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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1999
REGISTRATION NO. 333-70635
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PAWNMART, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 5940 75-2520896
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
301 COMMERCE STREET, SUITE 3600 CARSON R. THOMPSON
FORT WORTH, TEXAS 76102 301 COMMERCE STREET, SUITE 3600
(817) 335-7296 FORT WORTH, TEXAS 76102
(817) 335-7296
(Address, including zip code, and (Address, including zip code,
telephone number, including area code, and telephone number, including
registrant's principal executive offices) area code, of agent for service)
</TABLE>
COPIES TO:
Jakes Jordaan, Esq.
Jordaan & Pennington, PLLC Tom Herbelin
300 Crescent Court, Suite 1605 5925 Forest Lane Suite 410
Dallas, Texas 75201 Dallas, Texas 75230
(214) 871-6550 (214) 219-1119
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the date this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continual basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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PAWNMART, INC.
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K
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<CAPTION>
Form S-1 Item No. Location in Prospectus
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<S> <C> <C>
1. Forepart of the Registration Statement and Outside Facing Page of Registration Statement and Outside Front
Front Cover Page of Prospectus Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of Prospectus
Prospectus
3. Summary Information, Risk Factors and Ratio of Prospectus Summary; Risk Factors; Selected Historical
Earnings to Fixed Charges Consolidated Financial Data
4. Use of Proceeds Prospectus Summary; Use of Proceeds
5. Determination of Offering Price Not Applicable
6. Dilution Not Applicable
7. Selling Security Holders Not Applicable
8. Plan of Distribution Outside Front Cover Page of Prospectus; Plan of Distribution
9. Description of Securities to be Registered Prospectus Summary; Description of Subordinated Notes Due 2004
10. Interests of Named Experts and Counsel Legal Matters; Experts
11. Information With Respect to the Registrant Prospectus Summary; Risk Factors; Use of Proceeds;
Capitalization; Selected Historical Consolidated Financial
Data; Management's Discussion and Analysis of Financial
Condition and Results of Operations; Quantitative and
Qualitative Disclosures About Market Risk; Business;
Management; Security Ownership of Certain Beneficial Owners
and Management; Certain Relationships and Related
Transactions; Description of Subordinated Notes Due 2004;
Consolidated Financial Statements
12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act Liabilities
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<PAGE> 3
$10,000,000
[PAWNMART, INC.]
12% SUBORDINATED NOTES DUE 2004
THE OFFERING
We are offering up to $10,000,000 in principal amount of 12% Subordinated
Notes Due 2004 (the "Notes"). The Notes are being offered on a "best efforts"
basis by licensed broker dealers who are members of the National Association of
Securities Dealers, Inc. Massie Capital, Ltd. is serving as the managing broker
dealer for the Offering. See "Plan of Distribution." As of the date of this
Prospectus, we have sold $4,244,000 of Notes in connection with this Offering.
This Offering will continue until all Notes are sold or until September 15,
2000, whichever is earlier; however, we may extend the Offering until all of the
Notes offered hereby are sold, as permitted under applicable securities laws and
regulations. We may reject a subscription for any reason or for no reason
whatever and may terminate the Offering at any time.
We will use the net proceeds from the sale of the Notes and additional
borrowings under our $10 million revolving credit facility for store expansion
and for general corporate purposes.
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<CAPTION>
NOTES SOLD TOTAL
PER UNIT TO DATE MAXIMUM
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<S> <C> <C> <C>
Price to Investors.......................................... 100.0% $4,244,000 $10,000,000
Broker's Commissions(1)(2).................................. 8.0% $ 339,520 $ 800,000
Proceeds to Company......................................... 92.0% $3,904,480 $ 9,200,000
</TABLE>
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(1) We will pay 6.0% to participating licensed broker dealers and 2.0% to Massie
Capital, Ltd., as managing broker dealer. See "Plan of Distribution."
(2) As additional compensation for the sale of the Notes in this Offering, we
will issue 60 Series A Redeemable Common Stock Purchase Warrants ("Series A
Warrants") to Massie Capital, Ltd. for each $1,000 in principal amount of
Notes sold. Massie Capital, Ltd. will distribute up to 40 of such Series A
Warrants to participating broker dealers as additional compensation under
the Offering. Each Series A Warrant will have an exercise price of $6.00 and
will expire on March 17, 2003. The Series A Warrants may be redeemed subject
to certain conditions. See "Description of Capital Stock -- Series A
Warrants."
TERMS OF THE SECURITIES
Maturity Date...............
Each Note will mature on December 31, 2004.
Interest Rate...............
Each Note will bear interest at 12% per annum,
payable monthly on the fifteenth day of each month
beginning with the second full calendar month
following issuance.
Optional Redemption.........
We may redeem each Note, in whole or in part, at the
specified redemption price, plus accrued interest to
the date of redemption.
Ranking.....................
The Notes are general unsecured obligations,
subordinated in right and payment to all existing and
future Senior Debt (as defined herein). At May 15,
1999, we had $4.6 million of Senior Debt which would
rank senior in right of payment to the Notes.
THE COMPANY
We are 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. We currently own and operate 36 stores located in Alabama, Georgia,
North Carolina, South Carolina and Texas.
Our Common Stock, $.01 par value per share ("Common Stock"), Series A
Warrants and Series B Redeemable Common Stock Purchase Warrants ("Series B
Warrants") are traded on the Boston Stock Exchange under the symbols "PWT",
"PWTA" and "PWTB," respectively, and on the NASDAQ SmallCap Market under the
symbols "PMRT", "PMRTW" and PMRTZ," respectively. At May 15, 1999, the closing
market price of our Common Stock, Series A Warrants and Series B Warrants as
reported by NASDAQ was $2.00, $0.25, and $0.13, respectively.
---------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK, INCLUDING RISKS OF DEFAULT
ON THE NOTES. SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
MASSIE CAPITAL, LTD.
The date of this Prospectus is May 20, 1999.
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AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission"
or the "SEC") a registration statement on Form S-1 (the "Registration
Statement"), pursuant to the Securities Act of 1933, as amended (the "Securities
Act") covering the Notes offered by this Prospectus. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For more information about the Notes or the Company, you
should read the Registration Statement and related exhibits, annexes and
schedules. THE STATEMENTS CONTAINED IN THIS PROSPECTUS AS TO THE CONTENTS OF ANY
CONTRACT OR OTHER DOCUMENT IDENTIFIED AS EXHIBITS IN THIS PROSPECTUS ARE NOT
NECESSARILY COMPLETE, AND IN EACH INSTANCE, REFERENCE IS MADE TO A COPY OF SUCH
CONTRACT OR DOCUMENT FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT, EACH
STATEMENT BEING QUALIFIED IN ANY AND ALL RESPECTS BY SUCH REFERENCE. You may
inspect and copy the Registration Statement and related exhibits, annexes and
schedules at the Commission's Public Reference Room at 450 Fifth Street, NW,
Washington, D.C. 20549. Information about the operation of the Public Reference
Room of the Commission may be obtained by calling the Commission at
1-800-SEC-0330. In addition, the Commission maintains a site on the World Wide
Web that contains reports, proxy and information statements and other
information regarding registrants, like us, that file electronically with the
Commission. The address of the Web site is: http://www.sec.gov.
REPORTS TO SECURITY HOLDERS
You may request a copy of our latest annual report containing audited
consolidated financial statements and other such reports filed with the
Commission, at no cost, by writing or telephoning us at the address under the
"Prospectus Summary -- The Company."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements made in this Prospectus under the captions "Prospectus
Summary," "Risk Factors," "Business," and elsewhere in this Prospectus are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). When we use the words "anticipate," "assume," "believe," "estimate,"
"expect," "intend," and other similar expressions in this Prospectus, they are
generally intended to identify forward-looking statements. In connection with
such forward-looking statements, you should consider that they involve known and
unknown risks, uncertainties and other factors which are, in some cases, beyond
our control and which could materially affect our actual results, performance or
achievements. Factors that could cause our actual results, performance or
achievements to differ materially from those expressed or implied by such
forward-looking statements include, but are not limited to, the following:
- heightened competition, including specifically price competition, the
entry of new competitors or the introduction of new products by new and
existing competitors;
- adverse state and Federal legislation and regulation;
- the ability to attract and retain qualified personnel;
- fluctuations in operating results;
- changes in business strategy; and
- the inability to develop or acquire stores in selected markets.
We disclaim any obligation to update any such factors or to publicly
announce the result of any revisions to any of these forward-looking statements
contained herein to reflect subsequent events or developments.
i
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PROSPECTUS SUMMARY
The following is a summary of certain information contained herein. This summary
is qualified in its entirety by, and should be read in conjunction with, the
more detailed information and consolidated financial statements, including the
notes thereto, contained elsewhere in this Prospectus. Except as otherwise set
forth herein, references herein to "pro forma" financial data of the Company are
to the financial data of the Company which gives effect to the Offering of the
Notes.
THE COMPANY
Background
PawnMart, Inc. ("we" or the "Company") was incorporated under the laws of
the State of Delaware on January 13, 1994 and began operations under the name
"Pawnco, Inc." On June 14, 1994, we changed our name to PCI Capital Corporation
and conducted business under the trade name "PAWNMART(SM)." On October 21, 1997,
we changed our name to "PawnMart, Inc."
From our inception in January 1994 through March 1998, we opened 19 stores
with the capital provided by a series of private placements of preferred stock
and debt securities. In March 1998, we completed an initial public offering of
1,365,000 shares of Common Stock, 1,380,000 Series A Warrants, and 1,380,000
Series B Warrants resulting in total net proceeds of approximately $5,583,000.
In connection with the completion of the initial public offering, we
automatically converted $9,520,000 of our 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, we utilized $2,524,000 of the
net proceeds to repay certain notes payable.
Our 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, we utilized the remaining proceeds from the initial public offering
and secured a $10 million revolving line of credit with Comerica Bank. With the
above, we were able to achieve a 68 percent increase in the number of our 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 our ability to implement our business strategy.
Fiscal 1999 Expansion Plans
Our store expansion plans for fiscal 1999 include adding between 20 and 30
stores. The offering of the Notes pursuant to this Prospectus, combined with the
resulting additional borrowing base availability under the Credit Facility, is
expected to provide us with the financial ability to execute the planned store
expansion for fiscal 1999. However, there can be no assurance that we will be
able to achieve such growth. See "Risk Factors."
Our Business
We are a 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. We generate income in two ways: through collection of a monthly
service charge from advancing money to individuals based primarily upon the
estimated resale value of pledged personal property such as jewelry, consumer
electronics, tools, musical instruments, firearms, automobiles and other
miscellaneous items and through profit realized on the retail sale of the
unredeemed or other purchased pre-owned merchandise.
As of May 15, 1999, we were one of five publicly traded pawnshop operators
in the United States, and owned and operated 35 stores located in Alabama,
Georgia, North Carolina, South Carolina and Texas. Our principal office is
located at 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102 and our
telephone number is (817) 335-7296.
1
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BUSINESS STRATEGY
The pawnshop industry is a multi-billion dollar, rapidly growing industry
with an increasing number of states adopting favorable pawnshop regulations. 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 6 percent owned by five public companies.
We have developed extensive demographical information that identifies both
our borrowing and retail customers. Based on our research, we have observed
somewhat different demographics for our customers from those generally published
for the pawnshop industry. This data indicates that our customers have a
slightly higher median household income and that females comprise a higher
percentage of our customer base. In this regard, our 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.
Our strategic objective is to implement a rapid roll-out of PAWNMART(SM)
stores in order to capitalize upon growth opportunities afforded by the highly
fragmented pawnshop industry. To achieve its strategic objectives, we have
adopted the following strategy:
o Develop or acquire stores that meet site selection, store size and
configuration requirements in selected markets that allow us to be
positioned similar to national discount stores;
o Expand in metropolitan areas in states with favorable pawn
regulations;
o Utilize information technology as a platform for collateral assessment
and management control;
o Capitalize on the operational expertise of our management team and
board of directors; and
o Utilize targeted database marketing segmentation system for
promotions, customer acquisition and retention, and store site
selection.
EXPERIENCED SPECIALTY RETAIL MANAGEMENT TEAM AND BOARD OF DIRECTORS
Carson Thompson, our Chief Executive Officer and Chairman of the Board,
served as President and Chief Executive Officer for The Bombay Company, Inc.
during its roll-out phase. Also, Michael Record, our President, has more than
twenty years experience in the pawnshop industry, most recently serving as Vice
President of Operations at Cash America International, Inc. where he was
responsible for 118 stores.
Our Board of Directors includes Robert Camp who has 19 years of experience
with Pier 1 Imports, Inc., including five years as Chief Executive Officer or
Chief Operating Officer. Additional Directors include James Berk, who has served
as Vice Chairman and Chief Executive Officer of APC, Inc. and President and
Chief Executive Officer of Bizmart, Inc.; Monty Standifer, who served as Chief
Financial Officer of Bizmart, Inc. and is presently the Chief Financial Officer
of Gadzooks, Inc. (NASDAQ:GADZ); Mark Kane, who founded, and served as President
and Chief Executive Officer of CD Warehouse, Inc. (NASDAQ:CDWI); Robert
Bourland, Jr., who served previously as our President and Chief Operating
Officer and who worked for Tandy Corporation for twenty years serving as Senior
Vice President - Managing Director, Tandy U.K. operations and other management
capacities; and Roger Williams, who is presently Chairman of the Board and Chief
Executive Officer of Roger Williams Automall. See "Management - Directors and
Executive Officers." We intend to capitalize upon the specialty retail and pawn
experience and talents of these individuals to expand rapidly in a fragmented
industry.
2
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THE OFFERING
Securities Offered......... $10,000,000 principal amount of 12% Subordinated
Notes Due December 31, 2004.
Use of Proceeds............ The net proceeds from the sale of the Notes, after
deduction of discounts and commissions and
estimated offering expenses, together with
additional borrowings under our Credit Facility,
will be used for store expansion and general
corporate purposes. See "Use of Proceeds."
Issuer..................... PawnMart, Inc.
Maturity Date of Notes..... December 31, 2004.
Interest Payment Dates..... The Notes bear interest at a rate of 12% per
annum, payable monthly on the fifteenth day of
each month beginning with the second full calendar
month following issuance. The record date for each
payment of interest on the Notes is the close of
business on the first day of the month.
Optional Redemption........ The Notes may be redeemed, in whole or in part,
(i) prior to March 31, 2000 at 103% of the
principal amount outstanding, (ii) from April 1,
2000 to March 31, 2001 at 102% of the principal
amount outstanding, (iii) from April 1, 2001 to
March 31, 2002 at 101% of the principal amount
outstanding, and (iv) subsequent to March 31, 2002
at 100% of the principal amount outstanding.
Payment for redemption of the Notes will include
amounts due for accrued and unpaid interest, if
any, to the date of redemption.
Mandatory Redemption....... We are not required to make mandatory redemption
or sinking fund payments with respect to the
Notes.
Ranking of Notes........... The Notes are general unsecured obligations,
subordinated in right and payment to all existing
and future Senior Debt (as defined herein),
including borrowings under the Credit Facility. As
of May 15, 1999, we had $4.6 million of Senior
Debt which would rank senior in the right of
payment to the Notes. The indentures for the Notes
permit us to incur additional Senior Debt, subject
to certain limitations. See "Description of
Subordinated Notes Due 2004 - Subordination."
Listing.................... We do not intend to apply for listing of the Notes
on any securities exchange or authorization for
quotation on the NASDAQ system. We do not expect
that a trading market will develop for the Notes.
3
<PAGE> 8
Certain Covenants.......... The indenture under which the Notes are being
issued contains certain covenants for your benefit
which, among other things, limit:
- the payment of cash dividends on capital stock
and the purchase, redemption or retirement of
capital stock;
- transactions with affiliates; and
- the sale of assets.
Trustee.................... Trust Management, Inc., Fort Worth, Texas.
Tax Status................. The Notes are taxable obligations under the
Internal Revenue Code of 1986, as amended, and
interest paid or accrued will be taxable to
non-exempt holders of the Notes. A subsequent
purchaser of outstanding Notes may have to
recognize as ordinary income (rather than as
capital gain) any "market discount" on the Notes
upon its resale by the purchaser. Market discount
for Notes generally means the excess of its face
amount over the subsequent purchaser's tax basis
in such Notes. See "Certain U.S. Federal Income
Tax Considerations."
Denominations.............. The Notes are being issued in fully registered
form in denominations of $1,000 and integral
multiples thereof, subject to a minimum purchase
by each investor of $5,000 except for a $1,000
minimum purchase for individual retirement
accounts.
Plan of Distribution....... The Notes are being sold on a "best efforts" basis
by licensed broker dealers who are members of the
National Association of Securities Dealers, Inc.
Massie Capital, Ltd. is serving as the managing
broker dealer for the Offering. As of the date of
this Prospectus, we have sold $4,244,000 of Notes
in connection with this Offering. We have the
right to reject any subscription in whole or in
part. See "Plan of Distribution."
RISK FACTORS
Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before making any investment in the Notes.
4
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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical consolidated financial data of the Company. The summary
information should be read in conjunction with, and is qualified in its entirety
by, "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company included
elsewhere in the Prospectus.
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Fiscal Years Ended
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January 30, January 31, January 26, January 28, January 29,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(dollars in thousands)
OPERATING DATA:
<S> <C> <C> <C> <C> <C>
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
Ratio of Earning to Fixed Charges (2) ............ -- -- -- -- --
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>
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(1) Data provided only for comparable stores at January 30, 1999 (19 stores).
(2) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income taxes plus fixed charges. Fixed charges consist
of interest expense incurred (which includes amortization of deferred
financing costs) whether expensed or capitalized and a portion of rental
expense estimated to be attributable to interest. Earnings were
insufficient to cover fixed charges by $3,713,000, $5,436,000, $3,056,000,
$2,828,000 and $1,625,000 during the fiscal years ended January 30, 1999,
January 31, 1998, January 26, 1997, January 28, 1996, and January 29, 1995,
respectively.
5
<PAGE> 10
RISK FACTORS
An investment in the Notes offered hereby is speculative and involves a high
degree of risk, including the risk factors described below. In addition to the
other information presented in this Prospectus, each prospective investor should
carefully consider the following risk factors inherent in and affecting our
business and this Offering before making an investment decision. This Prospectus
contains certain forward-looking statements regarding our business and prospects
that are based upon numerous assumptions about future conditions which may
ultimately prove to be inaccurate and actual events and results may materially
differ from anticipated results described in such statements. Our ability to
achieve such results is subject to certain risks and uncertainties, such as
those risks detailed in this section, and other risks detailed throughout this
Prospectus. These forward-looking statements represent management's judgment as
of the date of the filing of this Prospectus. We disclaim, however, any intent
or obligation to update these forward-looking statements.
LACK OF PROFITABILITY, EXPECTED LOSSES DURING ROLL-OUT PHASE
From our inception on January 13, 1994 through January 30, 1999, we have
experienced aggregate losses of $16,687,000. Further, a key element of our
strategy consists of developing multiple PAWNMART(SM) stores meeting our
required store size, configuration, and site selection requirements in regional
and local markets. This strategy is likely to result in continued net losses
during our roll-out phase due to start-up losses associated with the anticipated
high number of developed new stores. Results of operations in the future will be
influenced by numerous factors including, among others, the number of new store
expansions, our ability to manage our growth and maintain the quality of our
personnel, and our ability to implement our strategic plan. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
After giving pro forma effect to the Offering, we would have total
long-term indebtedness at May 15, 1999 of approximately $8,808,000 assuming the
principal amount of Notes sold as of the date of this Prospectus and $14,564,000
assuming the maximum offering amount is subscribed. The degree to which we are
leveraged could have adverse consequences to holders of the Notes, including the
following: (i) substantial cash flow from our operations will be required for
the payment of principal and interest on our indebtedness and will not be
available for other purposes; (ii) our ability to obtain additional financing in
the future, whether for capital expenditures, further development, refinancings
or otherwise, may be impaired; (iii) we may be more leveraged than certain of
our competitors, which may place us at a competitive disadvantage; (iv) our high
degree of leverage makes us more vulnerable to changes in economic conditions
and may limit our ability to withstand competitive pressures and capitalize on
significant business opportunities.
We expect to repay our 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, if at all, of
the Series A Warrants, or (v) the sale of certain assets. We will require
substantial cash flows to meet our interest payment obligations with respect to
our indebtedness. Our cash flow is dependent on our future performance and is
subject to financial, economic and other factors, some of which are beyond our
control. Since the Credit Facility bears interest at a floating rate, we are
sensitive to any increase in prevailing interest rates. We believe that, based
upon anticipated levels of operations, we should be able to meet our debt
service obligations when due. If we are unable to generate such cash flow from
operations to satisfy our interest obligations, we may be required to refinance
all or a portion of such obligations, sell assets, or repay such indebtedness
with proceeds from other capital transactions, such as the issuance of
additional equity. There can be no assurance that such refinancing or extension
will be available on reasonable terms or at all, that additional equity will be
issued, or that a sale of assets will occur. The inability to repay such
indebtedness could have a material adverse effect on us.
6
<PAGE> 11
SUBORDINATION OF THE NOTES
The Notes will be unsecured subordinated obligations. The payment of
principal, premium (if any), and interest on the Notes will be subordinated in
right of payment to all our Senior Debt, including all indebtedness and
obligations under our existing $10 million Credit Facility with Comerica Bank.
Borrowings under the Credit Facility will constitute Senior Debt. The Notes will
permit us to incur additional Senior Debt. "Senior Debt" means the principal of
and interest on our indebtedness owed or hereinafter owing to commercial banks
(including, without limitation Comerica Bank) and other lenders, unaffiliated
note or debenture holders incurred (a) to provide working capital necessary for
the proper conduct of our business, (b) to develop additional PAWNMART(SM)
stores or (c) to acquire pawn stores or companies or entities involved in the
pawn industry provided that certain conditions are met. By reasons of the
subordination provisions of the Notes, in the event of insolvency, liquidation,
reorganization, dissolution or other winding-up, holders of Senior Debt will
have to be paid in full before we make payments in respect of the Notes. In
addition, no payment will be made to you if (i) any Senior Debt is not paid when
due or (ii) any other default on Senior Debt occurs and the maturity of such
Senior Debt is accelerated in accordance with its terms. Accordingly, there may
be insufficient assets remaining after such payments to pay amounts due on the
Notes.
INABILITY TO SELL MAXIMUM SUBSCRIPTION OF NOTES
As of the date of this Prospectus, we have sold $4,244,000 of Notes in
connection with this Offering. Although we are registering up to $10,000,000 in
Notes pursuant to this Prospectus, we can make no assurances that the maximum
offering amount will be subscribed. In addition to factors noted under "Risk
Factors - Management of Growth," our store expansion during fiscal 1999 will
largely be dependent upon the number of Notes sold pursuant to this Offering. In
the event we are unable to sell the maximum subscription or additional financing
alternatives are not obtained, our fiscal 1999 expansion schedule could be
reduced or modified.
ASSETS PLEDGED AS COLLATERAL UNDER THE COMERICA LINE OF CREDIT FACILITY
Obligations under the Credit Facility are secured by liens on substantially
all of our assets. If we become insolvent or are liquidated, or if payment under
the terms of Senior Debt is accelerated, the Senior Debt holders will be
entitled to exercise the remedies available to a secured lender.
LIQUIDITY
Although we have entered into the $10 million Credit Facility, we can make
no assurances that our cash and cash equivalents on hand and our cash
availability will be sufficient to meet our anticipated working capital needs
and capital expenditures in the future. To finance future expenditures, we may
need to issue additional securities or incur additional debt. We may not be able
to obtain additional required capital on satisfactory terms, if at all. The
failure to raise the funds necessary to finance future cash requirements could
materially and adversely affect our operating results and anticipated growth in
future periods. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
MANAGEMENT OF GROWTH
We plan to expand our business through a roll-out of PAWNMART(SM) stores.
To a significant extent, our future success will be dependent upon our ability
to engage in a successful expansion program and will be dependent, in part, upon
our ability to secure suitable sites for our new stores, obtain adequate
inventory for our new stores, maintain adequate financial controls and reporting
systems to manage a larger operation, and to obtain additional capital upon
favorable terms. There can be no assurance that we will be able to successfully
implement our planned expansion, finance our growth or manage the resulting
larger operation.
7
<PAGE> 12
AVAILABILITY OF QUALIFIED STORE MANAGEMENT PERSONNEL
Our ability to expand may also be limited by the availability of qualified
store management personnel. While we seek to train existing qualified personnel
for management positions and to create attractive compensation packages to
retain existing management personnel, there can be no assurance that sufficient
qualified personnel will be available to satisfy our needs with respect to our
planned expansion.
COMPETITION
We encounter significant competition in connection with the operation of
our business. In connection with lending operations, we compete with other
pawnshops (owned by individuals and by large operators) and certain financial
institutions, such as consumer finance companies, which generally lend on an
unsecured, as well as on a secured basis. Our competitors in connection with our
retail sales include numerous retail and discount stores. Many of our
competitors, including Cash America International, Inc., First Cash Financial
Services, Inc., and EZCORP, Inc., have greater financial resources. These
competitive conditions may adversely affect our revenues, profitability and
ability to expand.
In addition, we face competition in the acquisition of existing stores.
Several competing pawnshop companies have implemented expansion and acquisition
programs. There can be no assurance that we will be more successful than our
competitors in pursuing acquisition opportunities and leases for attractive
start-up locations. Increased competition could also increase prices for
attractive acquisition candidates.
GOVERNMENT REGULATION
Our lending operations are subject to extensive regulation, supervision and
licensing under various federal, state and local statutes, ordinances and
regulations. These statutes prescribe, among other things, service charges a
pawnshop may charge for lending money and the rules of conduct that govern an
entity's ability to maintain a pawnshop license. With respect to firearm and
ammunition sales, a pawnshop must comply with the regulations promulgated by the
United States Department of the Treasury-Bureau of Alcohol, Tobacco and
Firearms. Governmental regulators have broad discretionary authority to refuse
to grant a license or to suspend or revoke any or all existing licenses of
licensees under common control if it is determined that any such licensee has
violated any law or regulation or that the management of any such licensee is
not suitable to operate pawnshops. In addition, there can be no assurance that
additional state or federal statutes or regulations will not be enacted at some
future date which could inhibit our ability to expand, significantly decrease
the service charges we can charge for lending money, or prohibit or more
stringently regulate the sale of certain goods, such as firearms, any of which
could significantly adversely affect our prospects. Our ability to open new
stores in other states could be affected by the enactment of state or local
legislation, similar to current Texas legislation, which requires a finding of
public need and probable profitability by the Texas Consumer Credit Commissioner
as a condition to the issuance or activation of any new pawnshop license in
Texas counties having a population of more than 250,000. In addition, the
present statutory and regulatory environment of some states renders expansion
into those states impractical. For instance, certain states require public sale
of forfeited collateral or do not permit service charges sufficient to make
pawnshop operations profitable.
8
<PAGE> 13
RISKS RELATED TO IMPROPER ASSESSMENT OF THE PLEDGED PROPERTY'S ESTIMATED RESALE
VALUE
We make pawn loans without the borrower's personal liability and do not
investigate the creditworthiness of the borrower, but rely on the pledged
personal property, and the possibility of its forfeiture, as a basis for our
lending decision. In this regard, the recovery of the amount advanced, as well
as realization of a profit on sale of merchandise, is dependent on our initial
assessment of the property's estimated resale value. Improper assessment of the
resale value of the collateral in the lending function can result in reduced
marketability of the property and resale of the merchandise for an amount less
than the amount advanced. Although, historically, we have experienced profits
from the sale of such merchandise, no assurances can be given that our
historical results will continue. For example, unexpected technological changes
could adversely impact the value of consumer electronic products and declines in
gold and silver prices could reduce the resale value of jewelry items acquired
in pawn transactions and could adversely affect our ability to recover the
amount advanced on the acquired collateral.
DEPENDENCE ON KEY MANAGEMENT
We rely on the business and technical expertise of our executive officers
and certain other key employees, particularly our Chief Executive Officer,
Carson Thompson and our President, Michael Record. Except for an employment
agreement with Michael Record (see "Management - Employment Agreements"), we do
not have an employment agreement with any member of our executive staff. The
loss of the services of any of these individuals could have a material adverse
effect on our operating results. No assurance can be given that their services
will be available in the future. Our success will also be dependent on our
ability to attract and retain additional qualified management personnel.
RISKS RELATED TO FIREARM SALES
We have not, and, at present, do not intend to engage in the sale of
handguns or assault rifles to the public. We do wholesale handguns and assault
rifles to licensed firearm dealers. We also engage in the sale of sporting
rifles to the public leaving us open to the risk of lawsuits from persons who
may claim injury as a result of an improper sale. No such claims have been
asserted against us as of the date of this Prospectus. We maintain insurance
covering potential risks related to the sale of firearms.
RISKS RELATED TO AUTOMOBILE TITLE LOANS
Alabama and Georgia pawn regulations allow us to advance funds secured by
automobile titles. Approximately eight percent of our total revenues 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 our ability to advance funds against automobile titles could have a
material adverse effect on our business. In addition, we could be subject to
consumer claims and litigation seeking damages based upon wrongful repossession
of automobiles.
UTILIZATION OF OFFERING PROCEEDS
We expect to receive approximately $8.6 million in net proceeds from the
Offering assuming a maximum subscription. Although we intend to primarily
utilize the net proceeds from the Offering for store expansion, we will have
broad discretion to utilize such funds for acquisitions, interest payments,
working capital and other general corporate purposes. The use of funds for
purposes other than for store expansion could prevent us from meeting our fiscal
1999 store expansion goals. See "Use of Proceeds."
9
<PAGE> 14
ABSENCE OF PUBLIC MARKET FOR THE NOTES
We do not intend to apply for listing or quotation of the Notes on any
securities exchange or stock market. The managing broker dealer has advised us
that they intend to make a market in the Notes, subject to any limits imposed by
the Securities Act and the Exchange Act and subject to any limits imposed during
the pendency of any registration statement or shelf registration statement filed
under the Securities Act; however, the managing broker dealer is not obligated
to do so, and may discontinue such market-making at any time without notice.
Therefore, we can give no assurance as to the liquidity of any trading market
for the Notes or that an active market for the Notes will develop. Future
trading prices of the Notes will depend on many factors, including, among other
things, prevailing interest rates, our operating results and the market for
similar securities.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. We can give no assurance that the market for the Notes will not be
subject to similar disruptions. Any such disruptions could have an adverse
effect on the Notes.
NECESSITY TO MAINTAIN CURRENT PROSPECTUS AND REGISTRATION STATEMENT
We must maintain an effective registration statement on file with the
Commission before any of the Series A Warrants and Series B Warrants
(collectively, the "Warrants") may be redeemed or exercised. It is possible that
we may be unable to cause a registration statement covering the Common Stock
underlying the Warrants to be effective. It is also possible that the Warrants
could be acquired by persons residing in states where we are unable to qualify
the Common Stock underlying the Warrants for sale. In either event, the Warrants
may expire, unexercised, which would result in the holders losing all the value
of the Warrants.
STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of the Warrants have the right to exercise the Warrants only if the
underlying shares of Common Stock are qualified, registered or exempt from
registration under applicable securities laws of the states in which the various
holders of the Warrants reside. We cannot issue shares of Common Stock to
holders of the Warrants in states where such shares are not qualified,
registered or exempt. We have, however, qualified the Series A Warrants and
Series B Warrants for listing on the Boston Stock Exchange which provides for
blue sky registration in 13 states. See "Description of Capital Stock - Series A
Warrants and Series B Warrants."
REDEEMABLE WARRANTS AND IMPACT ON INVESTORS
We may redeem the Warrants in certain circumstances. Our exercise of this
right would force a holder of the Warrants to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holder to do so,
to sell the Warrants at the then current market price when the holder might
otherwise wish to hold the Warrants for possible additional appreciation, or to
accept the redemption price, which is likely to be substantially less than the
market value of the Warrants in the event of a call for redemption. Holders who
do not exercise their Warrants prior to redemption will forfeit their right to
purchase the shares of Common Stock underlying the Warrants. The foregoing
notwithstanding, we may not redeem the Warrants at any time that a current
registration statement under the Act is not then in effect. See "Description of
Capital Stock - Series A Warrants and Series B Warrants."
WARRANTS TO BROKERS
In connection with the Offering, we will issue up to 600,000 Series A
Warrants to participating broker dealers. To the extent that the Series A
Warrants are exercised, they would have a dilutive effect on the percentage of
outstanding shares of Common Stock. The exercise of the Series A Warrants is
likely to occur at a time when we could probably obtain additional equity
capital on terms more favorable than those provided by the Series A Warrants.
See "Description of Capital Stock - Series A Warrants" and "Plan of
Distribution."
10
<PAGE> 15
NEW MANAGING BROKER DEALER; MARKET MAKING ACTIVITIES
Massie Capital, Ltd., the managing broker dealer, was registered as a
broker dealer in 1996 and has not acted as the sole or managing broker dealer of
any previous offerings. Massie Capital, Ltd. may be deemed to be inexperienced
in the management and distribution of public offerings and this lack of
experience may adversely affect the ability to complete this Offering.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered by the
Company are estimated to range from approximately $3,444,000 from the principal
amount of Notes sold as of the date of this Prospectus to $8,600,000 under a
maximum subscription after deducting estimated discounts to broker dealers and
fees and expenses of the Offering. The net proceeds from the issuance of the
Notes, together with the resulting increase in borrowing base availability under
the Company's Credit Facility, will be used for store expansion and other
working capital and general corporate purposes. At May 15, 1999, $4,564,000 was
outstanding under the Credit Facility and an additional $1,241,000 was available
to the Company pursuant to the available borrowing base. The Credit Facility
matures on October 13, 2001 and all outstanding borrowings at May 15, 1999 bear
interest at the prime rate plus three-quarters of one percent (8.50% at May 15,
1999).
The approximate sources and uses of funds in connection with the Offering
are presented in the table below, assuming the Offering occurred as of May 15,
1999:
<TABLE>
<CAPTION>
Notes Sold Total
To Date Maximum
------------ ------------
<S> <C> <C>
Sources of Funds:
Proceeds from Notes offered hereby .................................. $ 4,244,000 $ 10,000,000
Additional borrowing base availability under the Credit Facility .... 1,241,000 5,436,000
------------ ------------
Total sources ................................................... $ 5,485,000 $ 15,436,000
============ ============
Uses of Funds:
Capital expenditures for store expansion ............................ $ 2,435,000 $ 11,536,000
Payment of interest on the Notes .................................... 750,000 1,000,000
Working capital and other general corporate purposes ................ 1,500,000 1,500,000
Fees and expenses of the Offering ................................... 800,000 1,400,000
------------ ------------
Total uses ...................................................... $ 5,485,000 $ 15,436,000
============ ============
</TABLE>
The Company anticipates utilizing the net proceeds to open up to 25 stores
under a maximum subscription. The exact allocation of the proceeds for such
purposes and the timing of such expenditures may vary significantly depending
upon numerous factors, including the number of stores to be developed by the
Company. Pending the application of such proceeds, the Company intends to invest
the net proceeds of this Offering in short-term, investment-grade securities.
The Company estimates that such proceeds will be sufficient to fund such
expenditures and other cash requirements for the next 12 months. Over the longer
term, it is likely that the Company will require additional capital to fund its
anticipated growth. The Company has no present plans, proposals, arrangements,
commitments, agreements or understandings with respect to any acquisitions.
However, the Company may use a portion of the net proceeds to acquire additional
stores or other pawnshop companies. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
11
<PAGE> 16
CAPITALIZATION
The following table sets forth (i) the consolidated capitalization of the
Company at January 30, 1999 and (ii) such consolidated capitalization as
adjusted to give effect to (1) the amount of Notes sold as of the date of this
Prospectus and (2) the amount of Notes sold under a maximum subscription. The
following table should be read in conjunction with the respective Consolidated
Financial Statements and notes thereto of the Company included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
January 30, 1999
--------------------------------------------
Pro Forma
----------------------------
Notes Sold
Actual To Date Maximum
-------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Long-term notes payable, net of current installments (2) .................. $ 4,840 $ 9,084 $ 14,840
-------- ---------- ----------
Stockholders' equity:
Common stock, $.01 par value; authorized 20,000,000 shares;
7,230,877 issued (1) ................................................ 72 72 72
Series A redeemable common stock purchase warrants, $0.125 par
value; 1,380,000 warrants issued and outstanding (actual),
1,395,000 warrants issued and outstanding (pro forma minimum),
and 1,980,000 warrants issued and outstanding (pro forma maximum)
(1) ................................................................. 173 173 173
Series B redeemable common stock purchase warrants, $0.0625 par
value; 1,380,000 warrants issued and outstanding (1) ................ 86 86 86
Additional paid-in capital ............................................. 22,242 22,242 22,242
Accumulated deficit .................................................... (17,596) (17,596) (17,596)
Less treasury stock, at cost; 21,432 common shares ..................... (70) (70) (70)
-------- ---------- ----------
Total stockholders' equity ....................................... 4,907 4,907 4,907
-------- ---------- ----------
Total capitalization ............................................. $ 9,747 $ 13,991 $ 19,747
======== ========== ==========
</TABLE>
(1) Does not include: (i) 219,347 shares of Common Stock which may be issued
upon exercise of currently outstanding Common Stock purchase warrants
issued to broker/dealers in connection with the private placements of the
Company's securities, (ii) 868,423 shares of Common Stock which may be
issued upon exercise of currently outstanding Common Stock options issued
under the 1997 PawnMart, Inc. Employee Stock Option Plan, (iii) 125,000
shares of Common Stock which may be issued upon exercise of currently
outstanding Common Stock options issued under the 1997 Stock Option Plan
for Directors, (iv) 120,000 shares of Common Stock, 120,000 Series A
Warrants and 120,000 Series B Warrants issuable upon exercise of warrants
issued in connection with the Company's initial public offering in March
1998, (v) 2,760,000 shares of Common Stock issuable upon exercise of the
Series A Warrants and Series B Warrants issued in connection with the
Company's initial public offering in March 1998, and (vi) from 15,000
shares of Common Stock under a minimum subscription of the Notes to 600,000
shares of Common Stock under a maximum subscription issuable upon exercise
of the Series A Warrants issued to participating broker dealers in
connection with this Offering.
(2) Includes $4,244,000 of Notes sold as of the date of this Prospectus and
$10,000,000 in Notes issued under a maximum subscription.
12
<PAGE> 17
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical financial data of the Company. The selected consolidated
historical financial data has been derived from the audited historical
consolidated financial statements of the Company and should be read in
conjunction with such financial statements and the notes thereto included
elsewhere in this Prospectus.
<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
Ratio of Earning to Fixed Charges (2) ................. -- -- -- -- --
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 ............... 4,840 9,778 8,288 5,445 866
Installments
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).
(2) In calculating the ratio of earnings to fixed charges, earnings consist of
income (loss) before income taxes plus fixed charges. Fixed charges consist
of interest expense incurred (which includes amortization of deferred
financing costs) whether expensed or capitalized and a portion of rental
expense estimated to be attributable to interest. Earnings were
insufficient to cover fixed charges by $3,713,000, $5,436,000, $3,056,000,
$2,828,000 and $1,625,000 during the fiscal years ended January 30, 1999,
January 31, 1998, January 26, 1997, January 28, 1996, and January 29, 1995,
respectively.
13
<PAGE> 18
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
"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.
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.
14
<PAGE> 19
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
"Selected Historical Consolidated Financial Data" and "Consolidated Financial
Statements" and the notes thereto included elsewhere in this Prospectus.
<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.
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.
15
<PAGE> 20
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>
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.
16
<PAGE> 21
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 "Consolidated Financial Statements"
included elsewhere in this Prospectus 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 "Consolidated Financial Statements" included elsewhere in this Prospectus
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.
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.
17
<PAGE> 22
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 "Consolidated Financial Statements"
included elsewhere in this Prospectus 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 "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.
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.
18
<PAGE> 23
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.
As of April 27, 1999, $3,817,000 of the Notes had been issued.
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 the Offering of the Notes. As of April 27,
1999, $3,817,000 of the 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 Notes, and future debt
or equity offerings. In addition to factors noted under "Risk Factors," the
Company's store expansion during the fiscal year ending January 29, 2000 will
largely be dependent upon the amount of 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 Notes or obtain additional financing.
RECENT ACCOUNTING PRONOUNCEMENTS
The following selected accounting pronouncements were issued during Fiscal
1998, but have not yet become effective, and are listed with the expected impact
on the Company.
FASB 133, Accounting for Derivative Instruments and Hedging Activities -
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivatives embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The statement is effective for fiscal periods beginning after
June 15, 1999. Since the Company does not use derivative instruments, the effect
of the implementation of this new pronouncement is not expected to have any
effect on the financial position or results of operations of the Company.
SOP 98-5, Reporting on the Costs of Start-Up Activities - This Statement of
Position requires that the costs of start-up activities, including
organizational costs, be expensed as incurred. SOP 98-5, effective for fiscal
years beginning after December 15, 1998, requires the initial application to be
recorded as of the beginning of the fiscal year in which the SOP is first
adopted and reported as a cumulative effect of a change in accounting principle.
The implementation of this new pronouncement is not expected to have a
significant effect on the financial position or results of operations of the
Company.
19
<PAGE> 24
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.
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.
20
<PAGE> 25
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. Additionally, the Notes
issued in connection with this Offering 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:
<TABLE>
<CAPTION>
Fiscal Years Ending January,
<S> <C>
2000 $ 342
2001 --
2002 4,840
2003 --
2004 --
-------
Total $ 5,182
=======
</TABLE>
The carrying amount of all other financial instruments included in the
Company's consolidated balance sheets approximate fair value due to the short
maturity of these instruments.
BUSINESS
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 May 15, 1999, the Company
was one of five publicly traded pawnshop operators in the United States, and
owned and operated 35 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.
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.
21
<PAGE> 26
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:
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.
22
<PAGE> 27
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 95/98(TM) 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.
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.
23
<PAGE> 28
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.
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.
24
<PAGE> 29
Personnel
As of May 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.
25
<PAGE> 30
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.
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.
26
<PAGE> 31
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.
27
<PAGE> 32
PROPERTY
The Company's corporate offices are leased under a five year lease expiring
on May 31, 1999. At May 15, 1999, the Company operated 35 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
"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 May 15, 1999.
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Georgia:
Atlanta Metropolitan Area........................... 19
Dalton.............................................. 1
Rome................................................ 1
Calhoun............................................. 1
---
Total Georgia................................... 22
---
Alabama:
Mobile.............................................. 4
Dothan.............................................. 1
---
Total Alabama................................... 5
---
North Carolina:
Charlotte........................................... 3
---
Total North Carolina............................ 3
---
South Carolina:
Greenville Metropolitan Area........................ 2
---
Total South Carolina............................ 2
---
Texas:
Burleson............................................. 1
Fort Worth........................................... 1
Weatherford......................................... 1
---
Total Texas..................................... 3
---
Total........................................... 35
===
</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.
LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits encountered in the ordinary
course of its business. Certain of these matters are covered to an extent by
insurance. In the opinion of management, the resolution of these matters will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Commission. The Company furnishes its shareholders with
annual reports containing audited financial statements and such other reports as
deemed appropriate or as may be required by law. Requests for information may be
directed to Carson R. Thompson, Chairman of the Board, PawnMart, Inc., 301
Commerce Street, Suite 3600, Fort Worth, Texas 76102, telephone number (817)
335-7296.
28
<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of the date of this
Prospectus with respect to the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Carson R. Thompson (3)(6)................ 60 Chief Executive Officer and Chairman of the Board
Michael D. Record........................ 45 President
Thomas W. White.......................... 29 Senior Vice President and Chief Financial Officer
Randall L. Haden......................... 38 Vice President - Information Services
James E. Berk (1)(4)..................... 53 Director
Robert D. Bourland, Jr. (1)(6)........... 57 Director
Robert E. Camp (3)(5)(6)................. 55 Director
Mark E. Kane (2)(5)...................... 44 Director
Monty R. Standifer (2)(4)................ 59 Director
J. Roger Williams (3)(5)................. 49 Director
</TABLE>
- ------------
(1) Class I Director whose term expires in 1999.
(2) Class II Director whose term expires in 2000.
(3) Class III Director whose term expires in 2001.
(4) Member of Audit Committee.
(5) Member of Compensation Committee.
(6) Member of Nominating Committee.
The business experience, principal occupations and employment of each of
the directors and executive officers of the Company during at least the past
five years, together with their periods of service as directors and executive
officers of the Company are set forth below.
Carson R. Thompson has served as a Director since 1996. In March 1997, he
was named Chairman of the Board and Chief Executive Officer of the Company.
Prior to this, Mr. Thompson served as President, Chief Executive Officer and
Chairman of the Board of The Bombay Company, Inc., a specialty retailer of home
furnishing products. Mr. Thompson joined Tandy Corporation, Fort Worth, Texas in
1957, and held various management positions before becoming President in 1981 of
Tandy Brands, Inc., a spin-off of Tandy Corporation and a manufacturer and
specialty retailer of various products. From 1982 to 1991, Mr. Thompson was
Chairman and Chief Executive Officer, from 1991 to 1996, he was Chairman, and
from 1996 to 1997, he was President and Chief Executive Officer of The Bombay
Company. Mr. Thompson serves as a director of The Bombay Company, Inc.
(NYSE:BBA), the University of North Texas Health Science Center at Fort Worth,
and the Osteopathic Health Foundation, Inc., and is a member of the Board of
Advisors of the College of Business Administration at the University of
Oklahoma.
Michael D. Record joined the Company on September 8, 1998 as President. Mr.
Record was previously employed for six years with Cash America International,
Inc., most recently as Vice President of Operations where he was responsible for
118 stores. Mr. Record has been employed in the pawnshop industry for over
twenty years.
Thomas W. White was named Senior Vice President and Chief Financial Officer
of the Company on January 7, 1999. From October 1997 until January 1999, he was
employed as the Company's Vice President -- Finance and Chief Accounting
Officer. Mr. White was previously employed for six years with the accounting
firm of KPMG LLP, most recently as an assurance manager serving numerous clients
within the financial services, manufacturing and retailing industries.
Randall L. Haden joined the Company in February 1994 as Vice President -
Information Services. From November 1991 until joining the Company, he was
employed by Search Capital Group, Inc., a publicly-held consumer finance
company, most recently as Vice President - Information Services.
29
<PAGE> 34
James E. Berk has served as a Director since 1997. From January 1999 to the
present, Mr. Berk has served as a consultant for Berk Development, a consulting
firm. From 1997 to 1998, Mr. Berk was Vice Chairman and Chief Executive Officer
of APC, Inc., a specialty retailer and wholesaler of auto parts. Mr. Berk
founded and, from 1993 to 1997, served as the President, Chief Executive Officer
and Chairman of the Board for Teach & Play Smart, Inc., a privately-held
specialty retail chain of children's educational products. Prior to that time,
he served as President and Chief Executive Officer of Bizmart, Inc., a chain of
office products superstores, and President and Chief Operating Officer of The
Wholesale Club, a chain of discount retail stores, and served in various other
companies in management capacities.
Robert D. Bourland, Jr. has served as a Director since 1994. From September
1998 to December 1998, he served the Company as President - Franchising. From
July 1994 to September 1998, he served the Company as President and Chief
Operating Officer. From 1985 until joining the Company, he served as President
of Cook's Nook, Inc., a specialty retailer of gourmet cookware. From 1964 until
that time, he served in various retail management positions with the Radio Shack
division of Tandy Corporation, including serving as Senior Vice President -
Managing Director, Tandy U.K. and as Tandy's Divisional Vice President
responsible for 1,200 Radio Shack stores. Radio Shack is a specialty retailer of
consumer electronic products.
Robert E. Camp has served as a Director since 1995. He founded and, from
1993 until the present, served as President of Hero's Welcome, Inc., a privately
held retail/mail order business. From 1982 until 1992, Mr. Camp was the founder
and Chief Executive Officer of Simpson & Fisher Companies, Inc., a specialty
retailer of apparel and home furnishing products. Mr. Camp is the former Chief
Executive Officer of Fort Worth based Pier 1 Imports, Inc., a specialty retailer
of home furnishing products, having been with that company for 18 years. Mr.
Camp currently serves as a director for Restoration Hardware, Inc.
(NASDAQ:RSTO), a publicly-held retailer of specialty home furnishings and
decorative hardware.
Mark E. Kane has served as a Director since 1997. Presently, he is
President and Chief Executive Officer of Compact Discs International, LLC, an
international affiliate of CD Warehouse Inc. that owns the worldwide development
rights for the CD Warehouse Inc. franchise concept. Mr. Kane founded and, from
1992 to 1997, served as President and Chief Executive Officer of CD Warehouse
Inc., a publicly traded national franchising firm specializing in the sale of
new and pre-owned compact discs.
Monty R. Standifer has served as a Director since 1997. From July 1995 to
the present, Mr. Standifer has served as Senior Vice President, Chief Financial
Officer, Treasurer and Secretary of Gadzooks, Inc., a specialty retailer of
apparel products. From June 1992 until July 1995, Mr. Standifer served as Vice
President - Treasurer and Chief Financial Officer of Gadzooks, Inc. From July
1991 to June 1992, Mr. Standifer served as Senior Vice President and Chief
Financial Officer of AmeriServ Food Company, a food service systems distributor.
Prior to that time, Mr. Standifer was a co-founder of Bizmart, Inc., a chain of
office products superstores, serving as Vice President - Finance, Treasurer and
Secretary from its founding in October 1987 until July 1991, shortly after the
company was sold. Mr. Standifer was previously employed by Tandy Corporation for
14 years in various financial management positions.
J. Roger Williams has served as a Director since April 1998. From 1974 to
1995, he served as President and Chief Executive Officer of Jack Williams
Automall, the multi-line dealership founded by his father, Jack Williams, in
1958. Currently, he serves as Chairman of the Board and Chief Executive Officer
of Roger Williams Automall in Weatherford, Texas, and Chairman of the Board of
Vestry Corporation of Fort Worth, Texas. He also owns and operates Roger
Williams Ranches in Weatherford, Texas.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established three committees: an Audit and
Finance Committee, a Compensation and Human Resources Committee and a Nominating
Committee. Each of these committees has one or more members who serve at the
discretion of the Board of Directors.
30
<PAGE> 35
The Audit and Finance Committee, currently comprised of Messrs. Standifer
and Berk, is responsible for reviewing the Company's financial statements, audit
reports, internal financial controls and the services performed by the Company's
independent public accountants, and for making recommendations with respect to
those matters to the Board of Directors.
The Compensation and Human Resources Committee, currently comprised of
Messrs. Camp, Kane and Williams, is responsible for reviewing and making
recommendations to the Board of Directors with respect to compensation of
executive officers, other compensation matters and awards under the Company's
stock option plan..
The Nominating Committee, currently comprised of Messrs. Thompson, Bourland
and Camp, is responsible for developing a strategy and criteria for new board
members and making recommendations to the Board of Directors that the selection
of future board members should be based thereon.
COMPENSATION OF DIRECTORS
Cash Compensation. No cash compensation has been paid by the Company to its
directors prior to the date of this Proxy Statement. Directors are reimbursed
for their ordinary and necessary expenses incurred in attending meetings of the
Board of Directors or a committee thereof.
1997 Stock Option Plan for Directors. Effective as of October 16, 1997, the
1997 PawnMart, Inc. Director Stock Option Plan (the "Directors' Option Plan")
was approved by the Company's Board of Directors and the holders of a majority
of the outstanding shares of the Company's Common Stock.
Stock options will be granted under the Directors' Option Plan to any
director who is not an employee of the Company and is not a holder of more than
5% of the outstanding shares of the Company's Common Stock or a person who is in
control of such holder ("Eligible Directors").
Newly appointed Eligible Directors will automatically receive an initial
grant of options to purchase 25,000 shares of Common Stock upon their
appointment to the Board of Directors. All Eligible Directors will receive
annual grants of options to purchase the lesser of 20,000 shares of Common Stock
or $200,000 in market value of underlying Common Stock as of the date following
each annual meeting of the Company's stockholders. The exercise price of options
granted under the Directors' Option Plan shall be one hundred percent (100%) of
the fair market value of the Common Stock on the date of grant or such higher
price as may be determined by the Compensation and Human Resources Committee.
Options granted pursuant to the Directors' Option Plan are immediately
exercisable. The expiration date can be no more than ten years from the date of
grant. Payment for shares purchased upon exercising an option is made in cash or
by certified check, bank draft or money order, or by delivery of previously
owned shares of Common Stock held for at least six months (at their fair market
value), or partly in cash and partly in such Common Stock.
A maximum of 263,788 shares of Common Stock (subject to certain
anti-dilution adjustments) may be issued to Eligible Directors upon the exercise
of options granted under the Directors' Option Plan. As of the date of this
Proxy Statement, options for 125,000 shares of Common Stock had been granted and
are outstanding under the Directors' Option Plan. All options have exercise
prices ranging from $4.25 to $4.44 per share of Common Stock.
31
<PAGE> 36
EXECUTIVE COMPENSATION
The following table sets forth the cash and noncash compensation earned by
the Chief Executive Officer of the Company and each executive officer of the
Company whose total annual salary and bonus exceeds $100,000 during the fiscal
years ended January 30, 1999 ("Fiscal 1998"), January 31, 1998 ("Fiscal 1997")
and January 26, 1997 ("Fiscal 1996") (collectively, the "Named Executive
Officers"). As of the date hereof, the Company has not granted any stock
appreciation rights.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
----------------------- Securities
Name and Principal Fiscal Underlying All Other
Position During Fiscal 1998 Year Salary ($) Bonus ($) Options (#) Compensation ($)
- --------------------------- ---- ---------- --------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Carson R. Thompson..................... 1998 150,000 -- 175,000 --
Chairman of the Board and 1997 80,769 6,000 164,867 --
Chief Executive Officer (1)(2) 1996 -- -- -- --
Robert D. Bourland, Jr................. 1998 97,112 -- -- 27,000
President, Chief Operating 1997 90,000 5,400 98,920 --
Officer and Director (1)(3) 1996 90,000 17,500 -- --
</TABLE>
- -------------
(1) Mr. Thompson and Mr. Bourland received personal benefits in addition to
salary and bonuses. The aggregate amount of such personal benefits,
however, did not exceed the lesser of $50,000 or 10% of the total of their
annual salary and bonus.
(2) Mr. Thompson joined the Company in March 1997 at an annual salary of
$100,000.
(3) From July 1994 to September 1998, Mr. Bourland served the Company as
President and Chief Operating Officer. From September 1998 to December
1998, he served the Company as President - Franchising. In December 1998,
Mr. Bourland resigned as President - Franchising and currently serves only
as a director. In connection with the resignation, Mr. Bourland received
$27,000 in severance pay.
The following table summarizes grants of options to purchase shares of
Common Stock under the PawnMart, Inc. 1997 Employee Stock Option Plan made
during Fiscal 1998 to Named Executive Officers.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------------------
Percent of
Number of Total
Securities Options
Underlying Granted To Exercise or
Options Employees in Base Price Expiration Black-Scholes Grant
Name Granted (#)(1) Fiscal Year ($/Share) Date Date Present Value(3)
---- -------------- ------------ --------- ---- ---------------------
<S> <C> <C> <C> <C> <C>
Carson R. Thompson
Chairman of the Board and
Chief Executive Officer(1) 175,000 28.1 % $ 4.25 6/12/08 $ 259,507
Robert D. Bourland, Jr.
President, Chief Operating
Officer and Director(2) -- -- -- -- --
</TABLE>
- -----------------
(1) The options to purchase shares of Common Stock were granted under the 1997
PawnMart, Inc. Employee Stock Option Plan and vest over a period of five
years.
(2) No options were granted to Mr. Bourland during Fiscal 1998.
(3) The grant date present value has been determined using the Black-Scholes
option pricing model with assumptions for the expected term of 3.93 years,
the risk-free interest rate of 5.04%, the expected volatility of 37.90%,
and no expected dividend yield.
32
<PAGE> 37
There were no exercises of stock options by any of the Named Executive
Officers during Fiscal 1998. The table below lists the number of shares of
Common Stock underlying each option held by the Named Executive Officers as of
January 30, 1999.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The-Money
Unexercised Options at Fiscal Year End Options At Fiscal Year End ($)
Name (#) Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------------------------- -------------------------
<S> <C> <C>
Carson R. Thompson 65,946/273,921 $0/$0(1)
Robert D. Bourland, Jr. (2) 19,784/40,000 $0/$0(1)
</TABLE>
- --------------
(1) All exercisable and unexercisable options held by Named Executive Officers
have exercise prices ranging from $3.79 to $4.25 per share. At January 30,
1999, the closing market price of the Company's Common Stock as reported by
the NASDAQ SmallCap Market was $1.66 per share.
(2) In connection with Mr. Bourland's resignation in December 1998, 39,136
unexercisable options were cancelled. The remaining 40,000 unexercisable
options vested on April 30, 1999.
EMPLOYMENT AGREEMENTS
On September 7, 1998, the Company entered into an employment agreement with
Mr. Record providing for a minimum beginning annual salary of $120,000 and a
$30,000 signing bonus. The employment agreement, which expires on December 31,
2000, provides Mr. Record with annual salary reviews at the beginning of each
fiscal year and provides for his participation in any Company bonus plans upon
the Company achieving an acceptable level of profitability. In connection with
the employment agreement, Mr. Record was granted 125,000 stock options at an
exercise price of $3.00. The options vest over a four-year period and expire in
September 2008. In the event Mr. Record is terminated "without cause" or as a
result of a "change of control" prior to expiration date of the agreement, Mr.
Record is entitled to one-half of his annual base salary. The employment
agreement also includes other provisions relating to benefits customary in
agreements of this nature.
EMPLOYEE STOCK OPTION PLAN
The Board of Directors and the stockholders of the Company have approved
the adoption of the 1997 PawnMart, Inc. Employee Stock Option Plan (the "Plan").
Stock options granted pursuant to the Plan may be either incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"), or non-qualified stock options. The
number of shares of Common Stock reserved for issuance pursuant to the Plan is
1,000,000 shares. As of the date of this Prospectus, options for 868,423 shares
of Common Stock had been granted and are outstanding under the Plan. All options
have exercise prices ranging from $3.00 to $4.25 per share of Common Stock.
The Plan is administered by the Compensation and Human Resources Committee
(the "Committee") of the Board of Directors. Subject to the provisions of the
Plan, the Committee has the exclusive power to grant options, to interpret the
Plan, to grant waivers of restrictions thereunder and to adopt such rules and
regulations as it may deem necessary or appropriate in keeping with the
objectives of the Plan.
Options granted pursuant to the Plan become exercisable on such date or
dates as may be established by the Committee. The exercise price of options
granted under the Plan may not be an amount less than the market value of Common
Stock at the time of grant. The exercise price must be paid in full in cash at
the time an option is exercised or, if permitted by the Committee, by means of
tendering previously owned shares of Common Stock held for at least six months
(at their fair market value), or partly in cash and partly in Common Stock.
In the event of a stock split, stock dividend, combination or
reclassification or certain other corporate transactions, the Committee is
authorized to make appropriate adjustments to the exercise price and number of
shares subject to options granted under the Plan. Subject to certain
limitations, the Board of Directors is authorized to amend, modify or terminate
the Plan to meet any changes in legal requirements or for any other purpose
permitted by law.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of May 1, 1999, certain information with
respect to voting securities, the Common Stock shares, beneficially owned by (i)
each person who is known by the Company to beneficially own more than five
percent of the Company's outstanding shares of Common Stock, (ii) the directors
and certain executive officers of the Company, individually; and (iii) the
directors and all executive officers of the Company as a group.
<TABLE>
<CAPTION>
Shares Beneficially Owned (1)(2)
-------------------------------------
Number of Shares Percent of Total
---------------- ----------------
<S> <C> <C>
BENEFICIAL OWNER
Directors and Executive Officers:
Carson R. Thompson (3)(9)............................................ 481,385 6.3%
Michael D. Record (3)(10)............................................ 35,300 *
Thomas W. White (3)(11).............................................. 23,425 *
Randall L. Haden (3)(12)............................................. 66,255 *
Robert D. Bourland (3)(13)........................................... 134,094 1.8%
Robert E. Camp (4)(14)............................................... 46,487 *
James E. Berk (5)(14)................................................ 28,243 *
Monty R. Standifer (6)(14)........................................... 53,243 *
Mark E. Kane (7)(14)................................................. 28,243 *
J. Roger Williams (8)(15)............................................ 53,500 *
All directors and executive officers as a group (10 persons)...... 950,175 12.5%
</TABLE>
*Less than 1% of the outstanding shares of Common Stock.
(1) Unless otherwise noted, the Company believes that each person named in the
table has sole voting and investment power with respect to all shares
beneficially owned by such persons.
(2) In calculating the percentage of shares beneficially owned, the number of
shares of Common Stock deemed outstanding was 7,580,972. This number
includes 371,527 shares issuable pursuant to stock options and warrants
that may be exercised within sixty (60) days after May 1, 1999.
(3) His address is 301 Commerce Street, Suite 3600, Fort Worth, Texas 76102.
(4) The address for Mr. Camp is Rural Route 1, Box 202, North Hero, Vermont
05474.
(5) The address for Mr. Berk is 437 South Highway 101, Suite 677, Solana Beach,
California, 92075.
(6) The address for Mr. Standifer is 4121 International Parkway, Carrollton,
Texas 75007.
(7) The address for Mr. Kane is 1017 N. Central Expressway, Suite 200, Plano,
Texas 75075.
(8) The address for Mr. Williams is 1015 Fort Worth Street, Weatherford, Texas
76086.
(9) Includes options exercisable into 104,079 shares of Common Stock.
(10) Includes options exercisable into 33,300 shares of Common Stock.
(11) Includes options exercisable into 15,182 shares of Common Stock.
(12) Includes options and warrants exercisable into 30,182 shares of Common
Stock.
(13) Includes options exercisable into 59,784 shares of Common Stock.
(14) Includes options exercisable into 20,000 shares of Common Stock.
(15) Includes options and warrants exercisable into 49,000 shares of
Common Stock.
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<PAGE> 39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In July 1997, Mr. Thompson acquired an aggregate of 375,000 shares of 12%
Series D Convertible Exchangeable Preferred Stock ("Series D Preferred Stock")
for $750,000 in connection with Mr. Thompson's becoming a Chief Executive
Officer of the Company. In connection with the completion of the Company's
initial public offering on March 20, 1998, the 375,000 shares of Series D
Preferred Stock were automatically converted into 187,500 shares of Common Stock
at a conversion price of $4.00. In March of 1996, Mr. Thompson purchased a
principal amount of $228,000 of 14% unsecured Convertible Subordinated
Debentures due June 30, 1999 which converted into 57,000 shares of Common Stock
in connection with the completion of the Company's initial public offering on
March 20, 1998. In October 1997, Mr. Standifer acquired an aggregate of 50,000
shares of Series D Preferred Stock for $100,000 in connection with Mr.
Standifer's becoming a Director of the Company. In connection with the
completion of the Company's initial public offering on March 20, 1998, the
50,000 shares of Series D Preferred Stock were automatically converted into
25,000 shares of Common Stock at a conversion price of $4.00.
During January and February 1998, the Company issued $225,000 in aggregate
principal amount of unsecured notes payable to Mr. Thompson in consideration for
Mr. Thompson advancing the Company $225,000. The notes, which accrued interest
at 12 percent, were paid in full by the Company on March 20, 1998. During
September and October 1998, the Company issued $322,000 in aggregate principal
amount of unsecured notes payable to Mr. Thompson in consideration for Mr.
Thompson advancing the Company $322,000. The notes, which accrued interest at 10
percent, were paid in full by the Company on October 16, 1998. The Company
believes that said arrangements were no less favorable to the Company than would
be available from unrelated third parties.
All future transactions between the Company and its officers, directors and
5% stockholders will be on terms no less favorable than could be obtained from
independent, third parties and will be approved by a majority of the
independent, disinterested directors of the Company. Furthermore, any
forgiveness of loans must be approved by a majority of the Company's independent
directors who do not have an interest in the transactions and who have access,
at the Company's expense, to the Company's counsel or independent counsel.
DESCRIPTION OF SUBORDINATED NOTES DUE 2004
The 12% Subordinated Notes mature on December 31, 2004, and are limited to
an aggregate principal amount of $10,000,000 issued pursuant to the Notes
Indenture (the "Note Indenture"). The Notes bear interest at the rate of 12% per
annum payable monthly on the fifteenth of each month beginning with the second
full calendar month following issuance, to the person in whose name the Notes
(or any predecessor Notes) are registered at the close of business on the 1st of
each month.
Principal of, and premium, if any, and interest on, the Notes are payable,
and the Notes are exchangeable and transferable, at an office or agency of the
Trustee for the Notes or such other office or agency permitted under the Note
Indenture. The Notes are issued only in fully registered form, without coupons,
in denominations of $1,000 or any integral multiple thereof. The Company may
require the holder of a Note to reimburse the Company for any out-of-pocket
costs incurred by the Company with respect to a transfer or exchange of a Note.
The Trustee for the Notes will be Trust Management, Inc., Fort Worth, Texas.
The following is a summary of the Notes. Capitalized terms used but not
otherwise defined in this summary have the meanings assigned thereto in the Note
Indenture.
Subordination. Payment of principal and interest and all other amounts on
the Notes is unsecured and subordinated; subject to the prior payment in full of
all Senior Debt. Upon (i) the maturity of any Senior Debt, whether by lapse of
time, upon redemption or by acceleration or otherwise, or (ii) any default in
the payment of any amount due in respect of principal or interest in respect of
any Senior Debt or (iii) any distribution or payment of assets or securities of
the Company upon any dissolution, winding up, liquidation or reorganization of
the Company, the holders of Senior Debt will be entitled to receive payment in
full of the principal thereof and interest due thereon before the holders of the
Notes are entitled to receive any payment. During the continuance of any default
or event of default under any agreement governing Senior Debt permitting
acceleration of the maturity thereof (other than a default or event of default
relating to payment of principal or interest, either at maturity, upon
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<PAGE> 40
redemption, by declaration or otherwise) and upon giving notice thereof, no
payment may be made on the Notes for a period of 179 days after the notice is
given, but payments may thereafter be resumed unless such payments are then
prohibited by the Note Indenture. Only one notice may be given effect within any
period of 360 consecutive days, and no more than one notice may be given with
respect to any continuing default or event of default. If, in any of the
situations referred to above, a payment is made to the Trustee for the Notes or
to any holder thereof before all Senior Debt has been paid in full or provision
has been made for such payment to such Trustee or such holder, such payment must
be paid over to the holders of Senior Debt or their respective representatives.
The failure to make payment on account of principal of or other interest on the
Notes by reason of such subordination will not prevent the occurrence of any
event of default under the Note Indenture.
Optional Redemption. The Notes may be redeemed at the option of the
Company, in whole or from time to time in part, at any time, on not more than 60
days notice, at the following redemption prices (expressed as percentages of the
principal amounts thereof), together with accrued and unpaid interest (if any)
to the date of redemption (subject to the rights of the holders of Notes to
receive interest due on the related interest payment date): (i) Prior to March
31, 2000 - 103%; (ii) From April 1, 2000 to March 31, 2001 - 102%; (iii) From
April 1, 2001 to March 31, 2002 - 101%; and (iv) Subsequent to March 31, 2002 -
100%.
Restrictive Covenants. Certain of the covenants in the Note Indenture are
restrictive on the operations and activities of the Company. The covenants
described are subject to a number of important qualifications and limitations.
Limitation on Restricted Payments. The Note Indenture provides that,
subject to certain exceptions, the Company is not permitted to, directly or
indirectly, make certain restricted payments if, at the time of such restricted
payments or after giving effect thereto: (i) a default or an event of default
will have occurred and be continuing under the terms of the Note Indenture, or
(ii) the aggregate amount of all restricted payments subsequent to the Notes
Issuance Date (the "Notes Issue Date") would exceed (A) the aggregate net cash
proceeds received by the Company from an issue or sale of certain of its
qualified capital stock, subsequent to the Notes Issue Date (other than capital
stock issued or sold to (x) an employee stock ownership plan or other trust
established by the Company or (y) management employees); and (B) the amount by
which indebtedness of the Company, as applicable, is reduced on the Company's
balance sheet upon the conversion or exchange of such indebtedness subsequent to
the Notes Issue Date for qualified capital stock of the Company (less the amount
of any cash or other property distributed by the Company upon such conversion or
exchange).
Limitation on Sales of Assets. The Note Indenture provides that the Company
is not permitted to, make any asset disposition except in limited circumstances
unless (i) consideration is received by the Company at the time of such asset
disposition at least equal to the fair market value of the shares, property and
assets subject to such asset disposition, (ii) except in certain limited
circumstances, at least 75% of such consideration consists of cash, temporary
cash investments or the assumption of Senior Debt of the Company and the release
thereof from all liability relating thereto, (iii) 100% of the net cash proceeds
from such asset disposition are applied as follows: (A) within the 365 day
period after receipt of any net cash proceeds, or as permitted by the terms of
the Note Indenture (the last day of such period, an "Application Date"), the
Company may apply all or a portion of such net cash proceeds to reinvestment
(whether by acquisition of an existing business or expansion, including, without
limitation, capital expenditures) in one or more certain permitted lines of
business, or any combination thereof, and (B) to the extent such net cash
proceeds are not applied as set forth above in clause (A), the Company will
apply all remaining net cash proceeds of such asset disposition to an offer to
purchase (an "Asset Disposition Purchase Offer") Notes, on the first Business
Day occurring 60 Business Days after the Application Date (the "Asset
Disposition Purchase Date") for cash at a purchase price equal to 100% of the
principal amount of the Notes so purchased plus accrued and unpaid interest
thereon to the Asset Disposition Purchase Date, in accordance with the
procedures set forth in the Note Indenture. Any net cash proceeds which remain
after the acquisition by the Company of Notes in accordance with the procedures
set forth in the Note Indenture will cease to be net cash proceeds.
Notwithstanding the foregoing, the Company will not be required to make an Asset
Disposition Purchase Offer until such time as the aggregate amount of net cash
proceeds from asset dispositions required to be so applied to the purchase of
Notes exceeds $2,000,000, and then the total amount of such net cash proceeds
will be applied to an Asset Disposition Offer. The Company will comply, to the
extent applicable, with the requirements of Section 14(e) of the Exchange Act
and any other securities laws or regulations in connection with the repurchase
of Notes pursuant to any Asset Disposition Purchase Offer. To the extent that
the provisions of any securities laws or regulations conflict with
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<PAGE> 41
provisions relating to the Asset Disposition Purchase Offer, the Company will
comply with the applicable securities laws and regulations and will not be
deemed to have breached its obligations described above by virtue thereof.
Limitations on Transactions with Affiliates. The Note Indenture provides
that the Company is not permitted to, directly or indirectly, conduct any
business, enter into or permit to exist any transaction (including, without
limitation, the sale, conveyance, disposition, purchase, exchange or lease of
any property, the lending, borrowing or advancing of any money or the rendering
of any services) with, or for the benefit of, any affiliate of the Company
unless such affiliate transaction (i) is in the best interest of the Company,
(ii) is on terms as favorable to the Company as those that could be obtained at
the time of such transaction for a similar transaction in arm's-length dealings
with a Person who is not such an affiliate and (iii) with respect to each such
transaction involving aggregate payments or value in excess of $750,000, the
transaction is approved by a disinterested majority of the board of directors of
the Company; provided, however, that the foregoing will not prohibit (A) any
restricted payment permitted to be paid under "Limitation on Restricted
Payments", (B) any issuance of securities or other payments, awards or grants in
cash, securities or otherwise pursuant to, or the funding of, employment
arrangements, stock options and stock ownership plans approved by the board of
directors of the Company, (C) loans or advances permitted under the Note
Indenture to employees in the ordinary course of business in accordance with
past practices of the Company, (D) the payment of reasonable fees to independent
directors of the Company or (E) reasonable and customary indemnification
arrangements between the Company and their respective directors and officers (to
the extent that such indemnification arrangements are permitted under applicable
law).
Trustee and Escrow Agent. The Trustee for the Notes is Trust Management,
Inc., a Texas trust company. The escrow agent for the Notes is Norwest Bank
Texas, N.A.
DESCRIPTION OF CREDIT FACILITY
On October 13, 1998, the Company entered into a $10 million revolving
credit facility with Comerica Bank (the "Credit Facility" or "Senior Debt"). The
following description of the Credit Facility is qualified in its entirety by
reference to the original agreement, copies of which have been previously filed
with the Securities and Exchange Commission. The following is a description of
the general terms of the Credit Facility.
SECURITY
Indebtedness of the Company under the Credit Facility is secured by a first
priority security interest in substantially all of the personal property
(including, without limitation, accounts receivable, inventory, equipment and
fixtures, and general intangibles) of the Company, whether now owned or
hereafter acquired.
INTEREST
Indebtedness under the Credit Facility bears interest at a floating rate
equal to, at the Company's option, the Eurodollar Rate (as defined in the credit
agreement) plus 3.35% or Comerica Bank's Prime Rate plus .75%. The Company is
required to pay interest on a monthly basis under the terms of the terms of the
Credit Facility.
BORROWING BASE
Advances under the Credit Facility are limited to 70% of eligible pawn
loans, 70% of eligible pawn service charges receivable, and from 40% to 70% of
eligible inventories.
MATURITY
Loans made pursuant to the Credit Facility may be borrowed, repaid and
reborrowed from time to time until the October 13, 2001, subject to the
satisfaction of certain conditions on the date of any such borrowing.
FEES
The Company is required to pay Comerica Bank a commitment fee equal to .50%
per annum, payable monthly, on the committed undrawn amount of the Credit
Facility. In addition, the Company was required to pay a non-refundable closing
fee in an amount equal to 1% of the total commitment amount of the Credit
Facility.
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<PAGE> 42
CONDITIONS TO EXTENSIONS OF CREDIT
The obligation of Comerica Bank to make advances under the Credit Facility
are subject to the satisfaction of certain customary conditions including, but
not limited to, the absence of a default or event of default under the Credit
Facility, all representations and warranties under the Credit Facility being
true and correct in all material respects and the absence of a material adverse
change.
COVENANTS
The Credit Facility contains customary covenants of the Company, including,
without limitation, restrictions on (i) the incurrence of debt, (ii) the sale of
assets, (iii) mergers, acquisitions and other business combinations, (iv)
investments, as well as prohibitions on the payment of dividends to, or the
repurchase or redemption of stock from shareholders and (v) various financial
covenants, including covenants requiring the maintenance of a minimum store
contribution percentage for stores open twelve months or more and a minimum net
worth requirement.
EVENTS OF DEFAULT
The Credit Facility contains certain customary events of default, including
without limitation, (i) the non-payment of principal or interest when due,
subject to the applicable grace periods in certain circumstances, (ii)
non-fulfillment of the covenants described above, (iii) certain changes in
control of the ownership of the Company, (iv) certain events of bankruptcy or
insolvency, (v) ERISA funding requirement deficiencies and (vi) material
judgments. If any event of default occurs, Comerica Bank will be entitled to
take all actions permitted to be taken by a secured creditor under the Uniform
Commercial Code and to accelerate the amounts due under the Credit Facility and
may require all such amounts outstanding thereunder to be immediately paid in
full.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock and selected
provisions of its Restated Certificate of Incorporation and By-laws, is a
summary and is qualified in its entirety by the Company's Restated Certificate
of Incorporation and By-laws, as amended, copies of which have been previously
filed with the Securities and Exchange Commission.
GENERAL
The total amount of authorized capital stock of the Company consists of
20,000,000 shares of Common Stock, par value $.01 per share and 10,000,000
shares of preferred stock, par value $.01 per share (the "Preferred Stock"). The
Company had 7,230,877 shares of Common Stock and no shares of Preferred Stock
issued at January 30, 1999. The Company has approximately 1,000 holders of
record of the Company's Common Stock. The following summary of certain
provisions of the Company's capital stock describes all material provisions of,
but does not purport to be complete and is subject to, and qualified in its
entirety by, the Restated Certificate of Incorporation and the By-laws of the
Company which have been previously filed with the Securities and Exchange
Commission and by the provisions of applicable law.
The Restated Certificate of Incorporation and By-laws contains certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors and which may have the
effect of delaying, deferring or preventing a future takeover or change in
control of the Company unless such takeover or change in control is approved by
the Board of Directors.
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<PAGE> 43
COMMON STOCK
The issued and outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Subject to the prior rights of the holders of any
Preferred Stock, the holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available therefor at such time and
in such amounts as the Board of Directors may from time to time determine. The
shares of Common Stock are not convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of Preferred Stock
then outstanding. Each outstanding share of Common Stock is entitled to one vote
on all matters submitted to a vote of stockholders. There is no cumulative
voting. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Except as otherwise required by law or the Restated
Certificate of Incorporation, the Common Stock will vote on all matters
submitted to a vote of the stockholders, including the election of directors.
PREFERRED STOCK
The Board of Directors may, without further action by the Company's
stockholders, from time to time, direct the issuance of shares of Preferred
Stock in series and may, at the time of issuance, determine the rights,
preferences and limitations of each series. Satisfaction of any dividend
preferences of outstanding shares of Preferred Stock would reduce the amount of
funds available for the payment of dividends on shares of Common Stock. Holders
of shares of Preferred Stock may be entitled to receive a preference payment in
the event of any liquidation, dissolution or winding-up of the Company before
any payment is made to the holders of shares of Common Stock. Under certain
circumstances, the issuance of shares of Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest, the
assumption of control by a holder of a large block of the Company's securities
or the removal of incumbent management. Upon the affirmative vote of a majority
of the total number of directors then in office, the Board of Directors, without
stockholder approval, may issue shares of Preferred Stock with voting and
conversion rights which could adversely affect the holders of shares of Common
Stock. The Company has no present intention to issue any shares of Preferred
Stock.
SERIES A WARRANTS
Presently, the Company has outstanding Series A Warrants to purchase an
aggregate of 1,380,000 shares of Common Stock at an exercise price of $6.00 per
share. In connection with this Offering, the Company has agreed to issue up to
600,000 Series A Warrants to purchase an aggregate of 600,000 shares of Common
Stock (assuming a maximum subscription) at an exercise price of $6.00 per share.
See "Plan of Distribution." The Series A Warrants are registered in a form
pursuant to an agreement dated March 20, 1998 (the "Series A Warrant
Agreement"), between the Company and Continental Stock Transfer & Trust Company,
a New York corporation, as the Warrant Agent (the "Warrant Agent"). The 600,000
Series A Warrants issued in connection with this Offering will be issued
pursuant to a supplemental warrant agreement between the Company and the Warrant
Agent. The following discussion of certain terms and provisions of the Series A
Warrants is qualified in its entirety by reference to the Series A Warrant
Agreement.
Each of the Series A Warrants entitles the registered holder to purchase
one share of Common Stock. The Series A Warrants are exercisable at a price
equal to $6.00 subject to certain adjustments. The Series A Warrants are
entitled to the benefit of adjustments in their exercise prices and in the
number of shares of Common Stock or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
The Series A Warrants may be exercised at any time and continuing
thereafter until March 17, 2003, unless such period is extended by the Company.
After the expiration date, Series A Warrant holders shall have no further
rights. Series A Warrants may be exercised by surrendering the certificate
evidencing such Series A Warrant, with the form of election to purchase on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price and any transfer tax, to the Warrant Agent. If
less than all of the Series A Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number
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<PAGE> 44
of Series A Warrants. Payment of the exercise price may be made by cash, bank
draft or official bank or certified check equal to the exercise price.
Series A Warrant holders do not have any voting or any other rights as
shareholders of the Company. The Company has the right at any time to redeem the
Series A Warrants, at a price of $.05 per Series A Warrant, by written notice to
the registered holders thereof, mailed not less than 30 nor more than 60 days
prior to the Redemption Date. The Company may exercise this right only if the
closing bid price for the Common Stock for seven trading days during a 10
consecutive trading day period ending no more than 15 days prior to the date
that the notice of redemption is given, equals or exceeds $9.00 per share,
subject to adjustment. If the Company exercises its right to call Series A
Warrants for redemption, such Series A Warrants may still be exercised until the
close of business on the day immediately preceding the Redemption Date. If any
Series A Warrant called for redemption is not exercised by such time, it will
cease to be exercisable, and the holder thereof will be entitled only to the
repurchase price. Notice of redemption will be mailed to all holders of Series A
Warrants of record at least 30 days, but not more than 60 days, before the
Redemption Date. The foregoing notwithstanding, the Company may not call the
Series A Warrants at any time that a current registration statement under the
Act is not then in effect.
The Series A Warrant Agreement permits the Company and the Warrant Agent
without the consent of Series A Warrant holders, to supplement or amend the
Series A Warrant Agreement in order to cure any ambiguity, manifest error or
other mistake, or to address other matters or questions arising thereafter that
the Company and the Warrant Agent deem necessary or desirable and that do not
adversely affect the interest of any Series A Warrant holder. The Company and
the Warrant Agent may also supplement or amend the Series A Warrant Agreement in
any other respect with the written consent of holders of not less than a
majority in the number of the Series A Warrants then outstanding; however, no
such supplement or amendment may (i) make any modification of the terms upon
which the Series A Warrants are exercisable or may be redeemed; or (ii) reduce
the percentage interest of the holders of the Series A Warrants without the
consent of each Series A Warrant holder affected thereby.
In order for the holder to exercise a Series A Warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of Common Stock underlying the Series A Warrants,
and the issuance of such shares to the holder must be registered, qualified or
exempt under the laws of the state in which the holder resides. If required, the
Company will file a new registration statement with the Commission with respect
to the securities underlying the Series A Warrants prior to the exercise of such
Series A Warrants and will deliver a prospectus with respect to such securities
to all holders thereof as required by Section 10(a)(3) of the Act. See "Risk
Factors - Necessity to Maintain Current Prospectus and Registration Statement"
and "State Blue Sky Registration Required to Exercise Warrants."
SERIES B WARRANTS
Presently, the Company has outstanding Series B Warrants to purchase an
aggregate of 1,380,000 shares of Common Stock at an exercise price of $8.00 per
share. The Series B Warrants are registered in a form pursuant to the Warrant
Agreement between the Company and Warrant Agent. The following discussion of
certain terms and provisions of the Series B Warrants is qualified in its
entirety by reference to the Warrant Agreement.
Each of the Series B Warrants entitles the registered holder to purchase
one share of Common Stock. The Series B Warrants are exercisable at a price
equal to $8.00 subject to certain adjustments. The Series B Warrants are
entitled to the benefit of adjustments in their exercise prices and in the
number of shares of Common Stock or other securities deliverable upon the
exercise thereof in the event of a stock dividend, stock split,
reclassification, reorganization, consolidation or merger.
The Series B Warrants may be exercised at any time and continuing
thereafter until March 17, 2004, unless such period is extended by the Company.
After the expiration date, Series B Warrant holders shall have no further
rights. Series B Warrants may be exercised by surrendering the certificate
evidencing such Series B Warrant, with the form of election to purchase on the
reverse side of such certificate properly completed and executed, together with
payment of the exercise price and any transfer tax, to the Warrant Agent. If
less than all of the Series B Warrants evidenced by a warrant certificate are
exercised, a new certificate will be issued for the remaining number of Series B
Warrants. Payment of the exercise price may be made by cash, bank draft or
official bank or certified check equal to the exercise price.
40
<PAGE> 45
Series B Warrant holders do not have any voting or any other rights as
shareholders of the Company. The Company has the right at any time to redeem the
Series B Warrants, at a price of $.05 per Series B Warrant, by written notice to
the registered holders thereof, mailed not less than 30 nor more than 60 days
prior to the Redemption Date. The Company may exercise this right only if the
closing bid price for the Common Stock for seven trading days during a 10
consecutive trading day period ending no more than 15 days prior to the date
that the notice of redemption is given, equals or exceeds $11.00 per share,
subject to adjustment. If the Company exercises its right to call Series B
Warrants for redemption, such Series B Warrants may still be exercised until the
close of business on the day immediately preceding the Redemption Date. If any
Series B Warrant called for redemption is not exercised by such time, it will
cease to be exercisable, and the holder thereof will be entitled only to the
repurchase price. Notice of redemption will be mailed to all holders of Series B
Warrants of record at least 30 days, but not more than 60 days, before the
Redemption Date. The foregoing notwithstanding, the Company may not call the
Series B Warrants at any time that a current registration statement under the
Act is not then in effect.
The Warrant Agreement permits the Company and the Warrant Agent without the
consent of Series B Warrant holders, to supplement or amend the Warrant
Agreement in order to cure any ambiguity, manifest error or other mistake, or to
address other matters or questions arising thereafter that the Company and the
Warrant Agent deem necessary or desirable and that do not adversely affect the
interest of any Series B Warrant holder. The Company and the Warrant Agent may
also supplement or amend the Warrant Agreement in any other respect with the
written consent of holders of not less than a majority in the number of the
Series B Warrants then outstanding; however, no such supplement or amendment may
(i) make any modification of the terms upon which the Series B Warrants are
exercisable or may be redeemed; or (ii) reduce the percentage interest of the
holders of the Series B Warrants without the consent of each Series B Warrant
holder affected thereby.
In order for the holder to exercise a Series B Warrant, there must be an
effective registration statement, with a current prospectus on file with the
Commission covering the shares of Common Stock underlying the Series B Warrants,
and the issuance of such shares to the holder must be registered, qualified or
exempt under the laws of the state in which the holder resides. If required, the
Company will file a new registration statement with the Commission with respect
to the securities underlying the Series B Warrants prior to the exercise of such
Series B Warrants and will deliver a prospectus with respect to such securities
to all holders thereof as required by Section 10(a)(3) of the Act. See "Risk
Factors - Necessity to Maintain Current Prospectus and Registration Statement"
and "State Blue Sky Registration Required to Exercise Warrants."
REPRESENTATIVE WARRANTS
Presently, the Company has outstanding Representative's Warrants to
purchase up to 120,000 shares, 120,000 Series A Warrants and 120,000 Series B
Warrants. The Representatives' Warrants are exercisable for a four-year period
commencing March 17, 1999 at an exercise price of $8.70 per share of Common
Stock, $.15 per warrant for the Series A Warrants, and $.075 per warrant for the
Series B Warrants. In addition, the Company has granted certain registration
rights with respect to registration of the shares of Common Stock and Warrants
underlying the Representative's Warrants (the "Underlying Warrants") and the
shares of Common Stock issuable upon exercise of the Underlying Warrants. The
Company has agreed to pay the Representative upon the exercise or redemption of
the Series A Warrants and Series B Warrants a fee equal to 5% of the gross
proceeds received by the Company from the exercise of the Series A Warrants and
Series B Warrants and 5% of the aggregate redemption price for Series A Warrants
and Series B Warrants redeemed. Such fee will be paid to the Representative or
its designee no sooner March 17, 1999. The Company has agreed to indemnify the
First London Securities Corporation, the Company's underwriter in its initial
public offering, against certain liabilities arising under the Securities Act of
1933.
OTHER WARRANTS
Presently, the Company has outstanding warrants to purchase an aggregate of
219,347 shares of Common Stock at an exercise price of $5.50 per share. The
Company has granted holders of these warrants certain piggy-back registration
rights. These warrants expire January 2, 2002.
41
<PAGE> 46
CERTAIN PROVISIONS OF THE RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS
The Restated Certificate of Incorporation provides for the Board to be
divided into three classes, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of the Board will be elected each year.
See "Management." Under the Delaware General Corporation Law, directors serving
on a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of the
outstanding voting stock from obtaining control of the Board until the second
annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the effect
of discouraging a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company and could increase the likelihood
that incumbent directors will retain their positions.
The Restated Certificate of Incorporation provides that stockholder action
can be taken only at an annual or special meeting of stockholders and cannot be
taken by written consent in lieu of a meeting. The Restated Certificate of
Incorporation and the By-laws provide that, except as otherwise required by law,
special meetings of the stockholders can only be called pursuant to a resolution
adopted by a majority of the Board of Directors or by the Chief Executive
Officer of the Company. Stockholders will not be permitted to call a special
meeting or to require the Board to call a special meeting.
The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of the Company, including
proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or
nominations specified in the notice of meeting or brought before the meeting by
or at the direction of the Board or by a stockholder who was a stockholder of
record on the record date for the meeting, who is entitled to vote at the
meeting and who has given to the Company's Secretary timely written notice, in
proper form, of the stockholder's intention to bring that business before the
meeting. Although the By-laws do not give the Board the power to approve or
disapprove stockholder nominations of candidates or proposals regarding other
business to be conducted at a special or annual meeting, the By-laws may have
the effect of precluding the conduct of certain business at a meeting if the
proper procedures are not followed or may discourage or deter a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of the Company.
The Restated Certificate of Incorporation and By-laws provide that the
affirmative vote of holders of at least 66 2/3% of the total votes eligible to
be cast in the election of directors is required to amend, alter, change or
repeal certain of their provisions. This requirement of a super-majority vote to
approve amendments to the Restated Certificate of Incorporation and By-laws
could enable a minority of the Company's stockholders to exercise veto power
over any such amendments.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company will be subject to the "Business Combination" provisions of the
Delaware General Corporation Law. In general, such provisions prohibit a
publicly held Delaware corporation from engaging in various "business
combination" transactions with any "interested stockholder" for a period of
three years after the date of the transaction in which the person became an
"interested stockholder," unless: (i) the transaction is approved by the Board
of Directors prior to the date the "interested stockholder" obtained such
status; (ii) upon consummation of the transaction which resulted in the
stockholder becoming an "interested stockholder," the "interested stockholder,"
owned at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding for purposes of determining the number
of shares outstanding those shares owned by (a) persons who are directors and
also officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
to such date the "business combination" is approved by the board of directors
and authorized at an annual or special meeting of stockholders by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the "interested stockholder." A "business combination" is defined
to include mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. In general, an "interested stockholder" is a person
who, together with affiliates and associates, owns (or within three years, did
own) 15% or more of a corporation's voting stock. The statute could prohibit or
delay mergers or other takeover or change in control attempts with respect to
the Company and, accordingly, may discourage attempts to acquire the Company.
42
<PAGE> 47
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate of Incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law. In
addition, the Restated Certificate of Incorporation will provide that the
Company shall indemnify directors and officers of the Company to the fullest
extent permitted by such law. The Company has entered into separate
indemnification agreements with its current directors and executive officers
which provides such persons indemnification protection in the event the Restated
Certificate of Incorporation is subsequently amended.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Warrants is
Continental Stock Transfer & Trust Company, a New York corporation.
PLAN OF DISTRIBUTION
The Company is offering up to $10,000,000 in aggregate principal amount of
the Notes. As of the date of this Prospectus, the Company has issued $4,244,000
of Notes in connection this Offering. The Notes are being offered by
participating soliciting broker dealers who are members of the National
Association of Securities Dealers, Inc. ("NASD"). Such broker dealers shall
enter into selling agreements with the Company to use their best efforts to
solicit subscriptions for the Notes but will make no legal commitment to sell to
investors, or to buy as dealers, any specific amount of the Notes. The Company
shall agree to pay each soliciting broker dealer, in consideration for its
services, a sales commission of 6.0% of the principal amount Notes sold to
investors which such broker dealer identified. Of that amount, a portion may
constitute an unallocated due diligence and marketing fee. The Company has
agreed to indemnify the broker dealers against certain liabilities, including
liabilities under applicable securities laws.
Massie Capital, Ltd., a duly licensed member of the NASD, is serving as
managing broker dealer for the Offering. Massie Capital, Ltd. has agreed to
solicit the participation in the Offering of broker dealers acceptable to the
Company, and to assist participating broker dealers in the distribution of this
Prospectus. For their services as managing broker dealer, Massie Capital, Ltd.
will receive a commission of 2.0% of the principal amount of Notes sold in this
Offering. Massie Capital, Ltd. will also serve as a selling broker dealer, and
in such case, will be entitled to a sales commission of 6.0% of the principal
amount of the Notes sold to investors identified by them. In addition, the
Company has agreed to pay Massie Capital, Ltd. a non-accountable expense
allowance of three percent (3%) of the gross proceeds of this Offering. Massie
Capital, Ltd.'s expenses in excess of the non-accountable expense allowance will
be paid by Massie Capital, Ltd. To the extent that the expenses of Massie
Capital, Ltd. are less that the amount of the non-accountable expense allowance
received, such excess shall be deemed to be additional compensation to Massie
Capital, Ltd.
The Company has agreed to issue 60 Series A Warrants to Massie Capital,
Ltd. for each $1,000 in principal amount of Notes sold. Massie Capital, Ltd.
will distribute up to 40 of such Series A Warrants to participating broker
dealers as additional compensation under the Offering. Each Series A Warrant
will have an exercise price of $6.00 and will mature on March 17, 2003.
See "Description of Capital Stock - Series A Warrants."
The Offering will terminate on September 30, 2000, unless sooner terminated
by the Company upon failure to achieve the minimum subscription amount, upon the
sale of all of the Notes or if the Company believes that additional selling
efforts will be unsuccessful. Early termination of the Offering may result in
the Company selling less than $10 million in aggregate principal amount of the
Notes and may expose prior purchasers of Notes to certain risks. See "Risk
Factors - Inability to Sell Maximum Subscription of Notes."
43
<PAGE> 48
The Company has agreed to indemnify participating broker dealers against
any costs or liabilities incurred by the broker dealer by reasons of
misstatements or omissions to state material facts in connection with the
statements made in the Registration Statement and the Prospectus. The broker
dealers have agreed in turn to indemnify the Company against any liabilities by
reason of misstatements or omissions to state material facts in connection with
the statements made in the Prospectus, based on information relating to the
broker dealer and furnished in writing by the broker dealer. To the extent that
this section may purport to provide exculpation from possible liabilities
arising from the federal securities laws, in the opinion of the Commission, such
indemnification is contrary to public policy and therefore unenforceable.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of such agreements which are filed as exhibits to the Registration Statement.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is based upon the provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulation promulgated thereunder, judicial authority and current administrative
rulings and practice, all of which are subject to change, possibly with
retroactive effect. This discussion does not purport to deal with all aspects of
U.S. Federal income taxation that might be relevant to particular holders in
light of their personal investment circumstances or status, nor does it discuss
the U.S. Federal income tax consequences to certain types of holders subject to
special treatment under the U.S. Federal income tax laws (for example, financial
institutions, insurance companies, dealers in securities, tax-exempt
organizations, or taxpayers holding the Notes as part of a "straddle," "hedge"
or "conversion transaction"). Moreover, the effect of any applicable state,
local, foreign, gift, estate or other tax laws generally is not discussed.
Except as otherwise indicated below, this discussion assumes that the Notes
are held as capital assets (as defined in Section 1221 of the Code) by holders
thereof. Additionally, the discussion assumes that the holder of the Note is (i)
an individual who is a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized under the laws of
the United States, or any political subdivision thereof, (iii) an estate the
income of which is subject to U.S. Federal income taxation regardless of its
source, (iv) a trust with respect to which a court within the United States is
able to exercise primary supervision of the administration of such trust and one
or more United States fiduciaries have the authority to control all substantial
decisions of such trust or (v) a person whose worldwide income or gain is
otherwise subject to U.S. Federal income taxation on a net basis. Potential
Federal income tax consequences to persons who are not listed above are not
addressed. Prospective holders are urged to consult their own tax advisors
regarding the Federal, state, local, foreign and other tax consequences and
other tax considerations of the acquisition, ownership and disposition of the
Notes. This discussion is limited to the material U.S. Federal income tax
consequences to initial holders of the Notes.
Stated Interest on Notes. The stated interest on the Notes generally will
be includable in the income of the holder as ordinary income at the time such
interest is received or accrued, in accordance with such holder's method of
accounting for U.S. Federal income tax purposes.
Market Discount on Resale of Notes. A holder of a Note should be aware that
the purchase or resale of a Note may be affected by the "market discount"
provisions of the Code. The market discount rules generally provide that if a
holder of a Note purchases the Note at a market discount (i.e. a discount other
than at original issue), any gain recognized upon the disposition of the Notes
by the holder will be taxable as ordinary interest income, rather than as
capital gain, to the extent such gain does not exceed the accrued market
discount on such Note at the time of disposition. "Market discount" generally
means the excess, if any, of a Note's stated redemption price at maturity over
the price paid by the holder thereof, unless a de minimis exception applies. A
holder who acquires a Note at a market discount also may be required to defer
the deduction of a portion of the amount of interest that the holder paid or
accrued during the taxable year on indebtedness incurred or maintained to
purchase or carry such Note, if any.
Any principal payments on a Note acquired by a holder at a market discount
will be included in gross income as ordinary income (generally, as interest
income) to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of the accrued market discount for purposes of
determining the tax treatment of subsequent payments on, or dispositions of, a
Note is reduced by the amounts so treated as ordinary income.
44
<PAGE> 49
A holder of a Note acquired at a market discount may elect to include
market discount in gross income, for Federal income tax purposes, as such market
discount accrues, either on a straight-line basis or on a constant interest rate
basis. This current inclusion election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the IRS. If a holder of a Note makes such an election, the foregoing rules
regarding the recognition of ordinary interest income on sales and other
dispositions and the receipt of principal payments with respect to such Note,
and regarding the deferral of interest deductions on indebtedness incurred or
maintained to purchase or carry such Note, will not apply.
Amortizable Bond Premium. A subsequent holder that purchases a Note for an
amount in excess of the sum of all amounts payable on the Note after the
purchase date, other than stated interest, will be considered to have purchased
the Note at a "premium." A holder generally may elect to amortize the premium
over the remaining term of the Note on a constant yield method. The amount
amortized in any year will be treated as a reduction of the holder's interest
income from the Note. Bond premium on a Note held by a holder that does not make
such an election will decrease the gain or otherwise increase the loss otherwise
recognized on the disposition of the Note. The election to amortize premium on a
constant yield method once made applies to all debt obligations held or
subsequently acquired by the electing holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
Sale, Exchange or Retirement of the Notes. In general, subject to the
market discount provisions and amortizable bond premium provisions discussed
above, upon the sale, exchange or redemption of a Note, a holder generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash proceeds and the fair market value of any property received on the sale,
exchange or redemption (except to the extent such amount is attributable to
accrued interest income not previously included in income which is taxable as
ordinary income) and (ii) such holders' adjusted tax basis in the Note. A
holder's adjusted tax basis in a Note generally will equal the cost of the Note
to such holder. Such capital gain or loss will be long-term capital gain or loss
if the holder's holding period in the Note is more than one year at the time of
sale, exchange or redemption.
Backup Withholding. A holder of a Note may be subject to backup withholding
at the rate of 31% with respect to interest paid on the Notes and the proceeds
from the sale, exchange, redemption or retirement of the Note, unless the holder
is (i) a corporation or comes within other exempt categories and, when required,
demonstrates that fact or (ii) provides a correct taxpayer identification
number, certifies as to no loss of exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A holder of a note who does not provide the Company with his correct taxpayer
identification number may be subject to penalties imposed by the IRS.
A holder of a Note who is not a U.S. person will generally be exempt from
backup withholding and information reporting requirements, but may be required
to comply with certification and identification procedures in order to obtain an
exemption from backup withholding and information reporting. Any amount paid as
backup withholding will be creditable against the holder's U.S.
Federal income tax liability.
LEGAL MATTERS
The validity of the Securities offered hereby has been passed upon for the
Company by Jordaan & Pennington, P.L.L.C., Dallas, Texas. Certain legal matters
in connection with the sale of the Securities offered hereby will be passed on
for the managing broker dealer by Tom Herbelin, Dallas, Texas. Members of
Jordaan & Pennington, P.L.L.C. own beneficially an aggregate of 74,933 shares of
Common Stock, 5,486 Series A Warrants, and 5,486 Series B Warrants.
EXPERTS
The consolidated financial statements of PawnMart, Inc. and subsidiaries as
of January 30, 1999 and January 31, 1998, and for each of the years in the
three-year period ended January 30, 1999, have been included herein in reliance
upon the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
45
<PAGE> 50
CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets............................................... F-3
Consolidated Statements of Operations..................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) ................ F-6
Consolidated Statements of Cash Flows..................................... F-7
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE> 51
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
F-2
<PAGE> 52
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>
F-3
<PAGE> 53
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 share) -- 6
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.
F-4
<PAGE> 54
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.
F-5
<PAGE> 55
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 Total
purchase warrants Additional Preferred stockholders'
----------------------- paid-in stock Accumulated Treasury equity
Shares Amount capital discount deficit stock (deficit)
---------- ---------- ---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1996 -- $ -- $ 3,210 $ -- $ (4,482) $ (50) $ (1,274)
Issuance of common stock (note 8) -- -- 30 -- -- -- 31
Issuance of preferred stock (note 8) -- -- 36 -- -- -- 36
Acquisition of 9,892 shares of
common stock (note 8) -- -- -- -- -- (15) (15)
Net loss -- -- -- -- (3,056) -- (3,056)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at January 26, 1997 -- -- 3,276 -- (7,538) (65) (4,278)
Issuance of common stock (note 8) -- -- 30 -- -- -- 31
Acquisition of 3,297 shares of
common stock (note 8) -- -- -- -- -- (5) (5)
Issuance of preferred stock (notes
8 and 10) -- -- 1,147 -- -- -- 1,153
Recognition of Convertible
Subordinated Debenture beneficial
conversion feature (note 6) -- -- 2,380 -- -- -- 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) -- (67)
Net loss -- -- -- -- (5,436) -- (5,436)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at January 31, 1998 -- -- 7,657 (674) (13,191) (70) (6,222)
Issuance of common stock and
warrants (note 2) 1,380,000 86 5,310 -- -- -- 5,583
Issuance of unregistered common
stock in exchange for services
(note 8) -- -- 200 -- -- -- 200
Conversion of Convertible
Subordinated Debentures (notes
2 and 6) -- -- 9,053 -- -- -- 9,077
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) -- (18)
Net loss -- -- -- -- (3,713) -- (3,713)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance at January 30, 1999 1,380,000 $ 86 $ 22,242 $ -- $ (17,596) $ (70) $ 4,907
========== ========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
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.
F-7
<PAGE> 57
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.
F-8 (Continued)
<PAGE> 58
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(c) Loans and Income Recognition
Pawn loans (loans) are generally made on the pledge of tangible
personal property for a one month period, with an automatic
sixty day extension period. Pawn service charges on loans are
recognized on an accrual basis during the initial thirty day
loan period and applicable sixty day extension period, net of
an allowance for pawn service charges deemed uncollectible,
based on the Company's historical loan redemption rate. If a
loan is not repaid, the principal amount advanced on the
loan, exclusive of any uncollected pawn service charges,
becomes the carrying value of the forfeited collateral
(inventory), which is recovered through sale.
(d) Inventories
Inventories are recorded at cost and represent merchandise
acquired from forfeited loans, merchandise purchased directly
from the public and merchandise purchased from vendors.
Inventories from forfeited loans are recorded at the
principal amount advanced on the related collateral,
exclusive of any uncollected pawn service charges. The cost
of inventories is determined on the specific identification
method. Inventories are stated at the lower of cost or
market. Interim payments from customers on layaway sales are
credited to deferred revenue and subsequently recorded as
income during the period in which final payment is received.
Deferred revenues related to layaway sales totaled
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.
F-9 (Continued)
<PAGE> 59
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.
F-10 (Continued)
<PAGE> 60
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(3) Summary of Significant Accounting Policies, Continued
(k) Fair Values of Financial Instruments
Pawn loans are outstanding for a relatively short period of time,
generally 90 days or less, depending on local regulations.
The rate of finance and service charge is determined by
regulatory guidelines and bears no valuation relationship to
interest rate market movements. For these reasons, management
believes that the fair value of pawn loans approximates their
carrying value. The 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>
F-11 (Continued)
<PAGE> 61
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>
F-12 (Continued)
<PAGE> 62
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>
F-13 (Continued)
<PAGE> 63
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.
F-14 (Continued)
<PAGE> 64
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.
F-15 (Continued)
<PAGE> 65
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).
F-16 (Continued)
<PAGE> 66
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.
F-17 (Continued)
<PAGE> 67
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>
F-18 (Continued)
<PAGE> 68
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.
F-19 (Continued)
<PAGE> 69
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
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.
F-20
<PAGE> 70
================================================================================
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN DULY AUTHORIZED
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE MANAGING BROKER DEALER. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF, ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER THE
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 11
Capitalization........................ 12
Selected Historical Consolidated
Financial Data...................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Quantitative and Qualitative
Disclosures About Market Risk....... 21
Business.............................. 21
Management............................ 29
Security Ownership of Certain
Beneficial Owners and Management.... 34
Certain Relationships and Related
Transactions........................ 35
Description of Subordinated Notes Due
2004................................ 35
Description of Credit Facility........ 37
Description of Capital Stock.......... 38
Plan of Distribution.................. 43
Certain U.S. Federal Income Tax
Considerations...................... 44
Legal Matters......................... 45
Experts............................... 45
Consolidated Financial Statements..... F-1
</TABLE>
================================================================================
================================================================================
$10,000,000
12% SUBORDINATED NOTES DUE 2004
[PAWNMART, INC.]
---------------------
PROSPECTUS
---------------------
MASSIE CAPITAL, LTD.
May 20, 1999
================================================================================
<PAGE> 71
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses to be incurred in connection
with this Registration Statement (assuming a maximum subscription), all of
which will be borne by the Company. All of such expenses are estimates, other
than the filing fees payable to the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 3,780.80
NASD Filing Fee............................................... 1,860.00
Accounting Fees and Expenses.................................. 50,000.00*
Legal Fees and Expenses (Other Than Blue Sky)................. 100,000.00*
Managing Broker-Dealer Non-accountable Expense Allowance...... 300,000.00*
Printing and Engraving........................................ 60,000.00*
Transfer Agent and Registrar Fees............................. 5,000.00*
Blue Sky Taxes, Fees and Expenses............................. 40,000.00*
Miscellaneous Expenses........................................ 39,359.20*
-----------
Total Expenses.......................................... $600,000.00*
===========
</TABLE>
* Estimated amount.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") permits a
corporation to indemnify a person who was or is a director, officer, employee,
or agent of a corporation or who serves at the corporation's request as a
director, officer, partner, proprietor, trustee, employee, or agent of another
corporation, partnership, trust, joint venture, or other enterprise (an
"outside enterprise"), who was, is, or is threatened to be named a defendant in
a legal proceeding by virtue of such person's position in the corporation or in
an outside enterprise, but only if the person acted in good faith and
reasonably believed, in the case of conduct in the person's official capacity,
that the conduct was in or, in the case of all other conduct, that the conduct
was not opposed to the corporation's best interest, and, in the case of a
criminal proceeding, the person had no reasonable cause to believe the conduct
was unlawful. A person may be indemnified within the above limitations against
judgments, fines, settlements, and reasonable expenses actually incurred.
Generally, an officer, director, agent, or employee of a corporation or a
person who serves at the corporation's request as an officer, director, agent,
or employee of an outside enterprise may not be indemnified, however, against
judgments, fines, and settlements incurred in a proceeding in which the person
is found liable to the corporation or is found to have improperly received a
personal benefit and may not be indemnified for expenses unless, and only to
the extent that, in view of all the circumstances, the person is fairly and
reasonably entitled to indemnification for such expenses. A corporation must
indemnify a director, officer, employee, or agent against reasonable expenses
incurred in connection with a proceeding in which the person is a party because
of the person's corporate position, if the person was successful, on the merits
or otherwise, in the defense of the proceeding. Under certain circumstances, a
corporation may also advance expenses to such person.
Section 145 of the DGCL also permits a corporation to purchase and
maintain insurance or to make other arrangements on behalf of any of the above
persons against any liability asserted against and incurred by the person in
such capacity, or arising out of the person's status as such a person, whether
or not the corporation would have the powers to indemnify the person against
the liability under applicable law.
II-1
<PAGE> 72
The Company's Restated Certificate of Incorporation provides that the
Company's directors will have no personal liability to the Company or its
stockholders for monetary damages for breach of, or an alleged breach of, a
director's fiduciary duty of care. This provision has no effect on director
liability for (i) a breach of the directors' duty of loyalty to the Company or
its stockholders, (ii) acts or omissions not in good faith that constitute a
breach of duty of a director or involving intentional misconduct or knowing
violations of law, (iii) approval of any transaction from which a director
derives an improper personal benefit, or (iv) an act or omission for which the
liability of a director is expressly provided by an applicable statute. In
addition, the Company's Restated Certificate of Incorporation provides that any
additional liabilities permitted to be eliminated by subsequent legislation
will automatically be eliminated without further stockholder vote, unless
additional stockholder approval is required by such legislation. The Company is
generally required to indemnify its directors, officers, employees, and agents
against all judgments, fines, settlements, legal fees, and other expenses
incurred in connection with pending or threatened legal proceedings because of
the person's position with the Company or another entity that the person serves
at the Company's request, subject to certain conditions, and to advance funds
to enable them to defend against such proceedings. Article X of the Company's
Restated Certificate of Incorporation permits the Company to enter into
agreements with its directors, officers, employees and agents to provide such
indemnification as deemed appropriate. Article X also provides that the Company
may extend to its directors and executive officers such indemnification and
additional indemnification.
The Company has entered into an indemnification agreement with certain of
its directors and officers. The form of indemnity agreement provides that each
such person will be indemnified to the full extent permitted by applicable law
against all expenses (including attorneys' fees), judgments, fines, penalties
and amounts paid in settlement of any threatened, pending or completed action,
suit or proceeding, on account of his services as a director and officer of the
Company or any other company or enterprise in which he is serving at the
request of the Company, or as a guarantor of any debt of the Company. To the
extent the indemnification provided under the agreement exceeds that permitted
by applicable law, indemnification may be unenforceable or may be limited to
the extent it is found by a court of competent jurisdiction to be contrary to
public policy.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three fiscal years, the Company has sold the securities
listed below pursuant to exemptions under the Securities Act.
1. From June 1995 through April 1996, the Company made a private
placement offering to accredited investors for up to $6,000,000 in
principal amount of 14% unsecured Convertible Subordinated Debentures
due June 30, 1999 ("1999 Debentures"). The total underwriting
commissions associated with the 1999 Debentures were $437,600. As of
January 31, 1998, the Company has sold $4,865,000 in 1999 Debentures.
In connection with the 1999 Debentures, the Company has issued 97,279
Common Stock purchase warrants to participating NASD Broker-Dealers.
The warrants have an exercise price of $5.50 per share and are
exercisable through January 2, 2002. The sale of securities were made
in reliance upon Section 4(2) of the Securities Act, and Rule 506
pursuant to Regulation D, promulgated thereunder, as an offering only
to accredited investors.
2. From June 1996 through January 1997, the Company made a private
placement offering to accredited investors for up to $2,000,000 in
principal amount of 14% unsecured Convertible Subordinated Debentures
due June 30, 2000 ("2000 Debentures"). The total underwriting
commissions associated with the 2000 Debentures were $161,600. As of
January 31, 1998, the Company has sold $2,000,000 in 2000 Debentures.
In connection with the 2000 Debentures, the Company has issued 41,442
Common Stock purchase warrants to participating NASD Broker-Dealers.
The warrants have an exercise price of $5.50 per share and are
exercisable through January 2, 2002. The sale of securities were made
in reliance upon Section 4(2) of the Securities Act, and Rule 506
pursuant to Regulation D, promulgated thereunder, as an offering only
to accredited investors.
II-2
<PAGE> 73
3. From December 1996 through June 1997, the Company made a private
placement offering to accredited investors for up to $2,655,000 in
principal amount of 14% unsecured Convertible Subordinated Debentures
due January 31, 2001 ("2001 Debentures"). The total underwriting
commissions associated with the 2001 Debentures were $231,600. As of
January 31, 1998, the Company has sold $2,655,000 in 2001 Debentures.
In connection with the 2001 Debentures, the Company has issued 53,967
Common Stock purchase warrants to participating NASD Broker-Dealers.
The warrants have an exercise price of $5.50 per share and are
exercisable through January 2, 2002. The sale of securities were made
in reliance upon Section 4(2) of the Securities Act, and Rule 506
pursuant to Regulation D, promulgated thereunder, as an offering only
to accredited investors.
4. In June 1997, the Company's Board of Directors authorized the issuance
of up to 500,000 shares of Series C Convertible Preferred Stock
("Series C") with a par value of $.01 per share to be issued to
employees in connection with the Company's employee stock purchase
plan. The employee stock purchase plan allows employees to purchase,
through payroll deductions and Company matches approved by the Board
of Directors, shares of Series C at a price of $2.50 per share. On
June 23, 1997, the Company issued 26,592 Series C shares and, on
September 10, 1997, the Company issued 250 Series C shares with total
proceeds received by the Company from both issuances of $47,932. The
sale of securities were made in reliance upon Rule 701 which provides
for an exemption for offers and sales of securities pursuant to
compensatory benefit plans and contracts relating to compensation.
5. In July 1997, the Company's Board of Directors authorized the issuance
of up to 1,000,000 shares of 12% Series D Convertible Exchangeable
Preferred Stock ("Series D") with a par value of $.01 per share to be
issued to accredited investors. From July 10, 1997 to October 26,
1997, the Company issued 542,500 Series D shares with total proceeds
received by the Company of $1,085,000. The sale of securities were
made in reliance upon Section 4(2) of the Securities Act, and Rule 506
pursuant to Regulation D, promulgated thereunder, as an offering only
to accredited investors.
6. From January 13, 1994 through January 26, 1997, the Company issued
427,139 shares of Common Stock of which 44,514 shares were issued to
certain directors in exchange for Board of Director services, 232,597
shares were issued to certain employees in exchange for employment
services, pay reductions and performance awards, and 150,208 shares
were issued to certain attorneys and consultants in exchange for legal
and consulting services. From January 26, 1997 to October 26, 1997,
the Company issued 104,602 shares of Common Stock of which 54,408
shares were issued to certain directors in exchange for Board of
Director services, 36,181 shares were issued to certain employees in
exchange for employment services, pay reductions and performance
awards, 10,716 shares were issued to certain attorneys and consultants
in exchange for legal and consulting services, and 3,297 shares were
issued to National Audio Electronics, Inc. in exchange for
merchandise. On May 8, 1997, the Company issued 824 shares of Common
Stock to an employee for $3.03 per share. The sale of securities were
made in reliance upon Rule 701 which provides for an exemption for
offers and sales of securities pursuant to compensatory benefit plans
and contracts relating to compensation.
7. From April 1996 to August 1996, the Company issued $278,000 in 15%
notes payable, to mature on March 31, 2000 to 5 non-accredited
investors and a class of accredited investors. From January 1997 to
July 1997, the Company issued $474,000 in 15% notes payable, to mature
on December 31, 2000 to 11 non-accredited investors and a class of
accredited investors. The sale of securities were made in reliance
upon Section 4(2) of the Securities Act which provides an exemption
for transactions not involving any public offering to investors
believed by the Company to be sophisticated business-persons and
investors.
II-3
<PAGE> 74
8. From January 1995 through November 1996, the Company issued 43,358
Series B Convertible Preferred stock ("Series B") in connection with
its employee stock purchase plan. The employee stock purchase plan in
effect during that time allowed employees to purchase, through payroll
deductions and Company matches approved by the Board of Directors,
shares of Series B at a price of $2.00 per share. The sale of
securities were made in reliance upon Rule 701 which provides for an
exemption for offers and sales of securities pursuant to compensatory
benefit plans and contracts relating to compensation.
9. On May 1, 1998, the Company issued 44,445 unregistered shares of the
Company's common stock to the Buxton Company in exchange for $200,000
in professional services associated with marketing and new store site
selection analysis. The sales of securities were made in reliance upon
Reliance upon Rule 701 which provides for an exemption for offers and
sales of securities pursuant to contracts relating to compensation.
The sale of securities above were made in reliance upon Rule 701 which
provides for exemption for offers and sales of securities pursuant to
compensatory benefit plans and contracts relating to compensation and Section
4(2) of the Securities Act, which provides exemptions for transactions not
involving a public offering to investors believed by the Company to be
sophisticated business-persons and investors, and Regulation D, promulgated
thereunder, as an offering only to accredited investors. The purchasers of
securities described above acquired them for their own account and not with a
view to any distribution thereof to the public. The certificates evidencing the
securities bear legends stating that the shares are not to be offered, sold or
transferred other than pursuant to an effective registration statement under
the Securities Act, or an exemption from such registration requirements.
The Company's Series B Convertible Preferred Stock, Series C Convertible
Preferred Stock, 12% Series D Convertible Exchangeable Preferred Stock, 14%
Convertible Subordinated Debentures Due June 30, 1999, 14% Convertible
Subordinated Debentures Due June 30, 2000, and 14% Convertible Subordinated
Debentures Due January 31, 2001 converted into Common Stock upon completion of
the Company's initial public offering in March 1998. See the notes to the
consolidated financial statements included elsewhere in this Registration
Statement for further information relating to the respective conversion
features.
II-4
<PAGE> 75
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT
NUMBER
-------
1.3 Form of Underwriting Agreement Between PawnMart, Inc. and Massie
Capital, Ltd. (7)
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 as of March 15, 1999
Between PawnMart, Inc., Massie Capital, Ltd. and Norwest Bank
Texas, N.A. (7)
5.1 Opinion of Jordaan & Pennington, PLLC (6)
10.1 Form of Indemnity Agreement with Officers and Directors of
PawnMart, Inc. (2)
10.2 1997 PawnMart, Inc. Employee Stock Option Plan (1)
10.3 1997 PawnMart, Inc. Director Stock Option Plan (2)
10.4 Revolving Credit Agreement Dated October 13, 1998 Between
PawnMart, Inc. and Comerica Bank (4)
10.5 Employment Agreement, Dated as of September 8, 1998, Between
PawnMart, Inc. and Michael D. Record (5)
12.1 Computation of Ratio of Earnings to Fixed Charges (9)
23.1 Consent of Jordaan & Pennington, PLLC (included as part of Exhibit
4.7 hereto)
23.2 Consent of KPMG LLP, Independent Auditors (9)
24.1 Reference is made to the Signatures section of the Registration
Statement on Form S-1 filed on January 15, 1999.
25.1 Form T-1 - Statement of Eligibility Under the Trust Indenture Act
of 1939 of the Trustee (5)
27.1 Financial Data Schedule as of 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. 1-13919).
(6) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 1 on Form S-1, filed on February 24, 1999 (File No.
1-13919).
(7) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 2 on Form S-1, filed on March 10, 1999 (File No. 1-13919).
(8) Files as an Exhibit to the registrant's Form 10-K for the fiscal year
ended January 30, 1999, filed on April 29, 1999 (File No. 1-13919).
(9) Filed herewith.
II-5
<PAGE> 76
(a) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) to file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of a prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement;
(2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
Insofar as indemnification for liabilities arising from the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-6
<PAGE> 77
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Fort Worth, State of
Texas, on May 20, 1999.
PAWNMART, INC.
By: /s/ Carson R. Thompson By: /s/ Thomas W. White
---------------------- -------------------
Carson R. Thompson Thomas W. White
Chief Executive Officer, Director Senior Vice President
and Chairman of the Board and Chief Financial Officer
(Principal Executive Officer) (Principal Financial and Accounting
Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Carson R. Thompson Chief Executive Officer, Director May 20, 1999
- ----------------------- and Chairman of the Board
Carson R. Thompson
/s/ Michael D. Record President May 20, 1999
- -----------------------
Michael D. Record.
/s/ Thomas W. White Senior Vice President and May 20, 1999
- ----------------------- Chief Financial Officer
Thomas W. White
/s/ Randall L. Haden Vice President - Information Services May 20, 1999
- -----------------------
Randall L. Haden
* Director May 20, 1999
- -----------------------
Robert E. Camp
* Director May 20, 1999
- -----------------------
James E. Berk
* Director May 20, 1999
- -----------------------
Monty R. Standifer
* Director May 20, 1999
- -----------------------
Mark E. Kane
* Director May 20, 1999
- -----------------------
Robert D. Bourland, Jr.
* Director May 20, 1999
- -----------------------
J. Roger Williams
*By: /s/ Carson R. Thompson
----------------------
Carson R. Thompson
Attorney-in-Fact
</TABLE>
II-7
<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<S> <C>
1.3 Form of Underwriting Agreement Between PawnMart, Inc. and Massie
Capital, Ltd. (7)
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 as of March 15, 1999
Between PawnMart, Inc., Massie Capital, Ltd. and Norwest Bank
Texas, N.A. (7)
5.1 Opinion of Jordaan & Pennington, PLLC (6)
10.1 Form of Indemnity Agreement with Officers and Directors of
PawnMart, Inc. (2)
10.2 1997 PawnMart, Inc. Employee Stock Option Plan (1)
10.3 1997 PawnMart, Inc. Director Stock Option Plan (2)
10.4 Revolving Credit Agreement Dated October 13, 1998 Between
PawnMart, Inc. and Comerica Bank (4)
10.5 Employment Agreement, Dated as of September 8, 1998, Between
PawnMart, Inc. and Michael D. Record (5)
12.1 Computation of Ratio of Earnings to Fixed Charges (9)
23.1 Consent of Jordaan & Pennington, PLLC (included as part of Exhibit
4.7 hereto)
23.2 Consent of KPMG LLP, Independent Auditors (9)
24.1 Reference is made to the Signatures section of the Registration
Statement on Form S-1 filed on January 15, 1999.
25.1 Form T-1 - Statement of Eligibility Under the Trust Indenture Act
of 1939 of the Trustee (5)
27.1 Financial Data Schedule as of January 30, 1999 (Filed in EDGAR
version only) (8)
</TABLE>
- ---------------
(1) Filed as an Exhibit to the registrant's Registration Statement on Form
SB-2, filed on October 23, 1997 (File No. 333-38597).
(2) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 2 to Form SB-2, filed on February 9, 1998 (File No.
333-38597).
(3) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 3 to Form SB-2, filed on March 11, 1998 (File No.
333-38597).
(4) Filed as an Exhibit to the registrant's Form 10-QSB for the quarter ended
October 31, 1998, filed on December 14, 1998 (File No. 1-13919).
(5) Filed as an Exhibit to the registrant's Registration Statement on Form
S-1, filed on January 15, 1999 (File No. 1-13919).
(6) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 1 on Form S-1, filed on February 24, 1999 (File No.
1-13919).
(7) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 2 on Form S-1, filed on March 10, 1999 (File No. 1-13919).
(8) Files as an Exhibit to the registrant's Form 10-K for the fiscal year
ended January 30, 1999, filed on April 29, 1999 (File No. 1-13919).
(9) Filed herewith.
<PAGE> 1
EXHIBIT 12.1
PAWNMART, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Fiscal Years Ended
---------------------------------------------------------------------------
January 30, January 31, January 26, January 28, January 29,
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Fixed Charges:
Interest Expense $ 996 $ 3,761 $ 1,360 $ 720 $ 62
Rent Expense Interest Factor 446 371 352 248 143
----------- ----------- ----------- ----------- -----------
1,442 4,132 1,712 968 205
=========== =========== =========== =========== ===========
Earnings:
Pretax Loss From Operations (3,713) (5,436) (3,056) (2,828) (1,625)
Fixed Charges Per Above 1,442 4,132 1,712 968 205
----------- ----------- ----------- ----------- -----------
Losses As Adjusted $ (2,271) $ (1,304) $ (1,344) $ (1,860) $ (1,420)
=========== =========== =========== =========== ===========
Ratio of Earnings to Fixed Charges (1.57) (0.32) (0.79) (1.92) (6.91)
=========== =========== =========== =========== ===========
Fixed Charges Exceeded Earnings By $ 3,713 $ 5,436 $ 3,056 $ 2,828 $ 1,625
=========== =========== =========== =========== ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
PawnMart, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Fort Worth, Texas
May 19, 1999
