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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended January 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File No. 1-13919
PAWNMART, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2520896
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6300 RIDGLEA PLACE, SUITE 724, FORT WORTH, TEXAS 76116
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 569-9305
Securities registered pursuant to Section 12(b) of the Act:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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COMMON STOCK, PAR VALUE $.01 PER SHARE NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
SERIES A REDEEMABLE COMMON STOCK PURCHASE WARRANTS NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
SERIES B REDEEMABLE COMMON STOCK PURCHASE WARRANTS NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates as of April 1,
2000 was approximately $12,709,000. Shares of common stock held by each officer
and director have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares of Common Stock outstanding as of April 1, 2000 was
7,209,445. The number of Series A Redeemable Common Stock Purchase Warrants
outstanding as of April 1, 2000 was 1,872,360. The number Series B Redeemable
Common Stock Purchase Warrants outstanding as of April 1, 2000 was 1,380,000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement relating to the Annual
Meeting of Stockholders for the fiscal year ended January 29, 2000, are
incorporated by reference in Part III of this Form 10-K.
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PAWNMART, INC.
Form 10-K Annual Report
for the Fiscal Year Ended January 29, 2000
Table of Contents
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PART I
Item 1. Business....................................................................... 1
Item 2. Properties..................................................................... 9
Item 3. Legal Proceedings.............................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders............................ 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.......... 10
Item 6. Selected Financial Data........................................................ 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations..................................................................... 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 22
Item 8. Consolidated Financial Statements and Supplementary Data....................... 23
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure..................................................................... 42
PART III
Item 10. Directors and Executive Officers of the Registrant............................. 42
Item 11. Executive Compensation......................................................... 42
Item 12. Security Ownership of Certain Beneficial Owners and Management................. 42
Item 13. Certain Relationships and Related Transactions................................. 42
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............... 43
Signatures ............................................................................... 44
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING INFORMATION
This Annual Report on Form 10-K contains certain statements that are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. Forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans," or "anticipates" or
the negative thereof, or other variations thereon, or comparable terminology, or
by discussions of strategy. Such statements include, but are not limited to, the
discussions of the Company's operations, liquidity, and capital resources.
Forward-looking statements are included under the captions "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
"Item 1. Business." Although the Company believes that the expectations
reflected in forward-looking statements are reasonable, there can be no
assurances that such expectations will prove to be accurate. Generally, these
statements relate to business plans, strategies, anticipated strategies, levels
of capital expenditures, liquidity and anticipated capital funding needed to
effect the business plan. All phases of the Company's operations are subject to
a number of uncertainties, risks and other influences, many of which are outside
the control of the Company and cannot be predicted with any degree of accuracy.
Factors such as changes in regional or national economic conditions, changes in
governmental regulations, unforeseen litigation, changes in interest rates or
tax rates, significant changes in the prevailing market price of gold, future
business decisions and other uncertainties may cause results to differ
materially from those anticipated by some of the statements made in this report.
In light of the significant uncertainties inherent in the forward-looking
statements made in this Annual Report on Form 10-K, the inclusion of such
statements should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
Security holders are cautioned that such forward-looking statements involve
risks and uncertainties. Such risks, uncertainties and other factors, include,
but are not limited to, those set forth herein under the caption "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and appearing elsewhere in this Annual Report on Form 10-K and
appearing from time to time in filings made by the Company with the Securities
and Exchange Commission. The forward-looking statements contained in this report
speak only as of the date of this Annual Report on Form 10-K and the Company
expressly disclaims any obligation or undertaking to release any updates or
revisions to any such statement to reflect any change in the Company's
expectations or any change in events, conditions or circumstance on which any
such statement is based.
GENERAL
PawnMart, Inc. 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. On October 21,
1997, the Company changed its name to "PawnMart, Inc." As of April 1, 2000, the
Company was the fourth largest publicly-traded pawnshop operator 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.
The Company is a specialty finance and retail enterprise principally
engaged in establishing and operating stores which advance money secured by the
pledge of tangible personal property and sell pre-owned merchandise to the
value-conscious consumer. The Company generates income in two ways: through
collection of a monthly service charge from advancing money to individuals based
primarily upon the estimated resale value of pledged personal property such as
jewelry, consumer electronics, tools, musical instruments, firearms, automobiles
and other miscellaneous items and through profit realized on the retail sale of
the unredeemed or other purchased pre-owned merchandise.
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INDUSTRY
The pawnshop industry is a multi-billion dollar, 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 14,000 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.
The Company believes that the pawnshop industry is in the early stages of
consolidation and has consciously positioned itself to take advantage of the
significant economies of scale, increased operating efficiencies, and revenue
growth provided by the highly fragmented pawnshop industry. The Company believes
that its business strategy will be enhanced by the implementation of specialty
retail merchandising techniques, the utilization of strict site selection
criteria, and the utilization of information technology to improve sales,
operational and inventory management.
BUSINESS STRATEGY
The Company has developed extensive demographical information that
identifies both its borrowing and retail customers. Based on its research, the
Company has observed somewhat different demographics for its customers from
those generally published for the pawnshop industry. This data indicates that
the Company's customers have a higher median household income than those
published for the pawnshop industry and that the Company's customers are
representative of the United States distribution of households in terms of
household income, education and occupation. This distribution provides the
Company with an extremely broad potential customer base. In this regard, the
Company's strategic market positioning targets these customer groups for both
pawn and retail. To appeal to these customers, all of the Company's stores are
attractive, clean, well-lit and often located close to national discount stores,
with merchandise displayed in an organized and easy-to-shop manner similar to
national discount stores.
The Company's strategic objective is to implement a rapid roll-out of
stores in order to capitalize upon growth opportunities afforded by the highly
fragmented pawnshop industry. To achieve its strategic objectives, the Company
has adopted the following strategy:
- DEVELOPING OR ACQUIRING STORES THAT MEET SITE SELECTION, STORE SIZE
AND CONFIGURATION REQUIREMENTS IN SELECTED MARKETS. The Company
believes that ideal site selection is one of the most critical
factors in creating a successful store. In this regard, the Company
has developed extensive customer demographics that identify both its
borrowing and retail customers. The Company, therefore, believes
that by opening new stores or by acquiring existing stores only in
locations meeting its demographic and site selection requirements,
it will be well situated to compete effectively in the highly
fragmented pawnshop industry. Second, the Company believes that the
"look and feel" of its stores is an important factor in establishing
a successful specialty finance and retail store. By opening new
stores or acquiring existing stores only in accordance with its
specifications, the Company can ensure that each store has a similar
"look and feel."
- MARKET POSITIONING STRATEGY. The Company's strategy is to operate
attractive stores that are clean, well-lit and conveniently located,
with merchandise displayed in an organized and easy-to-shop manner,
similar to national discount stores. The Company's store design and
layout specifically target both its borrowing and retail customers.
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- UTILIZE TARGETED DATABASE MARKETING. The Company has developed a
targeted database marketing segmentation system that identifies the
customers for both pawn and product sales from proprietary data
collected at the store level. Given this customer information, the
Company has developed a marketing strategy that seeks to leverage
its understanding of customer demographics, motivations and
purchasing behavior. This demographic data will be utilized for
customer acquisition, retention and promotions, store site
selection, and for developing in-store promotions.
- EXPAND IN METROPOLITAN AREAS IN STATES WITH FAVORABLE PAWN REGULATIONS.
The Company's roll-out strategy is to generate operating efficiencies
in supervision, administration, purchasing and marketing by first
expanding in the metropolitan areas surrounding its existing stores,
and thereafter, in metropolitan areas in states with favorable pawn
regulations.
- UTILIZE INFORMATION TECHNOLOGY. The Company has developed PAWNLINK-TM-,
a proprietary software system, which is connected to a "wide area
network" that allows for real-time point of sale connectivity.
PAWNLINK-TM- is a user friendly, menu driven software package that
operates in a Windows 95/98-TM- environment. PAWNLINK-TM- interfaces
with the Company's centralized database, assists in determining the
amount of funds to advance on any particular pawn item, and provides
in-store assistance with operational and sales management, inventory
control and accounting.
- OPERATIONAL EXCELLENCE. The Company believes that its success will be
substantially dependent on its ability to achieve excellence in
operating its stores. In this regard, the Company intends to
capitalize upon the operational expertise of its experienced
management team and board of directors, employ specialty retailers
and pawnbrokers as store management personnel, utilize extensive
training programs for employees and maintain effective extensive
operating controls.
STORE EXPANSION
Prior to March 1998, the Company owned and operated 19 stores. The
completion of the Company's initial public offering of common stock in March
1998 resulted in net proceeds of $5,583,000 and enhanced the Company's ability
to implement its business strategy. In connection with the completion of the
initial public offering, the Company automatically converted $9,520,000 of its
debt into 2,380,000 outstanding shares of common stock and 3,661,200 shares of
preferred stock into 1,482,766 outstanding shares of common stock. Additionally,
the Company utilized $2,524,000 of the net proceeds to repay certain notes
payable. The completion of the initial public offering in March 1998 positioned
the Company to begin implementation of its strategic business plan.
During the fiscal years ended January 29, 2000 ("Fiscal 1999"), January 30,
1999 ("Fiscal 1998"), January 26, 1997, January 28, 1996 and January 29, 1995,
the Company added 14, 13, 2, 10, and 7 stores, respectively. In order to fund
store expansion during Fiscal 1999 and Fiscal 1998, the Company utilized the
remaining proceeds from the initial public offering, borrowings under its $10
million revolving line of credit with Comerica Bank (the "Credit Facility"), the
net proceeds from the issuance of a publicly registered offering of 12%
Subordinated Notes due December 31, 2004 (the "2004 Notes"), and the net
proceeds from the issuance of $2.5 million of 8% Convertible Preferred Stock,
par value $6.00 per share (the "Preferred Stock"). With the above, the Company
was able to achieve a 44 percent and 68 percent increase in the number of its
stores during Fiscal 1999 and Fiscal 1998, respectively, bringing it to a total
of 46 stores. Management anticipates continuing its rapid roll-out strategy
during the fiscal year ending January 27, 2001 by focusing on a combination of
acquisitions and new store openings. However, no assurance can be made that the
Company will be able to obtain the necessary financing to support such growth.
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NEW STORE OPENINGS
The Company has opened 35 new stores since its inception and currently
plans to open additional stores in locations that meet its site selection
criteria. After a suitable location has been found and a lease and license are
obtained, a new store can be ready for business within six to eight weeks, with
completion of counters, vaults and security system and transfer of merchandise
from existing stores, and external purchases of pre-owned merchandise. The
Company projects the initial capital expenditures and costs associated with
opening a new 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. The projected initial capital expenditures do not
include corporate administrative expense allocations or capital costs related to
the funds raised to finance expansion. Because of these start-up losses and
expenditures necessary to support anticipated growth, the Company expects to
incur losses during a high-growth phase. There can be no assurance that future
initial capital expenditures and costs and start-up losses with new store
operations will not vary from historical amounts.
The 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 eight to ten
months 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
January 29, 2000, 18 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.
ACQUISITIONS
The Company has acquired the assets of 11 existing stores since its
inception and currently plans to acquire additional stores as part of its
expansion during the next fiscal year. The Company will generally acquire stores
in locations meeting its site selection criteria if the total capital
expenditures required to acquire the existing store are less than or equal to
the total costs to develop a new store and demographic data and due diligence
procedures indicate an acceptable growth potential. Prior to making an
acquisition, the Company performs an analysis of the site that considers the
demographic composition of its surrounding area. The analysis also includes an
evaluation of the retail and pawn potential, the number and size of competitors,
and regulatory issues. Additionally, the Company performs due diligence
procedures that specifically evaluate the volume of loan transactions, the
outstanding loan balances, historical redemption rates, the quality of
merchandise inventory, and the condition of property and equipment and the
existing facility, including lease terms.
An acquired store will generally mature faster than a new store due to an
established base of customers and the Company's ability to accelerate the
maturation of the store's pawn loan balances. The Company's profitability and
capital requirements during rapid expansion will be significantly impacted by
its ability to acquire existing stores meeting the Company's acquisition
criteria. There can be no assurance that future store revenues and store
profitability will not vary from historical amounts.
ACHIEVING OPERATIONAL EXCELLENCE
Management continually focuses on achieving operational excellence at both
its existing store base and new stores. The primary factors affecting the
profitability of the Company's existing and new stores are the quality and level
of outstanding loans, the volume of retail sales and resulting gross margins,
and the control of store expenses. In order to maximize profitability, the
Company has consciously positioned itself with stores that are clean, well-lit
and conveniently located, with merchandise displayed in an organized and
easy-to-shop manner, similar to national discount stores. Merchandise inventory
is categorized and displayed by department with uniform directional signage at
all of the Company's locations. Additionally, in-store advertising is utilized
to educate customers and implement planned promotions. The Company's store
design and layout specifically target both its borrowing and retail customers.
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STORE OPERATIONS
The Company is a specialty finance and retail enterprise engaged in
developing and operating stores which advance money secured by the pledge of
tangible personal property and sell pre-owned merchandise to the value-conscious
consumer. In this regard, 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 following discusses
various aspects of the Company's store operations.
LENDING
The Company's pawn loans are secured by pledged tangible personal property
which is intended to provide security to the Company for the repayment of the
amount advanced plus accrued pawn service charges. Pawn loans are made without
personal liability to the borrower. Because the pawn loan is made without the
borrower's personal liability, the Company does not investigate the
creditworthiness of the borrower, but relies on the pledged personal property,
and the possibility of its forfeiture, as a basis for its lending decision.
At the time a pawn transaction is entered into, a pawn loan agreement,
commonly referred to as a pawn ticket, is delivered to the borrower that sets
forth, among other items, the name and address of the pawnshop and the pledgor,
the pledgor's identification number from his or her driver's license or other
approved identification, the date, the identification and description of the
pledged goods, including applicable serial numbers, the amount financed, the
finance and service charge, the maturity date, the total amount that must be
paid to redeem the pledged goods on the maturity date and the annual percentage
rate.
The Company contracts for a pawn service charge as compensation for the use
of the funds advanced to cover such costs as storage, insurance, title
investigation and other transaction costs. The statutory service charges on
loans at the Company's stores range from 12% to 300% on an annualized basis
depending upon individual state regulations and the amount of the pawn loan.
Pawn service charges contributed to 31.9%, 30.5%, and 28.1% of the Company's
total revenues during Fiscal 1999, Fiscal 1998, and the fiscal year ended
January 31, 1998 ("Fiscal 1997"), respectively. Pawn service charges contributed
to 66.3%, 57.7%, and 57.4% of the Company's gross profit during Fiscal 1999,
Fiscal 1998, Fiscal 1997, respectively. The Company's average pawn loan was $115
and $110 at 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 the Company and becomes merchandise available for
sale.
Alabama, Georgia and South Carolina pawn regulations allow the Company to
advance funds secured by automobile titles. Approximately nine percent and eight
percent of the Company's total revenues during Fiscal 1999 and Fiscal 1998,
respectively, were related to pawn service charges generated from such advances.
During the term of the title loan, the borrower is allowed to maintain
possession of the collateral. In the event of default, the Company contracts to
repossess the automobile and subsequently disposes of the automobile through its
retail operations. Although the Company is exposed to the risk that it is unable
to locate the collateral securing forfeited title loans, it has not historically
experienced material adverse results from these instances.
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The recovery of the amount advanced, as well as realization of a profit on
the sale of merchandise, is dependent on the Company's initial assessment of the
property's estimated resale value. Improper assessment of the resale value of
the collateral in the lending function can result in reduced marketability of
the property and resale of the merchandise for an amount less than the amount
advanced. For example, unexpected technological changes could adversely impact
the value of consumer electronic products and declines in gold and silver prices
could reduce the resale value of jewelry items acquired in pawn transactions and
could adversely affect the Company's ability to recover the carrying cost of the
acquired collateral. However, historically, the Company has experienced profits
from the sale of such merchandise.
RETAIL SALES
The Company retails pre-owned products acquired either when a pawn loan is
not repaid or from individual customers or other sources. Merchandise acquired
through defaulted pawn loans is carried at the amount of the related pawn loan,
exclusive of any uncollected pawn service charges. Management believes that this
practice will decrease the likelihood that the Company will experience
significant, unexpected inventory devaluations.
Merchandise sales contributed to 66.9%, 68.5%, and 70.9% of the Company's
total revenues during Fiscal 1999, Fiscal 1998, and Fiscal 1997, respectively.
Merchandise sales contributed to 31.2%, 40.2%, and 40.6% of the Company's gross
profit during Fiscal 1999, Fiscal 1998, and Fiscal 1997, respectively. The
Company realized gross profit margins on merchandise sales of 22.5%, 31.0%, and
28.0% during Fiscal 1999, Fiscal 1998, and Fiscal 1997, respectively. See "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a discussion of factors affecting the results of operations of
the Company's retail sales.
The Company provides its customers with a 30-day guarantee on pre-owned
products, providing the customer with an exchange or cash refund. The Company
believes that most pawnshops do not offer this type of guarantee. Additionally,
the Company provides a layaway plan, with a maximum holding period of 90 days,
whereby the customer agrees to purchase an item by making an initial cash
deposit ranging from 10% to 20% of the sales price and making additional,
non-interest bearing payments of the balance of the sales price in accordance
with a specified schedule. The Company holds the item until the sales price is
paid in full. Should the customer fail to make a required payment, the item
becomes inventory available for sale and previous payments are forfeited to the
Company.
The Company provides an allowance for inventory valuation on its
merchandise held for resale based upon management's evaluation of the
marketability of the merchandise. Management's evaluation takes into
consideration the age of slow moving merchandise on hand and markdowns
necessary to liquidate slow moving merchandise. At January 29, 2000 and
January 30, 1999, total merchandise held for resale was $7,279,000 and
$3,011,000, respectively, after reduction for a valuation allowance of
$294,000 and $141,000, respectively.
RETAIL STORE MANAGEMENT
Each location has a store manager who typically supervises its personnel
and assures that it is managed in accordance with Company guidelines and
established policies and procedures. Each store manager reports to a District
Manager who will typically supervise up to 10 stores. At April 1, 2000, the
Company had established seven operating districts, each of which was managed by
a District Manager.
PERSONNEL
As of April 1, 2000, the Company had a total of 282 employees (of which 17
were in executive, administrative, clerical and accounting functions), 125 of
whom were salaried and 157 of whom were hourly employees. The Company has an
established training program that provides a combination of classroom
instruction and on-the-job loan and specialty retail training. The Company
maintains a performance-based compensation plan for all store employees, based
on, among other factors, profitability and special promotional contests. None of
the Company's employees are covered by collective bargaining agreements. The
Company considers its employee relations to be satisfactory.
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TRADE NAME
The Company's proprietary operating software has been registered under the
trade name "PAWNLINK-TM-." The Company has also registered various marks and
descriptive logos and phrases with the United States Patent and Trademark
Office.
COMPETITION
The Company encounters significant competition in connection with the
operation of its business. In connection with lending operations, the Company
competes with other pawnshops (owned by individuals and by large operators) and
certain financial institutions, such as consumer finance companies, which
generally lend on an unsecured as well as on a secured basis. The Company's
competitors in connection with its retail sales include numerous retail and
discount stores. Many competitors have greater financial resources than the
Company, including Cash America International, Inc., First Cash Financial
Services, Inc., and EZCORP, Inc. These competitive conditions may adversely
affect the Company's revenues, profitability and ability to expand.
The Company's stores are positioned similarly to national discount stores.
They are attractive, clean, well-lit and conveniently located. Merchandise is
displayed in an organized, easy-to-shop manner and the Company's stores do not
retail handguns, sporting rifles or assault rifles. The Company believes that
this positioning provides a more comfortable and desirable shopping experience
with better customer demographics.
In addition, the Company faces competition in the acquisition of existing
stores. Several competing pawnshop companies have implemented expansion and
acquisition programs. There can be no assurance that the Company will be more
successful than its competitors in pursuing acquisition opportunities and leases
for attractive start-up locations. Increased competition could also increase
prices for attractive acquisition candidates.
OPERATING CONTROLS
The Company has an organizational structure that management believes can
support a larger operating base. The store locations are monitored on a daily
basis from corporate headquarters through an online, real-time computer network
system. The Company has an internal audit staff that performs physical counts of
merchandise inventory and pawn loan collateral at each of the Company's
locations approximately every 60 days. Additionally, the internal audit staff
assists the corporate headquarters in verifying that the Company's policies and
procedures are consistently followed. Management believes that the current
operating and financial controls and computer systems are adequate for its
current operating base and for anticipated expansion in the near term.
REGULATION
The Company's store operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations in the six states in which it operates. Set forth
below is a summary of the state pawnshop regulations in those states of the
Company's present operating locations.
GEORGIA PAWNSHOP REGULATIONS. Georgia state law requires pawnbrokers to
maintain detailed permanent records concerning pawn transactions and to keep
them available for inspection by duly authorized law enforcement authorities.
The Georgia statute prohibits pawnbrokers from failing to make entries of
material matters in their permanent records; making false entries in their
records; falsifying, obliterating, destroying, or removing permanent records
from their places of business; refusing to allow duly authorized law enforcement
officers to inspect their records; failing to maintain records of each pawn
transaction for at least four years; accepting a pledge or purchase from a
person under the age of eighteen or who the pawnbroker knows is not the true
owner of the property; purchasing or accepting a pledge of merchandise on which
the serial number has been altered or obliterated; 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
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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 and county
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. Additional licenses are required from counties and municipalities.
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, storage, 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.
8
<PAGE>
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 may limit
the Company's 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, the Company must continue to
comply with the longstanding regulations promulgated by the Department of the
Treasury, Bureau of Alcohol, Tobacco and Firearms, which require each store
dealing in guns to maintain a permanent written record of all receipts and
dispositions of firearms. The Company does not currently sell handguns, assault
rifles or sporting rifles to the public.
In addition to the state statutes and regulations described above, many of
the Company's stores are subject to municipal ordinances, which may require, for
example, local licenses or permits, additional zoning restrictions, and
specified record-keeping procedures, among other things. Each of the Company's
stores, voluntarily or pursuant to municipal ordinance, provides to the police
department having jurisdiction copies of all daily transactions involving pawn
loans and over-the-counter purchases. These daily transaction reports are
designed to provide the local police with a detailed description of the goods
involved including serial numbers, if any, and the name and address of the owner
obtained from a valid identification card.
A copy of the transaction ticket is provided to local law enforcement
agencies for processing by the National Crime Investigative Computer to
determine rightful ownership. Goods which are either purchased or held to secure
pawn loans and which are determined to belong to an owner other than the
borrower or seller are subject to recovery by the rightful owner. However, the
Company historically has not experienced a material number of claims of this
sort, and the claims experienced have not had a material adverse effect on the
Company's consolidated results of operations.
Casualty insurance, including burglary coverage, is maintained for each of
the Company's stores, and fidelity bond coverage is maintained on each of the
Company's employees.
Management of the Company believes its operations are conducted in material
compliance with all federal, state and local laws and ordinances applicable to
its business. There can be no assurance that additional local, state or federal
legislation will not be enacted or that existing laws and regulations will not
be amended which could have a material adverse effect on the Company's
consolidated operations and financial condition.
ITEM 2. PROPERTIES
The Company's corporate offices are leased under a seven-year lease
expiring on August 31, 2006. At April 1, 2000, the Company operated 46 leased
store locations with monthly rental payments ranging from $1,300 to $7,000 per
location and having initial lease terms expiring from August 2000 through August
2005. Substantially all of the Company's leased locations include renewal
options. The size of the leased store locations range from approximately 1,500
to 13,000 square feet. With the exception of the location in Weatherford, Texas,
the Company leases all of these properties from unaffiliated third parties.
The following table sets forth the geographic markets served by the Company
and the number of stores in each market as of April 1, 2000.
<TABLE>
<CAPTION>
NUMBER OF STORES
----------------
<S> <C>
Georgia:
Atlanta Metropolitan Area............................ 23
Dalton............................................... 1
Rome................................................. 1
Calhoun.............................................. 1
---
Total Georgia.................................... 26
---
9
<PAGE>
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>
The Company considers is equipment, furniture and fixtures and leased
buildings to be in good condition. The Company's leases typically require the
Company to pay all maintenance costs, insurance costs and property taxes.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits encountered in the ordinary
course of its business. Certain of these matters are covered to an extent by
insurance. In the opinion of management, the resolution of these matters will
not have a material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during
the fourth quarter of Fiscal 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On March 17, 1998, the Company's Common Stock began trading on the Nasdaq
SmallCap Market ("NASDAQ") under the symbol of "PMRT" and on the Boston Stock
Exchange under the symbol of "PWT". The following table sets forth the high and
low sales prices per share of Common Stock as reported by NASDAQ during Fiscal
1999 and Fiscal 1998:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
First Quarter............. $ 3.13 $ 1.50 $ 5.88 $ 4.00
Second Quarter............ 4.56 1.88 4.50 3.13
Third Quarter............. 3.38 1.88 3.50 1.50
Fourth Quarter............ 2.38 1.66 3.81 1.31
</TABLE>
10
<PAGE>
As of April 1, 2000, the Company had approximately 1,450 stockholders of
record. To date, the Company has not declared or paid any cash dividends on its
Common Stock, and the present policy of the Board of Directors is to retain any
earnings to provide for the Company's growth. The Company is prohibited from
paying cash dividends under the terms of its revolving line of credit unless
specifically approved by its senior lender. Additionally, the subordinated note
indenture limits the payment of any cash dividends. Any future determination to
pay dividends will be at the discretion of the Board of Directors, and dependent
upon the Company's consolidated financial position, results of operations,
capital requirements and such other factors as the Board of Directors deems
relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical financial data of the Company. The information should be
read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Item 8. Consolidated
Financial Statements and Supplementary Data" and the notes thereto.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
------------------
(Dollars in Thousands, Except Per Share Data)
January 29, January 30, January 31, January 26, January 28,
2000 1999 1998 1997 1996
----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Pawn Service Charges........................... $ 6,674 $ 3,636 $ 2,862 $ 2,291 $ 1,338
Merchandise Sales.............................. 13,978 8,170 7,215 5,523 3,052
Other Income................................... 250 129 101 89 34
-------- -------- -------- -------- --------
Total Revenues............................ 20,902 11,935 10,178 7,903 4,424
Cost of Sales.................................. 10,832 5,634 5,192 3,739 1,942
-------- -------- -------- -------- --------
Gross Profit.............................. 10,070 6,301 4,986 4,164 2,482
Store Operating Expenses....................... 8,163 5,326 4,040 3,652 2,626
Corporate Administrative Expenses.............. 3,020 3,074 2,117 1,713 1,589
-------- -------- -------- -------- --------
EBITDA (1)..................................... (1,113) (2,099) (1,171) (1,201) (1,733)
Interest Expense............................... 1,358 996 3,761 1,360 720
Depreciation and Amortization.................. 805 618 504 495 375
-------- -------- -------- -------- --------
Net Loss.................................. (3,276) (3,713) (5,436) (3,056) (2,828)
Preferred Stock Dividends...................... 83 692 217 - -
-------- -------- -------- -------- --------
Net Loss to Common Stockholders........... $ (3,359) $ (4,405) $ (5,653) $ (3,056) $ (2,828)
======== ======== ======== ======== ========
Basic and Diluted Loss Per
Common Share............................ $ (0.47) $ (0.68) $ (3.01) $ (1.67) $ (1.68)
======== ======== ======== ======== ========
OTHER DATA:
Locations in Operation:
Beginning of Period......................... 32 19 19 17 7
Acquisitions................................ 6 3 - 1 -
Opened...................................... 8 10 - 1 10
-------- -------- -------- -------- --------
End of Period............................... 46 32 19 19 17
======== ======== ======== ======== ========
Average Age of Stores -
End of Period............................... 2.45 years 2.35 years 2.78 years 1.77 years .93 years
Average Loans Per Location..................... $ 147 $ 138 $ 127 $ 117 $ 85
Average Inventory Per Location................. $ 158 $ 94 $ 102 $ 104 $ 88
Annualized Inventory Turnover.................. 2.0x 2.4x 2.5x 2.3x 1.9x
Cash Dividends Per Common Share................ $ - $ - $ - $ - $ -
BALANCE SHEET DATA - END OF PERIOD:
Loans.......................................... $ 6,758 $ 4,419 $ 2,421 $ 2,227 $ 1,447
Inventories, Net............................... 7,279 3,011 1,944 1,971 1,490
Working Capital................................ 14,722 6,988 1,758 2,148 2,251
Total Assets................................... 21,044 11,192 6,677 6,474 5,249
Long-Term Notes Payable, Net of
Current Installments........................ 15,923 4,840 9,778 8,288 5,445
Stockholders' Equity (Deficit)................. 3,878 4,907 (6,222) (4,278) (1,274)
</TABLE>
- ----------------
(1) Earnings before interest, taxes, depreciation and amortization.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company's strategy is to develop or acquire stores in selected regional
and local markets meeting required store size, configuration, and site selection
requirements. The Company believes that such anticipated expansion will continue
to provide economies of scale in supervision, purchasing supplies and inventory,
administration and marketing by decreasing the overall average cost of such
functions per unit owned. The overall rate of store expansion will vary based on
the Company's ability to fund such growth internally or to obtain financing, the
availability of qualified store management personnel, and the Company's ability
to achieve a balance of growth with improving profitability.
The Company's total revenues are derived primarily from service charges on
loans and the proceeds from the sales of merchandise inventory. The Company's
pawn loans are generally made on the pledge of tangible personal property for
one month, with an automatic sixty-day extension period. All pawn loans are
collateralized by tangible personal property placed in the possession of the
Company, except for title loans. During the term of a title loan, the borrower
is allowed to maintain possession of the collateral. See "Item 1. Business -
Store Operations - Lending." 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.
The Company's revenues and gross profit dollars have been significantly
increased as a result of its rapid store expansion and improvements in the
results of operations at its mature stores. Of the 27 stores added during the
past two fiscal years, the Company has opened 18 new stores. The Company's store
contribution margin, earnings before interest, depreciation, and amortization
("EBITDA"), and overall results of operations have been impacted by the planned
start-up losses that result from these new store openings, the corporate
administrative expenses necessary to support rapid expansion, and the interest
expense associated with funding such expansion. These new 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.
See "Item 1. Business - New Store Openings."
The Company has acquired nine existing stores during the last two fiscal
years and currently plans to acquire additional stores as part of its expansion
during the next fiscal year. The Company will generally acquire stores in
locations meeting its site selection criteria if the total capital expenditures
required to acquire the existing store are less than or equal to the total costs
to develop a new store and demographic data and due diligence procedures
indicate an acceptable growth potential. An acquired store will generally mature
faster than a new store due to an established base of customers and the
Company's ability to accelerate the maturation of the store's pawn loan
balances. The Company's profitability and capital requirements during rapid
expansion will be significantly impacted by its ability to acquire existing
stores meeting the Company's acquisition criteria. There can be no assurance
that future store revenues and store profitability will not vary from historical
amounts.
The addition of Michael D. Record as President in September 1998 resulted
in a renewed emphasis on the Company's lending operations, the focus of which
was to lend more competitively and increase store traffic. The implementation of
this strategy has resulted in the substantial improvements in total revenues,
gross profit dollars, and store contribution margin. During Fiscal 1999, the
Company's 32 stores open for 12 months or more as of January 29, 2000 ("Fiscal
1999 Comparable Stores") achieved a 32 percent increase in total revenues, a 20
percent increase in gross profit dollars, and a 90 percent increase in store
contribution margin.
Although the Company has experienced significant improvements in gross
profit dollars as a result of the operational changes mentioned above, the
Company's realized gross profit margin as a percent of merchandise sales has
been reduced primarily due to the more competitive loaning philosophy. The
Company realized gross profit margins on merchandise sales of 22.5%, 31.0%, and
28.0% during Fiscal 1999, Fiscal 1998, and Fiscal 1997, respectively. Future
gross profit margins as a percent of merchandise sales will be affected by the
Company's lending practices and ability to effectively implement its specialty
retail strategies.
12
<PAGE>
Selected elements of the Company's consolidated financial statements are
presented below for Fiscal 1999, Fiscal 1998, and Fiscal 1997. The following
table, as well as the discussion following, should be read in conjunction with
"Item 6. Selected Financial Data" and "Item 8. Consolidated Financial Statements
and Supplementary Data" and the notes thereto.
<TABLE>
<CAPTION>
Fiscal Years Ended
-------------------------------------------
January 29, January 30, January 31,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operating statement items as a percent of
total revenues:
Merchandise sales................................ 66.9 % 68.5 % 70.9 %
Pawn service charges............................. 31.9 30.5 28.1
Other............................................ 1.2 1.0 1.0
----------- ----------- -----------
Total revenues................................ 100.0 100.0 100.0
Cost of sales.................................... 51.8 47.2 51.0
----------- ----------- -----------
Gross profit.................................. 48.2 52.8 49.0
----------- ----------- -----------
Store operating expenses......................... 39.1 44.6 39.7
----------- ----------- -----------
Store contribution margin..................... 9.1 8.2 9.3
Corporate administrative expenses................ 14.4 25.8 20.8
----------- ----------- -----------
Earnings before interest, taxes,
depreciation and amortization............... (5.3) (17.6) (11.5)
Interest expense................................. 6.5 8.3 36.9
Depreciation and amortization.................... 3.9 5.2 5.0
----------- ----------- -----------
Net loss...................................... (15.7)% (31.1)% (53.4)%
=========== =========== ===========
</TABLE>
RESULTS OF OPERATIONS
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. See discussion above under
"General." The Company's 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.
13
<PAGE>
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, advertising, licenses, supplies, security costs, and
other miscellaneous store expenses. 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 consists of all items relating to the
operation of the corporate headquarters, including the salaries of corporate
officers, district managers, store audit team members, other administrative
personnel, liability casualty insurance, outside legal and accounting fees and
investor relations expenses. 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 the Company has
added 27 stores in the last two fiscal years and plans to 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 "Item 8. - Consolidated Financial Statements and
Supplementary Data" 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 2004 Notes, and
other short-term borrowings which were utilized to fund store growth.
14
<PAGE>
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 "Item 8.
- - Consolidated Financial Statements and Supplementary Data" 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
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.
15
<PAGE>
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 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 "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 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 "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. 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 its initial public offering in March 1998, the
Company's operations were financed from funds generated from private debt and
equity offerings and funds generated from operations. In March 1998, the Company
received net proceeds of approximately $5,583,000 from the completion of its
initial public offering. In connection with the completion of the initial public
offering, $9,520,000 in aggregate principal amount of the Company's 14%
convertible subordinated debentures were automatically converted into 2,380,000
outstanding shares of Common Stock and all classes of the Company's preferred
stock were automatically converted into an aggregate of 1,482,766 outstanding
shares of Common Stock. Additionally, the Company utilized $2,524,000 of the net
proceeds to repay certain notes payable.
On October 13, 1998, the Company entered into a $10 million revolving
credit facility with Comerica Bank. At January 29, 2000, $8,260,000 was
outstanding under the Credit Facility and an additional $1,020,000 was available
to the Company pursuant to the available borrowing base. The Credit Facility
bears interest at either (i) the prevailing prime rate plus 0.75%, which was
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 Company is required
to pay an annual commitment fee of 1/2 of 1% on the average daily unused portion
of the Credit Facility commitment. The Company is prohibited from paying cash
dividends or acquiring treasury stock under the terms of the Credit Facility
unless specifically approved by Comerica Bank.
16
<PAGE>
On March 11, 1999, the Company commenced a public offering of up to $10
million in principal amount of 12% Subordinated Notes due December 31, 2004. The
2004 Notes are being offered on a "best efforts" basis by participating NASD
Broker-Dealers. Interest on the 2004 Notes is payable monthly commencing with
the second full calendar month following issuance. At the option of the Company,
the 2004 Notes may be redeemed prior to December 31, 2004 at stipulated
redemption prices. The Company had issued a total of $7,714,000 of the 2004
Notes as of January 29, 2000.
On September 1, 1999, the Company sold 416,667 shares of 8% Convertible
Preferred Stock, $6.00 par value per share, 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. See "Item 8.
- - Consolidated Financial Statements and Supplementary Data."
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 2004 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.
At January 29, 2000, the Company's primary sources of liquidity were
$795,000 in cash and cash equivalents, $710,000 in pawn service charges
receivable, $6,758,000 in pawn loans outstanding, $7,279,000 in inventories, and
$1,020,000 of available and unused funds under the Company's Credit Facility.
The Company had a current ratio of approximately 12.8 to 1.0 and 5.8 to 1.0 at
January 29, 2000 and January 30, 1999, respectively. Net cash used in operating
activities was $6,399,000 during Fiscal 1999 and $3,272,000 during Fiscal 1998.
The Company's profitability and liquidity is affected by the amount of
loans outstanding, which is controlled in part by the Company's loaning
decisions. The Company is able to influence the frequency of forfeiture of
collateral by increasing or decreasing the amount loaned in relation to the
sales value of the pledged property. Tighter credit decisions generally result
in smaller loans in relation to the estimated sales value of the pledged
property and can thereby decrease the Company's aggregate loan balance and,
consequently, decrease pawn service charges. Additionally, lower loans in
relation to the pledged property's estimated sales value tend to slightly
increase loan redemptions and improve the Company's liquidity. Conversely,
providing higher loans in relation to the estimated sales value of the pledged
property can result in an increase in the Company's pawn service charge income.
Higher average loan balances can also result in a slight increase in loan
forfeitures, which increases the quantity of goods on hand and, unless the
Company increases inventory turnover, reduces the Company's liquidity. In
addition to these factors, liquidity is also affected by merchandise sales and
the pace of store expansion.
17
<PAGE>
The Company believes its operations and planned roll-out of stores will be
funded by borrowings under the Credit Facility, cash flows generated from its
established stores, net proceeds from the offering of the 2004 Notes, and future
debt or equity offerings. In addition to factors noted below under "Factors That
Could Affect Future Performance," the Company's store expansion during the next
fiscal year will largely be dependent upon the amount of 2004 Notes sold, the
Company's ability to utilize its remaining borrowing base under its Credit
Facility, and the Company's ability to obtain debt or equity financing. In the
event the Company is unable to sell the maximum subscription or additional
financing alternatives are not obtained, its operational strategies could be
modified and its planned expansion schedule is likely to be significantly
reduced or suspended. No assurance can be made that the Company will be able to
sell the maximum subscription of 2004 Notes or obtain additional financing.
YEAR 2000
The Company did not experience any disruptions in its operations during the
transition into the Year 2000. During Fiscal 1999, the Company completed
necessary assessments, modifications or replacement and testing of systems
critical to the Company's operations and believed it had met its Year 2000
readiness objectives. The amounts incurred to carry out the overall Year 2000
plan totaled approximately $35,000. While the Company did not experience any
disruptions during the transition into the Year 2000, it will continue to
monitor its operations and address any date-related problems that may arise as
the year progresses.
RECENT ACCOUNTING PRONOUNCEMENTS
FASB 133, "Accounting for Derivative Instruments and Hedging Activities" -
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivatives embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments
at fair value. The statement, as amended, is effective for fiscal years
beginning after June 15, 2000. Since the Company does not use derivative
instruments, the effect of the implementation of this new pronouncement is not
expected to have any effect on the financial position or results of operations
of the Company.
INFLATION
The Company does not believe that inflation has had a material effect on
its lending activities or its results of operations.
SEASONALITY
The Company's retail operations are seasonal in nature with increased
merchandise sales during the first and fourth fiscal quarters of each year. The
Company's lending operations are also seasonal, with increased lending
activities during the second and third fiscal quarters of each year.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
LACK OF PROFITABILITY, EXPECTED LOSSES DURING ROLL-OUT PHASE
From its inception on January 13, 1994 through January 29, 2000, the
Company has experienced aggregate losses of $19,963,000. Further, a key element
of the Company's strategy consists of developing multiple stores meeting the
Company's required store size, configuration, and site selection requirements in
regional and local markets. This strategy is likely to result in continued net
losses during the Company's roll-out phase due to start-up losses associated
with the anticipated high number of new stores. Results of operations in the
future will be influenced by numerous factors including, among others, the
number of new store expansions, the Company's ability to manage its growth and
maintain the quality of its personnel, and the ability of the Company to
implement its strategic plan.
18
<PAGE>
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
At January 29, 2000, the Company had total long-term indebtedness of
$15,923,000 which represents borrowings under the Company's Credit Facility and
the 2004 Notes. The degree to which the Company is leveraged could have adverse
consequences to holders of the debt, including the following: (i) substantial
cash flow from the Company's operations will be required for the payment of
principal and interest on its indebtedness and will not be available for other
purposes; (ii) the Company's ability to obtain additional financing in the
future, whether for capital expenditures, further development, refinancings or
otherwise, may be impaired; (iii) the Company may be more leveraged than certain
of its competitors, which may place it at a competitive disadvantage; and (iv)
the Company's high degree of leverage makes it more vulnerable to changes in
economic conditions and may limit the Company's ability to withstand competitive
pressures and capitalize on significant business opportunities.
The Company expects to repay its indebtedness with either (i) cash flows
from operations, (ii) proceeds from the issuance of additional equity or debt
securities, (iii) refinancing, (iv) proceeds from the exercise of the Series A
Warrants, or (v) the sale of certain assets. The Company will require
substantial cash flows to meet its interest payment obligations with respect to
its indebtedness. The Company's cash flow is dependent on its future performance
and is subject to financial, economic and other factors, some of which are
beyond the Company's control. Since the Credit Facility bears interest at a
floating rate, the Company is sensitive to any increase in prevailing interest
rates. The Company believes that, based upon anticipated levels of operations,
it should be able to meet its debt service obligations when due. If the Company
is unable to generate sufficient cash flow from operations to satisfy its
interest obligations, the Company may be required to refinance all or a portion
of such obligations, sell assets, or repay such indebtedness with proceeds from
other capital transactions, such as the issuance of additional equity. There can
be no assurance that such refinancing or extension will be available on
reasonable terms or at all, that additional equity will be issued, or that a
sale of assets will occur. The inability to repay such indebtedness could have a
material adverse effect on the Company.
INABILITY TO MEET EXPANSION PLANS
As of the date of this Annual Report, the Company has issued approximately
$8.2 million of 2004 Notes on a "best efforts" basis. Although the Company is
offering up to $10 million in 2004 Notes, there are no assurances that the
maximum offering amount will be subscribed. The Company's store expansion during
the next fiscal year will largely be dependent upon the amount of 2004 Notes
sold, the Company's ability to utilize its remaining borrowing base under its
Credit Facility, and the Company's ability to obtain debt or equity financing.
In the event the Company is unable to sell the maximum subscription or
additional financing alternatives are not obtained, its planned expansion
schedule is likely to be significantly reduced or suspended. No assurance can be
made that the Company will be able to sell the maximum subscription of 2004
Notes or obtain additional financing.
LIQUIDITY
Although the Company has entered into the $10 million Credit Facility,
there are no assurances that the Company's cash and cash equivalents on hand and
its cash availability will be sufficient to meet the Company's anticipated
working capital needs and capital expenditures in the future. To finance future
expenditures, the Company may need to issue additional securities or incur
additional debt. The Company may not be able to obtain additional required
capital on satisfactory terms, if at all. The failure to raise the funds
necessary to finance future cash requirements could materially and adversely
affect the Company's consolidated operating results and anticipated growth in
future periods.
19
<PAGE>
MANAGEMENT OF GROWTH
The Company plans to expand its business through a roll-out of stores. To a
significant extent, the Company's future success will be dependent upon its
ability to engage in a successful expansion program and will be dependent, in
part, upon its ability to secure suitable sites for its new stores, obtain
adequate inventory for its new stores, maintain adequate financial controls and
reporting systems to manage a larger operation, and to obtain additional capital
upon favorable terms. There can be no assurance that the Company will be able to
successfully implement its planned expansion, finance its growth or manage the
resulting larger operation.
AVAILABILITY OF QUALIFIED STORE MANAGEMENT PERSONNEL
The Company's ability to expand may also be limited by the availability of
qualified store management personnel. While the Company seeks to train existing
qualified personnel for management positions and to create attractive
compensation packages to retain existing management personnel, there can be no
assurance that sufficient qualified personnel will be available to satisfy the
Company's needs with respect to its planned expansion.
COMPETITION
The Company encounters significant competition in connection with the
operation of its business. In connection with lending operations, the Company
competes with other pawnshops (owned by individuals and by large operators) and
certain financial institutions, such as consumer finance companies, which
generally lend on an unsecured, as well as on a secured basis. The Company's
competitors in connection with its retail sales include numerous retail and
discount stores. Many of the Company's competitors, including Cash America
International, Inc., First Cash Financial Services, Inc., and EZCORP, Inc., have
greater financial resources. These competitive conditions may adversely affect
the Company's revenues, profitability and ability to expand.
In addition, the Company faces competition in the acquisition of existing
stores. Several competing pawnshop companies have implemented expansion and
acquisition programs. There can be no assurance that the Company will be more
successful than its competitors in pursuing acquisition opportunities and leases
for attractive start-up locations. Increased competition could also increase
prices for attractive acquisition candidates.
GOVERNMENT REGULATION
The Company's lending operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations. These statutes prescribe, among other things,
service charges a pawnshop may charge for lending money and the rules of conduct
that govern an entity's ability to maintain a pawnshop license. With respect to
firearm and ammunition sales, a pawnshop must comply with the regulations
promulgated by the United States Department of the Treasury-Bureau of Alcohol,
Tobacco and Firearms. Governmental regulators have broad discretionary authority
to refuse to grant a license or to suspend or revoke any or all existing
licenses of licensees under common control if it is determined that any such
licensee has violated any law or regulation or that the management of any such
licensee is not suitable to operate pawnshops. In addition, there can be no
assurance that additional state or federal statutes or regulations will not be
enacted at some future date which could inhibit the Company's ability to expand,
significantly decrease the service charges the Company can charge for lending
money, or prohibit or more stringently regulate the sale of certain goods, such
as firearms, any of which could significantly adversely affect the Company's
prospects. The Company's ability to open new stores in other states could be
affected by the enactment of state or local legislation, similar to current
Texas legislation, which includes certain proximity restrictions in Texas
counties having a population of more than 250,000. In addition, the present
statutory and regulatory environment of some states renders expansion into those
states impractical. For instance, certain states require public sale of
forfeited collateral or do not permit service charges sufficient to make
pawnshop operations profitable.
20
<PAGE>
RISKS RELATED TO IMPROPER ASSESSMENT OF THE PLEDGED PROPERTY'S ESTIMATED RESALE
VALUE
The Company makes pawn loans without the borrower's personal liability and
does not investigate the creditworthiness of the borrower, but relies on the
pledged personal property, and the possibility of its forfeiture, as a basis for
its lending decision. In this regard, the recovery of the amount advanced, as
well as realization of a profit on sale of merchandise, is dependent on the
Company's initial assessment of the property's estimated resale value. Improper
assessment of the resale value of the collateral in the lending function can
result in reduced marketability of the property and resale of the merchandise
for an amount less than the amount advanced. Although, historically, the Company
has experienced profits from the sale of such merchandise, no assurances can be
given that the Company's historical results will continue. For example,
unexpected technological changes could adversely impact the value of consumer
electronic products and declines in gold and silver prices could reduce the
resale value of jewelry items acquired in pawn transactions and could adversely
affect the Company's ability to recover the amount advanced on the acquired
collateral.
DEPENDENCE ON KEY MANAGEMENT
The Company relies on the business and technical expertise of its executive
officers and certain other key employees, particularly its Chief Executive
Officer, Carson Thompson and its President, Michael Record. Except for an
employment agreement with Michael Record, the Company does not have an
employment agreement with any member of its executive staff. The loss of the
services of any of these individuals could have a material adverse effect on the
Company's consolidated operating results. No assurance can be given that their
services will be available in the future. The Company's success will also be
dependent on its ability to attract and retain additional qualified management
personnel.
RISKS RELATED TO FIREARM SALES
The Company currently does not, nor does it intend to, engage in the sale
of handguns, sporting rifles or assault rifles to the public. The Company does
wholesale forfeited handguns, sporting rifles and assault rifles to licensed
firearm dealers leaving it open to the risk of lawsuits from persons who may
claim injury as a result of an improper sale by the licensed firearm dealers. No
such claims have been asserted against the Company as of the date of this Annual
Report. The Company maintains insurance covering potential risks related to the
sale of firearms.
RISKS RELATED TO AUTOMOBILE TITLE LOANS
Alabama, Georgia, and South Carolina pawn regulations allow the Company to
advance funds secured by automobile titles. Approximately nine percent and eight
percent of the Company's total revenues during Fiscal 1999 and Fiscal 1998,
respectively, were related to pawn service charges generated from such advances.
During the term of the title loan, the borrower is allowed to maintain
possession of the collateral. In the event of default, the Company contracts to
repossess the automobile and subsequently disposes of the automobile through its
retail operations. Although the Company is exposed to the risk that it is unable
to locate the collateral securing forfeited title loans, it has not historically
experienced material adverse results from these instances and there can be no
guarantee that material adverse results will not occur in the future. Further,
the adoption of additional or the revision of existing laws and regulations
impacting the Company's ability to advance funds against automobile titles could
have a material adverse effect on the Company's business. The Company could also
be subject to consumer claims and litigation seeking damages based upon wrongful
repossession of automobiles.
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<PAGE>
PREFERRED STOCK; RISK OF DILUTION
The Company's Restated Certificate of Incorporation authorizes the issuance
of up to 10,000,000 shares of preferred stock with such rights and preferences
as may be determined from time to time by the Board of Directors. Accordingly,
the Board of Directors may, without stockholder approval, issue preferred stock
with dividend, liquidation, conversion, voting, redemption or other rights which
could adversely affect the voting power or other rights of the holders of the
Company's Common Stock. The issuance of any shares of preferred stock having
rights superior to those of the Company's Common Stock may result in a decrease
in the value or market price of the Common Stock and could further be used by
the Board as a device to prevent a change in control of the Company. Holders of
the preferred stock may have the right to receive dividends, certain preferences
and conversion rights.
On September 1, 1999, the Company sold 416,667 shares of 8% Convertible
Preferred Stock, $6.00 par value per share. The Preferred Stock bears dividends
at 8% per annum and is payable quarterly in cash. The Preferred Stock contains
conversion rights that allow the purchaser to convert into the Company's Common
Stock after March 1, 2001 at a discount to the current market price. The number
of shares of Common Stock into which the Preferred Stock may be converted is
based upon the then outstanding market price and, as such, could result in
significant dilution to the Company's common stockholders. The Company may
redeem the Preferred Stock, in whole or in part, at specified redemption prices.
NECESSITY TO MAINTAIN CURRENT PROSPECTUS AND REGISTRATION STATEMENT
The Company must maintain an effective registration statement on file with
the Commission before any of the Series A Warrants or Series B Warrants
(collectively, the "Warrants") may be redeemed or exercised. It is possible that
the Company may be unable to cause a registration statement covering the Common
Stock underlying the Warrants to be effective. It is also possible that the
Warrants could be acquired by persons residing in states where the Company is
unable to qualify the Common Stock underlying the Warrants for sale. In either
event, the Warrants may expire, unexercised, which would result in the holders
losing all the value of the Warrants.
POSSIBLE FAILURE TO QUALIFY FOR BOSTON STOCK EXCHANGE OR NASDAQ SMALLCAP MARKET
LISTING
The Company's Common Stock and Warrants are listed on the Boston Stock
Exchange and the Nasdaq SmallCap Market. In order to qualify for continued
listing on the Boston Stock Exchange, the Company must maintain, among other
things, a $500,000 market value of public float, $1 million in total assets and
$500,000 in stockholders' equity. In order to qualify for continued listing on
the Nasdaq SmallCap Market, the Company must maintain, among other things, a $1
million market value of public float and $2 million in total net tangible
assets. In addition, continued inclusion on the Nasdaq SmallCap Market requires
two market-makers and a minimum bid price of $1.00 per share. If the Company
is unable to obtain additional equity financing and incurs additional
operating losses, it may not be able to satisfy the listing maintenance
criteria. The failure to meet these maintenance criteria in the future may
result in a discontinuance of the listing of the Company's Common Stock and
Warrants on the Boston Stock Exchange and Nasdaq SmallCap Market.
If the Company is or becomes unable to meet the above referenced listing
criteria on a continued basis and is delisted therefrom, trading, if any, in the
Common Stock and Warrants would thereafter be conducted in the over-the-counter
market in the so-called "pink sheets" or, if then available, "Electronic
Bulletin Board" administered by the National Association of Securities Dealers,
Inc. In such an event, the market price of the Common Stock and Warrants may be
adversely impacted and an investor may find it difficult to dispose of or to
obtain accurate quotations as to the market value of the Common Stock and
Warrants.
22
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure relates to changes in interest
rates related to its long-term notes payable. The Company's revolving line of
credit with Comerica Bank bears interest at a variable rate that is frequently
adjusted on the basis of market rate changes and is equal to rates available for
debt with similar characteristics. Accordingly, management believes that the
carrying value of such debt approximates its fair value. The 2004 Notes bear
interest at a fixed rate of 12% per annum. As a result, the Company's only
interest rate risk is the opportunity loss associated with this debt should
interest rates decline for debt with similar characteristics. Based on the
average outstanding indebtedness during Fiscal 1999, a 10% increase in overall
interest rates would have increased the Company's interest expense by
approximately $114,000 during Fiscal 1999. The carrying amount of all other
financial instruments included in the Company's consolidated balance sheets
approximate fair value due to the short maturity of these instruments.
ITEM 8.CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. 24
Consolidated Balance Sheets............................................... 25
Consolidated Statements of Operations..................................... 26
Consolidated Statements of Stockholders' Equity (Deficit) ................ 27
Consolidated Statements of Cash Flows..................................... 28
Notes to Consolidated Financial Statements................................ 29
Supplementary Data........................................................ 42
</TABLE>
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<PAGE>
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.
KPMG LLP
Fort Worth, Texas
March 20, 2000
24
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
January 29, January 30,
2000 1999
----------- -----------
ASSETS (NOTE 5)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 795 $ 298
Accounts receivable 180 60
Pawn service charges receivable 710 446
Loans 6,758 4,419
Inventories, net 7,279 3,011
Prepaid expenses and other current assets 243 199
----------- -----------
Total current assets 15,965 8,433
----------- -----------
Property and equipment, net (note 4) 3,347 2,232
Goodwill, net (note 3) 530 156
Debt issuance costs, net of accumulated amortization of
$231 and $47 at January 29, 2000 and January 30, 1999,
respectively (note 5) 1,045 137
Other assets 157 234
----------- -----------
Total assets $ 21,044 $ 11,192
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 270 $ 523
Accrued interest payable 140 36
Accrued payroll and payroll taxes 269 206
Deferred rent 144 123
Accrued bonuses 36 42
Other accrued expenses 291 173
Current installments of notes payable (note 5) 93 342
----------- -----------
Total current liabilities 1,243 1,445
----------- -----------
Long-term notes payable, net of current installments (note 5) 15,923 4,840
=========== ===========
Total liabilities 17,166 6,285
=========== ===========
Stockholders' equity (notes 5, 7, and 8)
Preferred stock, $.01 par value; authorized 10,000,000 shares $ - $ -
8% Convertible preferred stock, $6.00 par value; 416,667 shares authorized,
issued, and outstanding (liquidation preference $6.00 per share) 2,500 -
Common stock, $.01 par value; authorized 20,000,000 shares; 7,230,877
shares issued 72 72
Series A redeemable common stock purchase warrants, $0.125 par value;
1,842,840 and 1,380,000 warrants issued and outstanding at January 29, 2000
and January 30, 1999, respectively 231 173
Series B redeemable common stock purchase warrants, $0.0625 par value;
1,380,000 warrants issued and outstanding 86 86
Additional common stock purchase warrants 60 -
Additional paid-in capital 21,954 22,242
Accumulated deficit (20,955) (17,596)
----------- -----------
3,948 4,977
Less treasury stock, at cost: 21,432 common shares (70) (70)
----------- -----------
Total stockholders' equity 3,878 4,907
Commitments and contingencies (note 9)
=========== ===========
Total liabilities and stockholders' equity $ 21,044 $ 11,192
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 29, January 30, January 31,
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Merchandise sales $ 13,978 $ 8,170 $ 7,215
Pawn service charges 6,674 3,636 2,862
Other 250 129 101
------------ ------------ ------------
Total revenues 20,902 11,935 10,178
Cost of sales 10,832 5,634 5,192
------------ ------------ ------------
Gross profit 10,070 6,301 4,986
------------ ------------ ------------
Expenses:
Store operating 8,163 5,326 4,040
Interest (note 5) 1,358 996 3,761
Depreciation 761 555 444
Amortization 44 63 60
Corporate administrative (note 7) 3,020 3,074 2,117
------------ ------------ ------------
Total expenses 13,346 10,014 10,422
------------ ------------ ------------
Net loss (3,276) (3,713) (5,436)
Preferred stock dividends (note 7) 83 692 217
------------ ------------ ------------
Net loss to common stockholders $ (3,359) $ (4,405) $ (5,653)
============ ============ ============
Loss per common share (note 2(k)):
Basic $ (0.47) $ (0.68) $ (3.01)
============ ============ ============
Diluted $ (0.47) $ (0.68) $ (3.01)
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended January 29, 2000, and January 30, 1999 and January 31, 1998
(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 (note 7) - - 105,426 1 - -
Acquisition of 3,297 shares of common stock
(note 7) - - - - - -
Issuance of preferred stock (note 7) 572,180 6 - - - -
Recognition of Convertible Subordinated
Debenture beneficial conversion feature
(note 5) - - - - - -
Recognition of preferred stock beneficial
conversion feature (note 7) - - - - - -
Amortization of preferred stock beneficial
conversion feature (note 7) - - - - - -
Preferred stock dividends paid - - - - - -
Net loss - - - - - -
------------- --------- ------------ --------- ------------ ---------
Balance at January 31, 1998 3,661,200 37 1,950,424 19 - -
Issuance of common stock and warrants
(note 7) - - 1,365,000 14 1,380,000 173
Issuance of unregistered common stock in
exchange for services (note 7) - - 44,445 - - -
Conversion of Convertible Subordinated
Debentures (note 5) - - 2,380,000 24 - -
Conversion of preferred stock (note 7) (3,661,200) (37) 1,491,008 15 - -
Amortization of preferred stock beneficial
conversion feature (note 7) - - - - - -
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 (note 5) - - - - 462,840 58
Issuance of 8% convertible preferred stock
and common stock purchase warrants (note 7) 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
============= ========= ============ ========= ============ =========
See accompanying notes to consolidated financial statements.
<CAPTION>
Series B Additional
redeemable common stock common
purchase warrants stock Additional Preferred
------------------------ purchase paid-in stock Accumulated
Shares Amount warrants capital discount deficit
<S> ------------ --------- ----------- ----------- ---------- -------------
<C> <C> <C> <C> <C> <C>
Balance at January 26, 1997 - $ - $ - $ 3,276 $ - $ (7,538)
Issuance of common stock (note 7) - - - 30 - -
Acquisition of 3,297 shares of common stock
(note 7) - - - - - -
Issuance of preferred stock (note 7) - - - 1,147 - -
Recognition of Convertible Subordinated
Debenture beneficial conversion feature
(note 5) - - - 2,380 - -
Recognition of preferred stock beneficial
conversion feature (note 7) - - - 824 (824) -
Amortization of preferred stock beneficial
conversion feature (note 7) - - - - 150 (150)
Preferred stock dividends paid - - - - - (67)
Net loss - - - - - (5,436)
------------ --------- ----------- ----------- ---------- -------------
Balance at January 31, 1998 - - - 7,657 (674) (13,191)
Issuance of common stock and warrants
(note 7) 1,380,000 86 - 5,310 - -
Issuance of unregistered common stock in
exchange for services (note 7) - - - 200 - -
Conversion of Convertible Subordinated
Debentures (note 5) - - - 9,053 - -
Conversion of preferred stock (note 7) - - - 22 - -
Amortization of preferred stock beneficial
conversion feature (note 7) - - - - 674 (674)
Preferred stock dividends paid - - - - - (18)
Net loss - - - - - (3,713)
------------ --------- ----------- ----------- ---------- -------------
Balance at January 30, 1999 1,380,000 86 - 22,242 - (17,596)
Issuance of Series A redeemable common stock
purchase warrants (note 5) - - - - - -
Issuance of 8% convertible preferred stock
and common stock purchase warrants (note 7) - - 60 (288) - -
Preferred stock dividends paid - - - - - (83)
Net loss - - - - - (3,276)
------------ --------- ----------- ----------- ---------- -------------
Balance at January 29, 2000 1,380,000 $ 86 $ 60 $ 21,954 $ - $ (20,955)
============ ========= =========== =========== ========== =============
<CAPTION>
Total
stockholders'
Treasury equity
stock (deficit)
<S> ---------- -------------
<C> <C>
Balance at January 26, 1997 $ (65) $ (4,278)
Issuance of common stock (note 7) - 31
Acquisition of 3,297 shares of common stock
(note 7) (5) (5)
Issuance of preferred stock (note 7) - 1,153
Recognition of Convertible Subordinated
Debenture beneficial conversion feature
(note 5) - 2,380
Recognition of preferred stock beneficial
conversion feature (note 7) - -
Amortization of preferred stock beneficial
conversion feature (note 7) - -
Preferred stock dividends paid - (67)
Net loss - (5,436)
---------- -------------
Balance at January 31, 1998 (70) (6,222)
Issuance of common stock and warrants
(note 7) - 5,583
Issuance of unregistered common stock in
exchange for services (note 7) - 200
Conversion of Convertible Subordinated
Debentures (note 5) - 9,077
Conversion of preferred stock (note 7) - -
Amortization of preferred stock beneficial
conversion feature (note 7) - -
Preferred stock dividends paid - (18)
Net loss - (3,713)
---------- -------------
Balance at January 30, 1999 (70) 4,907
Issuance of Series A redeemable common stock
purchase warrants (note 5) - 58
Issuance of 8% convertible preferred stock
and common stock purchase warrants (note 7) - 2,272
Preferred stock dividends paid - (83)
Net loss - (3,276)
---------- -------------
Balance at January 29, 2000 $ (70) $ 3,878
========== =============
</TABLE>
27
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (3,276) $ (3,713) $ (5,436)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 805 618 504
Amortization of debt issuance costs 196 124 271
Amortization of debt discount 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 (120) (28) (9)
Pawn service charges receivable (264) (213) (4)
Inventories, net (3,827) (860) 27
Prepaid expenses and other current assets (44) (101) (80)
Other assets 77 154 (254)
Accounts payable (253) 119 73
Accrued liabilities 300 (67) (319)
------------- --------------- ------------
Net cash used in operating activities (6,399) (3,272) (3,308)
------------- --------------- ------------
Cash flows from investing activities, net of effect of acquisitions:
Net increase in loans (2,101) (1,916) (193)
Purchases of property and equipment (1,765) (1,917) (197)
Acquisitions of existing operations (1,208) (513) -
------------- --------------- ------------
Net cash used in investing activities (5,074) (4,346) (390)
------------- --------------- ------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 19,427 6,352 3,172
Principal payments on notes payable (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 (1,104) (159) (261)
Net proceeds from issuance of preferred stock 2,272 - 1,148
Preferred stock dividends paid (83) (18) (67)
Decrease in bank overdraft - - (110)
------------- --------------- ------------
Net cash provided by financing activities 11,970 7,765 3,706
------------- --------------- ------------
Net increase in cash and cash equivalents 497 147 8
Cash and cash equivalents at beginning of year 298 151 143
------------- --------------- ------------
Cash and cash equivalents at end of year $ 795 $ 298 $ 151
============= =============== ============
Supplemental disclosures of cash flow information -
Cash paid for interest $ 1,051 $ 483 $ 1,565
============= =============== ============
</TABLE>
See Consolidated Statement of Stockholders' Equity (Deficit) and notes 3, 5 and
7 for noncash investing and financing activities.
See accompanying notes to consolidated financial statements.
28
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
January 29, 2000, January 30, 1999 and January 31, 1998
(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.
(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.
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.
(Continued)
29
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(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.
(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.
(Continued)
30
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(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.
(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".
(Continued)
31
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(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
years ended January 29, 2000, January 30, 1999 and January 31,
1998. Since the effect of using the weighted average number of
shares on a diluted basis was antidilutive to the diluted loss
per share calculation for the years ended January 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>
Year Ended Year Ended Year Ended
January 29, January 30, January 31,
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Weighted average shares - basic 7,209 6,506 1,878
Shares attributable to stock options, warrants and
convertible securities - 510 3,628
------------ ------------ -------------
Weighted average shares - diluted 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.
(Continued)
32
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
(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.
(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, 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>
(Continued)
33
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(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, 7,714 -
2004
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>
In October 1998, the Company entered into a $10,000,000 revolving credit
facility with Comerica Bank (the "Credit Facility"). At January 29,
2000, $8,260,000 was outstanding under the Credit Facility and an
additional $1,020,000 was available to the Company pursuant to the
available borrowing base. The Credit Facility bears interest at
either (i) the prevailing prime rate plus 0.75%, which was 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 $7,714,000 of the 2004 Notes
as of January 29, 2000.
(Continued)
34
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(5) NOTES PAYABLE, CONTINUED
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.
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>
35 (Continued)
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(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.
(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.
36 (Continued)
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(7) EQUITY, CONTINUED
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.
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.
37 (Continued)
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(7) EQUITY, CONTINUED
During the fiscal year ended January 31, 1998, the Company was a party to
the following common stock and preferred stock transactions:
- 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;
- 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;
- Acquired 3,297 shares of common stock from a former officer at a
price of $1.52 per share; and
- 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.
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.
38 (Continued)
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) STOCK OPTIONS, CONTINUED
Under the Directors' Option Plan, stock options will be granted to any
director who is not an employee of the Company and is not a holder of
more than 5% of the outstanding shares of common stock. Newly
appointed eligible directors will automatically receive an initial
grant of options to purchase 25,000 shares of common stock. All
eligible directors will receive annual grants of options to purchase
the lessor of 20,000 shares of common stock or $200,000 in market
value of underlying common stock. Options granted under the
Directors' Option Plan are required to have an exercise price equal
to 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:
<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>
39 (Continued)
<PAGE>
PAWNMART, INC. AND SUBSIDIARIES
Notes To Consolidated Financial Statements
(8) STOCK OPTIONS, CONTINUED
The Company applies the intrinsic value method of accounting for its
option issuances. Accordingly, no compensation expense has been
recognized for its employee stock option grants. If the Company had
adopted the fair value based method prescribed by the FASB's
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," and determined compensation cost based on
the fair value at the grant dates of such options, the Company's net
loss would have been increased 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>
40 (Continued)
<PAGE>
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.
41
<PAGE>
SUPPLEMENTARY DATA
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<C> <C> <C> <C> <C>
(In Thousands, Except Per Share Data)
Fiscal 1999:
Total revenue $ 4,347 $ 4,774 $ 5,227 $ 6,554
Gross profit 2,296 2,442 2,616 2,716
Net loss to common shareholders (542) (774) (881) (1,162)
Net loss per share (0.08) (0.11) (0.12) (0.16)
Weighted average shares 7,209 7,209 7,209 7,209
Fiscal 1998:
Total revenue $ 2,650 $ 2,499 $ 2,906 $ 3,880
Gross profit 1,430 1,374 1,497 2,000
Net loss to common shareholders (2,011) (711) (806) (877)
Net loss per share (0.63) (0.10) (0.11) (0.12)
Weighted average shares 3,215 7,209 7,209 7,209
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company did not change its principal independent accounting firm nor
have any disagreements with such firm on accounting and financial disclosure
matters during the two fiscal years ended January 29, 2000.
PART III
In accordance with General Instruction G(3), a presentation of information
in response to Items 10, 11, 12, and 13 shall appear in the Company's definitive
Proxy Statement to be filed pursuant to Regulation 14A within 120 days of the
Company's fiscal year end and shall be incorporated herein by reference when
filed.
42
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------
<S> <C>
3.1 PawnMart, Inc.'s Restated and Amended Certificate of Incorporation (1)
3.2 PawnMart, Inc.'s Second Amended and Restated Bylaws (1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Series A Warrant Certificate (2)
4.3 Specimen Series B Warrant Certificate (2)
4.4 Form of Warrant Agreement, dated as of March 20, 1998 between PawnMart, Inc. and Continental Stock
Transfer & Trust Company (2)
4.5 Form of National Association of Securities Dealers, Inc. broker-dealer warrants (3)
4.6 Form of Amendment to Warrant Agreement, Dated as of March 20, 1998 Between PawnMart, Inc. and
Continental Stock Transfer & Trust Company (6)
4.7 Indenture, Dated as of March 15, 1999 Between PawnMart, Inc. and Trust Management, Inc., as Trustee,
Relating to PawnMart, Inc.'s 12% Subordinated Notes Due 2004 (6)
4.8 Form of 12% Subordinated Note Due 2004 (included as part of Exhibit 4.7 hereto)
4.9 Form of Broker-Dealer Selling Agreement (6)
4.10 Form of Subscription Escrow Agreement dated March 15, 1999 Between PawnMart, Inc., Massie Capital,
Ltd. and Norwest Bank Texas, N.A. (7)
4.11 Certificate of Designations of the 8% Convertible Preferred Stock (8)
4.12 8% Convertible Preferred Stock and Warrant Purchase Agreement, dated as of August 19, 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 (8)
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 (8)
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 (8)
4.15 Transaction Warrant Agreement, dated as of September 1, 1999, by and between PawnMart, Inc. and Andrew
Garrett, Inc. (8)
10.1 Form of Indemnity Agreement with Officers and Directors of PawnMart, Inc. (2)
10.2 1997 PawnMart, Inc. Employee Stock Option Plan (1)
10.3 1997 PawnMart, Inc. Director Stock Option Plan (2)
10.4 Revolving Credit Agreement Dated October 13, 1998 Between PawnMart, Inc. and Comerica Bank (4)
10.5 Employment Agreement, Dated as of September 8, 1998, Between PawnMart, Inc. and Michael D. Record (5)
21.1 Subsidiaries of PawnMart, Inc. (9)
27.1 Financial Data Schedule as of January 29, 2000 (Filed in EDGAR version only) (9)
</TABLE>
----------------------
(1) Filed as an Exhibit to the registrant's Registration Statement
on Form SB-2, filed on October 23, 1997 File No. 333-38597).
(2) Filed as an Exhibit to the registrant's Registration Statement
on Amendment No.2 to Form SB-2, filed on February 9, 1998
(File No. 333-38597).
(3) Filed as an Exhibit to the registrant's Registration Statement
on Amendment No.3 to Form SB-2, filed on March 11, 1998
(File No. 333-38597).
(4) Filed as an Exhibit to the registrant's Form 10-QSB for the
quarter ended October 31, 1998, filed on December 14, 1998
(File No. 1-13919).
(5) Filed as an Exhibit to the registrant's Registration Statement
on Form S-1, filed on January 15, 1999 (File No. 333-70635).
(6) Filed as an Exhibit to the registrant's Registration Statement
on Amendment No.1 to Form S-1, filed on February 24, 1999
(File No. 333-70635).
(7) Filed as an Exhibit to the registrant's Registration Statement
on Amendment No.2 to Form S-1, filed on March 10, 1999
(File No. 333-70635).
(8) Filed as an Exhibit to the registrant's Form 8-K, filed on
September 1, 1999 (File No. 1-13919).
(9) Filed herewith.
(b) FINANCIAL STATEMENT SCHEDULES - None
(c) REPORTS ON FORM 8-K - No reports on Form 8-K were filed by the Company
during the fourth quarter of the fiscal year ended January 29, 2000.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PAWNMART, INC.
<TABLE>
<S> <C> <C> <C>
By: /s/ CARSON R. THOMPSON APRIL 19, 2000 By: /s/ THOMAS W. WHITE APRIL 19, 2000
---------------------- -------------- ------------------- --------------
Carson R. Thompson Date Thomas W. White Date
Chief Executive Officer, Director Senior Vice President
and Chairman of the Board and Chief Financial Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ CARSON R. THOMPSON Chief Executive Officer, Director April 19, 2000
- --------------------------- and Chairman of the Board
Carson R. Thompson
/s/ MICHAEL D. RECORD President April 19, 2000
- ---------------------------
Michael D. Record
/s/ THOMAS W. WHITE Senior Vice President and April 19, 2000
- --------------------------- Chief Financial Officer
Thomas W. White
/s/ RANDALL L. HADEN Vice President - Information Services April 19, 2000
- ---------------------------
Randall L. Haden
/s/ JAMES E. BERK Director April 19, 2000
- ---------------------------
James E. Berk
/s/ MONTY R. STANDIFER Director April 19, 2000
- ---------------------------
Monty R. Standifer
/s/ MARK E. KANE Director April 19, 2000
- ---------------------------
Mark E. Kane
/s/ ROBERT D. BOURLAND, JR. Director April 19, 2000
- ---------------------------
Robert D. Bourland, Jr.
/s/ J. ROGER WILLIAMS Director April 19, 2000
- ---------------------------
J. Roger Williams
</TABLE>
44
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF PAWNMART, INC.
<TABLE>
<CAPTION>
SUBSIDIARY NAME STATE OF INCORPORATION PERCENTAGE OWNED BY REGISTRANT
--------------- ---------------------- ------------------------------
<S> <C> <C>
PCI Finance 1994-I, Inc. Texas 100%
PCI Finance 1995-I, Inc. Texas 100%
PCI Finance 1996-1, Inc. Texas 100%
PCI Finance 1996-2, Inc. Texas 100%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF PAWNMART, INC. AND SUBSIDIARIES FOUND IN
THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 29, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-30-1999
<PERIOD-END> JAN-29-2000
<CASH> 795
<SECURITIES> 0
<RECEIVABLES> 7,648
<ALLOWANCES> 0
<INVENTORY> 7,279
<CURRENT-ASSETS> 15,965
<PP&E> 5,993
<DEPRECIATION> (2,646)
<TOTAL-ASSETS> 21,044
<CURRENT-LIABILITIES> 1,243
<BONDS> 7,714
0
2,500
<COMMON> 72
<OTHER-SE> 1,306
<TOTAL-LIABILITY-AND-EQUITY> 21,044
<SALES> 13,978
<TOTAL-REVENUES> 20,902
<CGS> 10,832
<TOTAL-COSTS> 18,995
<OTHER-EXPENSES> 3,825
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,358
<INCOME-PRETAX> (3,276)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,276)
<EPS-BASIC> (0.47)
<EPS-DILUTED> (0.47)
</TABLE>
