<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 18, 2000
REGISTRATION NO. 333-70635
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 4 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PAWNMART, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5940 75-2520896
(State or other jurisdiction of incorporation or (Primary Standard Industrial (I.R.S. Employer Identification No.)
organization) Classification Code)
6300 RIDGLEA PLACE, SUITE 724 CARSON R. THOMPSON
FORT WORTH, TEXAS 76116 6300 RIDGLEA PLACE, SUITE 724
(817) 569-93051 FORT WORTH, TEXAS 76116
(817) 569-9305
(Address, including zip code, and telephone number, (Address, including zip code, and telephone number, including
including area code, registrant's principal executive offices) area code, of agent for service)
COPIES TO:
Stephen B. Norris Tom Herbelin
Thompson & Knight L.L.P. 5925 Forest Lane Suite 410
801 Cherry Street, Suite 1600 Dallas, Texas 75230
Fort Worth, Texas 76102 (214) 219-1119
(817) 347-1700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the date this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continual basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. X
---
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. __
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. __
<PAGE> 2
$10,000,000
[PAWNMART, INC. LOGO]
12% Subordinated Notes Due 2004
The Offering
We are offering up to $10,000,000 in principal amount of 12% Subordinated Notes
Due 2004 (the "Notes"). This is a best efforts offering by licensed broker
dealers who are members of the National Association of Securities Dealers, Inc.
The underwriters are not required to sell any specific number or dollar amount
of securities but will use their best efforts to sell the securities offered.
Massie Capital, Ltd. is serving as the managing broker dealer for the Offering.
See "Plan of Distribution." As of July 28, 2000, we have sold $9,197,000 of
Notes in connection with this Offering. This Offering will continue until all
Notes are sold or until October 29, 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 have used the net proceeds from the sale of the Notes, the proceeds from the
sale of 8% Preferred Stock and additional borrowings under our $10 million
revolving credit facility for store expansion, expansion of business in existing
stores, debt service and for general corporate purposes. We will use the
remaining net proceeds from this Offering for debt service, general corporate
purposes and working capital.
<TABLE>
<CAPTION>
Notes Sold Total
Per Unit To Date Maximum
-------- ----------- ----------
<S> <C> <C> <C>
Price to Investors............... 100.0 % $9,197,000 $10,000,000
Broker's Commissions(1)(2)....... 8.0 % $ 735,760 $ 800,000
Proceeds to Company.............. 92.0 % $8,461,240 $ 9,200,000
</TABLE>
(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
<TABLE>
<S> <C>
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 July 28,
2000, we had $9.0 million of Senior Debt
which would rank senior in right of
payment to the Notes.
</TABLE>
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 46 stores located in Alabama, Florida,
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 July 28, 2000, the closing market price of
our Common Stock, Series A Warrants and Series B Warrants as reported by NASDAQ
was $0.906, $0.1875, and $0.125, 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 August 18, 2000
<PAGE> 3
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:
o the inability to obtain necessary debt or equity financing to fund working
capital, capital expenditures and other requirements;
o heightened competition, including specifically price competition, the
entry of new competitors or the introduction of new products by new and
existing competitors;
o adverse state and Federal legislation and regulation;
o fluctuations in operating results;
o changes in business strategy; and
o the inability to acquire or develop 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.
<PAGE> 4
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.
During the fiscal year ended January 30, 1999 ("Fiscal 1998"), we
increased our store base by 68 percent with the opening of 13 new stores
resulting in a total of 32 stores in operation at the fiscal year end. In order
to fund this expansion, we utilized the remaining proceeds of the initial public
offering and secured a $10 million line of credit with Comerica Bank, N.A. (the
"Credit Facility," which was increased to $15 million on June 27, 2000).
During the fiscal year ended January 29, 2000 ("Fiscal 1999"), we
increased our store chain by 44 percent with the addition of 14 new stores for a
total of 46 stores in operation at the fiscal year end. Our store expansion
program during Fiscal 1999 was funded through borrowings under our Credit
Facility, utilization of the net proceeds from the issuance of these Notes and
utilization of the net proceeds from the sale of 416,667 shares of 8%
Convertible Preferred stock (the "8% Preferred Stock"), par value $6.00 per
share, on September 1, 1999.
Our Business
We are a specialty finance and retail enterprise principally engaged in
acquiring, establishing and operating stores that 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, automobiles and other
miscellaneous items and through profit realized on the retail sale of the
unredeemed or other purchased pre-owned merchandise. We may, in the future,
implement a franchising program, under which we would generate additional income
through management fees paid to us by franchisees and through sales of existing
stores to franchisees.
As of July 28, 2000, we were one of five publicly traded pawnshop
operators in the United States and owned and operated 46 stores located in
Alabama, Florida, Georgia, North Carolina, South Carolina and Texas. Our
principal office is located at 6300 Ridglea Place, Suite 724, Fort Worth, Texas
76116, and our telephone number is (817) 569-9305.
1
<PAGE> 5
BUSINESS STRATEGY
The pawnshop industry is a multi-billion dollar, highly fragmented
industry with approximately 93 percent of the approximately 13,500 stores in the
United States owned by "mom and pop" operators and 7 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 than customers of other pawnshops. In
this regard, our strategic market positioning targets these customer groups for
both pawn and retail transactions with specialty retail concepts such as
"PAWNMART More Cash. More Choices(SM)." To appeal to these customers,
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 long-term strategic objective is to implement a roll-out of
PAWNMART(SM) stores in order to capitalize upon growth opportunities afforded by
the highly fragmented pawnshop industry. Since January 29, 1999, we have added
14 stores. However, due to liquidity constraints, we have temporarily ceased the
addition of new stores. See "Risk Factors." In order to allow our portfolio of
stores to mature and to build our financial resources to support our long-term
strategy, we may pursue other strategic business alternatives, including a
franchising program, in the near term. Moreover, to achieve our long-term
strategic objectives, we have adopted the following strategy:
o Acquire or develop 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 License or sell franchises in selected markets;
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 store roll-out phase. 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. Monty Standifer, our Senior Vice President and Chief
Financial Officer, has served as Chief Financial Officer of BizMart, Inc.
(NASDAQ:BZMT), and Gadzooks, Inc. (NASDAQ:GADZ). Mr. Standifer is also a
Director.
Other members of our Board of Directors include James Berk, who is Chief
Executive Officer of the Store of Knowledge and has served as Vice Chairman and
Chief Executive Officer of APC, Inc., President and Chief Operating Officer of
The Wholesale Club and President and Chief Executive Officer of BizMart, Inc.;
Mark Kane, who founded and served as President and Chief Executive Officer of
Compact Discs International, LLC (NASDAQ:CDI) and who currently is Chief
Executive Officer of the Movie Trading Company; 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 continue the growth of PawnMart.
2
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Securities Offered.................................... $10,000,000 principal amount of 12% Subordinated
Notes Due December 31, 2004.
Use of Proceeds....................................... As of July 28, 2000, 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 and the net proceeds from the sale
of the 8% Preferred Stock, have been used for store
expansion, expansion of business in existing
stores, debt service and general corporate
purposes. The remaining net proceeds will be used
for debt service, general corporate purposes and
working capital. 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, including borrowings under
the Credit Facility. As of July 28, 2000, we had
$9.0 million of debt outstanding under our Credit
Facility 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.
</TABLE>
3
<PAGE> 7
<TABLE>
<S> <C>
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................................... This is a best efforts offering by licensed broker
dealers who are members of the National Association
of Securities Dealers, Inc. The underwriters are
not required to sell any specific number or dollar
amount of securities but will use their best
efforts to sell the securities offered. Massie
Capital, Ltd. is serving as the managing broker
dealer for the Offering. As of July 28, 2000, we
have sold $9,197,000 of Notes in connection with
this Offering. We have the right to reject any
subscription in whole or in part. See "Plan of
Distribution."
</TABLE>
RISK FACTORS
Prospective investors should carefully consider the information set forth
under the caption "Risk Factors" and all other information set forth in this
Prospectus before making any investment in the Notes.
4
<PAGE> 8
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," the Consolidated Financial Statements of the Company and
related notes and the independent auditors' report, which contains an
explanatory paragraph stating that the Company's recurring losses from
operations, negative cash flows and significant difficulties in meeting its
obligations raise substantial doubt about the Company's ability to continue as a
going concern, included elsewhere in the Prospectus. The consolidated financial
statements and selected operating and balance sheet data do not include any
adjustments that might result from the outcome of this uncertainty.
----------------------------
<TABLE>
<CAPTION>
Three Months Ended Fiscal Years Ended
------------------ ------------------
(Dollars in Thousands, Except Per Share Data) (Unaudited) (Unaudited)
April 29, May 1, January 29, January 30, January 31, January 26, January 28,
2000 1999 2000 1999 1998 1997 1996
--------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Pawn Service Charges ....................... $ 1,879 $ 1,419 $ 6,674 $ 3,636 $ 2,862 $ 2,291 $ 1,338
Merchandise Sales .......................... 4,756 2,885 13,978 8,170 7,215 5,523 3,052
Other Income ............................... 77 43 250 129 101 89 34
-------- -------- -------- -------- -------- -------- --------
Total Revenues ....................... 6,712 4,347 20,902 11,935 10,178 7,903 4,424
Cost of Sales .............................. 3,724 2,051 10,832 5,634 5,192 3,739 1,942
-------- -------- -------- -------- -------- -------- --------
Gross Profit ......................... 2,988 2,296 10,070 6,301 4,986 4,164 2,482
Store Operating Expenses ................... 2,506 1,751 8,163 5,326 4,040 3,652 2,626
Corporate Administrative Expenses .......... 833 688 3,020 3,074 2,117 1,713 1,589
-------- -------- -------- -------- -------- -------- --------
EBITDA (1) ................................. (351) (143) (1,113) (2,099) (1,171) (1,201) (1,733)
Interest Expense ........................... 509 197 1,358 996 3,761 1,360 720
Depreciation and Amortization .............. 257 202 805 618 504 495 375
-------- -------- -------- -------- -------- -------- --------
Net Loss ............................. (1,117) (542) (3,276) (3,713) (5,436) (3,056) (2,828)
Preferred Stock Dividends .................. 50 -- 83 692 217 -- --
-------- -------- -------- -------- -------- -------- --------
Net Loss to Common Stockholders ...... $ (1,167) $ (542) $ (3,359) $ (4,405) $ (5,653) $ (3,056) $ (2,828)
======== ======== ======== ======== ======== ======== ========
Basic and Diluted Loss Per
Common Share ...................... $ (0.16) $ (0.08) $ (0.47) $ (0.68) $ (3.01) $ (1.67) $ (1.68)
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Stores in Operation:
Beginning of Period ..................... 46 32 32 19 19 17 7
Acquisitions ............................ -- 2 6 3 -- 1 --
New Openings ............................ -- -- 8 10 -- 1 10
-------- -------- -------- -------- -------- -------- --------
End of Period ........................... 46 34 46 32 19 19 17
======== ======== ======== ======== ======== ======== ========
Average Per Store:
Store Age .................................. 2.75 Years 2.49 years 2.45 years 2.35 years 2.78 years 1.77 years .93 years
Pawn Loans ................................ $ 140 $ 143 $ 147 $ 138 $ 127 $ 117 $ 85
Merchandise Inventory ..................... $ 162 $ 112 $ 158 $ 94 $ 102 $ 104 $ 88
Ratio of Earnings to Fixed Charges (2) -- -- -- -- -- -- --
BALANCE SHEET DATA - END OF PERIOD:
Pawn Loans ................................. $ 6,445 $ 4,851 $ 6,758 $ 4,419 $ 2,421 $ 2,227 $ 1,447
Merchandise Inventory ...................... 7,453 3,807 7,279 3,011 1,944 1,971 1,490
Total Working Capital ...................... 14,506 9,693 14,722 6,988 1,758 2,148 2,251
Total Assets ............................... 20,892 13,675 21,044 11,192 6,677 6,474 5,249
Long-Term Notes Payable, Net of Current
Installments (3) ..................... 17,015 8,517 15,923 4,840 9,778 8,288 5,445
Stockholders' Equity (Deficit) ............. 2,716 4,365 3,878 4,907 (6,222) (4,278) (1,274)
</TABLE>
----------------------
(1) Earnings(loss) before interest, taxes, depreciation and
amortization.
(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 $1,117,000 and $542,000 for the three months ended April
29, 2000 and May 1, 1999, respectively, and $3,276,000, $3,713,000,
$5,436,000, $3,056,000 and $2,828,000 during the years ended January
29, 2000, January 30, 1999, January 31, 1998, January 26, 1997 and
January 28, 1996, respectively.
(3) Includes the Credit Facility and the Notes.
5
<PAGE> 9
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.
LIQUIDITY AND "GOING CONCERN"
The independent auditors' report on our audited consolidated financial
statements includes a "going concern" explanatory paragraph, which indicates
that the auditors question our ability to continue operation under the current
business conditions given our recurring losses, negative cash flows and
substantial difficulties in meeting our obligations. On October 13, 1998, we
entered into a $10 million credit facility with Comerica Bank, which was amended
on June 27, 2000 to increase amounts available for borrowing to $15 million (the
"Credit Facility"). At July 28, 2000, $9,000,000 was outstanding under the
Credit Facility and an additional $109,000 was available pursuant to the
available borrowing base. We cannot be sure 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. If our current financial
situation does not improve, we may have our securities de-listed from Nasdaq.
The de-listing of our securities would impair our ability to raise capital
though the issuance of additional equity securities.
We have begun to address the "going concern" issue and the underlying
liquidity problem by aggressively promoting sales of merchandise in our stores
and reducing excess inventory through third party sales. We are also evaluating
various other alternatives, such as selling certain store locations under a
franchise arrangement or to other interested parties. In addition, we may have
to continue to reduce inventory, which could impair our cash flow from future
operations. To finance current and future expenditures, we will need to issue
additional equity securities or incur additional debt. We may not be able to
obtain additional required capital on satisfactory terms, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
LACK OF PROFITABILITY, EXPECTED LOSSES DURING ROLL-OUT PHASE
From our inception on January 13, 1994, and continuing through April 29,
2000, we have experienced aggregate losses of $21,080,000. A key element of our
strategy consists of developing multiple PAWNMART(SM) stores meeting our desired
store size, configuration and site selection requirements in regional and local
markets. Until we reach a critical mass of mature stores, this strategy is
likely to result in continued net losses due to start-up losses associated with
the anticipated high number of new stores. Results of operations in the future
will be influenced by numerous factors including, among others, the number of
new stores opened, the number of stores acquired from others, our ability to
manage our growth and maintain the quality of our personnel, the ability to
manage our debt 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
Assuming full subscription for this Offering, we would have total
long-term indebtedness at July 28, 2000, of approximately $18 million. 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 (cash flow is currently negative primarily due to our expansion
program and related high degree of leverage) 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
6
<PAGE> 10
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, including sales of
stores and sales associated with a potential franchise program. 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, in
particular, our ability to develop positive cash flow, and is subject to
financial, economic and other factors, some of which are beyond our control.
Because 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 and the other actions taken by us (See
"Liquidity and `Going Concern'"), 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.
SUBORDINATION OF 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 $15 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 pawnshops 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.
MANAGEMENT OF GROWTH
Our long-term strategy includes plans to expand our business through an
addition of PAWNMART(SM) stores. To a significant extent, our future success
will be dependent upon our ability to acquire existing stores 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.
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, operating results 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
7
<PAGE> 11
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 that 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 acquire or open new
stores in other states could be affected by the enactment of state or local
legislation, similar to current Texas legislation, which provides for certain
proximity restrictions to other pawnshops in order to obtain a new license. In
addition, the present statutory and regulatory environment of some states
renders expansion into those states impractical. For instance, certain states
require public sale of forfeited collateral or do not permit service charges
sufficient to make pawnshop operations profitable.
RISKS RELATED TO IMPROPER ASSESSMENT OF THE PLEDGED PROPERTY'S ESTIMATED RESALE
VALUE
We make pawn loans without the borrower's personal liability and do not
investigate the creditworthiness of the borrower, but rely on the pledged
personal property and the possibility of its forfeiture, as a basis for our
lending decision. In this regard, the recovery of the amount advanced, as well
as realization of a profit on sale of merchandise, is dependent on our initial
assessment of the property's estimated resale value. Improper assessment of the
resale value of the collateral in the lending function can result in reduced
marketability of the property and resale of the merchandise for an amount less
than the amount advanced. Although, historically, we have experienced profits
from the sale of such merchandise, no assurances can be given that our
historical results will continue. For example, unexpected technological changes
could adversely impact the value of consumer electronic products, and declines
in gold and silver prices could reduce the resale value of jewelry items
acquired in pawn transactions and could adversely affect our ability to recover
the amount advanced on the acquired collateral.
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 and
Severance 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 AUTOMOBILE TITLE LOANS
Alabama, Georgia and South Carolina pawn regulations allow us to advance
funds secured by automobile titles. Approximately eight percent of our total
revenues during Fiscal 1999 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.
8
<PAGE> 12
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."
9
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered are
estimated to be approximately $8,500,000 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 and the net proceeds from the issuance of the 8% Preferred Stock, have
to date been used for opening or acquiring new stores, debt service, working
capital and for general corporate purposes. At July 28, 2000, approximately
$9,000,000 was outstanding under the Credit Facility, which represented
substantially all available amounts pursuant to the available borrowing base.
The Credit Facility matures on October 13, 2002 and all outstanding borrowings
at July 28, 2000 bear interest at the prime rate plus three-quarters of one
percent (10.25% at July 28, 2000).
The approximate sources and uses of funds in connection with the Offering
and other financing sources during Fiscal 2000 are presented in the table below:
<TABLE>
<CAPTION>
Total Sold Total
To Date Maximum
----------- -----------
<S> <C> <C>
Sources of Funds:
Proceeds from Notes offered hereby ................................. $ 9,197,000 $10,000,000
Proceeds from issuance of 8% Preferred Stock ....................... 2,500,000 2,500,000
Additional borrowings under the Credit Facility .................. 3,600,000 3,600,000
----------- -----------
Total sources ................................................ $15,297,000 $16,100,000
=========== ===========
Uses of Funds:
New store additions and increases in pawn loans and inventory....... $ 8,726,916 $ 9,000,000
Payment of interest on the Notes ................................... 982,039 1,269,000(1)
Working capital and other general corporate purposes ............... 4,094,565 4,188,000
Fees and expenses from issuance of 8% Preferred Stock .............. 228,000 228,000
Fees and expenses of the Offering .................................. 1,265,480 1,415,000
----------- -----------
Total uses ................................................... $15,297,000 $16,100,000
=========== ===========
</TABLE>
----------
(1) The maximum amount is through the Offering Period, which ends
October 29, 2000.
The Company has opened 14 additional stores since the commencement of the
Offering from the proceeds of Notes sold to date and the proceeds from the
issuance of the 8% Preferred Stock along with additional borrowings under the
Credit Facility. In addition, the Company has funded increases in pawn loan
balances and increased levels of merchandise inventories available for sale at
the 32 stores that were in existence at the beginning of this Offering. We
anticipate that additional funds raised from the remainder of this Offering will
be utilized for debt service requirements and working capital. Over the long
term, we will require additional capital to fund our future growth. We have no
present plans, proposals, arrangements, commitments, agreements or
understandings with respect to any acquisitions. We are considering a franchise
program that could result in the sale of existing stores to franchisees. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
10
<PAGE> 14
CAPITALIZATION
The following table sets forth (i) our capitalization at April 29, 2000
and (ii) such 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>
April 29, 2000
-------------------------------
Pro Forma
----------------------
Total Sold To
Actual Date Maximum
------ ------------- -------
(in thousands)
<S> <C> <C> <C>
Long-term notes payable, net of current installments (2) ............................... $ 17,015 $ 17,782 $ 18,585
-------- -------- --------
Stockholders' equity:
8% Convertible preferred stock, $6.00 par value; authorized 416,667 shares;
416,667 shares issued and outstanding (liquidation preference $6.00 per share)...... 2,500 2,500 2,500
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; 1,885,800 warrants issued and outstanding (actual), 1,931,820
warrants issued and outstanding (pro forma notes sold to date), and
1,980,000 warrants issued and outstanding (pro forma maximum) (1) .............. 236 241 248
Series B redeemable common stock purchase warrants, $0.0625 par
value; 1,380,000 warrants issued and outstanding (1) ........................... 86 86 86
Additional common stock purchase warrants .......................................... 60 60 60
Additional paid-in capital ......................................................... 21,954 21,954 21,954
Accumulated deficit ................................................................ (22,122) (22,122) (22,122)
-------- -------- --------
Subtotal ....................................................................... 2,786 2,791 2,798
Less treasury stock, at cost; 21,432 common shares ................................. (70) (70) (70)
-------- -------- --------
Total stockholders' equity ................................................. 2,716 2,721 2,728
-------- -------- --------
Total capitalization ....................................................... $ 19,731 $ 20,530 $ 21,313
======== ======== ========
</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) 789,917 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) 300,000
shares of Common Stock that 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, (vi) 551,820 shares of
Common Stock under the current amount of Notes sold to date 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 and (vii) 402,500 common stock purchase
warrants issued in connection with the 8% Preferred Stock.
(2) Includes $9,197,000 of Notes sold as of July 28, 2000 and $10,000,000 in
Notes issued under a maximum subscription.
11
<PAGE> 15
SELECTED 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," the Consolidated Financial Statements of the Company and
related notes and the independent auditors' report, which contains an
explanatory paragraph stating that the Company's recurring losses from
operations, negative cash flows and significant difficulties in meeting its
obligations raise substantial doubt about the Company's ability to continue as a
going concern, included elsewhere in the Prospectus. The consolidated financial
statements and selected operating and balance sheet data do not include any
adjustments that might result from the outcome of this uncertainty.
----------
<TABLE>
<CAPTION>
Three Months Ended Fiscal Years Ended
------------------------ -------------------------------------------------------------
(Unaudited) (Unaudited)
April 29, May 1, January 29, January 30, January 31, January 26, January 28,
2000 1999 2000 1999 1998 1997 1996
----------- ----------- ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands, Except Per Share Data)
OPERATING DATA:
Pawn Service Charges ..................... $ 1,879 $ 1,419 $ 6,674 $ 3,636 $ 2,862 $ 2,291 $ 1,338
Merchandise Sales ........................ 4,756 2,885 13,978 8,170 7,215 5,523 3,052
Other Income ............................. 77 43 250 129 101 89 34
-------- -------- -------- -------- -------- -------- --------
Total Revenues ..................... 6,712 4,347 20,902 11,935 10,178 7,903 4,424
Cost of Sales ............................ 3,724 2,051 10,832 5,634 5,192 3,739 1,942
-------- -------- -------- -------- -------- -------- --------
Gross Profit ....................... 2,988 2,296 10,070 6,301 4,986 4,164 2,482
Store Operating Expenses ................. 2,506 1,751 8,163 5,326 4,040 3,652 2,626
Corporate Administrative Expenses ........ 833 688 3,020 3,074 2,117 1,713 1,589
-------- -------- -------- -------- -------- -------- --------
EBITDA (1) ............................... (351) (143) (1,113) (2,099) (1,171) (1,201) (1,733)
Interest Expense ......................... 509 197 1,358 996 3,761 1,360 720
Depreciation and Amortization ............ 257 202 805 618 504 495 375
-------- -------- -------- -------- -------- -------- --------
Net Loss ........................... (1,117) (542) (3,276) (3,713) (5,436) (3,056) (2,828)
Preferred Stock Dividends ................ 50 -- 83 692 217 -- --
-------- -------- -------- -------- -------- -------- --------
Net Loss to Common Stockholders .... $ (1,167) $ (542) $ (3,359) $ (4,405) $ (5,653) $ (3,056) $ (2,828)
======== ======== ======== ======== ======== ======== ========
Basic and Diluted Loss Per
Common Share .................... $ (0.16) $ (0.08) $ (0.47) $ (0.68) $ (3.01) $ (1.67) $ (1.68)
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Stores in Operation:
Beginning of Period ................... 46 32 32 19 19 17 7
Acquisitions .......................... -- 2 6 3 -- 1 --
Opened ................................ -- -- 8 10 -- 1 10
-------- -------- -------- -------- -------- -------- --------
End of Period ......................... 46 34 46 32 19 19 17
======== ======== ======== ======== ======== ======== ========
Average Per Store:
Store Age ............................. 2.75 years 2.49 years 2.45 years 2.35 years 2.78 years 1.77 years .93 years
Pawn Loans ............................ $ 140 $ 143 $ 147 $ 138 $ 127 $ 117 $ 85
Merchandise Inventory ................. $ 162 $ 112 $ 158 $ 94 $ 102 $ 104 $ 88
Ratio of Earnings to Fixed Charges (2) ... -- -- -- -- -- -- --
BALANCE SHEET DATA - END OF PERIOD:
Pawn Loans ............................... $ 6,445 $ 4,851 $ 6,758 $ 4,419 $ 2,421 $ 2,227 $ 1,447
Merchandise Inventories .................. 7,453 3,807 7,279 3,011 1,944 1,971 1,490
Total Working Capital .................... 14,506 9,693 14,722 6,988 1,758 2,148 2,251
Total Assets ............................. 20,892 13,675 21,044 11,192 6,677 6,474 5,249
Long-Term Notes Payable, Net of
Current Installments(3) ............... 17,015 8,517 15,923 4,840 9,778 8,288 5,445
Stockholders' Equity (Deficit) ........... 3,878 4,907 (6,222) (4,278) (1,274) 2,716 4,365
</TABLE>
----------
(1) Earnings(loss) before interest, taxes, depreciation and
amortization.
(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 $1,117,000 and
$542,000 for the three months ended April 29, 2000 and May 1,
1999, respectively, and $3,276,000, $3,713,000, $5,436,000,
$3,056,000 and $2,828,000 during the years ended January 29,
2000, January 30, 1999, January 31, 1998, January 26, 1997 and
January 28, 1996, respectively.
(3) Includes the Credit Facility and the Notes.
12
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Prior to March 1998, we owned and operated 19 stores. The completion of
our initial public offering of common stock in March 1998 resulted in net
proceeds of $5,583,000 and enhanced our ability to implement our business
strategy. 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 of such public offering to repay certain notes payable.
During the fiscal year ended January 30, 1999 ("Fiscal 1998"), we
increased our store base by 68 percent with the opening of 13 new stores
resulting in a total of 32 stores in operation. In order to fund this expansion,
we utilized the remaining proceeds of the initial public offering and secured a
$10 million line of credit with Comerica Bank (the "Credit Facility," which was
increased to $15 million on June 27, 2000).
During the fiscal year ended January 29, 2000 ("Fiscal 1999"), we
increased our store chain by 44 percent with the addition of 14 new stores
resulting in a total of 46 stores in operation at the fiscal year end. Our
expansion during Fiscal 1999 was funded through borrowings under our Credit
Facility, utilization of the net proceeds from the issuance of these Notes and
utilization of the net proceeds from the sale 416,667 shares of 8% Convertible
Preferred stock (the "8% Preferred Stock"), par value $6.00 per share, on
September 1, 1999.
As discussed in the following section, our results of operations and cash
flows are significantly impacted by (i) expansion through acquisitions of
existing stores and through development of new stores in locations that meet
site selection, store size and configuration requirements in selected markets
and (ii) the maturation cycle of stores. Although we have temporarily ceased our
expansion program due to liquidity constraints and cash flow problems,
management believes the actions instituted, if successful, will address the
liquidity issues and allow a return toward our long-term strategy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Initial Capital Expenditures and Costs Associated with Expansion
Our long-term strategy is to acquire or develop stores in selected
regional and local markets meeting our desired store size, configuration and
site selection requirements. We believe that such anticipated expansion will
continue to provide economies of scale in supervision, purchasing supplies and
inventory, administration and marketing by decreasing the overall average cost
of such functions per unit owned. After a suitable market has been selected,
management determines whether expansion through acquisitions or through
development of new stores would result in the most favorable impact on
profitability and capital requirements.
We will generally acquire stores in locations meeting our site selection
criteria if (i) the total capital expenditures required to acquire the existing
store are less than or equal to the total costs to develop a new store, (ii) the
acquisition does not result in significant goodwill balances and (iii)
demographic data and due diligence procedures indicate an acceptable growth
potential. Because acquired stores mature more quickly than new stores and
generally result in lower initial capital expenditures, our profitability and
capital requirements are impacted by the number of stores added through
acquisition versus the number of new stores added.
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, transfer of merchandise from
existing stores and external purchases of pre-owned merchandise. We estimate the
initial capital expenditures and costs associated with opening a new
PAWNMART(SM) store to total approximately $250,000 with additional expenditures
during the 12 months after opening of approximately $150,000 to fund loan growth
and planned start-up losses. Because of these start-up losses and expenditures
necessary to support anticipated growth, we expect 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.
13
<PAGE> 17
Maturation of Newly Established Stores and Acquired Stores
An acquired store will generally mature faster than a new store due to an
established base of customers and our ability to accelerate the maturation of
the store's pawn loan balances. Our profitability during rapid expansion will be
significantly impacted by our ability to acquire existing stores meeting the
Company's acquisition criteria. There can be no assurance that future store
revenues and store profitability will not vary from historical amounts.
The revenues and profitability of a new store are primarily impacted by
the Company's ability to increase pawn loans during the first 12 months of
operations. A new store is generally unprofitable during its first year of
operations due to the initial loan growth during that period resulting in lower
pawn service charges. The Company's new stores experience substantially higher
levels of revenues and profitability after reaching two years of age. At April
29, 2000, 27 of the Company's 46 stores were under two years of age. These
stores are expected to have a favorable impact on profitability if they achieve
the substantially increased lending and retail volumes experienced in the
Company's older stores.
Selected elements of the Company's consolidated financial statements are
presented below for the three months ended April 29, 2000 and May 1, 1999 and
for the fiscal years ended January 29, 2000, January 30, 1999 and January 31,
1998. 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>
Three Months Ended Fiscal Years Ended
---------------------- -----------------------------------
April 29, May 1, January 29, January 30, January 31,
2000 1999 2000 1999 1998
---------- ---------- ---------- ---------- -----------
Operating statement items as a percent of (Unaudited) (Unaudited)
Total revenues:
<S> <C> <C> <C> <C> <C>
Merchandise sales ................................. 70.9% 66.4% 66.9% 68.5% 70.9%
Pawn service charges .............................. 28.0 32.6 31.9 30.5 28.1
Other ............................................. 1.1 1.0 1.2 1.0 1.0
----- ----- ----- ----- -----
Total revenues ................................. 100.0 100.0 100.0 100.0 100.0
Cost of sales ..................................... 55.5 47.2 51.8 47.2 51.0
----- ----- ----- ----- -----
Gross profit ................................... 44.5 52.8 48.2 52.8 49.0
----- ----- ----- ----- -----
Store operating expenses .......................... 37.3 40.3 39.1 44.6 39.7
----- ----- ----- ----- -----
Store contribution margin ...................... 7.2 12.5 9.1 8.2 9.3
Corporate administrative expenses ................. 12.4 15.8 14.4 25.8 20.8
----- ----- ----- ----- -----
Loss before interest, taxes, depreciation
and amortization .................................. (5.2) (3.3) (5.3) (17.6) (11.5)
Interest expense .................................. 7.6 4.5 6.5 8.3 36.9
Depreciation and amortization ..................... 3.8 4.7 3.9 5.2 5.0
----- ----- ----- ----- -----
Net loss ....................................... (16.7)% (12.5)% (15.7)% (31.1)% (53.4)%
===== ===== ===== ===== =====
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended April 29, 2000 Compared to Three Months Ended May 1, 1999
Total revenues increased 54.4% to $6,712,000 during the three months ended
April 29, 2000 (the "Three Month 2000 Period") from $4,347,000 during the three
months ended May 1, 1999 (the "Three Month 1999 Period"). Total revenues at
Comparable Stores increased 26.8% and contributed $1,155,000 of the increase.
Merchandise sales increased 64.9% to $4,756,000 during the Three Month
2000 Period from $2,885,000 during the Three Month 1999 Period. Merchandise
sales at our Comparable Stores increased 33.4% and contributed $962,000 of the
increase. Average inventory per store increased 44.6% to $162,000 at April 29,
2000 from $112,000 at May 1, 1999 primarily due to continued implementation of
more aggressive lending operations to provide for the increased levels of
merchandise available for sale, and the maturation of new stores added during
the past two fiscal years.
14
<PAGE> 18
Pawn service charges increased 32.4% to $1,879,000 during the Three Month
2000 Period from $1,419,000 during the Three Month 1999 Period. Pawn service
charges at Comparable Stores increased 12.2% and contributed to $170,000 of the
increase. The increased pawn services charges from Comparable Stores resulted
primarily from pawn loans increasing 11.6% to $5,388,000 at April 29, 2000 from
$4,827,000 at May 1, 1999. In addition to the service charges recorded upon cash
payments, the Company records pawn service charges receivable in an amount
equivalent to one month's earned pawn service charges, net of an allowance for
pawn service charges deemed uncollectible, based on our historical loan
redemption rate. The operational changes that began to be implemented in
September 1998 resulted in significant loan growth during the Three Month 1999
Period. During the Three Month 2000 Period, our loan balances fluctuated due to
normal seasonality and as a result were reduced slightly. As such, the Three
Month 1999 Period was favorably impacted by approximately $90,000 in pawn
service charges and the Three Month 2000 Period was unfavorably impacted by
approximately $30,000 in pawn service charges reductions.
Gross profit increased 30.1% to $2,988,000 during the Three Month 2000
Period from $2,296,000 during the Three Month 1999 Period. Gross profit at
Comparable Stores increased 10.9% and contributed to $246,000 of the increase.
The increase in gross profit at the Comparable Stores is primarily attributable
to increased pawn service charges and a slight increase in aggregate gross
profit dollars from merchandise sales. Our realized gross profit margins as a
percent of merchandise sales decreased during the Three Month 2000 Period due to
the operational changes that were begun in September 1998. In addition, our
gross profit was also negatively impacted during the Three Month 2000 Period due
to higher inventory losses than historically realized. Our consolidated
annualized inventory turnover rate was 2.0 times during the Three Month 2000
Period compared to 2.4 times during Three Month 1999 Period. The decrease is
primarily due to a larger base of new stores existing during the Three Month
2000 Period combined with the effects of increased loan activities that have
resulted in higher average amounts of merchandise available for sale. On a
Comparable Store basis, our annualized inventory turnover rate decreased to 2.0
times during the Three Month 2000 Period from 3.2 times during the Three Month
1999 Period.
Store operating expenses consist of all items directly related to the
operation of the stores, including salaries and related payroll costs, rent,
property taxes, utilities, supplies, security costs, and other miscellaneous
store expenses. Store operating expenses increased 43.1% to $2,506,000 during
the Three Month 2000 Period from $1,751,000 during the Three Month 1999 Period.
As a percentage of total revenues, store operating expenses declined to 37.3%
from 40.3% during the prior year period. On a Comparable Store basis, store
operating expenses increased $162,000 in the aggregate, but decreased as a
percentage of total revenues to 34.5% during the Three Month 2000 Period from
40.0% during the Three Month 1999 Period. The overall decrease in the Comparable
Store operating expenses as a percent of total revenues resulted from the
Company's ability to leverage store operating expenses due to the 26.8% increase
in Comparable Store revenues.
Store contribution margin decreased 11.6% to $482,000, or 7.2% of total
revenues, during the Three Month 2000 Period compared to $545,000, or 12.5% of
total revenues, during the Three Month 1999 Period primarily due to the decrease
in gross profit discussed above, the effects on pawn service charge income as a
result of the operational changes discussed, and the increased inventory
shrinkage. Comparable Store contribution margin increased 15.6% to $623,000, or
11.4% of total revenues, during the Three Month 2000 Period compared to
$539,000, or 12.5% of total revenues, during the Three Month 1999 Period.
The following table presents an analysis of Comparable Store performance
for the Three Month 2000 Period compared to the Three Month 1999 Period.
<TABLE>
<CAPTION>
(In thousands) Three Month Three Month
2000 Period 1999 Period
----------- -----------
<S> <C> <C>
Merchandise sales .................. $3,839 $2,877
Pawn service charges ............... 1,565 1,395
Other .............................. 62 39
------ ------
Total revenues .................. 5,466 4,311
Cost of sales ...................... 2,955 2,046
------ ------
Gross profit .................... 2,511 2,265
Store operating expenses ........... 1,888 1,726
------ ------
Store contribution margin ........ $ 623 $ 539
====== ======
</TABLE>
15
<PAGE> 19
Corporate administrative expenses consists of all items relating to the
operation of the corporate headquarters and field supervision cost of the
district managers, store audit team members, and other administrative personnel.
Our administrative expenses increased 21.1% to $833,000 during the Three Month
2000 Period from $688,000 during the Three Month 1999 Period primarily due to
increased corporate personnel costs. However, our corporate administrative
expenses have reduced as a percentage of total revenues during the Three Month
2000 Period to 12.4% of total revenues from 15.8% during the Three Month 1999
Period as a result of the larger number of stores in operation.
EBITDA losses increased to $351,000 during the Three Month 2000 Period
from an EBITDA loss of $143,000 during the Three Month 1999 Period. The larger
loss primarily results from lower gross profit due to increased inventory
shrinkage and the effects on pawn service charges discussed above.
Interest expense increased to $509,000 during the Three Month 2000 Period
from $197,000 during the Three Month 1999 Period. The increase is attributable
to increased borrowings under our Credit Facility, the issuance of the Company's
2004 Notes, and other short-term borrowings which have been utilized to fund
continued store expansion.
The Three Month 2000 Period included $50,000 in preferred stock dividends
related to the Company's issuance of $2.5 million of 8% Preferred Stock on
September 1, 1999.
Net loss to common stockholders during the Three Month 2000 Period was
$1,167,000, or $0.16 per basic and diluted share, compared to $542,000, or $0.08
per basic and diluted share, during the Three Month 1999 Period.
Fiscal 1999 Compared to Fiscal 1998
Total revenues increased 75.1% to $20,902,000 during Fiscal 1999 as
compared to $11,935,000 during Fiscal 1998. Total revenues at the Company's
Fiscal 1999 Comparable Stores increased 31.7% and contributed to $3,736,000 of
the increase.
Merchandise sales increased 71.1% to $13,978,000 during Fiscal 1999 from
$8,170,000 during Fiscal 1998. Merchandise sales at the Company's Fiscal 1999
Comparable Stores increased 27.3% and contributed to $2,204,000 of the increase.
Average inventory per store increased 68.1% to $158,000 at January 29, 2000 from
$94,000 at January 30, 1999 primarily due to continued improvement in the
Company's lending operations which have increased the levels of merchandise
available for sale and the maturation of stores added during Fiscal 1999 and
Fiscal 1998.
Pawn service charges increased 83.6% to $6,674,000 during Fiscal 1999 from
$3,636,000 during Fiscal 1998. Pawn service charges at the Company's Fiscal 1999
Comparable Stores increased 41.1% and contributed to $1,477,000 of the increase.
The increased pawn services charges from Fiscal 1999 Comparable Stores resulted
primarily from pawn loans increasing 28.8% to $5,691,000 at January 29, 2000
from $4,419,000 at January 30, 1999.
Gross profit increased 59.8% to $10,070,000 during Fiscal 1999 from
$6,301,000 during Fiscal 1998. Gross profit at the Company's Fiscal 1999
Comparable Stores increased 20.2% and contributed to $1,257,000 of the increase.
The increase in gross profit at the Fiscal 1999 Comparable Stores is primarily
attributable to increased pawn service charges which were offset slightly by
decreased gross profit dollars from merchandise sales. The Company's realized
gross profit margins on merchandise sales decreased during Fiscal 1999 due to
operational changes implemented in September 1998. Our consolidated annualized
inventory turnover rate was 2.0 times during Fiscal 1999 compared to 2.4 times
during Fiscal 1998. The decrease is primarily due to a larger base of new stores
existing during the Fiscal 1999 combined with the effects of increased loan
activities that have resulted in higher average amounts of merchandise available
for sale. On a Fiscal 1999 Comparable Store basis, the Company's annualized
inventory turnover rate decreased to 2.4 times during Fiscal 1999 compared to
2.6 times during Fiscal 1998.
16
<PAGE> 20
Store operating expenses increased 53.3% to $8,163,000, or 39.1% of total
revenues, during Fiscal 1999 from $5,326,000, or 44.6% of total revenues, during
Fiscal 1998. On a Fiscal 1999 Comparable Store basis, store operating expenses
increased $194,000 and comprised 33.8% of total revenues during Fiscal 1999
compared to 42.8% of total revenues during Fiscal 1998. The overall decrease in
Fiscal 1999 Comparable Store operating expenses as a percent of total revenues
resulted from the Company's ability to leverage store operating expenses due to
the 31.7% increase in Fiscal 1999 Comparable Store revenues.
Store contribution margin increased 95.6% to $1,907,000, or 9.1% of total
revenues, during Fiscal 1999 compared to $975,000, or 8.2% of total revenues,
during Fiscal 1998 primarily due to significant improvements in the
profitability of the Company's Fiscal 1999 Comparable Stores which were offset
by the effects of $338,000 in planned start-up losses at 14 stores added during
Fiscal 1999. Excluding the effects of planned start-up losses, the Fiscal 1999
Comparable Store contribution margin increased 89.9% to $2,245,000, or 14.5% of
total revenues, during Fiscal 1999 compared to $1,182,000, or 10.0% of total
revenues, during Fiscal 1998. The following table presents an analysis of Fiscal
1999 Comparable Store performance for Fiscal 1999 compared to Fiscal 1998.
<TABLE>
<CAPTION>
(In thousands) Fiscal Fiscal
1999 1998
--------- --------
<S> <C> <C>
Merchandise sales ..................... $10,275 $ 8,071
Pawn service charges .................. 5,074 3,597
Other ................................. 184 129
------- -------
Total revenues ..................... 15,533 11,797
Cost of sales ......................... 8,044 5,565
------- -------
Gross profit ....................... 7,489 6,232
Store operating expenses .............. 5,244 5,050
------- -------
Store contribution margin .......... $ 2,245 $ 1,182
======= =======
</TABLE>
Corporate administrative expenses decreased 1.8% to $3,020,000 during
Fiscal 1999 from $3,074,000 during Fiscal 1998 primarily due to decreased
professional fees which were offset by increased labor costs associated with the
hiring of additional corporate field and administrative personnel to support
current and planned growth. The Company's rapid growth has reduced corporate
administrative expenses from 25.8% of total revenues during Fiscal 1998 to 14.4%
of total revenues during Fiscal 1999. Since we have added 27 stores in the last
two fiscal years and may add additional stores during the fiscal year ending
January 27, 2001, management anticipates corporate administrative expenses to
continue to decrease as a percentage of total revenues.
Earnings before interest, depreciation and amortization ("EBITDA")
improved 47.0% to an EBITDA loss of $1,113,000 during Fiscal 1999 from an EBITDA
loss of $2,099,000 during Fiscal 1998. The improvement results from overall
improvements in the profitability of the Company's stores combined with
significant reductions in corporate administrative expenses as a percentage of
total revenues.
Interest expense increased 36.3% to $1,358,000 during Fiscal 1999 from
$996,000 during Fiscal 1998. Fiscal 1998 includes $495,000 in non-cash interest
expense resulting from the accounting treatment relating to the beneficial
conversion feature associated with the Company's convertible subordinated
debentures and $313,000 in interest expense related to debt that was either
converted or repaid upon completion of the Company's initial public offering.
See note 5 to the consolidated financial statements for the year ended January
29, 2000 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. Interest expense during Fiscal 1999 was related to
borrowings under the Company's Credit Facility, the Company's Notes, and other
short-term borrowings which were utilized to fund store growth.
During Fiscal 1998, the Company recognized $674,000 in noncash preferred
stock dividends resulting from the accounting treatment relating to the
beneficial conversion feature associated with its convertible preferred stock
and $18,000 in preferred stock dividends associated with its 12% Series D
Convertible Exchangeable Preferred stock. See note 7 to the consolidated
financial statements for the year ended January 29, 2000 included under
17
<PAGE> 21
"Item 8. -- Consolidated Financial Statements and Supplementary Data" included
elsewhere in this Annual Report for a discussion of the accounting treatment
relating to the beneficial conversion feature associated with the Company's
convertible preferred stock. All classes of the Company's preferred stock
converted to common stock upon completion of the Company's initial public
offering in March 1998. Fiscal 1999 included $83,000 in preferred stock
dividends related to the Company's issuance of $2.5 million of 8% Preferred
Stock on September 1, 1999.
Net loss to common stockholders during Fiscal 1999 was $3,359,000, or
$0.47 per basic and diluted share, compared to $4,405,000, or $0.68 per basic
and diluted share, during Fiscal 1998.
At January 29, 2000, the Company's accumulated net operating loss
carryforwards for tax purposes were approximately $15,571,000. Such amounts are
available to offset future federal taxable income, if any, through 2020.
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. Total revenues at 19 stores opened
for 12 months of more as of January 30, 1999 ("Fiscal 1998 Comparable Stores")
increased 7.8% and contributed to $797,000 of the increase.
Merchandise sales increased 13.2% to $8,170,000 during Fiscal 1998 from
$7,215,000 during Fiscal 1997. Merchandise sales at the Company's Fiscal 1998
Comparable Stores increased 3.2% and contributed to $232,000 of the increase.
Average inventory per store for Fiscal 1998 Comparable Stores decreased from
$102,000 at January 31, 1998 to $101,000 at January 30, 1999.
Pawn service charges increased 27.0% to $3,636,000 during Fiscal 1998 from
$2,862,000 during Fiscal 1997. Pawn service charges at the Company's Fiscal 1998
Comparable Stores increased 20.2% and contributed to $578,000 of the increase.
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 increased
$411,000 and 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 $436,000 in 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, or
12.9% of total revenues, during Fiscal 1998 compared to $946,000, or 9.3% of
total revenues, during Fiscal 1997.
Corporate administrative expenses increased 45.2% to $3,074,000 during
Fiscal 1998 from $2,117,000 during Fiscal 1997 primarily due to (i) $200,000 in
noncash professional fees associated with new store site selection and marketing
services in exchange for 44,445 shares of unregistered common stock on May 1,
1998, (ii) increased labor
18
<PAGE> 22
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.
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
interest expense resulting from the accounting treatment relating to the
beneficial conversion feature associated with the Company's convertible
subordinated debentures and $313,000 in interest expense related to debt that
was either converted or repaid upon completion of the Company's initial public
offering. See note 5 to the consolidated financial statements for the year ended
January 29, 2000 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 interest
expense that relates to debt that was either converted or repaid upon completion
of the Company's initial public offering.
Fiscal 1998 includes $674,000 in noncash preferred stock dividends
resulting from the accounting treatment relating to the beneficial conversion
feature associated with its convertible preferred stock and $18,000 in preferred
stock dividends associated with its 12% Series D Convertible Exchangeable
Preferred stock. See note 7 to the consolidated financial statements for the
year ended January 29, 2000 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
preferred stock dividends associated with the Company's 12% Series D Convertible
Exchangeable Preferred stock.
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.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the completion of our initial public offering in March 1998, our
operations were financed from funds generated from private debt and equity
offerings and funds generated from operations. In March 1998, we received net
proceeds of approximately $5,583,000 from the completion of our initial public
offering. In connection with the completion of the initial public offering,
$9,520,000 in aggregate principal amount of the Company's 14% convertible
subordinated debentures were automatically converted into 2,380,000 outstanding
shares of Common Stock and all classes of the Company's preferred stock were
automatically converted into an aggregate of 1,482,766 outstanding shares of
Common Stock. Additionally, we utilized $2,524,000 of the net proceeds to repay
certain notes payable.
On October 13, 1998, we entered into the $10 million Credit Facility. On
June 27, 2000 we revised and extended the Credit Facility and increased the
total available credit line from $10 million to $15 million, subject to
available borrowing base. At July 28, 2000, $9,000,000 was outstanding under the
Credit Facility and an additional $109,000 was available pursuant to the
available borrowing base. The Credit Facility bears interest at either (i) the
prevailing prime rate plus 0.75%, which was 10.25% at July 28, 2000, or (ii) the
prevailing LIBOR rate plus 3.35%, and matures on October 13, 2002. Amounts
available under the Credit Facility are limited to certain percentages of pawn
loans, inventories and pawn service charges receivable. The Credit Facility is
collateralized by substantially all of our unencumbered assets. Under the terms
of the Credit Facility, we are required to maintain certain financial ratios and
comply with certain technical covenants. We were in compliance with these
requirements and covenants as of July 28, 2000. We are required to pay an annual
commitment fee of 1/2 of 1% on the average daily unused portion of the Credit
Facility commitment. We are prohibited from paying cash dividends or acquiring
treasury stock under the terms of the Credit Facility unless specifically
approved by Comerica Bank.
On March 11, 1999, we commenced this Offering of up to $10 million in
principal amount of the Notes. This is a best efforts offering by licensed
broker dealers who are members of the National Association of Securities
Dealers, Inc. The underwriters are not required to sell any specific number or
dollar amount of securities but will use their best efforts to sell the
securities offered. Interest on the Notes of 12% is payable monthly commencing
with the second full calendar month following issuance. At the option of the
Company, the Notes may be redeemed prior to
19
<PAGE> 23
December 31, 2004 at stipulated redemption prices. We have issued a total of
$9,197,000 of the Notes as of July 28, 2000.
On September 1, 1999, we sold 416,667 shares of 8% Preferred Stock, $6.00
par value per share, resulting in net proceeds of $2,272,000. Dividends on the
8% Preferred Stock are payable quarterly in cash. The 8% Preferred Stock is not
convertible into the Company's common stock until March 1, 2001. From March 1,
2001 until August 31, 2002, the 8% Preferred Stock is convertible at the option
of the purchaser at the lesser of (i) 80% of the average closing sales price of
the Company's common stock for the preceding 25 trading days as quoted on the
NASDAQ market or (ii) $6.00 per share. After August 31, 2002, the 8 % Preferred
Stock is convertible at the option of the purchaser at 66 2/3% of the average
closing sales price of the Company's common stock for the preceding 25 trading
days as quoted on the NASDAQ market. The Company may redeem the 8% Preferred
Stock, in whole or in part, prior to August 31, 2002 at 120% of the par value of
Preferred Stock then outstanding. After August 31, 2002, the Company may redeem
the 8% Preferred Stock, in whole or in part, at 100% of the par value of the 8%
Preferred Stock then outstanding. Each share of the 8% Preferred Stock shall be
entitled to one vote per share, voting together with the holders of the
Company's common stock, on all matters submitted to a vote of stockholders. In
connection with the sale of the 8% Preferred Stock, the Company issued 312,500
warrants exercisable to purchase shares of the Company's common stock through
August 31, 2004 at $5.00 per share and 90,000 warrants exercisable to purchase
shares of the Company's common stock through August 31, 2004 at $3.60 per share
(collectively referred to as the "Preferred Stock Warrants"). The fair value of
the Preferred Stock Warrants has been recorded as a $60,000 reduction of
additional paid-in capital. See also the Company's 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.
During the fiscal year ended January 29, 2000, the Company acquired the
assets of six pawnshops in purchase transactions for an aggregate cash purchase
price of $1,208,000. During the fiscal year ended January 30, 1999, the Company
acquired the assets of three pawnshops in purchase transactions for an aggregate
cash purchase price of $513,000. The acquisitions were substantially financed
with borrowings under the Company's Credit Facility and with net proceeds from
the issuance of the Notes. The purchase price for acquisitions was determined
based upon the volume of annual loan and sales transactions, outstanding pawn
loan and service charge receivable balances, inventory on hand, condition of
property and equipment, quality and condition of the location and projected
future operating results.
As of April 29, 2000, the Company's primary sources of liquidity were
$733,000 in cash and cash equivalents, $677,000 in pawn service charges
receivable, $6,445,000 in pawn loans outstanding and $7,453,000 in inventories.
The Company had a current ratio of approximately 13.5 to 1.0 and 12.8 to 1.0 at
April 29, 2000 and January 29, 2000, respectively.
Our operating results and liquidity are affected by the amount of loans
outstanding, which is controlled in part by the our loaning decisions. We are
able to influence the frequency of forfeiture of collateral by increasing or
decreasing the amount loaned in relation to the 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
our 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 our liquidity.
Conversely, providing higher loans in relation to the estimated sales value of
the pledged property can result in an increase in our 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 we
increase inventory turnover, reduces our liquidity. In addition to these
factors, liquidity is also affected by merchandise sales and the pace of store
expansion.
In addition to factors noted previously under Risk Factors, our store
expansion in the future will largely be dependent upon improving our liquidity
and raising additional capital through the issuance of equity securities. We do
not anticipate expanding the number of stores during the remainder of Fiscal
2000. In the event we are unable to obtain financing alternatives, our
operational strategies could be modified and further store expansion is likely
to be significantly reduced or suspended. No assurance can be made that we will
be able to obtain additional financing.
20
<PAGE> 24
The independent auditors' report on our audited consolidated financial
statements includes a "going concern" explanatory paragraph, which indicates
that the auditors question our ability to continue operation under the current
business conditions given our recurring losses, negative cash flows and
substantial difficulties in meeting our financial obligations. To address the
"going concern" issue and our underlying liquidity problem, we have begun to
aggressively promote the sale of merchandise in our stores and to reduce excess
inventory. We believe that, while these steps together with the sale of the
remainder of the Notes offered under this Prospectus may solve our immediate
liquidity needs, we will need to pursue alternative strategies to support our
longer-term liquidity needs. For example, we are currently exploring selling
some of our stores under a franchise arrangement. Under such a franchise
arrangement, we would sell certain stores to a third party and receive a
management fee for continuing to provide management services and operational
support. We believe that we will need to raise additional capital in the near
future through the issuance of additional equity securities. There can be no
assurance that we will be able to institute a franchise program or raise money
through the issuance of additional securities. In the event that our liquidity
concerns persist, we may need to further reduce inventories, which could further
harm our future operating results and cash flows. See "Risk Factors - Liquidity
and `Going Concern'".
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." It requires that all derivatives
be recognized as either assets or liabilities on the balance sheet and such
instruments be measured at their fair value. The Statement, as amended, is
effective for all quarters of years beginning after June 15, 2000. In June 2000,
SFAS 133 was further amended with the issuance of SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," which clarified
certain accounting and reporting issues of SFAS 133. The Company's management is
continuing to determine the effect of these new pronouncements, however, they
are not expected to have a significant impact on the balance sheet or statement
of operations. SFAS 133 will be reflected in the Company's quarter ending April
2001 consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation: an Interpretation of APB
Opinion No. 25," which is effective July 1, 2000. This interpretation clarifies
various accounting issues for stock compensation plans. Management of the
Company has determined that the interpretation will not have an effect on its
consolidated financial statements.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure relates to changes in interest
rates related to the Credit Facility. The Credit Facility bears interest at a
variable rate that is 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 Notes bear interest at a fixed rate of 12% per annum. As a result,
the Company's only interest rate risk is the opportunity loss associated with
this debt should interest rates decline for debt with similar characteristics.
At April 29, 2000, the Company had total long-term indebtedness, net of current
installments of $57,000, of $17,015,000 that represents borrowings under the
Credit Facility and the Notes.
The aggregate maturities of long-term notes payable as of are as follows:
<TABLE>
<CAPTION>
Fiscal Years Ending January,
<S> <C> <C>
2001 $ 57
2002 8,638
2003 -
2004 -
2005 8,377
-------
Total $17,072
=======
</TABLE>
21
<PAGE> 25
BUSINESS
GENERAL
PawnMart, Inc. 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 July 28, 2000 the Company was one of
five publicly traded pawnshop operators in the United States, and owned and
operated 46 stores located in Alabama, Florida, Georgia, North Carolina, South
Carolina and Texas. The Company's principal office is located at 6300 Ridglea
Place, Suite 724, Fort Worth, Texas 76116, and its telephone number is (817)
569-9305.
PawnMart is a specialty finance and retail enterprise principally engaged
in establishing and operating stores that 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. Furthermore, we are
considering implementing a franchising program, under which we would generate
additional income through management fees paid to us by franchisees and through
sales of existing stores to franchisees.
Prior to March 1998, the Company owned and operated 19 stores. The
completion of our initial public offering of common stock in March 1998 resulted
in net proceeds of $5,583,000 and enhanced our ability to implement our business
strategy. 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.
During the fiscal year ended January 30, 1999 ("Fiscal 1998"), we added 13
stores resulting in a 68 percent increase in our store base for a total of 32
stores. In order to fund this expansion, we utilized the remaining proceeds of
the initial public offering and secured the Credit Facility.
During the fiscal year ended January 29, 2000 ("Fiscal 1999"), we added 14
stores resulting in a 44 percent increase in our store base for a total of 46
stores in operation at the fiscal year end. Our expansion during Fiscal 1999 was
funded through borrowings under our Credit Facility, net proceeds from this
Offering and the net proceeds from the sale 416,667 shares of 8% Preferred Stock
on September 1, 1999.
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 93 percent of the approximately 13,500 stores in
the United States owned by "mom and pop" operators and approximately 7 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.
22
<PAGE> 26
BUSINESS STRATEGY
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 than the typical customer of other
pawnshops. In this regard, our strategic market positioning targets these
customer groups for both pawn and retail transactions with specialty retail
concepts such as "PAWNMART More Cash. More Choices."(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 long-term strategic objective is to implement a roll-out of
PAWNMART(SM) stores in order to capitalize upon growth opportunities afforded by
the highly fragmented pawnshop industry. To achieve our strategic objectives, we
have adopted the following strategy:
o Acquire or Develop Stores That Meet Site Selection, Store Size and
Configuration Requirements in Selected Markets. We believe that
ideal site selection is one of the most critical factors in creating
a successful PAWNMART(SM) store. In this regard, we have developed
extensive customer demographics that identify both our borrowing and
retail customers. We, therefore, believe that by acquiring existing
stores or by opening new stores only in locations meeting our
demographic and site selection requirements, we will be well
situated to compete effectively in the highly fragmented pawnshop
industry. Second, we believe that the "look and feel" of our stores
is an important factor in establishing a successful specialty
finance and retail store. By acquiring existing stores or opening
new stores only in accordance with its specifications, we can ensure
that each PAWNMART(SM) has a similar "look and feel."
o Franchise Operations in Select Markets. In order to support our
existing stores and to implement our roll-out strategy without
draining our financial and human resources, we may sell PAWNMART(SM)
franchises in existing and new markets. We have primarily focused on
establishing a sufficient base of Company owned stores through
Fiscal 1999. Now that we have a core group of maturing stores, we
believe we are well-positioned to pursue franchising in select
markets. We believe that a franchise program will allow franchisees
to benefit from our targeted database marketing segmentation system,
PAWNLINK(TM) computer software and information system, as well as
our standardized operating system. A franchise program may consist
of selling an existing or new PAWNMART(SM) store to a franchisee and
continuing to manage the store for a management fee, or it may
consist of selling our management services along with the right to
use the PAWNMART(SM) name to existing or new pawnshop operators. We
cannot assure you, however, that we will be able to sell any
franchises or that we will ultimately decide to implement a
franchise program.
o Expand in Metropolitan Areas in States with Favorable Pawn
Regulations. Our roll-out strategy is to generate operating
efficiencies in supervision, administration, purchasing and
marketing by first expanding in the metropolitan areas surrounding
our existing stores, and thereafter, in metropolitan areas in states
with favorable pawn regulations.
o Utilize Information Technology. We have 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 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. We believe that our success will be
substantially dependent on our ability to achieve excellence in
operating its stores. In this regard, we intend to capitalize upon
the operational expertise of our 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.
23
<PAGE> 27
o Utilize Targeted Database Marketing. We have 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, we have 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.
STORE OPERATIONS
Lending
We are a specialty finance and retail enterprise principally engaged in
developing and operating stores that 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, we do
not investigate the creditworthiness of the borrower, but rely on the pledged
personal property, and the possibility of its forfeiture and subsequent sale, 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.
We contract 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 our
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 31.9%, 30.5% and 28.1% of our total revenues during Fiscal 1999,
Fiscal 1998 and Fiscal 1997, respectively. Our average pawn loan was $109, $115
and $110 as of April 29, 2000, January 29, 2000 and January 30, 1999,
respectively.
The pledged property is held through the term of the transaction, which
generally is one month with an automatic sixty-day redemption period, except for
automobile title loans, where a shorter redemption period applies under state
regulations. The term of the transaction may continue if the 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 us 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 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. 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 carrying cost of the acquired
collateral. However, historically, we have experienced profits from the sale of
such merchandise.
Retail Sales
We retail pre-owned products acquired either when a pawn loan is not
repaid or from individual customers or other sources. Merchandise sales
contributed to 70.9%, 66.9%, 68.5% and 70.9% of our total revenues during the
Three Month 2000 Period, Fiscal 1999, Fiscal 1998 and Fiscal 1997, respectively.
We realized gross profit margins on merchandise sales of 21.7%, 22.5%, 31.0% and
28.0% during the Three Month 2000 Period, Fiscal 1999, Fiscal 1998 and Fiscal
1997, respectively.
24
<PAGE> 28
We provide our customers with a 30-day guarantee on pre-owned products,
providing the customer with an exchange or cash refund. We believe that most
pawnshops do not offer this type of guarantee. Additionally, we provide 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. We hold
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 us.
We provide an allowance for inventory valuation on our 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 April 29, 2000, January 29, 2000 and January 30, 1999, total
merchandise held for resale was $7,453,000, $7,279,000 and $3,011,000,
respectively, after reduction for a valuation allowance of $300,000, $294,000
and $141,000, respectively.
Retail Store Management
Each location has a store manager who typically supervises personnel and
assures that it is managed in accordance with our guidelines and established
policies and procedures. Each store manager reports to a District Manager who
will typically supervise up to 10 stores. Currently, we have six operating
districts, each of which is managed by a District Manager.
Franchise Management
We believe our experience in operating and developing stores in various
markets will be beneficial to a franchise owner. Although we have not yet
established a franchise program, we are currently in discussions with third
parties regarding a potential franchise arrangement. Under the franchise
structure we are discussing, we would sell PAWNMART(SM) stores to a franchisee
and provide management services to the franchisee for a management fee. Some of
the management services we may provide include inventory support and
development, marketing and advertising support, accounting and payroll services,
jewelry cleaning and assessment, employee and management training and ongoing
franchise support. However, we may not enter into this type of franchise program
at all, or we may enter into different franchising arrangements.
Trade Name
We operate our stores under the trade name "PAWNMART(SM)." We have
registered the "PAWNMART(SM)" marks and descriptive logos and phrases with the
United States Patent and Trademark Office.
Personnel
As of July 28, 2000, we had a total of 271 employees (of which 18 were in
executive, administrative, clerical and accounting functions), 119 of whom were
salaried and 152 of whom were hourly employees. We have an established training
program that provides a combination of classroom instruction and on-the-job loan
and specialty retail training. We maintain a performance-based compensation plan
for all store employees, based on, among other factors, profitability and
special promotional contests. None of our employees are covered by collective
bargaining agreements. We consider our employee relations to be satisfactory.
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 competitors have
greater financial resources than us, including Cash America International, Inc.,
First Cash
25
<PAGE> 29
Financial Services, Inc. and EZCORP, Inc. These competitive conditions may
adversely affect our revenues, operating results and ability to expand.
Our 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 our stores do not retail handguns,
sporting rifles or assault rifles. We believe that this positioning provides a
more comfortable and desirable shopping experience with better customer
demographics.
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.
OPERATING CONTROLS
We have 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. We
have an internal audit staff that performs physical counts of merchandise
inventory and pawn loan collateral at each of our locations approximately every
60 days. Additionally, the internal audit staff assists the corporate
headquarters in verifying that our policies and procedures are consistently
followed. Management believes that the current operating and financial controls
and computer systems are adequate for its current operating base and for
anticipated expansion in the near term.
REGULATION
Our 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 our 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.
26
<PAGE> 30
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.
Florida Pawnshop Regulations. The Florida Pawnbroking Act provides for the
licensing and bonding of pawnbrokers in Florida and for the Department of
Agriculture and Consumer Services' Division of Consumer Services to investigate
the general fitness of applicants and generally to regulate pawnshops in the
state. The statute limits the pawn service charge that a pawnbroker may collect
to a maximum of 25% of the amount advanced in the pawn for each 30 day period of
the transaction. The law also requires pawnbrokers to maintain detailed records
of all transactions and to deliver such records to the appropriate local law
enforcement officials. Among other things, the statute prohibits pawnbrokers
from falsifying or failing to make entries in pawn transaction forms, refusing
to allow appropriate law enforcement officials to inspect their records, failing
to maintain records of pawn transactions for at least two years, making any
agreement requiring the personal liability of a pledgor, failing to return
pledged goods upon payment in full of the amount due (unless the pledged goods
had been taken into custody by a court or law enforcement officer or otherwise
lost or damaged), or engaging in title loan transactions at licensed pawnshop
locations. It also prohibits pawnbrokers from entering into pawn transactions
with a person who is under the influence of alcohol or controlled substances, a
person who is under the age of eighteen, or a person using a name other than his
own name or the registered name of his business.
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.
In addition to establishing maximum allowable service charge rates and
loan ceilings, the Texas Pawnshop Act also provides for the licensing of
pawnshops and pawnshop employees. 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, certain proximity restrictions to
other pawnshops and single family dwellings may limit our ability to obtain a
new license.
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, we 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
our stores are subject to municipal ordinances, which may require, for example,
local licenses or permits, additional zoning restrictions, and specified
27
<PAGE> 31
record-keeping procedures, among other things. Each of our 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, we
historically have not experienced a material number of claims of this sort, and
the claims experienced have not had a material adverse effect on our
consolidated results of operations.
Casualty insurance, including burglary coverage, is maintained for each of
our stores, and fidelity bond coverage is maintained on each of the Company's
employees.
Management believes its operations are conducted in material compliance
with all federal, state and local laws and ordinances applicable to its
business.
PROPERTY
Our corporate offices are leased under a seven year lease expiring on
August 31, 2006. At July 29, 2000 we operated 46 leased store locations with
monthly rental payments ranging from $1,300 to $7,000 per location and having
initial lease terms expiring through August 2005. All of our 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, we lease all of these properties from
unaffiliated third parties. See "Certain Relationships and Related
Transactions." The following table sets forth the geographic markets served by
us and the number of stores in each market as of January 29, 2000.
<TABLE>
<CAPTION>
Number of Stores
----------------
<S> <C>
Georgia:
Atlanta Metropolitan Area....................................... 23
Dalton.......................................................... 1
Rome............................................................ 1
Calhoun......................................................... 1
---
Total Georgia............................................ 26
---
Alabama:
Birmingham...................................................... 2
Mobile.......................................................... 4
Dothan.......................................................... 1
---
Total Alabama............................................ 7
---
North Carolina:
Charlotte....................................................... 4
---
Total North Carolina..................................... 4
---
South Carolina:
Greenville Metropolitan Area.................................... 3
---
Total South Carolina..................................... 3
---
Florida:
Pensacola....................................................... 2
---
Total Florida............................................ 2
---
Texas:
Burleson........................................................ 1
Fort Worth...................................................... 2
Weatherford..................................................... 1
---
Total Texas.............................................. 4
---
Total.................................................... 46
===
</TABLE>
28
<PAGE> 32
We consider our equipment, furniture and fixtures and leased buildings to
be in good condition. Our leases typically require us to pay certain maintenance
costs, insurance costs and property taxes.
LEGAL PROCEEDINGS
We are a defendant in some lawsuits encountered in the ordinary course of
its business. Some of these matters are covered to an extent by insurance.
Management believes that the resolution of these matters will not have a
material adverse effect on our consolidated financial position, results of
operations or liquidity.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Exchange Act, and
in accordance therewith file reports, proxy statements and other information
with the Commission. We furnish our 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., 6300 Ridglea Place, Suite 724,
Fort Worth, Texas 76116, telephone number (817) 569-9305.
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 (1)(6)............. 61 Chief Executive Officer and Chairman of the Board
Michael D. Record..................... 46 President
Monty R. Standifer (3)................ 60 Director, Senior Vice President and Chief Financial Officer
Randall L. Haden...................... 39 Vice President - Information Services
James E. Berk (2)(4)(5)(6)............ 54 Director
Robert D. Bourland, Jr. (2)(6)........ 58 Director
Mark E. Kane (3)(4)(5)................ 45 Director
J. Roger Williams (1)(4)(5)........... 50 Director
</TABLE>
------------
(1) Class I Director whose term expires in 2001.
(2) Class II Director whose term expires in 2002.
(3) Class III Director whose term expires in 2003.
(4) Member of Audit and Finance Committee.
(5) Member of Compensation and Human Resource Committee.
(6) Member of Corporate Governance and 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.
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<PAGE> 33
Michael D. Record joined the Company in September 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.
Monty R. Standifer has served as a Director since 1997 and as Senior Vice
President and Chief Financial Officer since June 1, 2000. From May 1999 to
August 1999, Mr. Standifer served as Vice President and Treasurer of Shabang!,
Inc., an internet based shopping service. From July 1995 to May 1999, Mr.
Standifer 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.
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.
James E. Berk has served as a Director since 1997. From October 1999 to
the present, Mr. Berk has served as President and Chief Executive Officer of The
Store of Knowledge, a retailer of educational products. From January 1999 to
October 1999, 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. In June 2000,
he became Chief Executive Officer of 1stlegal.com, an internet based legal
document storage and retrieval system company. From December 1998 to June 2000,
Mr. Bourland was self-employed as an independent consultant. 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.
Mark E. Kane has served as a Director since 1997. From April 1998 to the
present, Mr. Kane has served as Chief Executive Officer of the Movie Trading
Company, Ltd, a specialty retailer of new and pre-owned movies. From 1997
through July 1999, Mr. Kane was 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 Compact Disc International, Ltd., a national franchising
firm specializing in the sale of new and pre-owned compact discs.
J. Roger Williams has served as a Director since April 1998. From 1995 to
the present, Mr. Williams has served as Chairman of the Board and Chief
Executive Officer of Roger Williams Automall in Weatherford, Texas. 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. Mr. Williams is Chairman of the Board of Vestry Corporation of Fort Worth,
Texas and owns and operates Roger Williams Ranches in Weatherford, Texas.
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<PAGE> 34
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 Corporate
Governance Committee. Each of these committees has one or more members who serve
at the discretion of the Board of Directors.
The Audit and Finance Committee, currently comprised of Messrs. Berk, Kane
and Williams is responsible for reviewing the Company's financial statements,
audit reports, financial planning, 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. Berk, 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 Corporate Governance Committee, currently comprised of Messrs.
Thompson, Berk and Bourland, is responsible for developing a strategy and
criteria for new board members and making recommendations to the Board of
Directors regarding the selection of future board members, board compensation
and corporate governance matters.
COMPENSATION OF DIRECTORS
Cash Compensation. No cash compensation has been paid by the Company to
its directors prior to the date of this Prospectus. 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 15,000 shares of Common Stock upon their
appointment to the Board of Directors. The initial grant is prorated based upon
the portion of the year remaining until the next annual meeting. All Eligible
Directors will receive annual grants of options to purchase the lesser of 15,000
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 463,788 shares of Common Stock (subject to certain
anti-dilution adjustments) may be issued to Eligible Directors upon the exercise
of options granted under the Directors' Option Plan. As of the date of this
Prospectus, options for 300,000 shares of Common Stock had been granted and are
outstanding under the Directors' Option Plan. All options have exercise prices
ranging from $3.00 to $4.44 per share of Common Stock.
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 $100,000 during
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<PAGE> 35
Fiscal 1999, Fiscal 1998 and Fiscal 1997 (collectively, the "Named Executive
Officers"). As of the date hereof, the Company has not granted any stock
appreciation rights.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Securities All Other
Name and Principal Fiscal ------------------------ Underlying Compensation
Position During Fiscal 1999 Year Salary ($) Bonus ($) Options(#) ($)
--------------------------- ------ ---------- --------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Carson R. Thompson ..................... 1999 164,423 -- -- --
Chairman of the Board and ........ 1998 150,000 -- 175,000 --
Chief Executive Officer (1)(2) ... 1997 80,769 6,000 164,867 --
Michael D. Record ...................... 1999 137,308 4,615 20,000 --
President (1) (3) ................ 1998 48,461 25,385 125,000 --
1997 -- -- -- --
</TABLE>
----------
(1) Mr. Thompson and Mr. Record 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) Mr. Record joined the Company in September 1998 at an annual salary of
$120,000. In connection with his employment, Mr. Record received a $30,000
signing bonus that was paid over a six month period.
The following table summarizes grants of options to purchase shares of
Common Stock under the PawnMart, Inc. 1997 Employee Stock Option Plan made
during Fiscal 1998 to Named Executive Officers.
<TABLE>
<CAPTION>
Individual Grants
-------------------------------------------------------------------------------------------
Number of Percent of
Securities Total Options
Underlying Granted To Exercise or
Options Employees in Base Price Expiration Black-Scholes Grant
Name Granted (#)(1) Fiscal Year ($/Share) Date Date Present Value (3)
---- -------------- ------------- ----------- ---------- ----------------------
<S> <C> <C> <C> <C> <C>
Carson R. Thompson
Chairman of the Board and
Chief Executive Officer (1) -- -- -- -- --
Michael D. Record
President (2) 20,000 19.8% $3.25 7/23/09 $19,997
</TABLE>
----------
(1) No options were granted to Mr. Thompson during Fiscal 1999.
(2) The options to purchase shares of Common Stock were granted under the 1997
Employee Stock Option Plan and vest over a period of three years.
(3) The grant date present value has been determined using the Black-Scholes
option pricing model with assumptions for the expected term of 2.77 years,
the risk-free interest rate of 5.25%, the expected volatility of 38.60%,
and no expected dividend yield.
EMPLOYMENT AGREEMENTS AND SEVERANCE 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.
On June 1, 2000, the Company entered into Severance Protection Agreements
with Mr. Thompson, Mr. Record, Mr. Standifer, Mr. Haden and Mike Musgrove. Each
of the agreements expires on June 1, 2002 with automatic one-year
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<PAGE> 36
renewals thereafter. Under each agreement, the Company has agreed to pay the
respective officer in one lump sum, one half of his base salary and bonus in the
event that he is terminated without cause, as defined in the agreement.
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 789,917 shares
of Common Stock had been granted and are outstanding under the Plan. All options
have exercise prices ranging from $3.00 to $4.25 per share of Common Stock.
The Plan is administered by the Compensation and Human Resources Committee
(the "Committee") of the Board of Directors. Subject to the provisions of the
Plan, the Committee has the exclusive power to grant options, to interpret the
Plan, to grant waivers of restrictions thereunder and to adopt such rules and
regulations as it may deem necessary or appropriate in keeping with the
objectives of the Plan.
Options granted pursuant to the Plan become exercisable on such date or
dates as may be established by the Committee. The exercise price of options
granted under the Plan may not be an amount less than the market value of Common
Stock at the time of grant. The exercise price must be paid in full in cash at
the time an option is exercised or, if permitted by the Committee, by means of
tendering previously owned shares of Common Stock held for at least six months
(at their fair market value), or partly in cash and partly in Common Stock.
In the event of a stock split, stock dividend, combination or
reclassification or certain other corporate transactions, the Committee is
authorized to make appropriate adjustments to the exercise price and number of
shares subject to options granted under the Plan. Subject to certain
limitations, the Board of Directors is authorized to amend, modify or terminate
the Plan to meet any changes in legal requirements or for any other purpose
permitted by law.
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<PAGE> 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of July 28, 2000, 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)............................................... 503,258 6.0%
Michael D. Record (3)(10)............................................... 58,225 *
Randall L. Haden (3)(11)................................................ 67,904 *
Robert D. Bourland (4)(12).............................................. 120,094 1.4%
James E. Berk (5)(13)................................................... 53,243 *
Monty R. Standifer (3)(13).............................................. 78,243 *
Mark E. Kane (6)(13).................................................... 52,343 *
J. Roger Williams (7)(14)............................................... 73,500 1.0%
All directors and executive officers as a group (9 persons)...... 1,032,884 12.3%
Jesse L. Upchurch, Trustee of Trust C of the Constance
J. Upchurch Family Trust Dated 10/14/94 (8)(15) 729,167 8.7%
</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 8,429,335. This number
includes 803,223 shares issuable pursuant to stock options and warrants
that may be exercised within sixty (60) days after April 1, 2000.
(3) His address is 6300 Ridglea Place, Suite 724, Fort Worth, Texas 76116.
(4) The address for Mr. Bourland is 1312 Mistletoe Drive, Fort Worth, Texas
76110.
(5) The address for Mr. Berk is 1005 Edgewater Court, Colleyville, Texas
76034.
(6) The address for Mr. Kane is 1017 N. Central Expressway, Suite 100, Plano,
Texas 75075.
(7) The address for Mr. Williams is 1015 Fort Worth Street, Weatherford, Texas
76086.
(8) The address for Mr. Upchurch is 500 Main Street, Suite 600, Fort Worth,
Texas 76102
(9) Includes options exercisable into 137,052 shares of Common Stock.
(10) Includes options exercisable into 56,225 shares of Common Stock.
(11) Includes options and warrants exercisable into 31,831 shares of Common
Stock.
(12) Includes options exercisable into 59,784 shares of Common Stock.
(13) Includes options exercisable into 40,000 shares of Common Stock.
(14) Includes options and warrants exercisable into 69,000 shares of Common
Stock.
(15) Includes warrants exercisable to purchase 312,500 shares of Common Stock.
34
<PAGE> 38
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 our 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 our 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 our 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, we 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, we 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. We believe that said
arrangements were no less favorable to us 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 our independent directors
who do not have an interest in the transactions and who have access, at our
expense, to our counsel or independent counsel.
DESCRIPTION OF SUBORDINATED NOTES DUE 2004
The 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. We may require the
holder of a Note to reimburse us for any out-of-pocket costs incurred with
respect to a transfer or exchange of a Note. The Trustee for the Notes will be
Trust Management, Inc., Fort Worth, Texas.
The following is a summary of the Notes. Capitalized terms used but not
otherwise defined in this summary have the meanings assigned thereto in the Note
Indenture.
Subordination. Payment of principal and interest and all other amounts on
the Notes is unsecured and subordinated; subject to the prior payment in full of
all Senior Debt. Upon (i) the maturity of any Senior Debt, whether by lapse of
time, upon redemption or by acceleration or otherwise, or (ii) any default in
the payment of any amount due in respect of principal or interest in respect of
any Senior Debt or (iii) any distribution or payment of assets or securities of
the Company upon any dissolution, winding up, liquidation or reorganization of
the Company, the holders of Senior Debt will be entitled to receive payment in
full of the principal thereof and interest due thereon before the holders of the
Notes are entitled to receive any payment. During the continuance of any default
or event of default under any agreement governing Senior Debt permitting
acceleration of the maturity thereof (other than a default or event of default
relating to payment of principal or interest, either at maturity, upon
redemption, by
35
<PAGE> 39
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
36
<PAGE> 40
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.
Amendment to Indenture Regarding Limitation on Sole Assets. We are
currently seeking the consents from a majority of the Note Holders to allow an
amendment to the Indenture, specifically the section that requires 75% of
consideration for disposition of our assets to be in cash, temporary cash
investments or the assumption of our Senior Debt would be changed to reduce the
percentage to 40%. If approved by a majority of the principal Note Holders, the
Indenture will be amended and effect all Note Holders. Although we cannot make
any assurances, we believe that a majority of the principal Note Holders will
consent to the proposed amendment.
DESCRIPTION OF CREDIT FACILITY
On October 13, 1998, we entered into the $10 million Credit Facility.
Subsequently, on June 27, 2000, the Credit Facility was amended and the line of
credit available was increased to $15 million. As of July 28, 2000,
approximately $9,000,000 was outstanding under the Credit Facility and an
additional $109,000 was available to the us pursuant to the available borrowing
base. 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 50% of eligible
inventories.
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MATURITY
Loans made pursuant to the Credit Facility may be borrowed, repaid and
reborrowed from time to time until October 13, 2002, 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 1/2
of 1% per annum, payable monthly, on the committed undrawn amount of the Credit
Facility. In addition, the Company was required to pay a non-refundable closing
fee in an amount equal to 1% of the total commitment amount of the Credit
Facility.
CONDITIONS TO EXTENSIONS OF CREDIT
The obligation of Comerica Bank to make advances under the Credit Facility
are subject to the satisfaction of certain customary conditions including, but
not limited to, the absence of a default or event of default under the Credit
Facility, all representations and warranties under the Credit Facility being
true and correct in all material respects and the absence of a material adverse
change.
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 our authorized capital stock consists of 20,000,000
shares of Common Stock, par value $.01 per share, 10,000,000 shares of preferred
stock, par value $.01 per share (the "Preferred Stock"), and 416,667 shares of
8% convertible preferred stock, par value $6.00 per share (the "8% Preferred
Stock"). We had 7,230,877 shares of Common Stock, no shares of Preferred Stock,
and 416,667 shares of 8% Preferred Stock issued at April 29, 2000. We have
approximately 1,000 holders of record of our Common Stock. The following summary
of certain provisions of our capital stock describes all material provisions of,
but does not purport to be complete and is subject to, and qualified in its
entirety by, our Restated Certificate of Incorporation and By-laws, 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
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of delaying, deferring or preventing a future takeover or change in control of
the Company unless such takeover or change in control is approved by the Board
of Directors.
COMMON STOCK
The issued and outstanding shares of Common Stock are validly issued,
fully paid and nonassessable. Subject to the prior rights of the holders of any
preferred stock, the holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available therefor at such time and
in such amounts as the Board of Directors may from time to time determine. The
shares of Common Stock are not convertible and the holders thereof have no
preemptive or subscription rights to purchase any securities of the Company.
Upon liquidation, dissolution or winding up of the Company, the holders of
Common Stock are entitled to receive pro rata the assets of the Company which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of preferred stock
then outstanding. Each outstanding share of Common Stock is entitled to one vote
on all 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.
8% PREFERRED STOCK
In September 1999, the Board of Directors authorized the issuance of
416,667 shares of 8% Preferred Stock for $2,500,000. The 8% Preferred Stock
bears dividends at 8% per annum and is payable quarterly in cash. The 8%
Preferred Stock is not convertible into the Company's common stock until March
1, 2001. From March 1, 2001 until August 31, 2002, the 8% Preferred Stock is
convertible at the option of the purchaser at the lesser of (i) 80% of the
average closing sales price of the Company's common stock for the preceding 25
trading days as quoted on the NASDAQ market or (ii) $6.00 per share. After
August 31, 2002, the 8% Preferred Stock is convertible at the option of the
purchaser at 66 2/3% of the average closing sales price of the Company's common
stock for the preceding 25 trading days as quoted on the NASDAQ market. The
Company may redeem the 8% Preferred Stock, in whole or in part, prior to August
31, 2002 at 120% of the par value of 8% Preferred Stock then outstanding. After
August 31, 2002, the Company may redeem the 8% Preferred Stock, in whole or in
part, at 100% of the par value of the 8% Preferred Stock then outstanding. Each
share of the 8% Preferred Stock shall be entitled to one vote per share, voting
together with the holders of the Company's common stock, on all matters
submitted to a vote of stockholders.
SERIES A WARRANTS
At the commencement of the Offering in March 1999, 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
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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 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
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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.
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."
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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.
In connection with the sale of the 8% Preferred Stock, the Company issued
312,500 warrants exercisable to purchase shares of the Company's common stock
through August 31, 2004 at $5.00 per share and 90,000 warrants exercisable to
purchase shares of the Company's common stock through August 31, 2004 at $3.60
per share.
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.
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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.
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
We are offering up to $10,000,000 in aggregate principal amount of the
Notes. As July 28, 2000, the Company has issued $9,197,000 of Notes in
connection with this Offering. The Notes are being offered by participating
soliciting broker dealers who are members of the National Association of
Securities Dealers, Inc. ("NASD"). The broker dealers have or will be required
to enter into selling agreements with us 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. We have
agreed 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
the broker dealer identified. Of that amount, a portion may constitute an
unallocated due diligence and marketing fee. We have 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
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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,
we have 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.
We have 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 "Series A
Warrants."
The Offering will terminate on October 28, 2000, unless sooner terminated
by us upon failure to achieve the minimum subscription amount, upon the sale of
all of the Notes or if we believe that additional selling efforts will be
unsuccessful. Early termination of the Offering may result in the selling of
less than $10 million in aggregate principal amount of the Notes and may expose
prior purchasers of Notes to certain risks.
We have 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 that 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.
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Stated Interest on Notes. The stated interest on the Notes generally will
be includable in the income of the holder as ordinary income at the time such
interest is received or accrued, in accordance with such holder's method of
accounting for U.S. Federal income tax purposes.
Market Discount on Resale of Notes. A holder of a Note should be aware
that the purchase or resale of a Note may be affected by the "market discount"
provisions of the Code. The market discount rules generally provide that if a
holder of a Note purchases the Note at a market discount (i.e. a discount other
than at original issue), any gain recognized upon the disposition of the Notes
by the holder will be taxable as ordinary interest income, rather than as
capital gain, to the extent such gain does not exceed the accrued market
discount on such Note at the time of disposition. "Market discount" generally
means the excess, if any, of a Note's stated redemption price at maturity over
the price paid by the holder thereof, unless a de minimis exception applies. A
holder who acquires a Note at a market discount also may be required to defer
the deduction of a portion of the amount of interest that the holder paid or
accrued during the taxable year on indebtedness incurred or maintained to
purchase or carry such Note, if any.
Any principal payments on a Note acquired by a holder at a market discount
will be included in gross income as ordinary income (generally, as interest
income) to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of the accrued market discount for purposes of
determining the tax treatment of subsequent payments on, or dispositions of, a
Note is reduced by the amounts so treated as ordinary income.
A holder of a Note acquired at a market discount may elect to include
market discount in gross income, for Federal income tax purposes, as such market
discount accrues, either on a straight-line basis or on a constant interest rate
basis. This current inclusion election, once made, applies to all market
discount obligations acquired on or after the first day of the first taxable
year to which the election applies, and may not be revoked without the consent
of the IRS. If a holder of a Note makes such an election, the foregoing rules
regarding the recognition of ordinary interest income on sales and other
dispositions and the receipt of principal payments with respect to such Note,
and regarding the deferral of interest deductions on indebtedness incurred or
maintained to purchase or carry such Note, will not apply.
Amortizable Bond Premium. A subsequent holder that purchases a Note for an
amount in excess of the sum of all amounts payable on the Note after the
purchase date, other than stated interest, will be considered to have purchased
the Note at a "premium." A holder generally may elect to amortize the premium
over the remaining term of the Note on a constant yield method. The amount
amortized in any year will be treated as a reduction of the holder's interest
income from the Note. Bond premium on a Note held by a holder that does not make
such an election will decrease the gain or otherwise increase the loss otherwise
recognized on the disposition of the Note. The election to amortize premium on a
constant yield method once made applies to all debt obligations held or
subsequently acquired by the electing holder on or after the first day of the
first taxable year to which the election applies and may not be revoked without
the consent of the IRS.
Sale, Exchange or Retirement of the Notes. In general, subject to the
market discount provisions and amortizable bond premium provisions discussed
above, upon the sale, exchange or redemption of a Note, a holder generally will
recognize capital gain or loss equal to the difference between (i) the amount of
cash proceeds and the fair market value of any property received on the sale,
exchange or redemption (except 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.
45
<PAGE> 49
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 Thompson & Knight L.L.P., Fort Worth, 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. Thompson & Knight
L.L.P. became counsel for the Company in August 2000. Prior to that, Jakes
Jordaan, P.L.L.C., Dallas, Texas, acted as counsel for the Company with respect
to various legal matters relating to the Offering and the Securities offered
under the Prospectus. Members of Jakes Jordaan, 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 29, 2000 and January 30, 1999, and for each of the years in the
three-year period ended January 29, 2000, 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. The report of KPMG LLP contains an explanatory paragraph that
states that the Company has suffered recurring losses from operations, negative
cash flows, and is currently experiencing significant difficulties in meeting
its obligations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
46
<PAGE> 50
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.................................................................. F-2
Consolidated Balance Sheets................................................................... F-3
Consolidated Statements of Operations......................................................... F-4
Consolidated Statements of Cash Flows......................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit)..................................... F-6
Notes to Consolidated Financial Statements.................................................... F-7
</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 29, 2000 and January 30, 1999, 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 29, 2000.
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 29, 2000 and January 30, 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 29, 2000, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 10 to
the consolidated financial statements, the Company has suffered recurring losses
from operations, negative cash flows, and is currently experiencing significant
difficulties in meeting its obligations. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in note 10. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Fort Worth, Texas
March 20, 2000,
except as to note 10, which is as of August 15, 2000.
F-2
<PAGE> 52
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
April 29, January 29, January 30,
2000 2000 1999
--------- ----------- ----------
(Unaudited)
<S> <C> <C> <C>
Assets (Note 5)
Current assets:
Cash and cash equivalents $ 733 $ 795 $ 298
Accounts receivable 145 180 60
Pawn service charges receivable 677 710 446
Loans 6,445 6,758 4,419
Inventories, net 7,453 7,279 3,011
Prepaid expenses and other current assets 214 243 199
-------- -------- --------
Total current assets 15,667 15,965 8,433
-------- -------- --------
Property and equipment, net 3,489 3,347 2,232
Debt issuance costs, net 1,057 1,045 137
Other assets, net 679 687 234
-------- -------- --------
Total assets $ 20,892 $ 21,044 $ 11,192
======== ======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,104 $ 1,150 $ 1,103
Current installments of notes payable 57 93 342
-------- -------- --------
Total current liabilities 1,161 1,243 1,445
-------- -------- --------
Long-term notes payable, net of current installments 17,015 15,923 4,840
-------- -------- --------
Total liabilities 18,176 17,166 6,285
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares -- -- --
8% Convertible preferred stock, $6.00 par value; authorized 416,667
shares; 416,667 shares issued and outstanding (liquidation
preference $6.00 per share) 2,500 2,500 --
Common stock, $.01 par value; authorized 20,000,000 shares;
7,230,877 shares issued 72 72 72
Series A redeemable common stock purchase warrants, $0.125 par
value; 1,885,800, 1,842,840 and 1,380,000 warrants issued and
outstanding at April 29, 2000, January 29, 2000 and January 30, 236 231 173
1999, respectively
Series B redeemable common stock purchase warrants, $0.0625 par
value; 1,380,000 warrants issued and outstanding 86 86 86
Additional common stock purchase warrants 60 60 --
Additional paid-in capital 21,954 21,954 22,242
Accumulated deficit (22,122) (20,955) (17,596)
-------- -------- --------
2,786 3,948 4,977
Less treasury stock, at cost; 21,432 common shares (70) (70) (70)
-------- -------- --------
Total stockholders' equity 2,716 3,878 4,907
-------- -------- --------
Commitments and contingencies (notes 9 and 10)
Total liabilities and stockholders' equity $ 20,892 $ 21,044 $ 11,192
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 53
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Year Ended Year Ended Year Ended
Ended April 29, Ended May 1, January 29, January 30, January 31,
2000 1999 2000 1999 1998
--------------- ------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 4,756 $ 2,885 $ 13,978 $ 8,170 $ 7,215
Pawn service charges 1,879 1,419 6,674 3,636 2,862
Other 77 43 250 129 101
------------ ------------ ------------ ------------ ------------
Total revenues 6,712 4,347 20,902 11,935 10,178
Cost of sales 3,724 2,051 10,832 5,634 5,192
------------ ------------ ------------ ------------ ------------
Gross profit 2,988 2,296 10,070 6,301 4,986
------------ ------------ ------------ ------------ ------------
Expenses:
Store operating 2,506 1,751 8,163 5,326 4,040
Corporate administrative 833 688 3,020 3,074 2,117
Interest 509 197 1,358 996 3,761
Depreciation and amortization 257 202 805 618 504
------------ ------------ ------------ ------------ ------------
Total expenses 4,105 2,838 13,346 10,014 10,422
------------ ------------ ------------ ------------ ------------
Net loss (1,117) (542) (3,276) (3,713) (5,436)
Preferred stock dividends 50 -- 83 692 217
------------ ------------ ------------ ------------ ------------
Net loss to common stockholders $ (1,167) $ (542) $ (3,359) $ (4,405) $ (5,653)
============ ============ ============ ============ ============
Loss per common share:
Basic $ (0.16) $ (0.08) $ (0.47) $ (0.68) $ (3.01)
============ ============ ============ ============ ============
Diluted $ (0.16) $ (0.08) $ (0.47) $ (0.68) $ (3.01)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended January 31, 1998, and January 30, 1999 and
January 29, 2000 and Three Months Ended April 29, 2000
(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 26, 1997 3,089,020 $ 31 1,844,998 $ 18 -- $ --
Issuance of common stock -- -- 105,426 1 -- --
Acquisition of 3,297 shares of common
stock -- -- -- -- -- --
Issuance of preferred stock 572,180 6 -- -- -- --
Recognition of Convertible Subordinated
Debenture beneficial conversion feature -- -- -- -- -- --
Recognition of preferred stock beneficial
conversion feature -- -- -- -- -- --
Amortization of preferred stock beneficial
conversion feature -- -- -- -- -- --
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 -- -- 1,365,000 14 1,380,000 173
Issuance of unregistered common stock
in exchange for services -- -- 44,445 -- -- --
Conversion of Convertible Subordinated
Debentures -- -- 2,380,000 24 -- --
Conversion of preferred stock (3,661,200) (37) 1,491,008 15 -- --
Amortization of preferred stock
beneficial conversion feature -- -- -- -- -- --
Preferred stock dividends paid -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- --------- ---------- --------- ----------
Balance at January 30, 1999 -- -- 7,230,877 72 1,380,000 173
Issuance of Series A redeemable
common stock purchase warrants -- -- -- -- 462,840 58
Issuance of 8% convertible preferred
stock and common stock purchase warrants 416,667 2,500 -- -- -- --
Preferred stock dividends paid -- -- -- -- -- --
Net loss -- -- -- -- -- --
---------- ---------- --------- ---------- --------- ----------
Balance at January 29, 2000 416,667 2,500 7,230,877 72 1,842,840 231
Issuance of Series A redeemable common stock
purchase warrants (unaudited) -- -- -- -- 42,960 5
Preferred stock dividends paid
(unaudited) -- -- -- -- -- --
Net loss (unaudited) -- -- -- -- -- --
---------- ---------- --------- ---------- --------- ----------
Balance at April 29, 2000 (unaudited) 416,667 $ 2,500 7,230,877 $ 72 1,885,800 $ 236
========== ========== ========= ========== ========= ==========
<CAPTION>
Series B
redeemable common Additional
stock purchase warrants common stock Additional Preferred
----------------------- purchase paid-in stock
Shares Amount warrants capital discount
-------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Balance at January 26, 1997 -- $ -- $ -- $ 3,276 $ --
Issuance of common stock -- -- -- 30 --
Acquisition of 3,297 shares of common
stock -- -- -- -- --
Issuance of preferred stock -- -- -- 1,147 --
Recognition of Convertible Subordinated
Debenture beneficial conversion feature -- -- -- 2,380 --
Recognition of preferred stock beneficial
conversion feature -- -- -- 824 (824)
Amortization of preferred stock beneficial
conversion feature -- -- -- -- 150
Preferred stock dividends paid -- -- -- -- --
Net loss -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Balance at January 31, 1998 -- -- -- 7,657 (674)
Issuance of common stock and warrants 1,380,000 86 -- 5,310 --
Issuance of unregistered common stock
in exchange for services -- -- -- 200 --
Conversion of Convertible Subordinated
Debentures -- -- -- 9,053 --
Conversion of preferred stock -- -- -- 22 --
Amortization of preferred stock
beneficial conversion feature -- -- -- -- 674
Preferred stock dividends paid -- -- -- -- --
Net loss -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Balance at January 30, 1999 1,380,000 86 -- 22,242 --
Issuance of Series A redeemable
common stock purchase warrants -- -- -- -- --
Issuance of 8% convertible preferred
stock and common stock purchase warrants -- -- 60 (288) --
Preferred stock dividends paid -- -- -- -- --
Net loss -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Balance at January 29, 2000 1,380,000 86 60 21,954 --
Issuance of Series A redeemable common stock
purchase warrants (unaudited) -- -- -- -- --
Preferred stock dividends paid
(unaudited) -- -- -- -- --
Net loss (unaudited) -- -- -- -- --
--------- ---------- ---------- ---------- ----------
Balance at April 29, 2000 (unaudited) 1,380,000 $ 86 $ 60 $ 21,954 $ --
========= ========== ========== ========== ==========
<CAPTION>
Total
Accumulated Treasury stockholders' equity
deficit stock (deficit)
----------- -------- --------------------
<S> <C> <C> <C>
Balance at January 26, 1997 $ (7,538) $ (65) $ (4,278)
Issuance of common stock -- -- 31
Acquisition of 3,297 shares of common
stock -- (5) (5)
Issuance of preferred stock -- -- 1,153
Recognition of Convertible Subordinated
Debenture beneficial conversion feature -- -- 2,380
Recognition of preferred stock beneficial
conversion feature -- -- --
Amortization of preferred stock beneficial
conversion feature (150) -- --
Preferred stock dividends paid (67) -- (67)
Net loss (5,436) -- (5,436)
---------- ---------- ----------
Balance at January 31, 1998 (13,191) (70) (6,222)
Issuance of common stock and warrants -- -- 5,583
Issuance of unregistered common stock
in exchange for services -- -- 200
Conversion of Convertible Subordinated
Debentures -- -- 9,077
Conversion of preferred stock -- -- --
Amortization of preferred stock
beneficial conversion feature (674) -- --
Preferred stock dividends paid (18) -- (18)
Net loss (3,713) -- (3,713)
---------- ---------- ----------
Balance at January 30, 1999 (17,596) (70) 4,907
Issuance of Series A redeemable
common stock purchase warrants -- -- 58
Issuance of 8% convertible preferred
stock and common stock purchase warrants -- -- 2,272
Preferred stock dividends paid (83) -- (83)
Net loss (3,276) -- (3,276)
---------- ---------- ----------
Balance at January 29, 2000 (20,955) (70) 3,878
Issuance of Series A redeemable common stock
purchase warrants (unaudited) -- -- 5
Preferred stock dividends paid
(unaudited) (50) -- (50)
Net loss (unaudited) (1,117) -- (1,117)
---------- ---------- ----------
Balance at April 29, 2000 (unaudited) $ (22,122) $ (70) $ 2,716
========== ========== ==========
</TABLE>
F-5
<PAGE> 55
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended Year Ended Year Ended Year Ended
April 29, May 1, January 29, January 30, January 31,
2000 1999 2000 1999 1998
------------ ------------ ----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (1,117) $ (542) $ (3,276) $ (3,713) $ (5,436)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 257 202 805 618 504
Amortization of debt issuance costs 63 42 196 124 271
Amortization of debt discount 3 -- 7 495 1,885
Common and preferred stock issued
for services -- -- -- 200 34
Changes in operating assets and
liabilities, net of effect of
acquisitions:
Accounts receivable 35 2 (120) (28) (9)
Pawn service charges receivable 33 (90) (264) (213) (4)
Inventories, net (174) (430) (3,827) (860) 27
Prepaids and other current assets 29 (11) (44) (101) (80)
Other assets -- 394 77 154 (254)
Accounts payable and accrued
liabilities (51) (418) 47 52 (246)
------------ ------------ ------------ ----------- ----------
Net cash used in operating
activities (917) (851) (6,399) (3,272) (3,308)
------------ ------------ ------------ ----------- ----------
Cash flows from investing activities:
Net increase in pawn loans 313 (230) (2,101) (1,916) (193)
Purchases of property and equipment (386) (101) (1,765) (1,917) (197)
Acquisitions of existing operations -- (993) (1,208) (513) --
------------ ------------ ------------ ----------- ----------
Net cash used in investing
activities (73) (1,324) (5,074) (4,346) (390)
------------ ------------ ------------ ----------- ----------
Cash flows from financing activities:
Proceeds from issuance of notes payable 3,416 6,076 19,427 6,352 3,172
Principal payments on notes payable (2,358) (2,633) (8,542) (3,993) (174)
Net proceeds from issuance of common
stock and warrants -- -- -- 5,583 3
Purchase of treasury stock -- -- -- -- (5)
Payment of debt issuance costs (75) (542) (1,104) (159) (261)
Net proceeds from issuance of preferred
stock -- -- 2,272 -- 1,148
Preferred stock dividends paid (50) -- (83) (18) (67)
Decrease in bank overdraft -- -- -- -- (110)
------------ ------------ ------------ ----------- ----------
Net cash provided by financing
activities 928 2,901 11,970 7,765 3,706
------------ ------------ ------------ ----------- ----------
Net increase (decrease) in cash and cash
equivalents (62) 726 497 147 8
Cash and cash equivalents at beginning of
period 795 298 298 151 143
------------ ------------ ------------ ----------- ----------
Cash and cash equivalents at end of period $ 733 $ 1,024 $ 795 $ 298 $ 151
============ ============ ============ =========== ==========
Supplemental disclosures of cash flow
information -
Cash paid for interest $ 434 $ 125 $ 1,051 $ 483 $ 1,565
============ ============ ============ =========== ==========
</TABLE>
See Consolidated Statement of Stockholders' Equity (Deficit) and notes 3, 5 and
7 for noncash financing activities.
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(1) Organization and Business
PawnMart, Inc. (the "Company"), was incorporated in Delaware on January
13, 1994. The Company is a specialty finance and retail
enterprise principally engaged in establishing and operating
stores which advance money secured by the pledge of tangible
personal property, and buy and sell pre-owned merchandise to the
value-conscious consumer. As of January 29, 2000, the Company
owned and operated 46 stores located in Alabama, Florida,
Georgia, North Carolina, South Carolina and Texas.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation and Fiscal Years
The consolidated financial statements include the financial
statements of the Company and its wholly owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
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.
The Company's fiscal year ends on the Saturday nearest
January 31. Accordingly, the fiscal years ended January
29, 2000 and January 30, 1999 consist of 52 weeks and
the fiscal year ended January 31, 1998 consists of 53
weeks.
The accompanying consolidated balance sheet as of April 29,
2000, the accompanying consolidated statements of
operations and cash flows for the three months ended
April 29, 2000 and May 1, 1999, and the accompanying
statement of stockholders' equity (deficit) for the
three months ended April 29, 2000, have been prepared by
the Company without an audit. In the opinion of
management, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair
presentation for such periods have been made. Results
for interim periods should not be considered as
indicative of results for a full year.
Footnote disclosures normally included in annual financial
statements prepared in accordance with generally
accepted accounting principles have been omitted herein
with respect to the interim financial data.
(b) Cash and Cash Equivalents
The Company considers any highly liquid investments with
original maturities of three months or less to be cash
equivalents.
(c) Loans and Income Recognition
Pawn loans (loans) are generally made on the pledge of
tangible personal property for one month, with an
automatic sixty-day extension period. Pawn service
charges are recognized when loans are repaid or renewed.
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.
F-7 (Continued)
<PAGE> 57
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) Summary of Significant Accounting Policies, Continued
Pawn service charges receivable represent an amount
equivalent to one month's earned pawn service charges,
net of an allowance for pawn service charges deemed
uncollectible, based on the Company's historical loan
redemption rate.
(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 $176,000 and $99,000 at January 29, 2000 and
January 30, 1999, 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 $294,000
and $141,000 at January 29, 2000 and January 30, 1999, respectively.
Additions to inventory allowances recorded as cost of goods sold
totaled approximately $389,000, $108,000, and $170,000 and deductions
from inventory allowances for write-off or other dispositions of
inventory totaled approximately $236,000, $127,000, and $94,000 during
the fiscal years ended January 29, 2000, January 30, 1999, and January
31, 1998, respectively.
F-8 (Continued)
<PAGE> 58
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) Summary of Significant Accounting Policies, Continued
(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) Goodwill
Goodwill represents the excess of purchase price over the fair value
of net assets acquired. Goodwill 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) 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.
F-9 (Continued)
<PAGE> 59
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) Summary of Significant Accounting Policies, Continued
(h) Advertising Costs
Advertising costs are expensed the first time advertising takes place.
Advertising expense was approximately $170,000, $395,000 and $163,000
for the fiscal years ended January 29, 2000, January 30, 1999, and
January 31, 1998, respectively.
(i) Fair Values of Financial Instruments
Pawnloans are outstanding for a relatively short period of time,
generally 90 days or less, depending on local regulations. The rate of
finance and service charge is determined by regulatory guidelines and
bears no valuation relationship to interest rate market movements. For
these reasons, management believes that the fair value of pawn loans
approximates their carrying value. The Company's revolving line of
credit with Comerica Bank bears interest at a variable rate that is
frequently adjusted on the basis of market rate changes and is equal
to rates available for debt with similar characteristics. Accordingly,
management believes that the carrying value of such debt approximates
its fair value. The fair values of the Company's remaining long-term
notes payable instruments are estimated based on market values for
debt issues with similar characteristics or rates currently available
for debt with similar terms and risks. Management believes that the
carrying values of those instruments approximate their 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.
(j) 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".
(k) 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 three
months ended April 29, 2000 and May 1, 1999 and the years ended
January 29, 2000, January 30, 1999 and January 31, 1998. Since the
effect of using the weighted average
F-10 (Continued)
<PAGE> 60
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) Summary of Significant Accounting Policies, Continued
number of shares on a diluted basis was antidilutive to the diluted
loss per share calculation for the three months ended April 29, 2000
and May 1, 1999 and the years ended January 30, 1999 and January 31,
1998, diluted loss per share was calculated using the same weighted
average number of common shares in the basic loss per share
calculation.
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Three Months Three Months Year Ended Year Ended Year Ended
Ended April 29, Ended May 1, January 29, January 30, January 31,
2000 1999 2000 1999 1998
--------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Weighted average shares - basic 7,209 7,209 7,209 6,506 1,878
Shares attributable to stock
options, warrants and _ _ _ 510 3,628
convertible securities
----- ----- ----- ----- -----
Weighted average shares - diluted 7,209 7,209 7,209 7,016 5,506
===== ===== ===== ===== =====
</TABLE>
(l) 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.
(m) Reclassifications
Certain amounts in the fiscal years ended January 31, 1998 and January
30, 1999 have been reclassified to conform with the presentation of
amounts in the fiscal year ended January 29, 2000.
(n) Liquidity
The Company's operations and expansion over the past three years have
been primarily funded by the net proceeds from the Company's initial
public offering and issuance of preferred stock (see note 7) and
borrowings under its Credit Facility and 2004 Notes (see note 5). The
Company believes that cash flows generated from its established
stores, borrowings under the Credit Facility, additional proceeds from
the offering of the 2004 Notes, and future debt or equity offerings
will enable the Company to meet its obligations during the fiscal year
ending January 27, 2001. In the event these sources of cash are not
sufficient to meet its obligations, the Company could increase its
cash flow by modifying its operational practices or by significantly
reducing or suspending its planned expansion. No assurance can be made
that these sources of cash will be sufficient to meet the Company's
working capital requirements and planned expansion needs in the future
(See note 10).
(3) Business Acquisitions
During the fiscal year ended January 29, 2000, the Company acquired the
assets of six pawnshops in purchase transactions for an aggregate cash
purchase price of $1,208,000. During the fiscal year ended January 30,
F-11 (Continued)
<PAGE> 61
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
1999, the Company acquired the assets of three pawnshops in purchase
transactions for an aggregate cash purchase price of $513,000. The
acquisitions were substantially financed with borrowings under the
Company's line of Credit Facility and with net proceeds from the issuance
of long-term notes payable. The purchase price for acquisitions was
determined based upon the volume of annual loan and sales transactions,
outstanding pawn loan and service charge receivable balances, inventory on
hand, condition of property and equipment, quality and condition of the
location, and projected future operating results.
All purchase transactions have been accounted for using the purchase method
of accounting. Accordingly, the purchase price was allocated to assets and
liabilities acquired based upon their estimated fair market values at the
dates of acquisition. The excess purchase price over the fair market value
of the net tangible assets acquired and identifiable intangible assets has
been recorded as goodwill. Goodwill, net of accumulated amortization,
resulting from acquisitions totaled $530,000 and $156,000 at January 29,
2000 and January 30, 1999, respectively. The results of operations of the
acquisitions have been included in the consolidated financial statements
from their respective dates of acquisition.
(4) Property and Equipment
Property and equipment consists of the following at January 29, 2000 and
January 30, 1999 (in thousands):
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
Automobiles $ 167 $ 130
Furniture and equipment 3,716 2,481
Leasehold improvements 2,110 1,506
------- -------
5,993 4,117
Less accumulated depreciation and amortization (2,646) (1,885)
------- -------
$ 3,347 $ 2,232
======= =======
</TABLE>
(5) Notes Payable
Notes payable consist of the following at January 29, 2000 and January 30,
1999 (in thousands):
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
Revolving line of credit with a bank, bearing interest at prime plus 0.75
basis points (9.25% at January 29, 2000) payable monthly, to mature
on October 13, 2001, secured by substantially all of the Company's
assets $ 8,260 $ 4,840
Unsecured subordinated notes payable to individuals, bearing interest at
12% payable monthly, to mature on December 31, 2004 7,714 --
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
Other unsecured notes payable 93 92
-------- --------
16,067 5,182
Less: Unamortized debt discount (51) --
Current portion (93) (342)
-------- --------
$ 15,923 $ 4,840
======== ========
</TABLE>
F-12 (Continued)
<PAGE> 62
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Notes Payable, Continued
In October 1998, the Company entered into a $10,000,000 revolving credit
facility with Comerica Bank (the "Credit Facility"). At April 29, 2000 and
January 29, 2000, $8,638,000 and $8,260,000, respectively, was outstanding
under the Credit Facility and an additional $220,000 and $1,020,000,
respectively, 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 9.25% at January 29, 2000, 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 29, 2000. The terms of the
Credit Facility also required the Company to pay an annual commitment fee
of 1/2 of 1% on the average daily unused portion of the total commitment.
The Company is also prohibited from paying cash dividends or acquiring
treasury stock under the terms of the Credit Facility unless specifically
approved by Comerica Bank.
On March 11, 1999, the Company commenced a public offering of up to
$10,000,000 in principal amount of 12% Subordinated Notes due December 31,
2004 (the "2004 Notes"). The 2004 Notes are being offered on a "best
efforts" basis by participating National Association of Securities Dealers,
Inc. broker-dealers ("NASD Broker-Dealers"). Interest on the 2004 Notes is
payable monthly commencing with the second full calendar month following
issuance. At the option of the Company, the 2004 Notes may be redeemed
prior to December 31, 2004 at stipulated redemption prices. The terms of
the 2004 Notes contain certain covenants which limit (i) the payment of
cash dividends on capital stock, (ii) the purchase, redemption or
retirement of capital stock, (iii) the amount of transactions with
affiliates, and (iv) the sales of assets. The Company was in compliance
with these requirements and covenants as of January 29, 2000. The Company
had issued a total of $8,430,000 and $7,714,000 of the 2004 Notes as of
April 29, 2000 and January 29, 2000, respectively.
In connection with the sale of the 2004 Notes, the Company has agreed to
issue Series A redeemable common stock purchase warrants ("Series A
Warrants") to participating NASD Broker-Dealers for the purchase of up to
600,000 shares of the Company's common stock. As of January 29, 2000,
462,840 Series A Warrants had been granted in connection with the sale of
the 2004 Notes. The Company has recorded a debt discount of $58,000
representing the value of the Series A Warrants and is amortizing such
amount into interest expense over the life of the 2004 Notes.
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. 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.
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.
F-13 (Continued)
<PAGE> 63
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) Notes Payable, Continued
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
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
$196,000, $124,000 and $271,000 for the fiscal years ended January 29,
2000, January 30, 1999, and January 31, 1998, respectively, and is included
in interest expense in the accompanying consolidated statements of
operations.
The aggregate maturities of long-term notes payable for each of the five
years subsequent to January 29, 2000 are as follows:
<TABLE>
<CAPTION>
Maturities of
Fiscal Years Long-Term
Ending January, Notes Payable
--------------- -------------
<S> <C>
2001 $ 93
2002 8,260
2003 --
2004 --
2005 7,714
-------
Total $16,067
=======
</TABLE>
(6) 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
29, 2000 and January 30, 1999 are presented below (in thousands):
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 5,757 $ 4,622
Property and equipment 248 245
Inventories 109 52
Goodwill and other intangible assets 51 70
------- -------
Total gross deferred tax assets 6,165 4,989
Less valuation allowance (6,165) (4,989)
------- -------
Net deferred tax assets -- --
------- -------
Total deferred tax liabilities -- --
------- -------
Net deferred tax assets $ -- $ --
======= =======
</TABLE>
At January 29, 2000, the Company has net operating loss carryforwards for
tax purposes of approximately $15,571,000 which are available to offset
future federal taxable income, if any, through 2020. Deferred tax valuation
allowances of $6,165,000 and $4,989,000 offset deferred tax assets at
January 29, 2000 and January 30, 1999, respectively, based on management's
determination that it is more likely than not that such amounts may not be
subsequently realized.
F-14 (Continued)
<PAGE> 64
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(7) Equity
On September 1, 1999, the Company sold 416,667 shares of 8% Convertible
Preferred Stock, $6.00 par value per share (the "Preferred Stock")
resulting in net proceeds of $2,272,000. The Preferred Stock bears
dividends at 8% per annum and is payable quarterly in cash. The Preferred
Stock is not convertible into the Company's common stock until March 1,
2001. From March 1, 2001 until August 31, 2002, the Preferred Stock is
convertible at the option of the purchaser at the lesser of (i) 80% of the
average closing sales price of the Company's common stock for the preceding
25 trading days as quoted on the NASDAQ market or (ii) $6.00 per share.
After August 31, 2002, the Preferred Stock is convertible at the option of
the purchaser at 66 2/3% of the average closing sales price of the
Company's common stock for the preceding 25 trading days as quoted on the
NASDAQ market. The Company may redeem the Preferred Stock, in whole or in
part, prior to August 31, 2002 at 120% of the par value of Preferred Stock
then outstanding. After August 31, 2002, the Company may redeem the
Preferred Stock, in whole or in part, at 100% of the par value of the
Preferred Stock then outstanding. Each share of the Preferred Stock shall
be entitled to one vote per share, voting together with the holders of the
Company's common stock, on all matters submitted to a vote of stockholders.
In connection with the sale of the Preferred Stock, the Company issued
312,500 warrants exercisable to purchase shares of the Company's common
stock through August 31, 2004 at $5.00 per share and 90,000 warrants
exercisable to purchase shares of the Company's common stock through August
31, 2004 at $3.60 per share (collectively referred to as the "Preferred
Stock Warrants"). The fair value of the Preferred Stock Warrants has been
recorded as a $60,000 reduction of additional paid-in capital in the
accompanying consolidated balance sheet at January 29, 2000.
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 redeemable common stock purchase warrants ("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.
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.
In connection with the completion of the Company's initial public offering,
3,661,200 outstanding shares of the Company's preferred stock, par value
$.01 per share, were automatically converted into an aggregate of 1,482,766
outstanding shares of common stock and the Company's preferred stock
treasury shares converted into 8,242 shares of common treasury shares.
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.
F-15 (Continued)
<PAGE> 65
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(7) Equity, Continued
On January 23, 1998, the Company's common and preferred stockholders
approved an amendment to the Company's certificate of incorporation
changing the automatic conversion price of the Company's preferred stock,
par value $.01 per share, 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 stock price. 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. 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 preferred stock, par value $.01 per
share, 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 year ended January 31, 1998, the Company was a party to
the following common stock and preferred stock transactions:
o Issued 542,500 shares of preferred stock, par value $.01 per share,
for $2.00 per share and 824 shares of common stock to an employee for
$3.03 per share;
o Issued 104,602 shares of common stock and 2,500 shares of preferred
stock, par value $.01 per share, to certain officers, employees and
other individuals in exchange for various services rendered on behalf
of the Company and recorded corporate administrative expenses totaling
$33,550 related to such issuances;
o Acquired 3,297 shares of common stock from a former officer at a price
of $1.52 per share; and
o Issued 27,180 shares of preferred stock, par value $.01 per share, in
connection with a former employee stock purchase plan and recorded
corporate administrative expenses totaling $19,000 related to such
issuances.
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 then 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 then
currently outstanding. The effect of the reverse stock splits have been
accounted for retroactively to January 26, 1997 in the accompanying
consolidated financial statements and, accordingly, all applicable share
and per share amounts have been restated to reflect these reverse stock
splits.
(8) Stock Options
During the fiscal 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.
F-16 (Continued)
<PAGE> 66
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) Stock Options, Continued
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 or greater than 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 29, 2000, January 30, 1999 and January 31, 1998, the
Company granted 101,000, 622,500 and 306,389 stock options, respectively,
under the Employee Option Plan with exercise prices ranging from $3.00 to
$4.25.
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 or greater than 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
100,000 and 125,000 stock options under the Directors' Option Plan during
the fiscal years ended January 29, 2000 and January 30, 1999, respectively,
with exercise prices ranging from $3.25 to $4.44.
The following table summarizes stock option activity from January 26, 1997
through January 29, 2000.
<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
Granted 101,000 100,000 $ 3.22
Cancelled (37,981) -- $ 4.18
-------- ---------
Balance at January 29, 2000 931,442 225,000 $ 3.84 572,928 $ 3.82
======== =========
</TABLE>
The following table summarizes total stock options outstanding under the
Employee Option Plan and Directors' Option Plan as of January 29, 2000:
(Continued)
F-17
<PAGE> 67
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) Stock Options, Continued
<TABLE>
<CAPTION>
Weighted
Average
Total Remaining Currently
Exercise Price Options Life Exercisable
-------------- ------------- --------- -------------
<S> <C> <C> <C>
$ 3.00 147,500 8.7 56,225
$ 3.25 176,000 9.4 100,000
$ 3.79 263,692 7.7 174,319
$ 4.00 10,000 8.4 10,000
$ 4.25 534,250 8.4 207,384
$ 4.44 25,000 8.2 25,000
------------- -------------
1,156,442 572,928
============= =============
</TABLE>
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 on a pro
forma basis by approximately $313,000, $346,000 and $52,000 during the
fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998,
respectively. Pro forma basic loss per common share and diluted loss per
common share would have been increased by $0.04 per share, $0.05 per share
and $0.03 per share during the fiscal years ended January 29, 2000, January
30, 1999 and January 31, 1998, respectively. The effects of applying the
fair value based method of accounting in the pro forma amounts above are
not indicative of future effects.
The weighted average grant-date fair value of options issued during the
fiscal years ended January 29, 2000, January 30, 1999 and January 31, 1998
was $0.91, $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 Year Ended
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Expected term (years) 3.01 3.77 3.29
Risk-free interest rate 5.20% 5.04% 5.61%
Expected volatility 37.07% 45.15% 0.10%
Expected dividend yield 0.00% 0.00% 0.00%
</TABLE>
(9) 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
$1,918,000, $1,339,000 and $1,112,000 for the fiscal years ended January
29, 2000, January 30, 1999 and January 31, 1998, respectively.
Future minimum lease payments under noncancelable operating leases as of
January 29, 2000 are (in thousands):
<TABLE>
<CAPTION>
Fiscal years ending Related
January Party Other Total
------------------- ------- ------ ------
<S> <C> <C> <C>
2001 $ 58 $2,083 $2,141
2002 58 1,719 1,777
2003 60 1,631 1,691
2004 61 1,380 1,441
2005 10 604 614
Thereafter -- 663 663
------ ------ ------
Total minimum
lease payments $ 247 $8,080 $8,327
====== ====== ======
</TABLE>
F-18 (Continued)
<PAGE> 68
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(9) Commitments and Contingencies, (Continued)
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 $56,000 during the fiscal year ended January 29, 2000 and
$48,000 during each of the fiscal years ended January 30, 1999 and January
31, 1998.
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.
(10) Going Concern
The Company has suffered recurring losses from operations, negative cash
flows and is currently experiencing substantial difficulties in meeting its
obligations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Management of the Company is addressing this going concern issue and the
underlying liquidity problem by aggressively promoting sales of merchandise
in its stores and reducing excess inventory. Additionally, various other
alternatives are being evaluated, including selling certain stores under a
franchise arrangement or to other interested partners. The Company
currently has $109,000 available pursuant to the borrowing base calculation
on its Credit Facility and is attempting to sell approximately $800,000
remaining available on its 2004 Notes offering. Additionally, the Company
may continue to reduce inventory. The Company has currently ceased the
addition of new stores; however, to finance current and future
expenditures, the Company will need to issue additional equity securities
or incur additional debt. The Company may not be able to obtain the
additional required capital on satisfactory terms, if at all.
F-19
<PAGE> 69
================================================================================
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 ...................................................... 10
Capitalization ....................................................... 11
Selected Historical Consolidated Financial
Data ............................................................ 12
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...................................................... 13
Quantitative and Qualitative Disclosures
About Market Risk ............................................... 21
Business ............................................................. 22
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 ........................................................ 46
Experts .............................................................. 46
Consolidated Financial Statements .................................... F-1
</TABLE>
$10,000,000
12% SUBORDINATED NOTES DUE 2004
[PAWNMART, INC. LOGO]
----------
PROSPECTUS
----------
MASSIE CAPITAL, LTD.
AUGUST 18, 2000
================================================================================
<PAGE> 70
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 ............................... 60,000.00*
Legal Fees and Expenses (Other Than Blue Sky) .............. 100,000.00*
Managing Broker-Dealer Non-accountable Expense Allowance ... 300,000.00*
Printing and Engraving ..................................... 70,000.00*
Transfer Agent and Registrar Fees .......................... 5,000.00*
Blue Sky Taxes, Fees and Expenses .......................... 45,000.00*
Miscellaneous Expenses ..................................... 14,359.20*
-----------
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> 71
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> 72
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> 73
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.
10. On September 1, 1999, the Company issued 416,667 unregistered
shares of the Company's 8% Convertible Preferred Stock ("8%
Preferred Stock") with a par value of $6.00 per share to an
accredited investor. The total finders fees and issuance costs
associated with the 8% Preferred Stock were $228,000. In
connection with the sale of the 8% Preferred Stock, the Company
issued 312,500 warrants exercisable to purchase shares of the
Company's common stock through August 31, 2004 at $5.00 per share
and 90,000 warrants exercisable to purchase shares of the
Company's common stock through August 31, 2004 at $3.60 per
share. 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.
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> 74
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)
4.11 Certificate of Designations of the 8% Convertible Preferred Stock(11)
4.12 8% Convertible Preferred Stock and Warrant Purchase Agreement, dated
as of August 19, 1999, by and between PawnMart, Inc. and Jesse L.
Upchurch, Trustee of Trust C of the Constance J. Upchurch Family Trust
Dated 10/14/94(11)
4.13 Purchaser Warrant Agreement, dated as of September 1, 1999, by and
between PawnMart, Inc. and Jesse L. Upchuch, Trustee of Trust C of the
Constance J. Upchurch Family Trust Dated 10/14/94(11)
4.14 Registration Rights Agreement, dated as of September 1, 1999, by and
between PawnMart, Inc. and Jesse L. Upchuch, Trustee of Trust C of the
Constance J. Upchurch Family Trust Dated 10/14/94(11)
4.15 Transaction Warrant Agreement, dated as of September 1, 1999, by and
between PawnMart, Inc. and Andrew Garrett, Inc.(11)
5.1 Opinion of Thompson & Knight L.L.P.(12)
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)
10.6* Form of Severance Agreement, dated June 1, 2000, between the Company
and each of Carson Thompson, Mike Record, Monty Standifer, Randy Haden
and Mike Musgrove(12)
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(12)
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 April 29, 2000 (Filed in EDGAR version
only)(10)
----------
* Management or compensation agreement required to be filed herewith
(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 as an Exhibit to the registrant's Registration Statement on
Post-Effective Amendment No. 1 on Form S-1, filed on May 20, 1999 (File No.
1-13919).
(10) Filed as an Exhibit to the registrant's Form 10-Q for the quarter ended
April 29, 2000, filed on June 13, 2000 (File No. 1-13919).
(11) Filed as an Exhibit to the registrant's Form 8-K, filed on September 1,
1999 (File No. 1-13919).
(12) Filed herewith.
II-5
<PAGE> 75
(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> 76
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 August 18, 2000.
PAWNMART, INC.
By: /s/ Carson R. Thompson By: /s/ Monty Standifer
----------------------- -----------------------
Carson R. Thompson Monty Standifer
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 August 18, 2000
----------------------------------- and Chairman of the Board
Carson R. Thompson
/s/ Michael D. Record President August 18, 2000
-----------------------------------
Michael D. Record
/s/ Monty Standifer Senior Vice President and August 18, 2000
----------------------------------- Chief Financial Officer
Monty Standifer
/s/ Randall L. Haden Vice President - Information Services August 18, 2000
-----------------------------------
Randall L. Haden
* Director August 18, 2000
-----------------------------------
James E. Berk
* Director August 18, 2000
-----------------------------------
Mark E. Kane
* Director August 18, 2000
-----------------------------------
Robert D. Bourland, Jr.
* Director August 18, 2000
-----------------------------------
J. Roger Williams
</TABLE>
*By: /s/ Carson R. Thompson
Carson R. Thompson
Attorney-in-Fact
II-7
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<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)
4.11 Certificate of Designations of the 8% Convertible Preferred Stock(11)
4.12 8% Convertible Preferred Stock and Warrant Purchase Agreement, dated
as of August 19, 1999, by and between PawnMart, Inc. and Jesse L.
Upchurch, Trustee of Trust C of the Constance J. Upchurch Family Trust
Dated 10/14/94(11)
4.13 Purchaser Warrant Agreement, dated as of September 1, 1999, by and
between PawnMart, Inc. and Jesse L. Upchuch, Trustee of Trust C of the
Constance J. Upchurch Family Trust Dated 10/14/94(11)
4.14 Registration Rights Agreement, dated as of September 1, 1999, by and
between PawnMart, Inc. and Jesse L. Upchuch, Trustee of Trust C of the
Constance J. Upchurch Family Trust Dated 10/14/94(11)
4.15 Transaction Warrant Agreement, dated as of September 1, 1999, by and
between PawnMart, Inc. and Andrew Garrett, Inc.(11)
5.1 Opinion of Thompson & Knight L.L.P.(12)
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)
10.6* Form of Severance Agreement, dated June 1, 2000, between the Company
and each of Carson Thompson, Mike Record, Monty Standifer, Randy Haden
and Mike Musgrove(12)
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(12)
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 April 29, 2000 (Filed in EDGAR version
only)(10)
</TABLE>
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* Management or compensation agreement required to be filed herewith
(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 as an Exhibit to the registrant's Registration Statement on
Post-Effective Amendment No. 1 on Form S-1, filed on May 20, 1999 (File No.
1-13919).
(10) Filed as an Exhibit to the registrant's Form 10-Q for the quarter ended
April 29, 2000, filed on June 13, 2000 (File No. 1-13919).
(11) Filed as an Exhibit to the registrant's Form 8-K, filed on September 1,
1999 (File No. 1-13919).
(12) Filed herewith.
