<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 October 28, 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) has 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 December 4, 2000 was
2,403,148. The number of Series A Redeemable Common Stock Purchase Warrants
outstanding as of December 4, 2000 was 1,974,060. The number of Series B
Redeemable Common Stock Purchase Warrants outstanding as of December 4, 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>
October 28, January 29,
2000 2000
------------- -------------
<S> <C> <C>
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 374 $ 795
Accounts receivable 146 180
Pawn service charges receivable 689 710
Loans 6,569 6,758
Inventories, net 6,953 7,279
Prepaid expenses and other current assets 207 243
------------- -------------
Total current assets 14,938 15,965
------------- -------------
Property and equipment, net 3,056 3,347
Debt issuance costs, net 1,120 1,045
Other assets, net 731 687
------------- -------------
Total assets $ 19,845 $ 21,044
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 1,037 $ 1,150
Notes payable - bank (note 2 ) 8,610 93
------------- -------------
Total current liabilities 9,647 1,243
------------- -------------
Long-term notes payable (note 2) 9,898 15,923
------------- -------------
Total liabilities 19,545 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;
2,410,292 shares issued 24 24
Series A redeemable common stock purchase warrants, $0.125 par
value; 1,975,140 and 1,842,840 warrants issued and outstanding
at October 28, 2000 and January 29, 2000, respectively (note 2) 247 231
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 22,002 22,002
Accumulated deficit (24,549) (20,955)
------------- -------------
370 3,948
Less treasury stock, at cost; 7,144 common shares (70) (70)
------------- -------------
Total stockholders' equity 300 3,878
------------- -------------
Total liabilities and stockholders' equity $ 19,845 $ 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 Nine Months Ended
---------------------------- ----------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 5,093 $ 3,371 $ 14,532 $ 9,285
Pawn service charges 1,899 1,807 5,646 4,910
Other 82 49 239 153
------------ ------------ ------------ ------------
Total revenues 7,074 5,227 20,417 14,348
Cost of sales 4,281 2,611 11,703 6,994
------------ ------------ ------------ ------------
Gross profit 2,793 2,616 8,714 7,354
------------ ------------ ------------ ------------
Expenses:
Store operating expenses 2,459 2,112 7,383 5,784
Corporate administrative expenses 660 757 2,299 2,236
Interest expense 597 382 1,688 893
Depreciation and amortization 264 213 788 605
------------ ------------ ------------ ------------
Total expenses 3,980 3,464 12,158 9,518
------------ ------------ ------------ ------------
Net loss (1,187) (848) (3,444) (2,164)
Preferred stock dividends 50 33 150 33
------------ ------------ ------------ ------------
Net loss to common
stockholders $ (1,237) $ (881) $ (3,594) $ (2,197)
============ ============ ============ ============
Loss per common share (note 4):
Basic $ (0.51) $ (0.37) $ (1.50) $ (0.91)
============ ============ ============ ============
Diluted $ (0.51) $ (0.37) $ (1.50) $ (0.91)
============ ============ ============ ============
</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>
Nine Months Ended
------------------------------
October 28, October 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,444) $ (2,164)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 788 605
Amortization of debt issuance costs 124 127
Amortization of debt discount 4 4
Changes in operating assets and liabilities:
Accounts receivable 34 (38)
Pawn service charges receivable 21 (308)
Inventories, net 326 (3,925)
Prepaid expenses and other current assets 36 (50)
Other assets (44) (328)
Accounts payable and accrued liabilities (113) 21
------------- -------------
Net cash used in operating activities (2,268) (6,056)
------------- -------------
Cash flows from investing activities:
Net (increase) decrease in pawn loans 189 (2,407)
Purchases of property and equipment (497) (1,073)
------------- -------------
Net cash used in investing activities (308) (3,480)
------------- -------------
Cash flows from financing activities:
Proceeds from issuance of notes payable 9,391 15,476
Principal payments on notes payable (6,887) (6,870)
Net proceeds from issuance of preferred stock -- 2,272
Payment of debt issuance costs (199) (970)
Preferred stock dividends paid (150) (33)
------------- -------------
Net cash provided by financing activities 2,155 9,875
------------- -------------
Net increase (decrease) in cash and cash equivalents (421) 339
Cash and cash equivalents at beginning of period 795 298
------------- -------------
Cash and cash equivalents at end of period $ 374 $ 637
============= =============
Supplemental disclosures of cash flow information -
Cash paid for interest $ 1,445 $ 681
============= =============
</TABLE>
Noncash Financing Activities:
During the nine months ended October 28, 2000 and October 30, 1999, the
Company issued 132,300 and 402,420, 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 $16,000 and $49,000, 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
October 28, 2000 and October 30, 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, except for the
reclassification of the revolving credit facility to short-term (see
below). The results of operations for the three and nine months ended
October 28, 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 October 28, 2000, $8,610,000
was outstanding under the Credit Facility and an additional $280,000
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 October 28, 2000, or (ii) the
prevailing LIBOR rate plus 3.35%, and matures on October 13, 2002.
Amounts available under the Credit Facility are limited to certain
percentages of pawn loans, inventories, and pawn service charges
receivable. The Credit Facility is collateralized by substantially all
of 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 is currently not in compliance with a
covenant which requires the Company to maintain a certain aggregate
store contribution as defined in the Credit Facility for store
locations which have been open for twelve months or more. A waiver or
amendment of this covenant is being discussed with Comerica Bank. As a
result of the noncompliance, all of the amounts outstanding at October
28, 2000 with Comerica Bank are classified as short-term.
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 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 were offered on a
"best efforts" basis by participating National Association of
Securities Dealers, Inc. broker-dealers ("NASD Broker-Dealers"). The
2004 Notes offering ended on October 29, 2000, and the Company had
issued a total of $9,950,000 of the 2004 Notes as of October 28, 2000
and at the termination of the offering. 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.
In connection with the sale of the 2004 Notes, the Company has
granted Series A Warrants to participating NASD Broker-Dealers for the
purchase of 540,720 shares of the Company's common stock as of October
28, 2000. 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 (Continued)
<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
Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (Statement No. 128).
Statement No. 128 requires a 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
and nine months ended October 28, 2000 and October 30, 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 and nine months ended October 28, 2000
and October 30, 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 Nine Months Ended
----------------------------- -----------------------------
(In Thousands) October 28, October 30, October 28, October 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted average shares - basic 2,403 2,403 2,403 2,403
Shares attributable to stock options, warrants
and convertible securities -- -- -- --
------------- ------------- ------------- -------------
Weighted average shares - diluted 2,403 2,403 2,403 2,403
============= ============= ============= =============
</TABLE>
(4) Liquidity
The Company has suffered recurring losses from operations,
negative cash flows and 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.
Certain corporate administrative expenses have been reduced and the
addition of new stores has ceased. Further reductions in corporate
overhead are being evaluated, in addition to various other alternatives
including the sale of certain stores to other parties, or closing
certain stores that may not reach the Company's profitability goals in
the near term. 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.
The Company is currently not in compliance with a covenant in
its Credit Facility as discussed in Note 2 above, and with the
requirements for continued listing of its common stock on the Nasdaq
SmallCap Market.
(6) Reverse Stock Split
On October 27, 2000, the shareholders of the Company approved
a reverse one-for-three common stock split. All share and per share
common stock amounts have been restated to reflect this reverse stock
split, as well as exercise prices and conversion rates on warrants and
options.
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.
On October 27, 2000, the shareholders of the Company approved a reverse
one- for-three common stock split. All share and per share common stock amounts
have been restated to reflect this reverse stock split, as well as exercise
prices and conversion rates on warrants and options.
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,
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 rollout
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 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 nine month period ended October 28,
2000; however, one store was closed on October 31, 2000 upon the expiration of
its lease. The Company had 45 stores in operation at December 4, 2000. We have
ceased the expansion of new stores due to our current liquidity constraints (See
Liquidity and Capital Resources).
The Company is not currently in compliance with all of the requirements
for continued listing of its common stock on the Nasdaq SmallCap Market. Our
current tangible net worth is below the minimum requirement of $2 million and if
we are not successful in raising additional equity through the issuance of new
equity securities, the sale of certain assets, or the potential exchange of our
12% Subordinated Notes Due 2004, we may have our common stock de-listed by
Nasdaq. Additionally, Nasdaq has notified the Company that its Class A and Class
B Warrants have failed to maintain a minimum of two active market makers, and
that the Company is in violation of its rules for continued listing of these
warrants. If the Company is unable to demonstrate compliance with this rule for
10 consecutive trading days prior to January 3, 2001, then our Class A and Class
B Warrants will be de-listed.
7
<PAGE> 8
OPERATIONS
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 available for subsequent sale in our stores.
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 reduced as a result of the change in
lending philosophy that has resulted in higher costs of merchandise from
defaulted pawn loans. During the three months ended October 28, 2000, we have
been aggressively promoting sales of merchandise in our stores and selling
excess inventory that was previously planned for additional new stores, to
reduce our overall inventories and improve liquidity. As a result, the Company's
gross profit as a percentage of merchandise sales was 18.7 and 20.5 percent,
respectively, for the three months and nine months ended October 28, 2000, down
from 22.6 and 24.7 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 nine months ended October 28, 2000
and October 30, 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 Nine Months Ended
------------------------------- -------------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Merchandise sales 72.0% 63.4 % 71.2% 64.7 %
Pawn service charges 26.8 34.6 27.7 34.2
Other income 1.2 .9 1.1 1.1
------------- ------------- ------------- -------------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales 60.5 50.0 57.3 48.7
------------- ------------- ------------- -------------
Gross profit 39.5 50.0 42.7 51.3
Store operating expenses 34.8 40.4 36.1 40.3
------------- ------------- ------------- -------------
Store contribution margin 4.7 9.6 6.6 11.0
Corporate administrative expenses 9.3 14.5 11.3 15.6
Interest expense 8.4 7.3 8.3 6.2
Depreciation and amortization 3.8 4.0 3.9 4.2
------------- ------------- ------------- -------------
Net loss (16.8)% (16.2)% (16.9)% (15.0)%
============= ============= ============= =============
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended October 28, 2000 Compared to Three Months Ended October 30,
1999
Total revenues increased 35.3% to $7,074,000 during the three months
ended October 28, 2000 (the "Three Month 2000 Period") from $5,227,000 during
the three months ended October 30, 1999 (the "Three Month 1999 Period"). The
overall increase was primarily attributable to a 10% increase in comparable
store revenues at the 40
8
<PAGE> 9
stores open for 12 full months or more as of October 28, 2000 ("Comparable
Stores") and revenues from the 6 stores added during the last three months of
the fiscal year ended January 29, 2000 ("New Stores"). In addition, the Company
sold certain excess inventories totaling $732,000 as discussed below.
Merchandise sales increased 51.1% to $5,093,000 during the Three Month
2000 Period from $3,371,000 during the Three Month 1999 Period due to a 14%
increase in merchandise sales from Comparable Stores and sales in New Stores. In
addition, the Company sold certain excess inventories to third parties totaling
approximately $732,000. Inventories had been accumulated for continued new store
expansion during the current fiscal year. Further store openings have now ceased
primarily due to liquidity constraints, and we have been aggressively reducing
inventories to improve liquidity and bring overall inventory levels in line with
the current number of stores in operation. Average inventory per store decreased
to $151,000 at October 28, 2000 from $173,000 at October 30, 1998.
Pawn service charges increased 5.1% to $1,899,000 during the Three
Month 2000 Period from $1,807,000 during the Three Month 1999 Period due to an
increase of 1% in pawn services charges from Comparable Stores and pawn service
charges from New Stores.
Gross profit increased 6.8% to $2,793,000 during the Three Month 2000
Period from $2,616,000 during the Three Month 1999 Period primarily due to
$200,000 in gross profit generated from New Stores. Gross profit as a percentage
of total revenues declined to 39.5% of total revenues during the Three Month
2000 Period from 50.0% of total revenues during the Three Month 1999 Period as a
result of increased sales promotional activities in our stores and the sales of
excess inventories totaling $732,000 at the approximate cost of such inventory.
Store operating expenses increased 16.4% to $2,459,000 during the Three
Month 2000 Period from $2,112,000 during the Three Month 1999 Period primarily
due to expenses attributable to New Stores. On a Comparable Store basis, store
operating expenses declined to 37% of total revenues during the Three Month 2000
Period compared to 40% 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 our ability to leverage store operating expenses due to
the 10% increase 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 to $334,000, or
4.7% of total revenues, during the Three Month 2000 Period compared to $504,000,
or 9.6% of total revenues, during the Three Month 1999 Period. The decrease is
primarily due to the lower gross profit as discussed above. Store contribution
margin in the Comparable Stores decreased to $446,000, or 7.8% of total
revenues, during the Three Month 2000 Period compared to $471,000, or 9.0% of
total revenues, during the Three Month 1999 Period.
Corporate administrative expenses decreased 12.8% to $660,000 or 9.3%
of total revenues during the Three Month 2000 Period from $757,000 or 14.5% of
total revenues during the Three Month 1999 Period primarily due to reductions in
personnel and related expenses at the corporate offices.
Interest expense increased to $597,000 during the Three Month 2000
Period from $382,000 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
$1,237,000, or $0.51 per basic and diluted share, compared to $881,000, or $0.37
per basic and diluted share, during the Three Month 1999 Period.
Nine Months Ended October 28, 2000 Compared to Nine Months Ended October 30,
1999
Total revenues increased 42.3% to $20,417,000 during the nine months
ended October 28, 2000 (the "Nine Month 2000 Period") from $14,348,000 during
the nine months ended October 30, 1999 (the "Nine Month 1999 Period"). The
overall increase was primarily attributable to a 19% increase in revenues from
Comparable Stores and revenues from New Stores.
Merchandise sales increased 56.5% to $14,532,000 during the Nine Month
2000 Period from $9,285,000 during the Nine Month 1999 Period primarily due to a
26.6% increase in merchandise sales from Comparable Stores and merchandise sales
from New Stores. In addition, the Company sold certain excess inventories to
third parties totaling $732,000 during the Three Month 2000 Period.
9
<PAGE> 10
Pawn service charges increased 15.0% to $5,646,000 during the Nine
Month 2000 Period from $4,910,000 during the Nine Month 1999 Period primarily
due to a 9.1% increase in pawn service charges from Comparable Stores and pawn
service charges from New Stores.
Gross profit increased 18.5% to $8,714,000 during the Nine Month 2000
Period from $7,354,000 during the Nine Month 1999 Period primarily due to a 6.1%
increase in gross profit from Comparable Stores and from New Store additions.
The increase in gross profit at Comparable Stores is primarily attributable to
increased pawn service charges. Gross profit as a percentage of total revenues
decreased to 42.7% during the Nine Month 2000 Period from 51.3% of total
revenues during the Nine Month 1999 Period primarily as a result of the sales
promotional and inventory reduction activities during the Three Month 2000
Period discussed above and the lower pawn service charges as a percentage of
total revenues during the first six months of Fiscal 2000 as pawn loan growth
normalized following the substantial growth in pawn loans during the first six
months of Fiscal 1999.
Store operating expenses increased 27.6% to $7,383,000 during the Nine
Month 2000 Period from $5,784,000 during the Nine Month 1999 Period primarily
due to expenses attributable to New Stores. On a Comparable Store basis, store
operating expenses declined to 35.5% of total revenues during the Nine Month
2000 Period compared to 40.2% of total revenues during the Nine Month 1999
Period. The overall decrease in Comparable Store operating expenses as a percent
of total revenues resulted from our ability to leverage store operating expenses
due to the increases in Comparable Store revenues.
Store contribution margin decreased to $1,331,000, or 6.5% of total
revenues, during the Nine Month 2000 Period compared to $1,570,000, or 10.9% of
total revenues, during the Nine Month 1999 Period primarily due to losses in New
Stores that have not yet matured to a profitable level. Store contribution
margin in the Comparable Stores increased to $1,816,000, or 10.7% of total
revenues during the Nine Month 2000 Period compared to $1,538,000, or 10.8% of
total revenues during the Nine Month 1999 Period.
Corporate administrative expenses increased 2.8% to $2,299,000 during
the Nine Month 2000 Period from $2,236,000 during the Nine Month 1999 Period,
but decreased as a percentage of total revenues to 11.2% during the Nine Month
2000 Period from 15.6% during the Nine Month 1999 Period primarily due to
leveraging these costs over the larger base of stores in operation.
Interest expense increased 89.0% to $1,688,000 during the Nine Month
2000 Period from $893,000 during the Nine Month 1999 Period as a result of
increased borrowings under the Credit Facility and the 2004 Notes to fund stores
expansion and working capital requirements.
Net loss to common stockholders during the Nine Month 2000 Period was
$3,594,000, or $1.50 per basic and diluted share, compared to $2,197,000, or
$0.91 per basic and diluted share, during the Nine 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, 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 793,333
outstanding shares of Common Stock and all classes of the Company's preferred
stock were automatically converted into an aggregate of 494,255 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. 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 October 28, 2000, $8,610,000 was
outstanding under the Credit Facility and an additional $280,000 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 October 28, 2000, or (ii) the prevailing LIBOR rate plus 3.35%, and
matures on October 13, 2002. Amounts available under the Credit Facility are
limited to certain percentages of pawn loans, inventories, and pawn service
charges receivable. The Credit Facility is collateralized by substantially all
of the unencumbered assets of the Company. Under the terms of the Credit
Facility,
10
<PAGE> 11
the Company is required to maintain certain financial ratios and comply with
certain technical covenants. The Company is currently not in compliance with a
covenant that requires the Company to maintain a certain aggregate store
contribution as defined in the Credit Facility for store locations, which have
been open for twelve months or more. As a result of this noncompliance, all of
the amounts outstanding at October 28, 2000 with Comerica Bank are classified as
short-term. A waiver or amendment of this covenant is being discussed with
Comerica Bank. While management does not believe it likely, Comerica Bank could
accelerate repayment of borrowings outstanding under the Credit Facility if a
waiver or amendment cannot be satisfactorily agreed.
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, the Company commenced a public offering of up to $10
million in principal amount of the 2004 Notes. The 2004 Notes were offered on a
"best efforts" basis by participating NASD Broker-Dealers. The 2004 Notes
offering ended on October 29, 2000 and we had issued a total of $9,950,000 of
the 2004 Notes as of that date. Interest on the 2004 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.
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 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) $18.00 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 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 8%
Preferred Stock, the Company issued 312,500 warrants exercisable to purchase
shares of the Company's common stock through August 31, 2004 at $15.00 per share
and 90,000 warrants exercisable to purchase shares of the Company's common stock
through August 31, 2004 at $10.80 per share.
At October 28, 2000, the Company's primary sources of liquidity were
$374,000 in cash and cash equivalents, $689,000 in pawn service charges
receivable, $6,569,000 in pawn loans outstanding, $6,953,000 in inventories, and
$280,000 of available and unused funds under the Company's Credit Facility. Net
cash used in operating activities was $2,268,000 during the Nine Month 2000
Period and $6,056,000 during the Nine Month 1999 Period.
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 have not opened any additional stores during the nine
months period ended October 28, 2000. One store was closed on October 31, 2000
upon the expiration of its lease and its business was consolidated with another
nearby location as previously planned. We have ceased the expansion of new
stores due to our current liquidity constraints. In the event we are unable to
obtain financing alternatives, our operational strategies could be modified and
further store expansion would not occur. 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 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 issued an additional $956,000 of our 2004 Notes. We plan to
continue reducing certain excess inventories in the near term. We will need to
continue to pursue alternative strategies to support our short-term and
long-term liquidity needs. We believe that we will need to raise additional
capital in the near future
11
<PAGE> 12
through the issuance of additional equity securities. There can be no assurance
that we will be able to 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, sell or close certain stores
on terms which could be less than otherwise desirable by the Company, all of
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 October
28, 2000, we have experienced aggregate losses of approximately $23,557,000. 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 October 28, 2000, we have debt totaling approximately $18.5 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/or (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 the sale of
stores. 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 successful
implementation of other actions taken or proposed to be 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 - At a
special meeting of shareholders held on October 27, 2000, a
reverse stock split of the Company's common stock was approved
whereby holders of record on September 28, 2000 will receive one
post-split share of common stock for each three pre-split shares
of common stock held on that date. All share and per share amounts
in this Form 10Q have been restated to give effect to this reverse
stock split.
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 (10)
13
<PAGE> 14
27.1 Financial Data Schedule as of October 28, 2000 (Filed in EDGAR
version only) (9)
----------
(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.
(10) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 4 on Form S-1 on August 15, 2000.
(b) REPORTS ON FORM 8-K -
No reports on Form 8-K were filed by the Company during the quarter
ended October 28, 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 December 12, 2000 By: /s/ Monty R. Standifer December 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
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 PawnMart, Inc.'s Restated and Amended Certificate of
Incorporation(1)
3.2 PawnMart, Inc.'s Second Amended and Restated Bylaws(1)
4.1 Specimen Common Stock Certificate(2)
4.2 Specimen Series A Warrant Certificate(2)
4.3 Specimen Series B Warrant Certificate(2)
4.4 Form of Warrant Agreement, dated as of March 20, 1998 between
PawnMart, Inc. and Continental Stock Transfer & Trust Company(2)
4.5 Form of National Association of Securities Dealers, Inc.
broker-dealer warrants(3)
4.6 Form of Amendment to Warrant Agreement, Dated as of March 20,
1998 Between PawnMart, Inc. and Continental Stock Transfer &
Trust Company(6)
4.7 Indenture, Dated as of March 15, 1999 Between PawnMart, Inc.
and Trust Management, Inc., as Trustee, Relating to PawnMart,
Inc.'s 12% Subordinated Notes Due 2004(6)
4.8 Form of 12% Subordinated Note Due 2004 (included as part of
Exhibit 4.7 hereto)
4.9 Form of Broker-Dealer Selling Agreement(6)
4.10 Form of Subscription Escrow Agreement dated March 15, 1999
Between PawnMart, Inc., Massie Capital, Ltd. and Norwest Bank
Texas, N.A.(7)
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(10)
27.1 Financial Data Schedule as of October 28, 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.
(10) Filed as an Exhibit to the registrant's Registration Statement on
Amendment No. 4 on Form S-1 on August 15, 2000.
