FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 1996
Commission file number: 0-18291
U.S. PAWN, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0819941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7215 Lowell Boulevard
Westminster, CO 80030
(Address of principal executive offices)
(Zip Code)
(303) 657-3550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods 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
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value, 3,194,322 shares as of May 13, 1996.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. PAWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(amounts in thousands)
ASSETS
------
March December
31, 1996 31, 1995
--------- --------
CURRENT ASSETS:
Cash $ 413 $ 282
Service charges receivable 364 352
Pawn loans 2,749 2,704
Accounts receivable, net 25 35
Notes receivable-related parties 238 241
Inventory 1,468 1,394
Prepaid expenses and other 99 96
----- ------
Total current assets 5,356 5,104
PROPERTY AND EQUIPMENT, at cost, net 1,278 1,249
NOTES RECEIVABLE-RELATED PARTIES 69 69
INTANGIBLE ASSETS, net 280 135
OTHER ASSETS 29 19
------ ------
$7,012 $6,576
====== ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(amounts in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March December
31, 1996 31, 1995
-------- --------
CURRENT LIABILITIES:
Accounts payable $ 99 $ 32
Customer layaway deposits 38 41
Accrued expenses 136 149
Income taxes payable 140 81
Notes payable 839 887
Notes payable-related parties 429 419
Current portion of long-term debt 64 21
------ -----
Total current liabilities 1,745 1,630
LONG-TERM DEBT, less current portion 57 50
DEFERRED INCOME TAXES 111 131
------ ------
Total Liabilities 1,913 1,811
COMMITMENTS AND CONTINGENCIES:
MINORITY INTEREST 23 -
STOCKHOLDERS' EQUITY:
Redeemable preferred stock, 9.5%,
$10 par value, 1,000,000 authorized:
37,500 shares issued and outstanding 378 378
Common stock, no par value, 30,000,000
shares authorized; 3,162,322 shares
issued and outstanding 3,374 3,241
Additional paid-in capital 802 822
Retained earnings 522 324
----- ------
Total Stockholders' Equity 5,076 4,765
------ ------
$7,012 $6,576
====== ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except share data)
Three Months Ended
March 31,
-----------------------
1996 1995
------ ------
REVENUES:
Sales $1,426 $1,330
Pawn service charges 1,102 1,044
Other income 21 25
------ -----
Total Revenues 2,549 2,399
COST OF SALES AND EXPENSES:
Cost of sales 1,092 1,097
Operations 779 772
Administration 245 238
Interest 51 58
Depreciation and amortization 56 53
------ ------
Total Cost of Sales and Expenses 2,223 2,218
------ ------
INCOME FROM OPERATIONS BEFORE
INCOME TAXES 326 181
PROVISION FOR INCOME TAXES 116 58
------ ------
NET INCOME 210 123
DIVIDENDS ON PREFERRED STOCK (9) (9)
MINORITY INTEREST (3) -
------ ------
EARNINGS AVAILABLE FOR
COMMON STOCKHOLDERS 198 114
====== ======
EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ 0.06 $ 0.04
------ ------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING 3,220,651 3,023,437
========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
--------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 206 $ 124
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 56 53
Deferred income taxes (20) 58
Minority interest in subsidiary earnings 3 -
Changes in:
Service charges receivable (12) 2
Inventory, excluding forfeited loan collateral 760 819
Accounts receivable 11 66
Prepaid expenses and other (3) (14)
Accounts payable 67 28
Accrued expenses (13) 26
Income taxes payable 59 -
Customer layaway deposits (3) 4
------- ------
Net Cash Provided by Operating Activities 1,111 1,166
CASH FLOWS (TO) INVESTING ACTIVITIES:
Pawn loans made (2,475) (2,496)
Pawn loans repaid 1,686 1,559
Purchase of property and equipment (63) (506)
Payments on notes receivables-related parties 3 239
Decrease(increase) in other assets (53) -
Acquisition of subsidiary company (83) -
------- ------
Net cash (Used) by Investing Activities (985) (1,204)
CASH FLOWS FROM(TO) FINANCING ACTIVITIES:
Dividends paid (9) (9)
Issuance of notes payable and long-term debt 107 175
Payments on notes payable and long-term debt (210) (254)
Payments on capital lease obligations - (1)
Issuance of notes payable-related parties 7 5
Payments on notes payable-related parties (3) -
Purchase of redeemable common stock - (12)
Issuance of common stock, net of offering costs 113 64
------- -------
Net Cash (Used) by Financing Activities 5 (32)
------- -------
NET INCREASE (DECREASE) IN CASH 131 (70)
CASH, beginning of year 282 270
------- -------
Cash, end of year $ 413 $ 200
------- -------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 46 $ 57
======= =======
Income taxes $ 88 $ -
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of forfeited loan collateral to
inventory $ 834 $ 892
======= =======
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
U.S. PAWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (the "financial
statements") include the accounts of U.S. Pawn, Inc. and its 80%-owned
subsidiary, Advantage Pawn (the "Company"), from the effective acquisition date
of February 1, 1996. All material inter-company transactions have been
eliminated upon consolidation. The financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions for Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations, and cash flows of
the Company for the interim periods presented.
The results for the three months ended March 31, 1996 are not necessarily
indicative of the results of operations for the full year. These financial
statements and related footnotes should be read in conjunction with the
financial statements and footnotes thereto included in the Company's Forms
10-KSB filed with the Securities and Exchange Commission for the year ended
September 30, 1995 and the three month transition period ended December 31,
1995.
Certain amounts in the prior year's financial statements have been reclassified
for comparative purposes to conform with the current year. These
reclassification had no effect on results of operations or retained earnings as
previously reported.
NOTE 2 - ACQUISITION
Effective February 1, 1996, the Company acquired 80% of the outstanding common
stock of Advantage Pawn, a Wyoming corporation ("Advantage"). Under the
agreement the sellers received $82,500 in cash, 45,000 shares of the Company's
common stock valued at $2.333 per share in exchange for 80% of the outstanding
Advantage common stock and $22,500 in cash in exchange for an agreement not to
compete. The Company also agreed to guarantee $105,000 in liabilities of
Advantage.
6
<PAGE>
U.S. PAWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
NOTE 3 - INCOME TAXES
The provision for income taxes has been recorded based upon the Company's
estimate of the expected annualized effective tax rate for each interim period
presented. Deferred income taxes have been recorded in accordance with generally
accepted accounting principles under SFAS 109.
NOTE 4 - EARNING PER COMMON SHARE
Earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common stock and common stock
equivalents outstanding during each interim period presented. When common stock
equivalents have an anti-dilutive effect on earnings per share, they are
excluded from the calculation.
NOTE 5 - CONTINGENCIES
On February 26, 1996, a former officer and director of the Company, filed a
legal action alleging a breach of the terms of a certain stock registration
agreement between the former officer and director and the Company. The Company
and its legal counsel believe that the action is without merit, do not expect an
unfavorable result and intend to contest the action vigorously.
In addition, the Company is party to a number lawsuits arising in the normal
course of business. In the opinion of management, the resolution of these
matters will not have a material effect on the Company's financial position.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
U.S. Pawn, Inc. (the "Company") is one of four publicly traded pawnshop
operators in the United States. The Company operates pawnshops that lend money
on the security of pledged tangible personal property (a transaction commonly
referred to as a "pawn loan"), for which the Company receives a pawn service
charge to compensate it for the pawn loan. The pawn service charge is calculated
as a percentage of the pawn loan amount, in a manner similar to which interest
is charged on a loan, and has generally ranged from 120% to 240% annually. The
pledged property is held through the term of the pawn loan, which generally is
30 to 90 days, unless otherwise earlier paid or renewed. Generally, the customer
repays the pawn loan and accrued service charge in full, redeeming the pledged
property, or pays the accrued service charge and renews the pawn loan. In the
event the customer does not redeem the pledged property or renew the pawn loan,
the unredeemed collateral is forfeited to the Company and becomes inventory
available for sale in the pawnshop. The Company currently owns and operates
fourteen (14) pawnshops, of which twelve (12) are located Colorado and two (2)
are located in Wyoming.
Expansion of Operations
As an integral part of its business strategy, the Company intends to continue
concentrating multiple pawnshops in single markets in order to improve market
penetration, enhance name recognition and reinforce market programs. Consistent
with this philosophy, the Company added 2, 2, 2 and 3 stores to its operations
during Fiscal 1996, 1994, 1993 and 1992, respectively. On January 26, 1996, the
Company agreed to acquire 80% of the outstanding common stock of Advantage Pawn,
a Wyoming corporation, for total consideration of $187,500, payable $82,500 in
cash and $105,000 of common stock in the Company valued at the closing date. In
addition, the Company agreed to pay $22,500 in cash in exchange for a
non-compete agreement with the Advantage shareholders. The transaction closed on
March 16, 1996, at which time $82,500 in cash and 45,000 shares of the Company's
common stock valued at $2.333 per share were transferred to the Advantage
shareholders in exchange for 80% of the outstanding voting common shares of
Advantage Pawn. The Company also agreed to guarantee $105,000 in liabilities of
Advantage Pawn.
Profitability vs. Liquidity.
The profitability and liquidity of the Company is affected by the amount of the
Company's outstanding pawn loans, which in turn is affected in part by the
Company's pawn loan decisions. The Company is generally able to influence the
frequency of pawn loan redemptions and forfeitures of pawn loan collateral by
increasing or decreasing the amount loaned in relation to the estimated resale
value of the pledged property. A more conservative loan policy, i.e. smaller
loans in relation to the pledged property's estimated resale value, generally
results in fewer and smaller transactions being entered into, a decrease in the
Company's aggregate loan balance and a decrease in pawn service charge income.
However, smaller loans also tend to increase loan redemptions and improve the
Company's liquidity. A conservative loan policy also tends to decrease the cost
of merchandise inventory, thereby improving the margins possible through resale
of forfeited loan collateral. Conversely, a more aggressive loan policy which
provides for larger loans in relation to the estimated resale value of the
pledged property generally results in increased pawn service charge income, but
also tends to increase loan forfeitures, thereby increasing the quantity of
inventory on hand and, unless the Company is able to increase inventory turns,
reducing the Company's liquidity.
8
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 ("1996 Quarter") Compared to Three Months
Ended March 31, 1995 ("1995 Quarter")
Revenues
Total revenues for the 1996 Quarter increased by 6.3 % to $2,549,380 from
$2,399,466 for the 1995 Quarter. During the 1996 Quarter, same store operations
(twelve stores) generated revenues of $2,437,509 and stores acquired during the
1996 Quarter (two stores) contributed revenues of $111,871. The increase in
revenues reflects an improvement of 7.2% in merchandise sales to $1,425,799 from
$1,329,646, an improvement of 5.5% in pawn service charges to $1,101,652 from
$1,044,415, and a 16% decrease in other income to $21,929 from $25,405. As a
percentage of total revenues, merchandise sales increased to 56% from 55% and
pawn service charges decreased to 43% from 44% during the 1996 Quarter as
compared to the 1995 Quarter. The shift in the revenue mix is consistent with
the Company's renewed emphasis on better merchandising of for-sale inventory at
annualized inventory turns of 3.0 to 4.0 times per year. The Company expects
that merchandise sales will continue to comprise the majority of its total
revenues for the reasonably foreseeable future.
Merchandise Sales
During the 1996 Quarter, same store operations generated merchandise sales of
$1,350,784 and stores acquired during the 1996 Quarter posted merchandise sales
of $75,015. For the 1996 Quarter, the Company's annualized inventory turnover
rate was 3.1 times with a gross profit margin on sales of 23.4% as compared to
3.7 times and 17.5% for the 1995 Quarter. The increase in gross profit margin on
sales is due primarily to the Company's renewed emphasis on better merchandising
of for-sale inventory and compensation incentives for store managers and
customer service personnel to reach and/or exceed profitability goals set by
management. As a result, inventories have been evenly maintained at desired
levels which has allowed the Company to eliminate the practice of discounting
merchandise inventory to generate working capital during the first calendar
quarter.
9
<PAGE>
The Company expects its annualized inventory turnover rate to approximate 3.5
times and to produce gross margins on sales of more than 20% for the twelve
months ending December 31, 1996 (Fiscal 1996).
Pawn Service Charges
During the 1996 Quarter, same store operations generated pawn service charges of
$1,065,773 and stores acquired during the 1996 Quarter contributed pawn service
charges of $35,879. The Company's pawn loan balance outstanding increased by
$45,045 or 2% to $2,749,293 from $2,704,248 at December 31, 1995. The increase
in the pawn loan balance is due primarily to the acquisition completed during
the 1996 Quarter. Demand for new pawn loans during the 1996 Quarter decreased
slightly (0.8%) as compared to the 1995 Quarter due primarily to fewer pawn
loans written in January 1996 as compared to January 1995. The Company expects
the demand for pawn loans to remain strong for the remainder of Fiscal 1996.
The forfeiture rate for pawn loans (calculated as total current period new loans
plus previous period ending loan balance minus current period ending loan
balance in relationship to total forfeited amount during the period) decreased
to 34% for the 1996 Quarter from 36% as compared to the 1995 Quarter. The
Company's forfeiture rate is slightly higher than industry comparisons primarily
due to the Company's aggressive loan policy which provides for slightly higher
loan to value ratios than competing pawn shops in an effort to attract more pawn
customers. The Company plans to continue this loan strategy for the reasonably
foreseeable future and expects the forfeiture rate to approximate 35% for Fiscal
1996.
Total Cost of Sales and Expenses
Total cost of sales and expenses for the 1996 Quarter increased 0.2% to
$2,223,408 as compared to $2,218,204 for the 1995 Quarter. As a percentage of
total revenues, total cost of sales and expenses for the 1996 Quarter decreased
to 87% from 92% as compared to the 1995 Quarter. The decrease in total cost of
sales and expenses as a percentage of total revenues is comprised primarily of a
3% decrease in cost of sales and a 2% decrease in operating expenses.
Administration, interest and depreciation were relatively unchanged. The Company
will continue its policies designed to reduce, whenever possible, cost of sales
and expenses as a percentage of total revenues in the future.
Operating Expenses
Operating expenses increased during the 1996 Quarter by $6,240 or 0.8% to
$778,407 from $772,167 as compared to the 1995 Quarter. This nominal increase in
operating expenses is due primarily to little change in the number of stores in
operation during the quarters under comparison. However, as a percentage of
total revenues, operating expenses decreased to 42% for the 1996 Quarter as
compared to 46% for the 1995 Quarter. The number of employees increased to 92
from 84 late in the 1996 Quarter due to the acquisition completed during the
1996 Quarter.
10
<PAGE>
Administration
Administrative overhead increased during the 1996 Quarter by $7,334 or 0.3% to
$244,990 from $237,656 as compared to the 1995 Quarter. As a percentage of total
revenues, administrative overhead remained constant at 10%.
Other
Interest expense decreased for the 1996 Quarter due to the Company's ability to
reduce outstanding principal due on debt. Depreciation expense increased
slightly due to new equipment purchased to replace fully used older equipment.
Operating Results
While total revenues increased by 6.3% for the 1996 Quarter as compared to the
1995 Quarter, gross profit margin on sales increased to 23.4% from 17.5% and
total cost of sales and expenses remained steady. As a result, income from
operations before income taxes for the 1996 Quarter increased by 80% to $325,972
from $181,262 as compared to the 1995 Quarter. After accounting for the effects
of income taxes, net income for the 1996 Quarter increased 70% to $209,914 from
$123,259 as compared to the 1995 Quarter.
Earnings Per Share
Earnings per share for the 1996 Quarter equaled $0.06 as compared to $0.04 for
the 1995 Quarter. The weighted average number of shares and common share
equivalents outstanding increased by 7% in the 1996 Quarter to 3,220,651 from
3,023,437. The increase in the number of weighted average shares and common
share equivalents outstanding is primarily due to the issuance of common shares
in connection with the acquisition and additional common share equivalents due
to the increase in the average market price for the Company's stock during the
1996 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital increased by 5% to $3,647,760 at March 31, 1996 from $3,473,718
at December 31, 1995. Total assets increased during the 1996 Quarter by $435,907
mainly due to increases in cash, pawn loans, inventory and intangibles
associated with the acquisition completed during the 1996 Quarter. Total
shareholders' equity increased during the 1996 Quarter by $310,733 as a result
of profits, net of income taxes and preferred dividends, of $197,509 and net
common stock transactions of $113,224.
The Company's operations have been financed from funds generated from
operations, bank borrowing, private borrowing, and public offerings. During the
1996 Quarter, the Company raised sufficient capital to satisfy all capital
requirements.
During the 1996 Quarter, the Company maintained a bank line of credit totaling
$650,000. As of March 31, 1996, the Company had borrowed $223,431 under this
credit facility.
11
<PAGE>
The line of credit agreement is renewable on an annual basis and the agreement
expires on April 1, 1997.
The private borrowing which comprises $1,033,102 of the total liabilities are
due in 1996 and 1997 and there is no indication that these notes will not be
renewed.
The Company plans to continue expanding its operating base with acquisitions of
existing pawn companies, but will review potential start-up locations that may
become available. The Company expects to fund this expansion and meet its
on-going working capital needs with internally generated funds, debt or equity
offerings if needed and additional lines of credit. There can be no assurance
however, that such debt or equity offerings and lines of credit will be
available to the Company.
The Company has experienced that new start-up stores generally result in
operating losses during the first three to twelve months of operations.
Leasehold improvements and equipment costs for new stores have ranged from
approximately $75,000 to $100,000 per store. Acquisition of existing pawn
companies generally result in immediate increases in operating income. However,
acquisitions also generally result in an increase in intangibles due to purchase
prices which may be in excess of the value of assets acquired. Such intangibles
are then amortized to expense over their estimated useful lives.
Inflation
The Company does not believe that inflation has had a material effect on the
loans made or unredeemed goods sold by the Company or on its results of
operations.
Seasonality
The Company's loan demand and sales follow slight seasonal trends, with loan
demand decreasing during the first calendar quarter and sales increasing during
the fourth calendar quarter.
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings
On February 26, 1996, a former officer and director of the Company filed a legal
action alleging a breach of the terms of a certain stock registration agreement
between the former officer and director and the Company. The Company and its
legal counsel believe that the action is without merit, do not expect an
unfavorable result and intend to contest the action vigorously.
ITEM 2. Changes in securities
None.
12
<PAGE>
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
Exhibits: none.
Reports on Form 8-K: During the three months covered by this report, the Company
filed one report on Form 8-K to report the acquisition of 80% of the outstanding
common shares of Advantage Pawn, a Wyoming corporation.
13
<PAGE>
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 thereto duly authorized.
Date: May 14 , 1996 U.S. PAWN, INC.
---- ----------------------
( Registrant)
/S/ MELVIN WEDGLE
------------------------------------
Melvin Wedgle
Chief Executive Officer
/S/ CHARLES C. VAN GUNDY
------------------------------------
Charles C. Van Gundy
Chief Financial Officer
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 413
<SECURITIES> 0
<RECEIVABLES> 3,404
<ALLOWANCES> (28)
<INVENTORY> 1,468
<CURRENT-ASSETS> 5,356
<PP&E> 2,289
<DEPRECIATION> (1,011)
<TOTAL-ASSETS> 7,012
<CURRENT-LIABILITIES> 1,745
<BONDS> 0
0
378
<COMMON> 3,374
<OTHER-SE> 1,324
<TOTAL-LIABILITY-AND-EQUITY> 7,012
<SALES> 1,426
<TOTAL-REVENUES> 2,549
<CGS> 1,092
<TOTAL-COSTS> 2,172
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51
<INCOME-PRETAX> 326
<INCOME-TAX> 116
<INCOME-CONTINUING> 210
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 210
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
