739 1,942 553
---------- ---------- ---------- ---------- ----------
Gross Profit ..................................... 6,301 4,986 4,164 2,482 753
Store Operating Expenses .............................. 5,326 4,040 3,652 2,626 1,000
Corporate Administrative Expenses ..................... 3,074 2,117 1,713 1,589 1,118
Interest Expense ...................................... 996 3,761 1,360 720 62
Depreciation and Amortization ......................... 618 504 495 375 198
---------- ---------- ---------- ---------- ----------
Net Loss ......................................... (3,713) (5,436) (3,056) (2,828) (1,625)
Preferred Stock Dividends ............................. 692 217 -- -- --
---------- ---------- ---------- ---------- ----------
Net Loss to Common Stockholders .................. $ (4,405) $ (5,653) $ (3,056) $ (2,828) $ (1,625)
========== ========== ========== ========== ==========
Basic and Diluted Loss Per Common Share .......... $ (0.68) $ (3.01) $ (1.67) $ (1.68) $ (1.02)
========== ========== ========== ========== ==========
OTHER DATA:
Locations in Operation:
Beginning of Period ................................ 19 19 17 7 --
Acquisitions ....................................... 3 -- 1 -- 1
Opened ............................................. 10 -- 1 10 6
---------- ---------- ---------- ---------- ----------
End of Period ...................................... 32 19 19 17 7
========== ========== ========== ========== ==========
Average Age of Stores - End of Period ................. 2.35 years 2.78 years 1.77 years .93 years .61 years
Average Loans Per Location ............................ $ 138 $ 127 $ 117 $ 85 $ 82
Average Loans Per Location - Comparable Stores (1) .... $ 194 $ 127 $ 117 -- --
Average Inventory Per Location ........................ $ 94 $ 102 $ 104 $ 88 $ 80
Average Inventory Per Location - Comparable Stores (1). $ 101 $ 102 $ 104 -- --
Annualized Inventory Turnover ......................... 2.4x 2.5x 2.3x 1.9x 2.0x
BALANCE SHEET DATA - END OF PERIOD:
Loans ................................................. $ 4,419 $ 2,421 $ 2,227 $ 1,447 $ 571
Inventories, Net ...................................... 3,011 1,944 1,971 1,490 560
Working Capital ....................................... 6,988 1,758 2,148 2,251 225
Total Assets .......................................... 11,192 6,677 6,474 5,249 2,445
Long-Term Notes Payable, Net of Current Installments .. 4,840 9,778 8,288 5,445 866
Stockholders' Equity (Deficit) ........................ 4,907 (6,222) (4,278) (1,274) 422
</TABLE>
- ---------------
(1) Data provided only for comparable stores at January 30, 1999 (19 stores).
9
<PAGE> 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's store growth through January 31, 1998 was funded primarily
through a series of debt offerings and convertible preferred stock offerings.
With the net proceeds from such offerings, the Company added seven, ten and two
stores during the fiscal years ended January 29, 1995, January 28, 1996 and
January 26, 1997, respectively. During Fiscal 1997, management devoted
substantially all its resources to restructuring the balance sheet and capital
structure and completing the initial public offering of its common stock. See
"Item 1. Business - General". The completion of the initial public offering in
March 1998 resulted in a significant financial restructuring of the capital
structure which dramatically improved the Company's consolidated balance sheet
and its interest and dividend requirements.
Since the Company's inception in January 1994, profitability has been
significantly impacted by two factors: interest expense associated with
outstanding indebtedness and development of the infrastructure necessary to
support rapid growth. The Company converted or repaid substantially all
outstanding indebtedness as a result of its 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 the
Company's 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 corporate administrative expenses
as a percentage of total revenues.
During Fiscal 1998, the Company added 13 stores bringing the total to 32
stores. 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. The Company believes 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
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 does not capitalize start-up losses and does not recognize pawn service
charges on defaulted loans.
10
<PAGE> 13
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 six to eight
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 January 30, 1999, 13 of the Company's 32 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 other 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 Fiscal 1998, Fiscal 1997, and Fiscal 1996. The following
table, as well as the discussion following, should be read in conjunction with
"Item 6. Selected Financial Data" and "Item 8. Consolidated Financial
Statements" and the notes thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended
-----------------------------------------
January 30, January 31, January 26,
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Income statement items as a percent of
total revenues:
Merchandise sales ...................................... 68.5% 70.9% 69.9%
Pawn service charges ................................... 30.5 28.1 29.0
Other .................................................. 1.0 1.0 1.1
--------- --------- ---------
Total revenues ...................................... 100.0 100.0 100.0
Cost of sales .......................................... 47.2 51.0 47.3
--------- --------- ---------
Gross profit ........................................ 52.8 49.0 52.7
--------- --------- ---------
Store operating expenses ............................... 44.6 39.7 46.2
--------- --------- ---------
Store contribution .................................. 8.2 9.3 6.5
Interest expense ....................................... 8.3 36.9 17.2
Depreciation and amortization .......................... 5.2 5.0 6.3
Corporate administrative expenses ...................... 25.8 20.8 21.7
--------- --------- ---------
Net loss ............................................ (31.1)% (53.4)% (38.7)%
========= ========= =========
</TABLE>
RESULTS OF OPERATIONS
Fiscal 1998 Compared to Fiscal 1997
Total revenues increased 17.3% to $11,935,000 during Fiscal 1998 as
compared to $10,178,000 during Fiscal 1997. The overall increase was
attributable to a 7.8% increase in comparable store revenues at stores opened
12 months or more as of January 30, 1999 ("Fiscal 1998 Comparable Stores") and
revenues from 13 stores added during Fiscal 1998.
11
<PAGE> 14
Merchandise sales increased 13.2% to $8,170,000 during Fiscal 1998 from
$7,215,000 during Fiscal 1997 due to a 3.2% increase in merchandise sales from
Fiscal 1998 Comparable Stores and merchandise sales from 13 stores added during
Fiscal 1998. Average inventory per store for Fiscal 1998 Comparable Stores
decreased from $102,000 at January 31, 1998 to $101,000 at January 30, 1999.
Pawn service charges increased 27.0% to $3,636,000 during Fiscal 1998 from
$2,862,000 during Fiscal 1997 primarily due to a 20.2% increase in pawn service
charges from Fiscal 1998 Comparable Stores and pawn service charges from 13
stores added during Fiscal 1998. The increased pawn services charges from
Fiscal 1998 Comparable Stores results primarily from pawn loans increasing
52.3% from $2,421,000 at January 31, 1998 to $3,686,000 at January 30, 1999.
Gross profit as a percentage of total revenues increased 3.8% from 49.0%
during Fiscal 1997 to 52.8% during Fiscal 1998 primarily due to improvements in
shrinkage, an uninsured theft at one of the Company's stores during February
1997, and the recording of inventory valuation allowances at January 31, 1998
which were offset by the effect of 13 stores added during Fiscal 1998. On a
Fiscal 1998 Comparable Store basis, gross profit as a percentage of total
revenues increased 4.4% from 49.0% during Fiscal 1997 to 53.4% during Fiscal
1998. Excluding the uninsured theft at one of its stores during February 1997,
the Company's annualized inventory turnover rate was 2.4 times during Fiscal
1998 compared to 2.5 times during Fiscal 1997. Casualty insurance, including
burglary coverage, is currently maintained for each of the Company's stores,
and fidelity bond coverage is maintained on each of the Company's employees.
Store operating expenses increased 31.8% to $5,326,000 during Fiscal 1998
from $4,040,000 during Fiscal 1997 primarily due to expenses attributable to 13
stores added during Fiscal 1998, increased labor at Fiscal 1998 Comparable
Stores to support increased store activity, and increased advertising expenses.
On a Fiscal 1998 Comparable Store basis, store operating expenses comprised
40.6% of total revenues during Fiscal 1998 compared to 39.7% of total revenues
during Fiscal 1997.
Store contribution margin increased 3.1% to $975,000 during Fiscal 1998
compared to $946,000 during Fiscal 1997 primarily due to significant
improvements in the profitability of Fiscal 1998 Comparable Stores which were
offset by the effects of planned start-up losses at 13 stores added during
Fiscal 1998. Excluding the effects of planned start-up losses, the Fiscal 1998
Comparable Store contribution margin increased 49.2% to $1,411,000 during
Fiscal 1998 compared to $946,000 during Fiscal 1997. The following table
presents an analysis of Fiscal 1998 Comparable Store and new store performance
for Fiscal 1998 compared to Fiscal 1997.
<TABLE>
<CAPTION>
Fiscal 1998 Fiscal 1997
---------------------------------------- ------------
Fiscal 1998
Comparable New
Stores Stores Consolidated Consolidated
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Merchandise sales ........... $ 7,447 $ 723 $ 8,170 $ 7,215
Pawn service charges ........ 3,440 196 3,636 2,862
Other ....................... 88 41 129 101
---------- ---------- ---------- ----------
Total revenues ........... 10,975 960 11,935 10,178
Cost of sales ............... 5,113 521 5,634 5,192
---------- ---------- ---------- ----------
Gross profit ............. 5,862 439 6,301 4,986
Store operating expenses .... 4,451 875 5,326 4,040
========== ========== ========== ==========
Store contribution ....... $ 1,411 $ (436) $ 975 $ 946
========== ========== ========== ==========
</TABLE>
12
<PAGE> 15
Corporate administrative expenses increased 45.2% to $3,074,000 during
Fiscal 1998 from $2,117,000 during Fiscal 1997 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 the
Company added 13 stores during Fiscal 1998 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 73.5% to $996,000 during Fiscal 1998 from
$3,761,000 during Fiscal 1997. Fiscal 1998 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 for the
year ended January 30, 1999 included under "Item 8. Consolidated Financial
Statements" for a discussion of the accounting treatment relating to the
beneficial conversion feature associated with the Company's convertible
subordinated debentures. Fiscal 1997 included $3,742,000 in Non-Recurring
Interest Expense.
During Fiscal 1998, 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 for the year ended January 30, 1999 included
under "Item 8. Consolidated Financial Statements" for a discussion of the
accounting treatment relating to the beneficial conversion feature associated
with the Company's convertible preferred stock. Fiscal 1997 included $217,000
in Non-Recurring Preferred Dividends.
Net loss to common stockholders during Fiscal 1998 was $4,405,000, or
$0.68 per basic and diluted share, compared to $5,653,000, or $3.01 per basic
and diluted share, during Fiscal 1997. 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
Fiscal 1998 would have been $2,705,000, or $0.42 per basic and diluted share,
compared to $1,694,000, or $0.90 per basic and diluted share, during Fiscal
1997.
At January 30, 1999, the Company's accumulated net operating loss
carryforwards for tax purposes were approximately $12,503,000. Such amounts are
available to offset future federal taxable income, if any, through 2019.
Fiscal 1997 Compared to Fiscal 1996
Total revenues increased 28.8% to $10,178,000 during Fiscal 1997 as
compared to $7,903,000 during Fiscal 1996. The overall increase was
attributable to a 24.1% increase in comparable store revenues at stores opened
12 months or more as of January 31, 1998 ("Fiscal 1997 Comparable Stores") and
revenues from two stores added during Fiscal 1996.
Merchandise sales increased 30.6% to $7,215,000 during Fiscal 1997 from
$5,523,000 during Fiscal 1996 due to a 26.1% increase in merchandise sales from
Fiscal 1997 Comparable Stores and merchandise sales from two stores added
during Fiscal 1996. Average inventory per store decreased from $104,000 at
January 26, 1997 to $102,000 at January 31, 1998.
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. The overall
increase was attributable to a 19.7% increase in pawn service charges from
Fiscal 1997 Comparable Stores and pawn service charges from two stores added
during Fiscal 1996. The Company expects that, during the first four years of
operation, a store should experience significant increases in loan activity
resulting in a higher number of loans being renewed or redeemed, causing pawn
service charges to increase as a percentage of loans outstanding.
13
<PAGE> 16
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 sell older inventory, an uninsured theft at one of the Company's
stores during February 1997 and allowances provided for shrinkage and valuation
based on management's evaluation of inventories on hand. The Company's
annualized inventory turnover rate was 2.5 times during Fiscal 1997 compared to
2.3 times during Fiscal 1996 primarily due to increased store traffic and a
conscious effort to sell older inventory.
Store 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 Fiscal
1997 Comparable Stores to support increased store activity and the addition of
two 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 Fiscal 1997 Comparable Store
merchandise 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 Fiscal
1997 Comparable Store merchandise sales and pawn service charges which were not
offset by corresponding increases in store operating expenses.
Interest expense increased 176.5% 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 associated with the Company's convertible subordinated debentures and
increases in the aggregate outstanding principal amount of convertible
subordinated debentures. See note 6 to the consolidated financial statements
for the year ended January 30, 1999 included under "Item 8. Consolidated
Financial Statements" for a discussion of the accounting treatment relating to
the beneficial conversion feature associated with the Company's convertible
subordinated debentures.
Corporate 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 the Company's comprehensive insurance
package, (iv) and increased professional fees associated with human resource
development, the preparation of the Company's franchise offering circular and
fees associated with the preparation of tax returns. However, administrative
expenses decreased to 20.8% of total revenues during Fiscal 1997 compared to
21.7% during Fiscal 1996 primarily resulting from significant increases in
comparable store merchandise sales and pawn service charges discussed above.
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. See "Item 1. Business - General." 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.
14
<PAGE> 17
On October 13, 1998, the Company entered into a $10 million revolving
credit facility with Comerica Bank (the "Credit Facility"). At January 30,
1999, $4,840,000 was outstanding under the Credit Facility and an additional
$175,000 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 8.75% at January 30, 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 January 30, 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 January 30, 1999, the Company's primary sources of liquidity were
$298,000 in cash and cash equivalents, $446,000 in pawn service charges
receivable, $4,419,000 in pawn loans outstanding, $3,011,000 in inventories,
and $175,000 of available and unused funds under the Company's Credit Facility.
The Company had a current ratio of approximately 5.8 to 1.0 and 1.6 to 1.0 at
January 30, 1999 and January 31, 1998, respectively. Net cash used in operating
activities was $3,635,000 during Fiscal 1998 and $3,308,000 during Fiscal 1997.
The Company's profitability and liquidity is affected by the amount of
loans outstanding, which is controlled in part by the Company's loaning
decisions. The Company is able to influence the frequency of forfeiture of
collateral by increasing or decreasing the amount loaned in relation to the
sales value of the pledged property. Tighter credit decisions generally result
in smaller loans in relation to the estimated sales value of the pledged
property and can thereby decrease the Company's aggregate loan balance and,
consequently, decrease pawn service charges. Additionally, lower loans in
relation to the pledged property's estimated sales value tend to slightly
increase loan redemptions and improve the Company's liquidity. Conversely,
providing higher loans in relation to the estimated sales value of the pledged
property can result in an increase in the Company's pawn service charge income.
Higher average loan balances can also result in a slight increase in loan
forfeitures, which increases the quantity of goods on hand and, unless the
Company increases inventory turnover, reduces the Company's liquidity. In
addition to these factors, liquidity is also affected by merchandise sales and
the pace of store expansion.
.
The addition of Michael D. Record as President in September 1998 resulted
in a renewed focus on the Company's lending operations. During Fiscal 1998,
pawn loans increased $1,998,000 or 82.5% due to a $1,265,000 or 52.3% increase
in Fiscal 1998 Comparable Store pawn loans and a $733,000 increase in pawn
loans at 13 stores opened during Fiscal 1998. 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 with a minimum subscription of $250,000.
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. As
of April 27, 1999, $3,817,000 of the 2004 Notes had been issued.
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. In addition to factors noted under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Factors That Could Affect Future Performance," the Company's store
expansion during the fiscal year ending January 29, 2000 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 fiscal 1999 expansion schedule could 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.
15
<PAGE> 18
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 is not expected to have
a significant effect on the financial position or results of operations of the
Company.
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 has begun a project to bring 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 January 30, 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 June
30, 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.
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 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.
16
<PAGE> 19
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.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
Lack Of Profitability, Expected Losses During Roll-Out Phase
From its inception on January 13, 1994 through January 30, 1999, the
Company has experienced aggregate losses of $16,687,000. Further, a key element
of the Company's strategy consists of developing multiple PAWNMART(SM) stores
meeting the Company's required store size, configuration, and site selection
requirements in regional and local markets. This strategy is likely to result
in continued net losses during the Company's roll-out phase due to start-up
losses associated with the anticipated high number of new stores. Results of
operations in the future will be influenced by numerous factors including,
among others, the number of new store expansions, the Company's ability to
manage its growth and maintain the quality of its personnel, and the ability of
the Company to implement its strategic plan.
Substantial Leverage; Ability to Service Debt
At January 30, 1999, the Company had total long-term indebtedness of
$4,840,000. In addition, the Company is currently offering up to $10 million of
2004 Notes on a "best efforts" basis. At April 27, 1999, the Company had
$3,817,000 of 2004 Notes outstanding. The degree to which the Company is
leveraged could have adverse consequences to holders of the debt, including the
following: (i) substantial cash flow from the Company's operations will be
required for the payment of principal and interest on its indebtedness and will
not be available for other purposes; (ii) the Company's ability to obtain
additional financing in the future, whether for capital expenditures, further
development, refinancings or otherwise, may be impaired; (iii) the Company may
be more leveraged than certain of its competitors, which may place it at a
competitive disadvantage; and (iv) the Company's high degree of leverage makes
it more vulnerable to changes in economic conditions and may limit the
Company's ability to withstand competitive pressures and capitalize on
significant business opportunities.
The Company expects to repay its indebtedness with either (i) cash flows
from operations, (ii) proceeds from the issuance of additional equity or debt
securities, (iii) refinancing, (iv) proceeds from the exercise of the Series A
Warrants, or (v) the sale of certain assets. The Company will require
substantial cash flows to meet its interest payment obligations with respect to
its indebtedness. The Company's cash flow is dependent on its future
performance and is subject to financial, economic and other factors, some of
which are beyond the Company's control. Since the Credit Facility bears
interest at a floating rate, the Company is sensitive to any increase in
prevailing interest rates. The Company believes that, based upon anticipated
levels of operations, it should be able to meet its debt service obligations
when due. If the Company is unable to generate such cash flow from operations
to satisfy its interest obligations, the Company 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 the Company.
17
<PAGE> 20
Inability to Sell Maximum Subscription of 2004 Notes
Although the Company is offering up to $10 million in 2004 Notes on a
"best efforts" basis, there are no assurances that the maximum offering amount
will be subscribed. The Company's store expansion during the fiscal year ending
January 29, 2000 will largely be dependent upon the number of 2004 Notes sold.
In the event the Company is unable to sell the maximum subscription or
additional financing alternatives are not obtained, the Company's fiscal 1999
expansion schedule could be reduced or modified.
Liquidity
Although the Company has entered into the $10 million Credit Facility,
there are no assurances that the Company's cash and cash equivalents on hand
and its cash availability will be sufficient to meet the Company's anticipated
working capital needs and capital expenditures in the future. To finance future
expenditures, the Company may need to issue additional securities or incur
additional debt. The Company 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 the Company's operating results and anticipated growth in future
periods.
Management of Growth
The Company plans to expand its business through a roll-out of PAWNMART(SM)
stores. To a significant extent, the Company's future success will be dependent
upon its ability to engage in a successful expansion program and will be
dependent, in part, upon its ability to secure suitable sites for its new
stores, obtain adequate inventory for its new stores, maintain adequate
financial controls and reporting systems to manage a larger operation, and to
obtain additional capital upon favorable terms. There can be no assurance that
the Company will be able to successfully implement its planned expansion,
finance its growth or manage the resulting larger operation.
Availability of Qualified Store Management Personnel
The Company's ability to expand may also be limited by the availability of
qualified store management personnel. While the Company seeks to train existing
qualified personnel for management positions and to create attractive
compensation packages to retain existing management personnel, there can be no
assurance that sufficient qualified personnel will be available to satisfy the
Company's needs with respect to its planned expansion.
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 of the Company's competitors, including Cash America
International, Inc., First Cash Financial Services, Inc., and EZCORP, Inc.,
have greater financial resources. These competitive conditions may adversely
affect the Company's revenues, profitability and ability to expand.
In addition, the Company faces competition in the acquisition of existing
stores. Several competing pawnshop companies have implemented expansion and
acquisition programs. There can be no assurance that the Company will be more
successful than its competitors in pursuing acquisition opportunities and
leases for attractive start-up locations. Increased competition could also
increase prices for attractive acquisition candidates.
18
<PAGE> 21
Government Regulation
The Company's lending operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations. These statutes prescribe, among other things,
service charges a pawnshop may charge for lending money and the rules of
conduct that govern an entity's ability to maintain a pawnshop license. With
respect to firearm and ammunition sales, a pawnshop must comply with the
regulations promulgated by the United States Department of the Treasury-Bureau
of Alcohol, Tobacco and Firearms. Governmental regulators have broad
discretionary authority to refuse to grant a license or to suspend or revoke
any or all existing licenses of licensees under common control if it is
determined that any such licensee has violated any law or regulation or that
the management of any such licensee is not suitable to operate pawnshops. In
addition, there can be no assurance that additional state or federal statutes
or regulations will not be enacted at some future date which could inhibit the
Company's ability to expand, significantly decrease the service charges the
Company can charge for lending money, or prohibit or more stringently regulate
the sale of certain goods, such as firearms, any of which could significantly
adversely affect the Company's prospects. The Company's ability to open new
stores in other states could be affected by the enactment of state or local
legislation, similar to current Texas legislation, which requires a finding of
public need and probable profitability by the Texas Consumer Credit
Commissioner as a condition to the issuance or activation of any new pawnshop
license in Texas counties having a population of more than 250,000. In
addition, the present statutory and regulatory environment of some states
renders expansion into those states impractical. For instance, certain states
require public sale of forfeited collateral or do not permit service charges
sufficient to make pawnshop operations profitable.
Risks Related to Improper Assessment of the Pledged Property's Estimated Resale
Value
The Company makes pawn loans without the borrower's personal liability and
does not investigate the creditworthiness of the borrower, but relies on the
pledged personal property, and the possibility of its forfeiture, as a basis
for its lending decision. In this regard, the recovery of the amount advanced,
as well as realization of a profit on sale of merchandise, is dependent on the
Company's initial assessment of the property's estimated resale value. Improper
assessment of the resale value of the collateral in the lending function can
result in reduced marketability of the property and resale of the merchandise
for an amount less than the amount advanced. Although, historically, the
Company has experienced profits from the sale of such merchandise, no
assurances can be given that the Company's historical results will continue.
For example, unexpected technological changes could adversely impact the value
of consumer electronic products and declines in gold and silver prices could
reduce the resale value of jewelry items acquired in pawn transactions and
could adversely affect the Company's ability to recover the amount advanced on
the acquired collateral.
Dependence on Key Management
The Company relies on the business and technical expertise of its
executive officers and certain other key employees, particularly its Chief
Executive Officer, Carson Thompson and its President, Michael Record. Except
for an employment agreement with Michael Record, the Company does not have an
employment agreement with any member of its executive staff. The loss of the
services of any of these individuals could have a material adverse effect on
the Company's operating results. No assurance can be given that their services
will be available in the future. The Company's success will also be dependent
on its ability to attract and retain additional qualified management personnel.
Risks Related to Firearm Sales
The Company has not, and, at present, does not intend to engage in the
sale of handguns or assault rifles to the public. The Company does wholesale
handguns and assault rifles to licensed firearm dealers. The Company has
engaged in the sale of sporting rifles to the public leaving it open to the
risk of lawsuits from persons who may claim injury as a result of an improper
sale. No such claims have been asserted against the Company as of the date
hereof. The Company does maintain insurance covering potential risks related to
the sale of firearms.
19
<PAGE> 22
Risks Related to Automobile Title Loans
Alabama and Georgia pawn regulations allow the Company to advance funds
secured by automobile titles. Approximately eight percent of the Company's
total revenues during Fiscal 1998 were related to pawn service charges
generated from such advances. The adoption of additional or the revision of
existing laws and regulations impacting the Company's ability to advance funds
against automobile titles could have a material adverse effect on the Company's
business. In addition, the Company could be subject to consumer claims and
litigation seeking damages based upon wrongful repossession of automobiles.
Necessity to Maintain Current Prospectus and Registration Statement
The Company must maintain an effective registration statement on file with
the Commission before any of the Series A Warrants or Series B Warrants
(collectively, the "Warrants") may be redeemed or exercised. It is possible
that the Company 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 acquired by persons residing in states where the Company
is 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.
ITEM 7A. 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. Subsequent to
January 30, 1999, the Company commenced a public offering of the 2004 Notes
which 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 for each of the five years
subsequent to January 30, 1999 are as follows:
Fiscal Years Ending January,
2000 $ 342
2001 --
2002 4,840
2003 --
2004 --
---------
Total $ 5,182
=========
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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report..................................... 21
Consolidated Balance Sheets...................................... 22
Consolidated Statements of Operations............................ 24
Consolidated Statements of Stockholders' Equity (Deficit) ....... 25
Consolidated Statements of Cash Flows............................ 26
Notes to Consolidated Financial Statements....................... 27
</TABLE>
20
<PAGE> 23
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 30, 1999 and January 31, 1998, 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 30, 1999.
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 30, 1999 and January 31, 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 30, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Fort Worth, Texas
March 12, 1999, except for note 13
which is as of April 27, 1999
21
<PAGE> 24
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
Assets (note 6)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 298 $ 151
Accounts receivable 60 32
Pawn service charges receivable 446 233
Loans 4,419 2,421
Inventories, net 3,011 1,944
Prepaid expenses and other current assets 199 98
---------- ----------
Total current assets 8,433 4,879
---------- ----------
Property and equipment, net (note 4) 2,232 802
Goodwill and other intangible assets, net (note 5) 156 63
Debt issuance costs, net of accumulated amortization of $47 and $601
at January 30, 1999 and January 31, 1998, respectively (notes 2 and 6) 137 545
Other assets 234 388
---------- ----------
Total assets $ 11,192 $ 6,677
========== ==========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable $ 523 $ 404
Accrued interest payable 36 142
Accrued payroll and payroll taxes 206 114
Deferred rent 123 105
Accrued bonuses 42 33
Other accrued expenses 173 253
Current installments of notes payable, including $347 payable to
stockholders at January 31, 1998 (notes 2 and 6) 342 2,070
---------- ----------
Total current liabilities 1,445 3,121
---------- ----------
Long-term notes payable, net of current installments (notes 2 and 6) 4,840 9,778
---------- ----------
Total liabilities 6,285 12,899
---------- ----------
</TABLE>
(Continued)
22
<PAGE> 25
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets - Continued
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
------------ ------------
<S> <C> <C>
Stockholders' equity (deficit) (notes 2, 6, 8, 9, and 10)
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 31, 1998 (liquidation preference of $.50 per share) $ -- $ 20
Series B Convertible Preferred stock; 1,091,858 shares issued at January 31,
1998 (liquidation preference of $2.00 per share) -- 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 -- 6
share)
Common stock, $.01 par value; authorized 20,000,000 shares; 7,230,877 and
1,950,424 shares issued at January 30, 1999 and January 31, 1998, respectively 72 19
Series A redeemable common stock purchase warrants, $0.125 par value;
1,380,000 warrants issued and outstanding at January 30, 1999 173 --
Series B redeemable common stock purchase warrants, $0.0625 par value;
1,380,000 warrants issued and outstanding at January 30, 1999 86 --
Additional paid-in capital 22,242 7,657
Preferred stock discount -- (674)
Accumulated deficit (17,596) (13,191)
------------ ------------
4,977 (6,152)
------------ ------------
Less treasury stock, at cost: 21,432 common shares at January 30, 1999 and
13,189 common shares and 25,000 Series B Convertible Preferred shares at
January 31, 1998 (70) (70)
------------ ------------
Total stockholders' equity (deficit) 4,907 (6,222)
Commitments, contingencies and subsequent event (notes 11, 12 and 13)
============ ============
Total liabilities and stockholders' equity (deficit) $ 11,192 $ 6,677
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 26
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 30, January 31, January 26,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Merchandise sales $ 8,170 $ 7,215 $ 5,523
Pawn service charges 3,636 2,862 2,291
Other 129 101 89
---------- ---------- ----------
Total revenues 11,935 10,178 7,903
Cost of sales 5,634 5,192 3,739
---------- ---------- ----------
Gross profit 6,301 4,986 4,164
---------- ---------- ----------
Expenses:
Store operating (note 11) 5,326 4,040 3,652
Interest (note 6) 996 3,761 1,360
Depreciation 555 444 435
Amortization 63 60 60
Corporate administrative (note 8) 3,074 2,117 1,713
---------- ---------- ----------
Total expenses 10,014 10,422 7,220
---------- ---------- ----------
Net loss (3,713) (5,436) (3,056)
Preferred stock dividends (note 8) 692 217 --
---------- ---------- ----------
Net loss to common stockholders $ (4,405) $ (5,653) $ (3,056)
========== ========== ==========
Loss per common share (note 3(m)):
Basic $ (0.68) $ (3.01) $ (1.67)
========== ========== ==========
Diluted $ (0.68) $ (3.01) $ (1.67)
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 27
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended January 26, 1997, January 31, 1998, and January 30, 1999
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
Series A
redeemable common stock
Preferred stock Common stock purchase warrants
----------------------- ---------------------- ----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1996 3,074,626 $ 31 $1,759,071 $ 17 -- $ --
Issuance of common stock (note 8) -- -- 85,927 1 -- --
Issuance of preferred stock (note 8) 14,394 -- -- -- -- --
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 -- --
Issuance of common stock (note 8) -- -- 105,426 1 -- --
Acquisition of 3,297 shares of common stock (note 8) -- -- -- -- -- --
Issuance of preferred stock (notes 8 and 10) 572,180 6 -- -- -- --
Recognition of Convertible Subordinated Debenture
beneficial conversion feature (note 6) -- -- -- -- -- --
Recognition of preferred stock beneficial
conversion feature (note 8) -- -- -- -- -- --
Amortization of preferred stock beneficial
conversion feature (note 8) -- -- -- -- -- --
Preferred stock dividends paid -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at January 31, 1998 3,661,200 37 1,950,424 19 -- --
Issuance of common stock and warrants (note 2) -- -- 1,365,000 14 1,380,000 173
Issuance of unregistered common stock in exchange
for services (note 8) -- -- 44,445 -- -- --
Conversion of Convertible Subordinated
Debentures (notes 2 and 6) -- -- 2,380,000 24 -- --
Conversion of preferred stock (notes 2 and 8) (3,661,200) (37) 1,491,008 15 -- --
Amortization of preferred stock beneficial
conversion feature (note 8) -- -- -- -- -- --
Preferred stock dividends paid -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Balance at January 30, 1999 -- $ -- 7,230,877 $ 72 1,380,000 $ 173
========== ========== ========== ========== ========== ==========
<CAPTION>
Series B
redeemable common stock
purchase warrants Additional Preferred
---------------------- paid-in stock Accumulated
Shares Amount capital discount deficit
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Balance at January 28, 1996 -- $ -- $ 3,210 $ -- $ (4,482)
Issuance of common stock (note 8) -- -- 30 -- --
Issuance of preferred stock (note 8) -- -- 36 -- --
Acquisition of 9,892 shares of common stock (note 8) -- -- -- -- --
Net loss -- -- -- -- (3,056)
---------- ---------- ---------- ---------- ----------
Balance at January 26, 1997 -- -- 3,276 -- (7,538)
Issuance of common stock (note 8) -- -- 30 -- --
Acquisition of 3,297 shares of common stock (note 8) -- -- -- -- --
Issuance of preferred stock (notes 8 and 10) -- -- 1,147 -- --
Recognition of Convertible Subordinated Debenture
beneficial conversion feature (note 6) -- -- 2,380 -- --
Recognition of preferred stock beneficial
conversion feature (note 8) -- -- 824 (824) --
Amortization of preferred stock beneficial
conversion feature (note 8) -- -- -- 150 (150)
Preferred stock dividends paid -- -- -- -- (67)
Net loss -- -- -- -- (5,436)
---------- ---------- ---------- ---------- ----------
Balance at January 31, 1998 -- -- 7,657 (674) (13,191)
Issuance of common stock and warrants (note 2) 1,380,000 86 5,310 -- --
Issuance of unregistered common stock in exchange
for services (note 8) -- -- 200 -- --
Conversion of Convertible Subordinated
Debentures (notes 2 and 6) -- -- 9,053 -- --
Conversion of preferred stock (notes 2 and 8) -- -- 22 -- --
Amortization of preferred stock beneficial
conversion feature (note 8) -- -- -- 674 (674)
Preferred stock dividends paid -- -- -- -- (18)
Net loss -- -- -- -- (3,713)
---------- ---------- ---------- ---------- ----------
Balance at January 30, 1999 1,380,000 $ 86 $ 22,242 $ -- $ (17,596)
========== ========== ========== ========== ==========
<CAPTION>
Total
stockholders'
Treasury equity
stock (deficit)
---------- ----------
<S> <C> <C>
Balance at January 28, 1996 $ (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)
---------- ----------
Balance at January 26, 1997 (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 10) -- 1,153
Recognition of Convertible Subordinated Debenture
beneficial conversion feature (note 6) -- 2,380
Recognition of preferred stock beneficial
conversion feature (note 8) -- --
Amortization of preferred stock beneficial
conversion feature (note 8) -- --
Preferred stock dividends paid -- (67)
Net loss -- (5,436)
---------- ----------
Balance at January 31, 1998 (70) (6,222)
Issuance of common stock and warrants (note 2) -- 5,583
Issuance of unregistered common stock in exchange
for services (note 8) -- 200
Conversion of Convertible Subordinated
Debentures (notes 2 and 6) -- 9,077
Conversion of preferred stock (notes 2 and 8) -- --
Amortization of preferred stock beneficial
conversion feature (note 8) -- --
Preferred stock dividends paid -- (18)
Net loss -- (3,713)
---------- ----------
Balance at January 30, 1999 $ (70) $ 4,907
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 28
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 30, January 31, January 26,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,713) $ (5,436) $ (3,056)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 618 504 495
Amortization of debt issuance costs 124 271 228
Amortization of debt discount 495 1,885 --
Common and preferred stock issued for services 200 34 31
Changes in operating assets and liabilities:
Accounts receivable (28) (9) (13)
Pawn service charges receivable (213) (4) (22)
Inventories, net (1,067) 27 (481)
Prepaids and other current assets (101) (80) 29
Other assets (2) (254) (10)
Accounts payable 119 73 32
Accrued liabilities (67) (319) 410
---------- ---------- ----------
Net cash used in operating activities (3,635) (3,308) (2,357)
---------- ---------- ----------
Cash flows from investing activities:
Net increase in pawn loans (1,998) (193) (781)
Purchases of property and equipment (1,985) (197) (279)
---------- ---------- ----------
Net cash used in investing activities (3,983) (390) (1,060)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 6,352 3,172 4,269
Principal payments on notes payable (3,993) (174) (563)
Net proceeds from issuance of common stock and warrants 5,583 3 --
Purchase of treasury stock -- (5) (15)
Payment of debt issuance costs (159) (261) (375)
Net proceeds from issuance of preferred stock -- 1,148 36
Preferred stock dividends paid (18) (67) --
Increase (decrease) in bank overdraft -- (110) 81
---------- ---------- ----------
Net cash provided by financing activities 7,765 3,706 3,433
---------- ---------- ----------
Net increase in cash and cash equivalents 147 8 16
Cash and cash equivalents at beginning of year 151 143 127
========== ========== ==========
Cash and cash equivalents at end of year $ 298 $ 151 $ 143
========== ========== ==========
Supplemental disclosures of cash flow information -
Cash paid for interest $ 483 $ 1,565 $ 1,341
========== ========== ==========
</TABLE>
See Consolidated Statement of Stockholders' Equity (Deficit) and notes 6 and 8
for noncash financing activities.
See accompanying notes to consolidated financial statements.
26
<PAGE> 29
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
January 30, 1999, January 31, 1998 and January 26, 1997
(1) Organization and Business
PawnMart, Inc. (the "Company"), was incorporated in Delaware on January
13, 1994. 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. As
of January 30, 1999, the Company owned and operated 32 stores
located in Alabama, Georgia, North Carolina, South Carolina, and
Texas.
(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 (the "Series A Warrants", and 1,380,000 Series B redeemable
common stock purchase warrants at a price of $0.0625 (the "Series B
Warrants") 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.
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 outstanding shares of common stock 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 outstanding shares of
common stock (notes 6 and 8). 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 30, 1999 and
January 26, 1997 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.
27 (Continued)
<PAGE> 30
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(c) Loans and Income Recognition
Pawnloans (loans) are generally made on the pledge of tangible
personal property for a one month period, with an automatic
sixty day extension period. Pawn service charges on loans are
recognized on an accrual basis during the initial thirty day
loan period and applicable sixty day extension period, net of
an allowance for pawn service charges deemed uncollectible,
based on the Company's historical loan redemption rate. If a
loan is not repaid, the principal amount advanced on the
loan, exclusive of any uncollected pawn service charges,
becomes the carrying value of the forfeited collateral
(inventory), which is recovered through sale.
(d) Inventories
Inventories are recorded at cost and represent merchandise
acquired from forfeited loans, merchandise purchased directly
from the public and merchandise purchased from vendors.
Inventories from forfeited loans are recorded at the
principal amount advanced on the related collateral,
exclusive of any uncollected pawn service charges. The cost
of inventories is determined on the specific identification
method. Inventories are stated at the lower of cost or
market. Interim payments from customers on layaway sales are
credited to deferred revenue and subsequently recorded as
income during the period in which final payment is received.
Deferred revenues related to layaway sales totaled
approximately $99,000 and $63,000 at January 30, 1999 and
January 31, 1998, 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 approximately $141,000 and $160,000 at January 30,
1999 and January 31, 1998, respectively. Additions to
inventory allowances recorded as cost of goods sold totaled
approximately $108,000, $170,000, and $61,000 and deductions
from inventory allowances for write-off or other dispositions
of inventory totaled approximately $127,000, $94,000, and
$29,000 during the fiscal years ended January 30, 1999,
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 two to seven 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.
28 (Continued)
<PAGE> 31
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(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
ten years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the
goodwill balance over its remaining life can be recovered
through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if
any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(g) Intangible Assets
Intangible assets consisting of an amount applicable to a
noncompete agreement with a founding stockholder and the cost
of acquiring a trade name are being amortized over an
estimated useful life of five years.
(h) Income Taxes
The Company and its subsidiaries file a consolidated Federal
income tax return. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their
respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the fiscal years in which those temporary
differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes
the enactment date.
(i) Advertising Costs
Advertising costs are expensed the first time advertising takes
place. Advertising expense was approximately $395,000,
$163,000 and $104,000 for the fiscal years ended January 30,
1999, January 31, 1998, and January 26, 1997, 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.
29 (Continued)
<PAGE> 32
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(k) Fair Values of Financial Instruments
Pawnloans 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 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
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.
(l) Stock Based Compensation
The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations, in accounting for its employee
stock option plan. As such, compensation expense would only
be recorded on the date of grant if the current market price
of the underlying stock exceeded the exercise price. The
Company provides the disclosure-only provisions of the
Financial Accounting Standards Board's (the "FASB") Statement
of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation".
(m) Net Loss Per Common Share
Net loss per common share is calculated as required by FASB
Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (Statement No. 128). Statement No. 128
requires dual presentation of basic and diluted earnings per
share and a reconciliation between the two amounts. Basic
earnings per share excludes dilution, and diluted earnings
per share reflects the potential dilution that would occur if
securities to issue common stock were exercised and converted
into common stock. 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 30, 1999, January 31, 1998 and January
26, 1997. Since the effect of using the weighted average
number of shares on a diluted basis was antidilutive to the
diluted loss per share calculation for the years ended
January 30, 1999, January 31, 1998 and January 26, 1997,
diluted loss per share was calculated using the same weighted
average number of common shares in the basic loss per share
calculation.
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 30, January 31, January 26,
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Weighted average shares - basic 6,506 1,878 1,825
Shares attributable to stock options, warrants and
convertible securities 510 3,628 2,522
---------- ---------- ----------
Weighted average shares - diluted 7,016 5,506 4,347
========== ========== ==========
</TABLE>
30 (Continued)
<PAGE> 33
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(n) Reclassifications
Certain amounts in the fiscal years ended January 26, 1997 and
January 31, 1998 have been reclassified to conform with the
presentation of amounts in the fiscal year ended January 30,
1999.
(o) Newly Issued Accounting Pronouncements
Statement of Position 98-5 ("SOP 98-5"), issued by the American
Institute of Certified Public Accountants - "Reporting on the
Costs of Start-up Activities," requires that previously
capitalized start-up costs including organization costs be
written off and future costs related to start up entities be
charged to expense as incurred. The effective date for SOP
98-5 is for financial statements for fiscal years beginning
after December 15, 1998. The Company adopted SOP 98-5
effective January 31, 1999; however, there were no
capitalized start-up costs requiring write-off upon adoption.
(p) Segment Information
In June 1997, Statement of Financial Accounting Standards No.
131, "Disclosures About Segments of an Enterprise and Related
Information" (Statement No. 131) was issued which establishes
standards for the way public business enterprises are to
report information about operating segments. The Company
defines each of its stores as operating segments; however,
management has determined that all of its stores have similar
economic characteristics and also meet the other criteria
which permit the stores to be aggregated into one reportable
segment. The Company's management makes decisions about
resource allocation and performance assessment based on the
same financial information presented throughout these
consolidated financial statements. Therefore, the disclosure
requirements of Statement No. 131 are not presented in these
consolidated financial statements.
(4) Property and Equipment
Property and equipment consists of the following at January 30, 1999 and
January 31, 1998 (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
<S> <C> <C>
Automobiles $ 130 64
Furniture and equipment 2,481 1,369
Leasehold improvements 1,506 699
---------- ----------
4,117 2,132
Less accumulated depreciation and amortization (1,885) (1,330)
---------- ----------
$ 2,232 802
========== ==========
</TABLE>
31 (Continued)
<PAGE> 34
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following at January
30, 1999 and January 31, 1998 (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
----------- ----------
<S> <C> <C>
Goodwill $ 345 189
Noncompete agreement 60 60
Corporate trademark 50 50
----------- ----------
455 299
Less accumulated amortization (299) (236)
----------- ----------
$ 156 63
=========== ==========
</TABLE>
(6) Notes Payable
Notes payable consist of the following at January 30, 1999 and January
31, 1998 (in thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
-------------- --------------
<S> <C> <C>
Revolving line of credit with a bank, bearing interest at prime plus
0.75 basis points (8.75% at January 30, 1999) payable monthly, to
mature on October 31, 2001, secured by substantially all of the
Company's assets $ 4,840 $ --
Revolving line of credit with a trust, bearing interest at 12%
payable monthly, to mature on November 19, 1999, secured by all of
the Company's treasury stock 250 250
Unsecured convertible subordinated debentures to various individuals,
bearing interest at 14% payable monthly, to mature from June 30,
1999 to January 31, 2001 -- 9,520
Notes payable issued to various individuals, bearing interest at 15%
payable monthly, to mature from March 31, 1998 to December
31, 2000, secured by pawn loans and associated collateral -- 2,142
Notes payable to stockholders of the Company pursuant to revolving
lines of credit, due on demand, bearing interest from 12% to 15% -- 157
Note payable to the Chief Executive Officer of the Company, bearing
interest at 12%, principal and interest due on March 31, 1998,
unsecured -- 190
Other unsecured notes payable 92 84
-------------- --------------
5,182 12,343
Less: Unamortized debt discount - (495)
Current portion (342) (2,070)
-------------- --------------
$ 4,840 $ 9,778
============== ==============
</TABLE>
32 (Continued)
<PAGE> 35
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Notes Payable, Continued
On October 13, 1998, the Company entered into a $10,000,000 revolving
credit facility with Comerica Bank (the "Credit Facility"). At
January 30, 1999, $4,840,000 was outstanding under the Credit
Facility and an additional $175,000 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 8.75% at January 30, 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 January 30, 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 January 31, 1998, the Company had $9,520,000 in aggregate principal
amount outstanding under private placement offerings of 14%
unsecured Convertible Subordinated Debentures due June 30, 1999, 14%
unsecured Convertible Subordinated Debentures due June 30, 2000, and
14% unsecured Convertible Subordinated Debentures due January 31,
2001 (collectively, the "Debentures"). In connection with the
completion of the Company's initial public offering on March 20,
1998, the Debentures, net of unamortized debt issuance costs of
$443,000, were automatically converted into 2,380,000 shares of
common stock.
On October 30, 1997, the holders of the Debentures amended the
conversion price related to the automatic conversion of the
convertible subordinated debentures in the event of an initial
public offering to be the lower of $9.10 principal amount per share
or 80 percent of the initial public offering stock price (note 2).
The value of the resulting beneficial conversion feature was
recognized by the Company as additional financing costs by recording
$2,380,000 in debt discount and additional paid-in-capital. Such
amount was 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 $495,000 and $1,885,000 for the fiscal years ended
January 30, 1999 and January 31, 1998, respectively, and is included
in interest expense in the accompanying consolidated statements of
operations.
In connection with the sale of the Debentures, the Company issued
warrants to purchase 192,688 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 obtaining financing, the Company incurs origination
and commitment fees. Such amounts are capitalized and are being
amortized on a straight-line basis through the respective maturity
date of each obligation. Amortization expense related to debt
issuance costs was $124,000, $271,000 and $228,000 for the fiscal
years ended January 30, 1999, January 31, 1998, and January 26,
1997, respectively, and is included in interest expense in the
accompanying consolidated statements of operations.
33 (Continued)
<PAGE> 36
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(6) Notes Payable, Continued
The aggregate maturities of long-term notes payable for each of the five
years subsequent to January 30, 1999 are as follows:
<TABLE>
<CAPTION>
Maturities of
Fiscal Years Long-Term
Ending January, Notes Payable
--------------- -------------
<S> <C>
2000 $ 342
2001 --
2002 4,840
2003 --
2004 --
-----------
Total $ 5,182
===========
</TABLE>
(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 30, 1999 and January 31, 1998 are presented below (in
thousands):
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 4,622 3,595
Property and equipment 245 164
Inventories 52 59
Intangible assets 70 58
---------- ----------
Total gross deferred tax assets 4,989 3,876
Less valuation allowance (4,989) (3,876)
---------- ----------
Net deferred tax assets -- --
---------- ----------
Total deferred tax liabilities -- --
---------- ----------
Net deferred tax assets $ -- --
========== ==========
</TABLE>
At January 30, 1999, the Company has net operating loss carryforwards
for tax purposes of approximately $12,503,000 which are available to
offset future federal taxable income, if any, through 2019. Deferred
tax valuation allowances of $4,989,000 and $3,876,000 offset
deferred tax assets at January 30, 1999 and January 31, 1998,
respectively, based on management's determination that it is more
likely than not that such amounts may not be subsequently realized.
(8) Equity
On March 20, 1998, the Company completed an initial public offering of
1,200,000 shares of common stock, 1,380,000 Series A Warrants, and
1,380,000 Series B Warrants, 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.
34 (Continued)
<PAGE> 37
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) Equity, Continued
In connection with the completion of the initial public offering, 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 and the Company's Series B Convertible Preferred stock
treasury shares converted into 8,242 shares of common treasury
shares.
Each Series A Warrant entitles the registered holder to purchase one
share of common stock at $6.00, subject to adjustment in the event
of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger. The Series A Warrants may be exercised
through March 17, 2003. The Company may redeem the Series A
Warrants, at a price of $.05 per Series A Warrant, prior to March
17, 2003 if the closing bid price for the common stock equals or
exceeds $9.00 per share for a predetermined number of trading days.
Each Series B Warrant entitles the registered holder to purchase one
share of common stock at $8.00, subject to adjustment in the event
of a stock dividend, stock split, reclassification, reorganization,
consolidation or merger. The Series B Warrants may be exercised
through March 17, 2004. The Company may redeem the Series B
Warrants, at a price of $.05 per Series B Warrant, prior to March
17, 2004 if the closing bid price for the common stock equals or
exceeds $11.00 per share for a predetermined number of trading days.
On May 1, 1998, the Company issued 44,445 shares of unregistered common
stock to a corporation in exchange for professional services
associated with marketing and new store site selection analysis. In
connection with such issuance, the Company has recorded $200,000 in
corporate administrative expenses during the fiscal year ended
January 30, 1999.
On January 23, 1998, the Company's common and preferred stockholders
approved an amendment to the Company's certificate of incorporation
changing the $.50 Series A Convertible Preferred stock, Series B
Convertible Preferred stock, Series C Convertible Preferred stock,
and 12% Series D Convertible Exchangeable Preferred stock 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 (note 2). The
value of the resulting beneficial conversion feature was recognized
as a return to the preferred shareholders by recording $824,000 in
preferred stock discounts and additional paid-in capital. Such
amounts have been 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 years ended January 30, 1999 and January 31, 1998,
the Company recorded $674,000 and $150,000 in preferred stock
dividends, respectively, resulting from the amortization of the
preferred stock beneficial conversion feature.
As a result of the private placement of Series B Convertible Preferred
stock, the Company currently has outstanding warrants to purchase
26,659 shares of the Company's common stock which were issued to
participating NASD Broker-Dealers. The warrants have an exercise
price of $5.50 per share and are exercisable through January 2,
2002.
During the fiscal years ended January 31, 1998 and January 26, 1997, the
Company issued 338 and 14,394 shares of Series B Convertible
Preferred stock, respectively, in connection with the Company's
employee stock purchase plan (note 10).
35 (Continued)
<PAGE> 38
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) Equity, 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 and January 26, 1997, the
Company issued 104,602 and 85,927 shares of the Company's common
stock, respectively, 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 corporate administrative expenses totaling $28,550 and
$31,272 during the fiscal years ended January 31, 1998 and January
26, 1997, respectively.
During the fiscal year ended January 31, 1998, the Company issued 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 corporate
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 10). Additionally,
the Company issued 542,500 shares of 12% Series D Convertible
Exchangeable Preferred stock for $2.00 per share and 824 shares of
common stock to an employee for $3.03 per share.
During the fiscal year ended January 31, 1998, the Company adopted (i) a
reverse stock split of its issued and outstanding shares of common
stock on a basis of one new share for each two shares currently
outstanding and (ii) an additional reverse stock split of its issued
and outstanding shares of common stock on a basis of one new share
for each 1.5163715 shares currently outstanding. The effect of the
reverse stock splits have been accounted for retroactively to
January 28, 1996 in the accompanying consolidated financial
statements and, accordingly, all applicable share and per share
amounts have been restated to reflect these reverse stock splits.
(9) Stock Options
During the year ended January 31, 1998, the Board of Directors and
stockholders adopted the 1997 PawnMart, Inc. Employee Stock Option
Plan (the "Employee Option Plan") and the 1997 PawnMart, Inc.
Director Stock Option Plan (the "Directors' Option Plan"). The
number of shares reserved for issuance under the Employee Option
Plan and Directors' Option Plan is 1,000,000 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. The stock options granted have
contractual terms of ten years and generally vest ratably over a
three to five year period beginning on the first anniversary of the
date of grant. During the fiscal years ended January 30, 1999 and
January 31, 1998, the Company granted 622,500 and 306,389 stock
options, respectively, under the Employee Option Plan with exercise
prices ranging from $3.00 to $4.25.
36 (Continued)
<PAGE> 39
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(9) Stock Options, Continued
Under the Directors' Option Plan, stock options will be granted to any
director who is not an employee of the Company and is not a holder
of more than 5% of the outstanding shares of common stock. Newly
appointed eligible directors will automatically receive an initial
grant of options to purchase 25,000 shares of common stock. All
eligible directors will receive annual grants of options to purchase
the lessor of 20,000 shares of common stock or $200,000 in market
value of underlying common stock. Options granted under the
Directors' Option Plan are required to have an exercise price equal
to the closing price of common stock on the date of grant. The
options will be immediately exercisable and will have a contractual
term of ten years from the date of grant. The Company granted
125,000 stock options under the Directors' Option Plan during the
fiscal year ended January 30, 1999 with exercise prices ranging from
$4.25 to $4.44.
The following table summarizes stock option activity from January 26,
1997 through January 30, 1999.
<TABLE>
<CAPTION>
Exercisable
----------------------------
Employee Directors' Weighted Weighted
Option Option Average Average
Plan Plan Exercise Price Number Exercise Price
---------- ---------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Balance at January 26, 1997 -- -- -- -- --
---------- ---------
Granted 306,389 -- $ 3.79
---------- ---------
Balance at January 31, 1998 306,389 -- $ 3.79 32,973 $ 3.79
Granted 622,500 125,000 $ 4.04
Cancelled (60,466) -- $ 3.93
---------- ---------
Balance at January 30, 1999 868,423 125,000 $ 3.97 268,584 $ 4.03
========== =========
</TABLE>
The following table summarizes total stock options outstanding under the
Employee Option Plan and Directors' Option Plan as of January 30,
1999:
<TABLE>
<CAPTION>
Weighted
Average
Total Remaining Currently
Exercise Price Options Life Exercisable
-------------- ---------- --------- -------------
<S> <C> <C> <C>
$3.00 125,000 9.6 --
$3.79 263,923 8.7 133,584
$4.00 10,000 9.4 10,000
$4.25 569,500 9.4 100,000
$4.44 25,000 9.3 25,000
--------- ---------
993,423 268,584
========= =========
</TABLE>
37 (Continued)
<PAGE> 40
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(9) Stock Options, Continued
The Company applies the intrinsic value method of accounting for its
option issuances. Accordingly, no compensation expense has been
recognized for its employee stock option grants. If the Company had
adopted the fair value based method prescribed by the FASB's
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," and determined compensation cost based on
the fair value at the grant dates of such options, the Company's net
loss would have been increased by approximately $346,000 and $52,000
during the fiscal years ended January 30, 1999 and January 31, 1998,
respectively. Basic loss per common share and diluted loss per
common share would have been increased by $0.05 per share and $0.03
per share during the fiscal years ended January 30, 1999 and January
31, 1998, respectively.
The weighted average grant-date fair value of options issued during the
fiscal years ended January 30, 1999 and January 31, 1998 was $1.36
and $0.85, respectively, which was calculated in accordance with the
Black-Scholes option pricing model using the following weighted
average assumptions:
<TABLE>
<CAPTION>
Year Ended Year Ended
January 30, January 31,
1999 1998
----------- -----------
<S> <C> <C>
Expected term (years) 3.77 3.29
Risk-free interest rate 5.04% 5.61%
Expected volatility 45.15% 0.10%
Expected dividend yield 0.00% 0.00%
</TABLE>
(10) Employee Stock Purchase Plan
Prior to January 31, 1998, the Company administered 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 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 prior to January 31, 1998. The
Company has recorded approximately $19,000 and $10,000 in
compensation expense during the fiscal years ended January 31, 1998
and January 26, 1997, respectively, which represents the value of
Company matches approved by the Board of Directors.
(11) 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 $1,339,000, $1,112,000 and $1,055,000 for the fiscal
years ended January 30, 1999, January 31, 1998 and January 26, 1997,
respectively.
38 (Continued)
<PAGE> 41
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(11) Commitments and Contingencies, Continued
Future minimum lease payments under noncancelable operating leases as of
January 30, 1999 are (in thousands):
<TABLE>
<CAPTION>
Fiscal years ending Related
January Party Other Total
------------------- ---------- ----------- ------------
<S> <C> <C> <C>
2000 $ 8 1,534 1,542
2001 -- 1,249 1,249
2002 -- 885 885
2003 -- 800 800
2004 -- 558 558
Thereafter -- 75 75
---------- ------------ ------------
Total minimum
lease payments $ 8 5,101 5,109
========== ============ ============
</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 30, 1999, January 31, 1998 and January 26, 1997.
The Company is involved in various claims and lawsuits arising in the
ordinary course of business. In the opinion of management, the
resolution of these matters will not have a material adverse effect
on the Company's consolidated financial position or results of
operations.
(12) Year 2000 (unaudited)
During the fiscal year ended January 30, 1999, the Company initiated an
enterprise-wide project to bring software and systems into Year 2000
compliance in order to minimize any significant or detrimental
effects on operations. The project covers information systems,
operating systems, other non-financial systems equipment and third
party vendors, as well as, products. At January 30, 1999, the
Company has made significant progress on its workplan and expects
completion of such workplan by the middle of 1999. Although there
can be no assurance regarding Year 2000 remediation, management does
not expect an adverse impact on the Company's operations.
(13) Subsequent Event
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 NASD
Broker-Dealers with a minimum subscription of $250,000. 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. As of April 27, 1999, $3,817,000 of the 2004
Notes has been issued.
In connection with the sale of the 2004 Notes, the Company has agreed
to issue Series A Warrants for the purchase of up to 600,000 shares
of the Company's common stock (note 8). As of April 27, 1999,
229,020 Series A Warrants had been granted in connection with the
sale of the 2004 Notes.
39
<PAGE> 42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company did not change its principal independent accounting firm nor
have any disagreements with such firm on accounting and financial disclosure
matters during the two fiscal years ended January 30, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 30, 1999 to be filed with the Securities and
Exchange Commission (the "SEC") not later than 120 days after the end of the
such year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 30, 1999 to be filed with the SEC not later than
120 days after the end of the such year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 30, 1999 to be filed with the SEC not later than
120 days after the end of the such year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
definitive proxy statement for the Company's Annual Meeting of Stockholders for
the fiscal year ended January 30, 1999 to be filed with the SEC not later than
120 days after the end of the such year.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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)
40
<PAGE> 43
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)
21.1 Subsidiaries of PawnMart, Inc. (8)
27.1 Financial Data Schedule as of January 30, 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).
(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) FINANCIAL STATEMENT SCHEDULES
None
(c) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the fourth quarter
of the fiscal year ended January 30, 1999.
41
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PAWNMART, INC.
<TABLE>
<S> <C> <C> <C>
By: /s/ Carson R. Thompson April 29, 1999 By: /s/ Thomas W. White April 29, 1999
----------------------- -------------- ------------------- --------------
Carson R. Thompson Date Thomas W. White Date
Chief Executive Officer, Director Senior Vice President
and Chairman of the Board and Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Carson R. Thompson Chief Executive Officer, Director April 29, 1999
- ---------------------- and Chairman of the Board
Carson R. Thompson
/s/ Michael D. Record President April 29, 1999
Michael D. Record.
/s/ Thomas W. White Senior Vice President and April 29, 1999
- ------------------- Chief Financial Officer
Thomas W. White
/s/ Randall L. Haden Vice President - Information Services April 29, 1999
- --------------------
Randall L. Haden
/s/ Robert E. Camp Director April 29, 1999
- ------------------
Robert E. Camp
/s/ James E. Berk Director April 29, 1999
- -----------------
James E. Berk
/s/ Monty R. Standifer Director April 29, 1999
- ----------------------
Monty R. Standifer
/s/ Mark E. Kane Director April 29, 1999
- ----------------
Mark E. Kane
/s/ Robert D. Bourland, Jr. Director April 29, 1999
- ---------------------------
Robert D. Bourland, Jr.
/s/ J. Roger Williams Director April 29, 1999
- ---------------------
J. Roger Williams
</TABLE>
<PAGE> 45
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)
21.1 Subsidiaries of PawnMart, Inc. (8)
27.1 Financial Data Schedule as of January 30, 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).
(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>
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF PAWNMART, INC.
<TABLE>
<CAPTION>
Subsidiary Name State of Incorporation Percentage Owned By Registrant
<S> <C> <C>
PCI Finance 1994-I, Inc. Texas 100%
PCI Finance 1995-I, Inc. Texas 100%
PCI Finance 1996-1, Inc. Texas 100%
PCI Finance 1996-2, Inc. Texas 100%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PAWNMART, INC. AND SUBSIDIARIES FOUND IN
THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> JAN-30-1999
<CASH> 298
<SECURITIES> 0
<RECEIVABLES> 4,925
<ALLOWANCES> 0
<INVENTORY> 3,011
<CURRENT-ASSETS> 8,433
<PP&E> 4,117
<DEPRECIATION> (1,885)
<TOTAL-ASSETS> 11,192
<CURRENT-LIABILITIES> 1,445
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 4,835
<TOTAL-LIABILITY-AND-EQUITY> 11,192
<SALES> 8,170
<TOTAL-REVENUES> 11,935
<CGS> 5,634
<TOTAL-COSTS> 10,960
<OTHER-EXPENSES> 3,692
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 996
<INCOME-PRETAX> (3,713)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,713)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,713)
<EPS-PRIMARY> (0.68)
<EPS-DILUTED> (0.68)
</TABLE>
