<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 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)
<TABLE>
<S> <C>
DELAWARE 75-2520896
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
6300 RIDGLEA PLACE, SUITE 724, FORT WORTH, TEXAS 76116
(Address of principal executive offices)
(817) 569-9305
(Registrant's telephone number)
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares of Common Stock outstanding as of September 11, 2000 was
7,209,445. The number of Series A Redeemable Common Stock Purchase Warrants
outstanding as of September 11, 2000 was 1,974,060. The number of Series B
Redeemable Common Stock Purchase Warrants outstanding as of September 11, 2000
was 1,380,000.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
PAWNMART, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
July 29, January 29,
2000 2000
----------- -----------
(Unaudited)
<S> <C> <C>
Assets (note 2 )
Current assets:
Cash and cash equivalents $ 737 $ 795
Accounts receivable 140 180
Pawn service charges receivable 710 710
Loans 6,759 6,758
Inventories, net 7,349 7,279
Prepaid expenses and other current assets 191 243
-------- --------
Total current assets 15,886 15,965
-------- --------
Property and equipment, net 3,244 3,347
Debt issuance costs, net 1,157 1,045
Other assets, net 664 687
-------- --------
Total assets $ 20,951 $ 21,044
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,332 $ 1,150
Current installments of notes payable -- 93
-------- --------
Total current liabilities 1,332 1,243
-------- --------
Long-term notes payable, net of current installments 18,089 15,923
-------- --------
Total liabilities 19,421 17,166
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 10,000,000 shares -- --
8% Convertible preferred stock, $6.00 par value; authorized 416,667
shares; 416,667 shares issued and outstanding (liquidation
preference $6.00 per share) 2,500 2,500
Common stock, $.01 par value; authorized 20,000,000 shares;
7,230,877 shares issued 72 72
Series A redeemable common stock purchase warrants, $0.125 par
value; 1,920,720 and 1,842,840 warrants issued and outstanding
at July 29, 2000 and January 29, 2000, respectively 240 231
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 60
Additional paid-in capital 21,954 21,954
Accumulated deficit (23,312) (20,955)
-------- --------
1,600 3,948
Less treasury stock, at cost; 21,432 common shares (70) (70)
-------- --------
Total stockholders' equity 1,530 3,878
Contingency (note 5 )
-------- --------
Total liabilities and stockholders' equity $ 20,951 $ 21,044
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
PAWNMART, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 4,683 $ 3,029 $ 9,439 $ 5,914
Pawn service charges 1,868 1,684 3,747 3,103
Other 80 61 157 104
-------- -------- -------- --------
Total revenues 6,631 4,774 13,343 9,121
Cost of sales 3,698 2,332 7,422 4,383
-------- -------- -------- --------
Gross profit 2,933 2,442 5,921 4,738
-------- -------- -------- --------
Expenses:
Store operating expenses 2,418 1,921 4,924 3,672
Corporate administrative expenses 806 791 1,639 1,479
Interest expense 582 314 1,091 511
Depreciation and amortization 267 190 524 392
-------- -------- -------- --------
Total expenses 4,073 3,216 8,178 6,054
-------- -------- -------- --------
Net loss (1,140) (774) (2,257) (1,316)
Preferred stock dividends 50 -- 100 --
-------- -------- -------- --------
Net loss to common
stockholders $ (1,190) $ (774) $ (2,357) $ (1,316)
======== ======== ======== ========
Loss per common share (note 3):
Basic $ (0.17) $ (0.10) $ (0.33) $ (0.18)
======== ======== ======== ========
Diluted $ (0.17) $ (0.10) $ (0.33) $ (0.18)
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
PAWNMART, INC. AND SUBSIDIARIES
Unaudited Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------
July 29, July 31,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,257) $ (1,316)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 524 392
Amortization of debt issuance costs 66 92
Amortization of debt discount 4 2
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable 40 188
Pawn service charges receivable -- (260)
Inventories, net (70) (1,833)
Prepaid expenses and other current assets 52 (77)
Other assets (4) 102
Accounts payable and accrued liabilities 182 (60)
-------- --------
Net cash used in operating activities (1,463) (2,770)
-------- --------
Cash flows from investing activities, net of effect of acquisitions:
Net increase in pawn loans (1) (1,972)
Purchases of property and equipment (393) (508)
Acquisitions of existing operations -- (1,068)
-------- --------
Net cash used in investing activities (394) (3,548)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of notes payable 7,221 10,696
Principal payments on notes payable (5,144) (3,318)
Payment of debt issuance costs (178) (712)
Preferred stock dividends paid (100) --
-------- --------
Net cash provided by financing activities 1,799 6,666
-------- --------
Net increase (decrease) in cash and cash equivalents (58) 348
Cash and cash equivalents at beginning of period 795 298
-------- --------
Cash and cash equivalents at end of period $ 737 $ 646
======== ========
Supplemental disclosures of cash flow information -
Cash paid for interest $ 1,012 $ 350
======== ========
</TABLE>
Noncash Financing Activities:
During the six months ended July 29, 2000 and July 31, 1999, the Company
issued 77,880 and 303,780, respectively, of Series A Warrants in connection with
the issuance of the 2004 Notes (see note 2). The Company has recorded a debt
discount of $9,700 and $37,000, respectively, representing the value of the
underlying Series A Warrants and is amortizing such amount into interest expense
over the life of the 2004 Notes.
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
PAWNMART, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
July 29, 2000 and July 31, 1999
(Unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim
financial information and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management,
all adjustments have been made that are necessary for a fair presentation
of the financial position and results of operations and cash flows as of
and for the periods presented. All such adjustments are of a normal
recurring nature. The results of operations for the three months and six
months ended July 29, 2000 are not necessarily indicative of the results
that may be expected for the entire fiscal year or any other interim
period.
The consolidated financial statements include the financial statements
of PawnMart, Inc. (the "Company") and its wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements should be read in
conjunction with the consolidated financial statements for the fiscal year
ended January 29, 2000 included in the Company's Form 10-K which has been
previously filed with the Securities and Exchange Commission.
(2) Notes Payable
Revolving Credit Facility-
The Company has a $15,000,000 revolving credit facility with Comerica
Bank (the "Credit Facility"). At July 29, 2000, $8,942,000 was outstanding
under the Credit Facility and an additional $109,000 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
10.25% at July 29, 2000, or (ii) the prevailing LIBOR rate plus 3.35%, and
matures on October 13, 2002. Amounts available under the Credit Facility
are limited to certain percentages of pawn loans, inventories, and pawn
service charges receivable. The Credit Facility is collateralized by
substantially all of 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 July 29,
2000. The terms of the Credit Facility also require 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.
Subordinated Debt -
On March 11, 1999, the Company commenced a public offering of up to
$10,000,000 in principal amount of 12% Subordinated Notes due December 31,
2004 (the "2004 Notes"). The 2004 Notes are being offered on a "best
efforts" basis by participating National Association of Securities Dealers,
Inc. broker-dealers ("NASD Broker-Dealers"). Interest on the 2004 Notes is
payable monthly commencing with the second full calendar month following
issuance. At the option of the Company, the 2004 Notes may be redeemed
prior to December 31, 2004 at stipulated redemption prices. The Company had
issued a total of $9,197,000 of the 2004 Notes as of July 29, 2000.
Subsequent to July 29, 2000, the Company sold additional 2004 Notes
totaling $728,000 through September 11, 2000.
In connection with the sale of the 2004 Notes, the Company has agreed
to issue Series A Warrants to participating NASD Broker-Dealers for the
purchase of up to 600,000 shares of the Company's common stock. As of July
29, 2000, 540,720 Series A Warrants had been granted in connection with the
sale of the 2004 Notes. The Company has recorded a debt discount of $66,000
representing the value of the Series A Warrants and is amortizing such
amount into interest expense over the life of the 2004 Notes.
5
<PAGE> 6
PAWNMART, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(3) Net Loss Per Common Share
Net loss per common share is calculated as required by FASB Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" (Statement
No. 128). Statement No. 128 requires dual presentation of basic and diluted
earnings per share and a reconciliation between the two amounts. Basic
earnings per share excludes dilution, and diluted earnings per share
reflects the potential dilution that would occur if securities to issue
common stock were exercised and converted into common stock. In loss
periods, dilutive common equivalent shares are excluded as the effect would
be antidilutive.
The following table presents a reconciliation between basic and
diluted weighted average common shares outstanding for the three months and
six months ended July 29, 2000 and July 31, 1999, respectively. Since the
effect of using the weighted average number of shares on a diluted basis
was antidilutive to the diluted loss per share calculation for the three
months and six months ended July 29, 2000 and July 31, 1999, diluted loss
per share was calculated using the same weighted average number of common
shares in the basic loss per share calculation.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------ ------------------
(In Thousands) July 29, July 31, July 29, July 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted average shares - basic 7,209 7,209 7,209 7,209
Shares attributable to stock options, warrants
and convertible securities -- -- -- --
----- ----- ----- -----
Weighted average shares - diluted 7,209 7,209 7,209 7,209
===== ===== ===== =====
</TABLE>
(4) Reclassifications
Certain amounts in the three months and six months period ended July
31, 1999 have been reclassified to conform with the presentation of amounts
in the three months and six months period ended July 29, 2000.
(5) Liquidity
The Company has suffered recurring losses from operations, negative
cash flows and is has been experiencing substantial difficulties in meeting
its obligations. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
Management of the Company is addressing this going concern issue and
the underlying liquidity problem by aggressively promoting sales of
merchandise in its stores and reducing excess inventory. Additionally,
various other alternatives are being evaluated, including selling certain
stores under a franchise arrangement or to other interested parties. The
Company has sold an additional $728,000 of its 2004 Notes since the period
ended July 29, 2000, as described above, and believes that the remaining
$75,000 available on its 2004 Notes offering will be sold shortly.
Additionally, the Company may continue to reduce inventory. The Company has
currently ceased the addition of new stores: however, to finance current
and future expenditures, the Company will need to issue additional equity
securities or incur additional debt. The Company may not be able to obtain
the additional required capital on satisfactory terms, if at all.
6
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements appearing in the following discussion that are not historical
facts are forward-looking statements ("forward-looking statements") within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, which are intended
to be covered by the safe harbors created by those sections. Such
forward-looking statements are necessarily estimates reflecting the best
judgment of the Company's management based upon current information and involve
known and unknown risks, uncertainties and other factors which may cause the
actual results, performance or achievements of the Company, or industry results,
to be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and other factors, include, but are not limited to, those set
forth and those appearing from time to time in filings made by the Company with
the Securities and Exchange Commission. These risks, uncertainties and other
factors should not be construed as exhaustive and the Company does not
undertake, and specifically disclaims any obligation, to update any
forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
In addition, the following discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and notes
thereto and other financial data included in the Company's Form 10-K for the
fiscal year ended January 29, 2000.
GENERAL
PawnMart, Inc. (the "Company") is a specialty finance and retail enterprise
principally engaged in establishing and operating stores that advance money
secured by the pledge of tangible personal property and sell pre-owned
merchandise to the value-conscious consumer. The Company generates income in two
ways: through collection of a monthly service charge from advancing money to
individuals based primarily upon the estimated resale value of pledged personal
property such as jewelry, consumer electronics, tools, musical instruments,
firearms, automobiles and other miscellaneous items and through profit realized
on the retail sale of the unredeemed or other purchased pre-owned merchandise.
The Company's long-term strategic objective is to implement a roll-out of
PAWNMART stores in order to capitalize upon growth opportunities afforded by the
highly fragmented pawnshop industry. Prior to March 1998 the Company owned and
operated 19 stores. The completion of our initial public offering in March 1998
enabled us to begin the implementation of our business strategy. During the
fiscal year ended January 30, 1999 ("Fiscal 1998"), we increased the total
stores in operation by 68 percent with the addition of 13 stores, and during the
fiscal year ended January 29, 2000 ("Fiscal 1999"), we increased the total
stores in operation by 44 percent with the addition of 14 stores for a total of
46 stores in operation at the 1999 fiscal year end. Of the 27 stores added
during the past two years, the Company has opened 18 new stores and acquired 9
existing stores. Our expansion during Fiscal 1998 and Fiscal 1999 was funded
with proceeds remaining from the initial public offering, borrowings under the
Credit Facility, the issuance of the 2004 Notes, and proceeds from the sale of
416,667 shares of 8% Convertible Preferred Stock on September 1, 1999. We have
not opened any additional stores during the period ended July 29, 2000.
The Company's recently revised expansion strategy is to primarily acquire
stores in selected regional and local markets meeting its 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
obtain financing to fund such growth, funds generated internally, and the
Company's ability to achieve a balance of continued store growth with improving
profitability. Although we have currently ceased our store expansion program due
to liquidity constraints, we have begun to address the underlying liquidity
concerns by aggressively promoting sales of merchandise in our stores and
reducing excess inventory through third party sales. Various other alternatives
are being evaluated, including selling certain stores under a franchise
arrangement or to other interested parties. To finance future expenditures, we
will need to issue additional equity securities or incur additional debt.
Management believes these actions, if successful, will address the liquidity
issues and allow a return toward our long-term strategy.
7
<PAGE> 8
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 automobile title loans. During the term of an automobile
title loan, the borrower is allowed to maintain possession of the collateral.
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 subsequent sales.
Operational changes made in September 1998 resulted in an increased
emphasis on the Company's lending business, the focus of which was to lend more
aggressively and increase store traffic. The implementation of this strategy
resulted in substantial increases in pawn service charges and total revenues,
gross profit dollars, and store contribution margin, particularly during the
first six months of fiscal 1999. Although the Company has experienced
significant improvements in aggregate gross profit dollars as a result of the
operational changes mentioned above, the Company's realized gross profit as a
percentage of merchandise sales has been subsequently reduced as a result of the
change in lending philosophy which has resulted in higher costs of merchandise
from defaulted pawn loans. As a result, the Company's gross profit as a
percentage of merchandise sales was 25.8 and 28.4 percent, respectively, for the
three months and six months ended July 29, 2000, down from 31.3 and 32.5
percent, respectively, during the comparable periods of the prior year.
Selected elements of the Company's unaudited consolidated statements of
operations are shown below for the three and six months ended July 29, 2000 and
July 31, 1999 as a percentage of total revenues. The following table, as well as
the discussion following, should be read in conjunction with the Company's
consolidated financial statements and notes thereto and other financial data
included in the Company's Form 10-K for the fiscal year ended January 29, 2000.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -------------------------
July 29, July 31, July 29, July 31,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Merchandise sales 70.6% 63.4% 70.7% 64.8%
Pawn service charges 28.2 35.3 28.1 34.0
Other income 1.2 1.3 1.2 1.2
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Cost of sales 55.8 48.9 55.6 48.0
----- ----- ----- -----
Gross profit 44.2 51.1 44.4 52.0
Store operating expenses 36.5 40.2 36.9 40.3
----- ----- ----- -----
Store contribution margin 7.7 10.9 7.5 11.7
Corporate administrative expenses 12.2 16.6 12.3 16.2
Interest expense 8.7 6.5 8.2 5.6
Depreciation and amortization 4.0 4.0 3.9 4.3
----- ----- ----- -----
Net loss (17.2)% (16.2)% (16.9)% (14.4)%
----- ----- ----- -----
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended July 29, 2000 Compared to Three Months Ended July 31, 1999
Total revenues increased 38.9% to $6,631,000 during the three months ended
July 29, 2000 (the "Three Month 2000 Period") as compared to $4,774,000 during
the three months ended July 31, 1999 (the "Three Month 1999 Period"). The
overall increase was attributable to a 25% increase in comparable store revenues
at the 37 stores open
8
<PAGE> 9
for 12 full months or more as of July 31, 2000 ("Comparable Stores") and
revenues from 9 stores added during the 12 months ended July 29, 2000 ("New
Stores").
Merchandise sales increased 54.6% to $4,683,000 during the Three Month 2000
Period from $3,029,000 during the Three Month 1999 Period due to a 32.7%
increase in merchandise sales from Comparable Stores and merchandise sales from
New Stores. Average inventory per store for Comparable Stores increased 27.8% to
$156,000 at July 29, 2000 from $122,000 at July 31, 1999.
Pawn service charges increased 10.9% to $1,868,000 during the Three Month
2000 Period from $1,684,000 during the Three Month 1999 Period due to an
increase of 10.0% in pawn service charges from Comparable Stores and pawn
service charges from New Stores.
Gross profit increased 20.1% to $2,933,000 during the Three Month 2000
Period from $2,442,000 during the Three Month 1999 Period primarily due to
$432,000 in gross profit generated from New Stores. Gross profit as a percentage
of total revenues declined to 44.2% during the Three Month 2000 Period from
51.1% during the Three Month 1999 Period primarily as a result of lower pawn
service charges as a percentage of total revenues during the Three Month 2000
Period as pawn loan growth normalized following the substantial growth in pawn
loans during the later part of Fiscal 1998 and, in particular, the first half of
Fiscal 1999 as discussed above, and to a lesser extent lower gross profit on
merchandise sales.
Store operating expenses increased 25.8% to $2,418,000 during the Three
Month 2000 Period from $1,921,000 during the Three Month 1999 Period primarily
due to expenses attributable to New Stores. On a Comparable Store basis, store
operating expenses were 34% of total revenues during the Three Month 2000 Period
compared to 41% of total revenues during the Three Month 1999 Period. The
overall decrease in Comparable Store operating expenses as a percent of total
revenues resulted from the Company's ability to leverage store operating
expenses due to increases in Comparable Store revenues.
Store contribution margin (defined as total store revenues less direct
operating expenses, which exclude corporate administrative expenses, interest
expense, and depreciation and amortization expense) decreased 1.0% to $515,000,
or 7.8% of total revenues, during the Three Month 2000 Period compared to
$521,000, or 10.9% of total revenues, during the Three Month 1999 Period
primarily due to the lower gross profit as a percentage of total revenues
discussed above and increased expenses associated with New Stores.
Corporate administrative expenses increased 1.9% to $806,000 during the
Three Month 2000 Period from $791,000 during the Three Month 1999 Period, but
were reduced to 12.2% of total revenues during the Three Month 2000 Period from
16.6% of total revenues during the Three Month 1999 Period due to leveraging
these costs over the larger base of stores in operation.
Interest expense increased to $582,000 during the Three Month 2000 Period
from $314,000 during the Three Month 1999 Period primarily due to increased
borrowings under the Credit Facility and the 2004 Notes.
Net loss to common stockholders during the Three Month 2000 Period was
$1,190,000, or $0.17 per basic and diluted share, compared to $774,000, or $0.10
per basic and diluted share, during the Three Month 1999 Period.
Six Months Ended July 29, 2000 Compared to Six Months Ended July 31, 1999
Total revenues increased 46.3% to $13,343,000 during the six months ended
July 29, 2000 (the "Six Month 2000 Period") as compared to $9,121,000 during the
six months ended July 31, 1999 (the "Six Month 1999 Period"). Comparable Stores
revenues increased 28% during the Six Month 2000 Period.
Merchandise sales increased 59.6% to $9,439,000 during the Six Month 2000
Period from $5,914,000 during the Six Month 1999 Period due to a 36.6% increase
in merchandise sales from Comparable Stores and merchandise sales from New
Stores.
9
<PAGE> 10
Pawn service charges increased 20.7% to $3,747,000 during the Six Month
2000 Period from $3,103,000 during the Six Month 1999 Period primarily due to a
16.4% increase in pawn service charges from Comparable Stores and pawn service
charges from New Stores.
Gross profit increased 25.0% to $5,921,000 during the Six Month 2000 Period
from $4,738,000 during the Six Month 1999 Period primarily due to a 16.8%
increase in gross profit from Comparable Stores and from New Store additions.
The increase in aggregate gross profit at Comparable Stores is primarily
attributable to increased pawn service charges. Gross profit as a percentage of
total revenues decreased to 44.4% during the Six Month 2000 Period from 52.0%
during the Six Month 1999 Period primarily as a result of lower pawn service
charges as a percentage of total revenues during the Three Month 2000 Period as
pawn loan growth normalized following the substantial growth in pawn loans
during the first six months of fiscal 1999 noted above, and to a lesser extent
lower gross profit on merchandise sales as discussed above.
Store operating expenses increased 34.1% to $4,924,000 during the Six Month
2000 Period from $3,672,000 during the Six Month 1999 Period primarily due to
expenses attributable to New Stores. Store operating expenses decreased as a
percentage of total revenues to 36.9% during the Six Month 2000 Period from
40.3% of total revenues during the Six Month 1999 Period primarily due to
increases in merchandise sales and pawn service charges in the Comparable
Stores.
Store contribution margin decreased 6.4% to $997,000, or 7.5% of total
revenues, during the Six Month 2000 Period compared to $1,066,000, or 11.7% of
total revenues, during the Six Month 1999 Period due to the lower gross profit
as a percentage of total revenues discussed above and increased expenses
associated with New Stores.
Corporate administrative expenses increased 10.8% to $1,639,000 during the
Six Month 2000 Period from $1,479,000 during the Six Month 1999 Period due to
increased personnel costs, but were decreased as a percentage of total revenues
to 12.3% during the Six Month 2000 Period from 16.2% during the Six Month 1999
Period primarily due to leveraging these costs over the larger base of stores in
operation.
Interest expense increased 113.5% to $1,091,000 during the Six Month 2000
Period from $511,000 during the Six Month 1999 Period as a result of increased
borrowings under the Credit Facility and the 2004 Notes to fund store expansion
and working capital requirements.
Net loss to common shareholders during the Six Month 2000 Period was
$2,357,000 or $0.33 per basic and diluted share, compared to $1,316,000 or $0.18
per basic and diluted share during the Six Month 1999 Period.
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, we received
net proceeds of approximately $5,583,000 from the completion of our initial
public offering. In connection with the completion of the initial public
offering, $9,520,000 in aggregate principal amount of the Company's 14%
convertible subordinated debentures were automatically converted into 2,380,000
outstanding shares of Common Stock and all classes of the Company's preferred
stock were automatically converted into an aggregate of 1,482,766 outstanding
shares of Common Stock. Additionally, the Company utilized $2,524,000 of the net
proceeds to repay certain notes payable.
On October 13, 1998, we entered into a $10 million revolving Credit
Facility. On June 27, 2000 we revised and extended the Credit Facility and
increased the total available credit line from $10 million to $15 million,
subject to available borrowing base. At July 29, 2000, $8,942,000 was
outstanding under the Credit Facility and an additional $109,000 was available
pursuant to the available borrowing base. The Credit Facility bears interest at
either (i) the prevailing prime rate plus 0.75%, which was 10.25% at July 29,
2000, or (ii) the prevailing LIBOR rate plus 3.35%, and matures on October 13,
2002. Amounts available under the Credit Facility are limited to certain
percentages of pawn loans, inventories, and pawn service charges receivable. The
Credit Facility is collateralized by substantially all our unencumbered assets.
Under the terms of the Credit Facility, we are required to maintain certain
financial ratios
10
<PAGE> 11
and comply with certain technical covenants. We were in compliance with these
requirements and covenants as of July 29, 2000. We are required to pay an annual
commitment fee of 1/2 of 1% on the average daily unused portion of the Credit
Facility commitment. We are prohibited from paying cash dividends or acquiring
treasury stock under the terms of the Credit Facility unless specifically
approved by Comerica Bank.
On March 11, 1999, we commenced a public offering of up to $10 million in
principal amount of the 2004 Notes. This is a "best efforts" offering by
licensed broker dealers who are members of the National Association of
Securities Dealers, Inc. The underwriters are not required to sell any specific
number or dollar amount of securities but will use their best efforts to sell
the securities offered. Interest on the Notes of 12% is payable monthly
commencing with the second full calendar month following issuance. At the option
of the Company, the 2004 Notes may be redeemed prior to December 31, 2004 at
stipulated redemption prices. The Company had issued a total of $9,197,000 of
the 2004 Notes as of July 29, 2000. Subsequent to July 29, 2000, the Company
sold additional 2004 Notes totaling $728,000 through September 11, 2000.
On September 1, 1999, we sold 416,667 shares of 8% Convertible Preferred
Stock, $6.00 par value per share for $2,500,000. The Preferred Stock bears
dividends at 8% per annum and is payable quarterly in cash. The 8% Preferred
Stock is not convertible into the Company's common stock until March 1, 2001.
From March 1, 2001 until August 31, 2002, the 8% Preferred Stock is convertible
at the option of the purchaser at the lesser of (i) 80% of the average closing
sales price of the Company's common stock for the preceding 25 trading days as
quoted on the NASDAQ market or (ii) $6.00 per share. After August 31, 2002, the
8% Preferred Stock is convertible at the option of the purchaser at 66 2/3% of
the average closing sales price of the Company's common stock for the preceding
25 trading days as quoted on the NASDAQ market. The Company may redeem the 8%
Preferred Stock, in whole or in part, prior to August 31, 2002 at 120% of the
par value of Preferred Stock then outstanding. After August 31, 2002, the
Company may redeem the 8% Preferred Stock, in whole or in part, at 100% of the
par value of the 8% Preferred Stock then outstanding. Each share of the 8%
Preferred Stock shall be entitled to one vote per share, voting together with
the holders of the Company's common stock, on all matters submitted to a vote of
stockholders. In connection with the sale of the 8% Preferred Stock, the Company
issued 312,500 warrants exercisable to purchase shares of the Company's common
stock through August 31, 2004 at $5.00 per share and 90,000 warrants exercisable
to purchase shares of the Company's common stock through August 31, 2004 at
$3.60 per share. The fair value of the Preferred Stock Warrants has been
recorded as a $60,000 reduction of additional paid-in capital.
At July 29, 2000, the Company's primary sources of liquidity were $737,000
in cash and cash equivalents, $710,000 in pawn service charges receivable,
$6,759,000 in pawn loans outstanding, $7,349,000 in inventories, and $109,000 of
available and unused funds under the Credit Facility. The Company had a current
ratio of approximately 12.1 to 1.0 and 12.8 to 1.0 at July 29, 2000 and January
29, 2000, respectively.
Our store expansion in the future will largely be dependent upon improving
our liquidity and raising additional capital through the issuance of equity
securities. We do not anticipate expanding the number of stores during the
remainder of Fiscal 2000. In the event we are unable to obtain financing
alternatives, our operational strategies could be modified and further store
expansion is likely to be significantly reduced or suspended. No assurance can
be made that we will be able to obtain additional financing.
Subsequent to the fiscal year ended January 29, 2000, in connection with
the filing of Amendment No. 4 to the 12% Subordinated Notes offering on August
18, 2000, a "going concern" explanatory paragraph was added to the independent
auditors report on our audit as of January 29, 2000. Such explanatory paragraph
indicated that the auditors question our ability to continue operation under the
current business conditions given our recurring losses, negative cash flows and
the substantial difficulties we have recently experienced in meeting our
financial obligations. To address the "going concern" issue and our underlying
liquidity difficulties, we have been aggressively promoting the sale of
merchandise in our stores and we have been reducing excess inventory through
sales to third parties. Since the quarter ended July 29, 2000, we have also sold
an additional $728,000 of the 2004 Notes through September 11, 2000 and
anticipate that the remaining $75,000 will be sold shortly. We plan to continue
reducing certain excess inventories in the near term. We will need to continue
to pursue alternative strategies to support our intermediate and long-term
liquidity needs. For example, we are currently exploring selling some of our
stores under a franchise arrangement. Under such a franchise arrangement, we
would sell certain stores to a third party and receive a
11
<PAGE> 12
management fee for continuing to provide management services and operational
support. We believe that we will need to raise additional capital in the near
future through the issuance of additional equity securities and we are currently
in discussions with outside parties concerning an additional equity offering.
There can be no assurance that we will be able to institute a franchise program
or raise money through the issuance of additional securities. In the event that
our liquidity concerns persist, we may need to make further substantial
reductions of inventories, which could further harm our future operating results
and cash flows. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
See "Factors that could affect future performance" below.
FACTORS THAT COULD AFFECT FUTURE PERFORMANCE
Lack Of Profitability, Expected Losses During Roll-Out Phase
From our inception on January 13, 1994, and continuing through July 29,
2000, we have experienced aggregate losses of $22,220,000. A key element of our
strategy consists of developing multiple PAWNMART(SM) stores meeting our desired
store size, configuration and site selection requirements in regional and local
markets. Until we reach a critical mass of mature stores, this strategy is
likely to result in continued net losses due to start-up losses associated with
the anticipated high number of new stores. Results of operations in the future
will be influenced by numerous factors including, among others, the number of
new stores opened, the number of stores acquired from others, our ability to
manage our growth and maintain the quality of our personnel, the ability to
manage our debt and our ability to implement our strategic plan.
Substantial Leverage; Ability to Service Debt
At July 29, 2000, we have debt totaling approximately $18.1 million. The
degree to which we are leveraged could have adverse consequences on us,
including the following: (i) substantial cash flow from our operations (cash
flow is currently negative primarily due to our expansion program and related
high degree of leverage) will be required for the payment of principal and
interest on our indebtedness and will not be available for other purposes; (ii)
our ability to obtain additional financing in the future, whether for capital
expenditures, further development, refinancings or otherwise, may be impaired;
(iii) we may be more leveraged than certain of our competitors, which may place
us at a competitive disadvantage; and (iv) our high degree of leverage makes us
more vulnerable to changes in economic conditions and may limit our ability to
withstand competitive pressures and capitalize on significant business
opportunities.
We expect to repay our indebtedness with either (i) cash flows from
operations, (ii) proceeds from the issuance of additional equity or debt
securities, (iii) refinancing, (iv) proceeds from the exercise, if at all, of
the Series A Warrants or (v) the sale of certain assets, including sales of
stores and sales associated with a potential franchise program. We will require
substantial cash flows to meet our interest payment obligations with respect to
our indebtedness. Our cash flow is dependent on our future performance, in
particular, our ability to develop positive cash flow, and is subject to
financial, economic and other factors, some of which are beyond our control.
Because the Credit Facility bears interest at a floating rate, we are sensitive
to any increase in prevailing interest rates. We believe that, based upon
anticipated levels of operations and the other actions taken by us (See
"Liquidity and Capital Resources"), we should be able to meet our debt service
obligations when due. If we are unable to generate such cash flow from
operations to satisfy our interest obligations, we may be required to refinance
all or a portion of such obligations, sell assets or repay such indebtedness
with proceeds from other capital transactions, such as the issuance of
additional equity. There can be no assurance that such refinancing or extension
will be available on reasonable terms or at all, that additional equity will be
issued, or that a sale of assets will occur. The inability to repay such
indebtedness could have a material adverse effect on us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no significant change in the Company's quantitative and
qualitative market risk exposure from January 29, 2000.
12
<PAGE> 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit
Number
----------
3.1 PawnMart, Inc.'s Restated and Amended Certificate of
Incorporation (1)
3.2 PawnMart, Inc.'s Second Amended and Restated Bylaws (1)
4.1 Specimen Common Stock Certificate (2)
4.2 Specimen Series A Warrant Certificate (2)
4.3 Specimen Series B Warrant Certificate (2)
4.4 Form of Warrant Agreement, dated as of March 20, 1998 between
PawnMart, Inc. and Continental Stock Transfer & Trust Company (2)
4.5 Form of National Association of Securities Dealers, Inc.
broker-dealer warrants (3)
4.6 Form of Amendment to Warrant Agreement, Dated as of March 20,
1998 Between PawnMart, Inc. and Continental Stock Transfer &
Trust Company (6)
4.7 Indenture, Dated as of March 15, 1999 Between PawnMart, Inc. and
Trust Management, Inc., as Trustee, Relating to PawnMart, Inc.'s
12% Subordinated Notes Due 2004 (6)
4.8 Form of 12% Subordinated Note Due 2004 (included as part of
Exhibit 4.7 hereto)
4.9 Form of Broker-Dealer Selling Agreement (6)
4.10 Form of Subscription Escrow Agreement dated March 15, 1999
Between PawnMart, Inc., Massie Capital, Ltd. and Norwest Bank
Texas, N.A. (7)
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. Upchurch, 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. Upchurch, 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. Upchurch, 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)
10.6 Form of Severance Agreement, dated June 1, 2000, between the
Company and each of Carson Thompson, Mike Record, Monty
Standifer, Randy Haden and Mike Musgrove (9)
27.1 Financial Data Schedule as of July 29, 2000 (Filed in EDGAR
version only) (10)
(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).
13
<PAGE> 14
(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 as an Exhibit to the registrant's Registration Statement on
Amendment No. 4 on Form S-1, filed on August 15, 2000.
(10) Filed herewith.
(b) REPORTS ON FORM 8-K -
No reports on Form 8-K were filed by the Company during the quarter ended
July 29, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAWNMART, INC.
<TABLE>
<S> <C> <C> <C>
By: /s/ Carson R. Thompson September 12, 2000 By: /s/ Monty R. Standifer September 12, 2000
---------------------- ------------------ ---------------------- ------------------
Carson R. Thompson Date Monty R. Standifer Date
Chief Executive Officer, Director Senior Vice President
and Chairman of the Board Chief Financial Officer
</TABLE>
14
<PAGE> 15
EXHIBIT INDEX
<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. Upchurch, 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. Upchurch, 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. Upchurch, 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)
10.6 Form of Severance Agreement, dated June 1, 2000, between the
Company and each of Carson Thompson, Mike Record, Monty
Standifer, Randy Haden and Mike Musgrove (9)
27.1 Financial Data Schedule as of July 29, 2000 (Filed in EDGAR
version only) (10)
</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 as an Exhibit to the registrant's Registration Statement on
Amendment No. 4 on Form S-1, filed on August 15, 2000.
(10) Filed herewith.
