SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 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 Identification
incorporation or organization) Number)
7215 Lowell Boulevard
Westminster, Colorado 80030
- --------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 657-3550
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
Indicated 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 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
----- -------
As of March 20, 1997, 3,899,114 shares of the Registrant's no par value common
stock were outstanding and the aggregate market value of the shares held by
non-affiliates was approximately $12,000,000.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
<PAGE>
PART I
ITEM 1. BUSINESS
Introduction
U.S. Pawn, Inc. (the "Company") was organized as a Colorado corporation on
March 18, 1980. As of December 31, 1996, the Company was one of four publicly
traded pawn shop operators in the United States, and it owned and operated
eighteen (18) pawn shops in Colorado (12), Wyoming (4) and Nevada (2). The
Company's principal offices are located at 7215 Lowell Boulevard, Westminster,
Colorado 80030, and its telephone number is (303) 657-3550. As used herein, the
term "Company" includes U.S. Pawn, Inc. and its subsidiaries.
Except for the historical information contained herein, certain matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks are detailed
from time to time in the Company's periodic reports filed with the Securities
and Exchange Commission. These forward-looking statements speak only as of the
date hereof. The Company disclaims any intent or obligation to update these
forward-looking statements.
General
The Company is engaged in acquiring, establishing and operating pawn shops
that lend money on the security of pledged tangible personal property, a
transaction commonly referred to as a "pawn loan". Pawn shops provide a
convenient source of consumer loans and a ready market for the resale of
previously-owned merchandise acquired by the Company when customers do not repay
the loan. The Company receives a pawn service charge to compensate it for the
loan. The pawn service charge is calculated as a percentage of the pawn loan
amount based on the size and term of the loan, in a manner similar to which
interest is charged on a loan, and has generally ranged from 96% to 240%
annually, as permitted by state laws and local ordinances. The pledged property
is held through the term of the pawn loan contract, which generally is 30 to 120
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 pawn shop.
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For the fiscal year ended September 30, 1995 ("Fiscal 1995"), the Company
realized an average pawn service charge equal to 161% of pawn loans outstanding.
For the three months ended December 31, 1995 (the "Transition Period"), the
Company realized an annualized average pawn service charge equal to 158% of pawn
loans outstanding. For the twelve months ended December 31, 1996 ("Fiscal
1996"), the Company realized an annualized average pawn service charge equal to
149% of pawn loans outstanding.
The pawn shop industry in the United States is highly fragmented and in the
early stages of consolidation. The four publicly traded pawn shop companies
operate approximately 8% of the total United States pawn shops. Management
believes that there are significant opportunities for growth through the
acquisition of existing pawn shops, the opening of new pawn shops, and the
improvement of productivity in pawn shop operations through the application of
modern management techniques.
The Company intends to continue concentrating multiple pawn shops in single
markets in order to improve market penetration, enhance name recognition and
reinforce market programs. The Company's recent growth has resulted from the
acquisition of existing pawn shops that management believes will respond
favorably to the Company's management systems. Consistent with this philosophy,
the Company increased the number of pawn shops it operated by 6, 2, 2 and 3
stores during Fiscal 1996, 1994, 1993 and 1992, respectively.
Pawn Operations
The Company is engaged in the business of advancing money to customers on
the security of pledged goods. The pledged goods are tangible personal property
and generally consist of jewelry, guns, tools, televisions and stereos, musical
instruments and other miscellaneous items. The pledged personal property is
offered by the customer to provide security to the Company for the repayment of
the pawn loan. Pawn loans cannot be made with personal liability to the
customer, and therefore, the Company does not investigate the creditworthiness
of the customer, but relies on the pledged personal property and the possibility
of its forfeiture as a basis for its credit decision. The Company receives a
pawn service charge to compensate it for extending the pawn loan. Pawn service
charges contributed approximately 44%, 41% and 44% to the Company's total
operating revenues for Fiscal 1995, the Transition Period and Fiscal 1996,
respectively.
3
<PAGE>
At the time a pawn transaction is entered into, a pawn contract agreement,
commonly referred to as a pawn ticket, is delivered to the customer (pledgor)
that sets forth, among other items, the name and address of the pawn shop and
the customer, the customer's identification number from his driver's license or
military identification, a description of the pledged goods, including
applicable serial numbers, and the amount advanced, the pawn service charge, the
maturity date of the pawn loan, total amount that must be paid to redeem the
pledged goods on the maturity date and the monthly percentage rate of the pawn
service charge.
The amount which the Company is willing to finance is typically based on a
percentage of the pledged personal property's estimated resale value. The
sources for the Company's determination of the resale value include catalogs,
blue books, newspaper advertisements and previously made similar pawn
transactions. The pledged property is held through the term of the pawn loan,
which generally is 30 to 120 days, unless earlier paid or renewed. In the
majority of cases, the customer pays the pawn loan amount 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 pay or renew
the pawn loan, the unredeemed collateral is forfeited to the Company and becomes
inventory available for sale in the pawn shop. The Company does not record pawn
loan losses or charge-offs inasmuch as, if the pledged property is not redeemed,
the pawn loan amount plus the accrued service charge becomes the inventory cost
of the forfeited collateral that is recovered through the resale operations
described below.
The recovery of the pawn loan amount and accrued service charges, as well
as realization of gross profit on sales of inventory, is dependent on the
Company's initial assessment of the property's estimated resale value. Improper
assessment of the resale value of the collateral when extending a pawn loan can
result in reduced marketability of the property and resale of the property for
an amount less than the pawn loan amount plus accrued service charge. However,
historically, the Company has experienced gross profits from sales of inventory.
The Company generated gross profit margins on the sale of inventory of
approximately 22%, 24% and 26% for Fiscal 1995, the Transition Period and Fiscal
1996, respectively.
At September 30, 1995, the Company had 29,520 pawn loans outstanding with
an aggregate pawn loan balance of $2,611,000, or an average of $88.47 per pawn
loan outstanding. At December 31, 1995, the Company had 31,693 pawn loans
outstanding with an aggregate balance of $2,841,000, or an average of $89.64 per
pawn loan outstanding. At December 31, 1996, the Company had 39,411 pawn loans
outstanding with an aggregate balance of $3,547,000, or an average of $90.00 per
pawn loan outstanding. The Company monitors and maintains record keeping in
connection with its pawn loans through a specialized computer hardware and
software system.
4
<PAGE>
During Fiscal 1995, the Transition Period and Fiscal 1996, approximately
36%, 36% and 35%, respectively, of pawn loans were not redeemed, with the
forfeited pledged property added to the Company's sales inventory. See
"Financial Statements."
Resale Operations
The Company sells used goods acquired when a pawn loan is not repaid and
new goods purchased from vendors. New goods, which historically represent less
than 1% of the Company's total inventory, consist primarily of accessory
merchandise which enhances the marketability of inventory, such as settings for
precious stones. Sales of new and used goods were approximately 56%, 58% and 56%
of the Company's total operating revenues for Fiscal 1995, the Transition Period
and Fiscal 1996, respectively.
From time to time, the Company may finance a small part of the sales price
of its goods. The Company also permits its customers to purchase inventory on a
"lay-away" plan whereby the customer purchases an item by making an initial cash
deposit representing a part of the selling price and agrees to make additional,
non-interest bearing payments of the balance of the selling price in accordance
with a specified schedule. The Company then sets aside the lay-away item until
the selling price is paid in full. Should the customer fail to make a required
payment, the item may be returned to inventory and previous payments forfeited
to the Company. Revenues derived from financing and lay-away plans historically
amount to less than 1% of total revenues.
Expansion
The Company intends to increase the number of pawn shops it owns and
operates primarily through acquisition of existing pawn shops rather than by
opening new pawn shops. Management believes that additional pawn shops will
provide economies of scale in supervision, purchasing, administration and
marketing. The Company's primary pawn shop acquisition criteria include the
perceived competence of current management, the annual number of pawn
transactions, the outstanding pawn loan balances, the quality and quantity of
pawn shop inventory, pawn shop locations, number of competitive pawn shops in
the market area, lease terms and physical condition of the pawn shop.
On March 16, 1996, the Company acquired 80% of the outstanding common stock
of Advantage Pawn, Inc., a Wyoming corporation ("Advantage"), for $105,000 in
cash and 45,000 shares of the Company's common stock, valued at $2.333 per
share. Goodwill of approximately $109,000 was recorded as a result of the
transaction. The management of Advantage was retained to operate its locations
as a subsidiary of the Company.
5
<PAGE>
On August 2, 1996, the Company acquired substantially all of the assets and
business of City National Pawn, Inc. and Bohlinger, Inc., two privately held
pawn shop companies with common ownership d/b/a City National Pawn, with one
location in Fort Collins, Colorado and two locations in Cheyenne, Wyoming ("City
National"). The assets and business of Bohlinger, Inc. were acquired by
Advantage. The assets acquired from City National consisted of furniture, store
equipment, merchandise inventory, pawn loans, pawn service charges receivable,
and customer lists valued at approximately $515,000. The total purchase price
for City National was $775,000, paid in cash. The transaction was accounted for
using the purchase method of accounting for business combinations.
On December 9, 1996, the Company agreed to acquire 100% of the outstanding
common stock of Pawnbroker, Inc. d/b/a Quick Bill's ("Bill"s") in Henderson,
Nevada in exchange for approximately 250,000 shares of the Company's common
stock valued at $1,000,000. The transaction will be accounted for using the
pooling of interests method of accounting for business combinations. Bill's
began operations in late December 1994, and accordingly, the three months ended
December 31, 1995 and the twelve months ended September 30, 1995 have been
restated to give effect to the pooling with Bills. Several contingencies must be
overcome prior to closing the transaction, including the approval of the
transfer of the pawn shop license by local authorities and the execution of
appropriate closing documents.
On December 9, 1996, the Company agreed to acquire a 100% interest in
Bobby's Pawnshop, Inc. ("Bobby's") located in Las Vegas, Nevada in exchange for
$700,000 in cash. The assets to be acquired consist primarily of inventory and
pawn loan receivables valued at approximately $480,000. The transaction will be
accounted for using the purchase method of accounting for business combinations.
Several minor contingencies must be overcome prior to closing the transaction,
including the execution of appropriate closing documents.
In Februry 1997, the Company agreed to acquire a 100% interest in Pawn
Warehouse Outlet, Inc. located in Omaha, Nebraska in exchange for shares of the
Company's common stock valued at $275,000. The transaction will be accounted for
using the pooling of interest method of accounting for business combinations.
Several contingencies must be overcome prior to closing the transaction,
including the approval of the acquisition by the respective boards of directors,
the approval of the transfer of the pawn shop license by the local authorities,
and the execution of appropriate closing documents.
The Company expects to finance the acquisition or development of additional
pawn shops through internal cash flow, additional lines of credit and debt
and/or equity securities offerings. The Company cannot assure, however, that
these sources of financing will be available. Furthermore, a number of factors
may limit or even eliminate the Company's ability to increase its number of pawn
shops including, (i) unanticipated operating losses or increases in overhead
expenses, (ii) unavailability of acceptable pawn shop locations, and, (iii)
higher pawn loan demand which will reduce the Company's available capital for
expansion.
6
<PAGE>
Competition
In connection with its lending of money, the Company competes with other
pawn shops and with certain other financial institutions such as consumer
finance companies, which generally lend money on an unsecured as well as on a
secured basis. Other lenders may lend money on terms more favorable than the
Company.
The pawn shop industry is highly fragmented and includes over 10,000 pawn
shops in the United States, the great majority of which are managed by
independent owner-operators. Some of these independent operators own multiple
pawn shops, and a few companies (who are generally regional operators) own more
than 50 pawn shops. Including the Company, there are four publicly held pawn
shop chains of which the Company has the fewest pawn shops and the smallest
amount of assets, revenues, net worth and personnel. In the Company's Colorado
market, which comprises 67% of all Company locations, there are approximately
180 competitor pawn shops including 24 pawn shops operated by another publicly
held pawn shop chain. To the Company's knowledge, there are no other pawn shop
operators in Colorado who operate more pawn shops than the Company.
In connection with its resale of tangible personal property, the Company
competes with numerous retail and wholesale stores, including jewelry stores,
gun stores, discount retail stores, consumer electronics stores and other pawn
shops. The Company encounters significant competition in all aspects of the
operation of its business. Many competitors (public and private) have greater
financial resources than the Company.
Regulation
The Company's pawn shop operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations in the three states in which it operates. Set forth
below is a summary of the various regulations applicable to the Company's
operations.
Colorado. In Colorado pawn shops must be licensed by the city in which the
pawn shop is located, as well as by the state. Maximum allowable service charge
rates may be set by both city ordinance, as well as state statute. Pawn shop
licenses may be revoked by state or local authorities for certain defined
improper conduct. For instance, under Colorado state law, a pawnbroker may not
accept a pledge from a person under the age of 18 years; make any agreement
requiring the personal liability of the customer; accept any waiver of any right
or protection accorded to a pledgor under Colorado state law; fail to exercise
reasonable care to protect pledged goods from loss or damage; fail to return
pledged goods to a pledgor upon payment of the full amount due; make any charge
for insurance in connection with a pawn transaction; enter into any pawn
transaction that has a maturity date of more than 90 days; display for sale in
7
<PAGE>
storefront windows or sidewalk display cases, pistols, swords, canes, blackjacks
or similar weapons; or purchase used or second hand personal property unless a
record is established containing the name, address and identification of the
seller, a complete description of the property, including serial number, and a
signed statement that the seller has the right to sell the property.
Under applicable state law, the maximum allowable pawn service charges for
Colorado pawn loans are 240% annually for pawn loans under $50 and 120% annually
for pawn loans of $50 and over. Local municipalities in which the Company
operates may also regulate pawn service charges within their jurisdictions. The
City and County of Denver is the only Colorado municipality in which the Company
operates that deviates from the Colorado statute pertaining to pawn service
charges. The maximum allowable pawn service charges for Denver pawn loans are
120% annually.
Wyoming. In Wyoming pawn shops must be licensed by the city in which the
pawn shop is located, as well as by the state. Maximum allowable service charge
rates may be set by both city ordinance, as well as state statute. Pawn shop
licenses may be revoked by state or local authorities for certain defined
improper conduct. For instance, under Wyoming state law, a pawnbroker may not
accept a pledge from a person under the age of 18 years; make any agreement
requiring the personal liability of the customer; accept any waiver of any right
or protection accorded to a pledgor under Wyoming state law; fail to exercise
reasonable care to protect pledged goods from loss or damage; fail to return
pledged goods to a pledgor upon payment of the full amount due; make any charge
for insurance in connection with a pawn transaction; enter into any pawn
transaction that has a maturity date of more or less than two months from the
transaction date; fail to disclose information concerning the pawn transaction
to its customers pursuant to applicable provisions of Federal Regulation Z of
the Truth in Lending Act and the Wyoming Uniform Consumer Credit Code; fail to
display in a conspicuous place on its premises the days and hours during which a
redemption may be made; engage in false or misleading advertising concerning the
terms or conditions of credit with respect to a pawn transaction; or purchase
used or second hand personal property unless a record is established containing
the name, address, accurate description and identification of the seller, a
complete description of the property, including serial number, and a signed
statement that the seller has the right to sell the property. Under applicable
state law, the maximum allowable pawn service charges for Wyoming pawn loans are
240% annually and the amount lent in any one pawn transaction to any one
customer may not exceed $3,000. Local municipalities in which the Company
operates may also regulate pawn service charges within their jurisdictions. The
City of Cheyenne is the only Wyoming municipality in which the Company operates
that deviates from the Wyoming statute pertaining to pawn service charges. The
maximum allowable pawn service charges for Cheyenne pawn loans are set forth
below:
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On That Part of Unpaid Principal
Maximum Annual Rate Balance Which is Between
------------------- ------------------------
240% $0 to $200
120% $200 to $400
60% $400 to $1,000
18% $1,000 to $3,000
Nevada. In Nevada pawn shops must be licensed by the city in which the
pawn shop is located, as well as by the state. Maximum allowable service charge
rates may be set by both city ordinance, as well as state statute. Pawn shop
licenses may be revoked by state or local authorities for certain defined
improper conduct. For instance, under Nevada state law, a pawnbroker may not
accept a pledge from a person under the age of 18 years or employ a person under
the age of 18 years to accept a pledge; accept a pledge from a person in an
intoxicated condition; fail to furnish to the pawn customer a printed,
sequentially numbered receipt for each article pawned which clearly shows the
amount lent, the interest and any other charges to be paid by the pawn customer,
a description of the property pawned, the date of receipt thereof, the last date
for redemption and the name and address of the pawnbroker; fail to have each
receipt signed by the pawn customer; fail to insure the pawn customer against
loss by destruction by fire of the pledged property; fail to return pledged
goods to a pawn customer upon payment of the full amount due; enter into any
pawn transaction that has a maturity date of less than 120 days from the
transaction date; or purchase used or second hand personal property unless a
record is established containing the name, address, accurate description and
identification of the pawn customer, a complete description of the property,
including serial number, a signed statement that the pawn customer has the right
to sell the property, and the name or other identification of the person or
employee conducting the transaction. Under applicable state law and local
ordinance, the maximum allowable pawn service charges for Nevada pawn loans are
96% annually plus a $5 handling fee per item pawned.
With respect to gun sales, all the Company's pawn shops must comply with
federal regulations promulgated by the Department of the Treasury, Bureau of
Alcohol, Tobacco and Firearms which require, among other things, each pawn shop
dealing in guns to maintain a permanent written record of all guns received or
disposed. During Fiscal 1994, the Company implemented procedures which comply
with all rules and regulations promulgated by federal, state and local
authorities under the Brady Handgun Violence Prevention Act of 1993 (the "Brady
Bill") which requires, among other things, a background investigation of any
person purchasing or redeeming a handgun prior to completion of the transaction.
The Company does not sell or deal in ammunition for firearms. As a matter of
policy, the Company does not sell handguns to the general public in any of its
stores operating in the Denver Colorado Metropolitan Area (the "Denver Area"),
but rather, wholesales all forfeited handguns from Denver Area stores to
licensed dealers or transfers handguns forfeited from Denver Area pawn shops to
other Company pawn shops outside the Denver Area.
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In order to avoid the acquisition of stolen merchandise, all the Company's
pawn shops voluntarily or pursuant to municipal ordinance provide the local
police department with daily copies of all transactions involving pawn loans and
over-the-counter purchases. These daily transaction reports are designed to
provide the police with a detailed description of the merchandise including
serial numbers, if any, and the name and address of the owner obtained from a
valid identification card. A copy of the pawn ticket is provided to local law
enforcement agencies for processing by the National Crime Investigative Computer
to determine rightful ownership. Goods held to secure pawn loans or goods
purchased which are determined to belong to an owner other than the pledgor or
seller are subject to recovery by the rightful owner upon application to the
police department and satisfactory evidence of ownership. In connection with
pawn shops acquired by the Company, there is a risk that acquired merchandise
may be subject to claims of rightful owners. Historically, the Company has not
experienced a material number of rightful owner claims.
The Company has experienced no material losses by theft or casualty. The
Company maintains liability and casualty insurance and insurance against
employee theft at each of its pawn shop locations. The Company does not maintain
insurance against robbery and burglary, as the risk of loss does not justify the
premium cost of coverage. Historically, the Company has not experienced material
losses due to robbery or burglary.
Employees
The Company currently employs 110 employees, including its executive
officers.
Implementation of New Accounting Pronouncement
In October 1995, the Financial Accounting Standards Board ("FASB") issued
FASB Statement No. 123, "Accounting for Stock Based Compensation" (the
"Statement"), which prescribes accounting and reporting standards for all stock
based compensation plans. The Company is required to implement the Statement for
its fiscal year that begins January 1, 1996. Pursuant to the alternatives
provided in the Statement, the Company has elected to continue to account for
stock based compensation under the old rules and disclose in the footnotes to
its financial statements the pro-forma effects on net income and earnings per
share had compensation cost for the Company's stock based compensation plans
been recorded under the rules promulgated by the Statement.
ITEM 2. - PROPERTIES
- --------------------
10
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The Company's executive offices are located at 7215 Lowell Boulevard in
Westminster, Colorado pursuant to a five year lease which commenced April 1,
1992 at a monthly rental of $2,800 with two options to renew for five years.
The Company owns the real estate and building for one of its Denver,
Colorado pawn shops and currently leases its other seventeen pawn shops at
monthly rentals between $2,200 and $6,600 on lease terms between three and seven
years. The Company leases one of its Aurora, Colorado pawn shops from its
President. The Company believes the rental rate for the Aurora pawn shop
location is fair, reasonable and consistent with rental rates charged by
unaffiliated individuals in the same market area. The Company expects to
continue leasing its pawn shops in order to utilize its working capital for pawn
loans.
ITEM 3. - LEGAL PROCEEDINGS
- ---------------------------
The Company is not a party to any pending or threatened material legal
proceedings.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -------------------------------------------------------------
None.
11
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PART II
ITEM 5. - MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
The Company's Common Stock has been traded on the NASDAQ SmallCap Market
("NASDAQ") under the symbol "USPN" since May 10, 1989. On March 20, 1997, the
closing bid price for the Company's Common Stock was $4.19 per share.
The following table sets forth for the quarters indicated, the range of
high and low bid prices of the Company's Common Stock as reported by NASDAQ.
Common Stock
By Quarter Ended: High Low
---- ---
Fiscal 1996
December 31, 1996......................... 5.13 2.50
September 30, 1996........................ 4.56 3.56
June 30, 1996............................. 3.88 2.75
March 31, 1996............................ 2.88 1.44
Fiscal 1995
December 31, 1995......................... 2.13 1.69
September 30, 1995........................ 2.44 1.69
June 30, 1995............................. 2.31 1.38
March 31, 1995............................ 2.31 1.63
Fiscal 1994
December 31, 1994......................... 1.75 1.50
September 30, 1994........................ 1.81 .75
June 30, 1994............................. 1.63 1.16
March 31, 1994............................ 2.13 1.50
The above quotations were reported by NASDAQ and reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
As of March 20, 1997, the Company had approximately 750 stockholders of
record. The Company has not declared any dividends on its Common Stock to date.
12
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ITEM 6. - SELECTED FINANCIAL DATA
- ---------------------------------
The following selected financial data of the Company relates to the year
ended December 31, 1996, the three months ended December 31, 1995 and the four
years ended September 30, 1995, 1994, 1993, and 1992. The financial data is not
covered by an opinion of the Company's independent certified public accountants,
and should be read in conjunction with the financial statements and related
notes of the Company for the periods indicated, which are included elsewhere
herein. See "Financial Statements."
<TABLE>
<CAPTION>
Periods ended December 31, -------------Years ended September 30,--------------------
Restated
Year Quarter Restated
1996 1995 1995 1994 1993 1992
----- ---- ---- ---- ---- ----
(Amounts in thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total Assets 9,584 6,891 6,762 6,229 6,150 5,185
Total
Liabilities 2,908 2,065 2,188 2,169 2,034 1,702
Revenues 10,893 2,652 9,728 9,050 7,506 5,785
Net Income
(loss) 822 186 602 (97) 99 419
Earnings(loss)
per share 0.22 0.05 0.17 (0.04) 0.02 0.16
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------
Except for the historical information contained herein, certain matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks are detailed
from time to time in the Company's periodic reports filed with the Securities
and Exchange Commission. These forward-looking statements speak only as of the
date hereof. The Company disclaims any intent or obligation to update these
forward-looking statements.
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RESULTS OF OPERATIONS
Twelve Months Ended December 31, 1996 ("1996") Compared to Twelve Months
Ended December 31, 1995, Unaudited ("1995")
Effective December 31, 1995, the Company changed its fiscal year end
to December 31. The following selected and unaudited financial data is presented
to facilitate management's discussion and analysis for 1996:
<TABLE>
<CAPTION>
Unaudited
Restated Restated and Restated
Three Months Twelve Months Three Months Twelve Months Twelve Months
Dec. 31, 1995 Sept. 30, 1995 Dec. 31, 1994 Dec. 31, 1995 Dec. 31, 1996
--------------- --------------- ------------- -------------- -------------
(amounts in thousands of dollars or shares, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues:
Sales 1,550 5,409 1,434 5,525 6,053
Pawn service charges 1,078 4,232 1,003 4,307 4,752
Other 24 87 24 88 88
------- ------- ------ ------- --------
Total revenues 2,652 9,728 2,461 9,920 10,893
Cost of Sales and Expenses:
Cost of sales 1,174 4,245 1,109 4,310 4,481
Operations 782 3,180 821 3,141 3,467
Administration 267 947 237 977 1,094
Interest 70 258 55 273 241
Depreciation 62 228 49 241 303
------- ------ ------- -------- --------
Total Cost of Sales
and Expenses 2,355 8,858 2,271 8,942 9,586
------- ------- ------- ------- --------
Income before Income Taxes
and Minority Interest 297 870 190 978 1,307
Income Taxes 111 268 61 318 463
------- -------- ------- ------- --------
Income before
Minority Interest 186 602 129 660 844
Minority Interest - - - - (22)
------- -------- ------- ------- --------
Net Income 186 602 129 660 822
Dividends on Preferred
Stock (9) (36) (9) (36) (36)
------- -------- ------- ------- --------
Net Income Available
for Common
Stockholders 177 566 120 624 786
======= ======== ======= ======= ========
Earnings per Common Share and Common Share Equivalents .18 .22
======= ========
Weighted Average Number of Common Shares and Common
Share Equivalents Outstanding 3,411 3,619
======= ========
</TABLE>
14
<PAGE>
Total revenues for 1996 increased by 9.8% to $10,893,000 compared with
$9,920,000 for 1995. Revenues of $9,449,000 were generated by same store
operations (11 stores) and $1,566,000 were generated from stores acquired or
opened during 1996 (7 stores). Two stores were acquired during the first
quarter, three stores were acquired during third quarter and two stores were
acquired in December of 1996. The increase in revenues reflects an improvement
of 9.5% in merchandise sales to $6,053,000 from $5,525,000, an improvement of
10.3% in pawn service charges to $4,752,000 from $4,307,000. As a percentage of
total revenues, merchandise sales and pawn service charges remained unchanged at
56% and 44%, respectively. This revenue mix is consistent with the Company's
overall goals for inventory turns and pawn loan activity and is expected to
continue for the foreseeable future.
Income from operations for 1996 increased to $1,307,000 or 33.6% compared
to the prior year's results of $978,000. Earnings, net of income taxes, minority
interest and preferred dividends, for 1996 were $786,000 or $0.22 per share
compared to $624,000 or $0.18 per share for 1995. Total shares issued and
outstanding at December 31, 1996 increased to 3,746,789 from a prior year total
of 3,337,322 due primarily to the issuance of common shares in connection with
the Company's pawn shop acquisitions and the exercise of consultant and employee
stock options during 1996. The weighted average number of common shares and
common stock equivalents outstanding increased by 6.1% to 3,619,150 from a prior
year total of 3,411,057.
Total cost of sales and expenses for 1996 increased by $644,000, or 7.2%,
to $9,586,000 from $8,942,000 in 1995. The increase was comprised primarily of a
4% increase in cost of goods sold as a direct result of increased sales, a 12%
increase in administrative expenses and a 10% increase in operating expenses.
However, as a percentage of total revenues, total cost of sales and expenses
decreased by 2.1% to 88% from 90.1% in 1995.
Administrative expenses increased due primarily to staff additions in the
executive, systems and training departments. Operating expenses increased over
the previous year due primarily to operating expenses related to stores acquired
during 1996. As a percentage of total revenues, administrative expenses
increased slightly to 10% from 9.8% in 1995 and operating expenses remained
unchanged at 32%.
Interest expense decreased to $241,000 from $273,000 due to the Company's
ability to more effectively manage its commercial bank line of credit thereby
minimizing the amounts required to service the debt. The Company has available
to it a commercial bank line of credit of $650,000. Depreciation expense
increased due to the acquisition of pawn shops during 1996 and the purchase of
additional equipment and leasehold improvements.
15
<PAGE>
The Company's inventory turnover rate for 1996 was 2.5 times, compared to
3.3 times in the prior year. The decrease in inventory turns is due primarily to
lower sales volumes then same store operations generated by pawn shops acquired
during 1996. Management expects the inventory turns to improve in these pawn
shops as the Company's sales programs are fully implemented. Gross profit margin
on sales for 1996 increased to 26% from 22% for 1995. The improvement in gross
profit margin is primarily attributable to a new incentive compensation plan
implemented at the beginning of 1995 for store managers and customer service
personnel which rewards those employees for reaching and/or exceeding
profitability goals set by management.
The forfeiture rate for pawn loans (total new loans this year plus previous
year ending loan balance, minus current year ending loan balance in relationship
to total forfeited amount during the year) decreased to 35% in 1996 from 36% in
the prior year and is slightly above industry comparisons. The Company's
slightly higher than industry forfeiture rate is due primarily to the aggressive
pawn loan policy in use for the past several years, which allows for slightly
higher pawn loan to value ratios than competing pawn shops in an effort to
attract more pawn customers. The Company intends to continue its aggressive pawn
loan policy for the reasonably foreseeable future. Due primarily to the
acquisition of pawn shops during 1996, the Company's pawn loans increased by 25%
to $3,547,000 in 1996 as compared to $2,841,000 in 1995.
Income Taxes
The Company changed its method of accounting for income taxes effective
October 1, 1992 in accordance with the Financial Accounting Standards Board
"Statement of Financial Accounting Standards No. 109" (SFAS109) (see Notes to
Financial Statements #11). The application of SFAS109 reflects the deferred tax
consequences of temporary differences between the bases of assets and
liabilities for financial and income tax reporting purposes. The Company
recognized income tax expense of $463,000 for 1996 as compared to $318,000 for
1995.
Three Months Ended December 31, 1995, Restated (the "1995 Quarter") Compared
To Three Months Ended December 31, 1994 (the "1994 Quarter")
Under the pooling of interest method of accounting for business
combinations, all prior periods presented in the financial statements must be
restated as if the combination were effective for all periods presented.
The following selected and unaudited financial data is presented to
facilitate the discussion of the 1995 Quarter:
16
<PAGE>
<TABLE>
<CAPTION>
Restated
Three Months Three Months Effects of the
Dec. 31, 1995 Dec. 31, 1995 Restatement
------------- ------------- -----------
(amounts in thousands of dollars or shares, except per share data)
<S> <C> <C> <C>
Revenues:
Sales 1,550 1,513 37
Pawn service charges 1,078 1,042 36
Other 24 24 -
------ ------ ------
Total revenues 2,652 2,579 73
Cost of Sales and Expenses:
Cost of sales 1,174 1,160 14
Operations 782 758 24
Administration 267 267 -
Interest 70 52 18
Depreciation 62 56 6
------ ------ ------
Total Cost of Sales
and Expenses 2,355 2,293 62
----- ------ ------
Income before Income Taxes 297 286 11
Income Taxes 111 111 -
------ ------ ------
Net Income 186 175 11
Dividends on Preferred Stock (9) (9) -
------ -------- ------
Net Income Available
for Common 177 166 11
====== ====== ======
Earnings per Common Share
and Common Share Equivalents .05 .05 -
====== ======= =======
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding 3,353 3,103 250
====== ======= =======
</TABLE>
Total revenues for the three months ended December 31, 1995 (the "1995
Quarter") increased by 7.8% to $2,652,000 compared with $2,461,000 for the three
months ended December 31, 1994 (the "1994 Quarter"). Revenues of $2,579,000 were
generated by pawn shops acquired or opened prior to the 1994 Quarter (12 pawn
shops) and $73,000 were related to the restatement required as part of the
pooling of interest acquisition during 1996 (1 pawn shop). The increase in
revenues reflects an improvement of 8.1% in merchandise sales to $1,550,000 from
$1,434,000, an improvement of 7.5% in pawn service charges to $1,078,000 from
$1,003,000. As a percentage of total revenues, merchandise sales and pawn
service charges were unchanged at 58% and 41%, respectively, during the 1995
Quarter as compared to the 1994 Quarter.
17
<PAGE>
Income from operations for the 1995 Quarter increased by 56% to $297,000 as
compared to the prior year's results of $190,000. Earnings, net of income taxes
and preferred dividends, for the 1995 Quarter were $177,000 or $0.05 per share
compared to $120,000 or $0.04 per share for the 1994 Quarter. Total shares
issued and outstanding at December 31, 1995 increased to 3,337,322 from a total
of 2,958,663 at December 31, 1994 due primarily to the sale of additional common
shares, shares related to the pooling of interest acquisition, and the exercise
of employee stock options. The weighted average number of common shares and
common stock equivalents outstanding increased by 11.1% to 3,352,857 from
3,016,903 at December 31, 1994.
Total cost of sales and expenses for the 1995 Quarter increased by $84,000,
or 3.7%, to $2,355,000 from $2,271,000 in the 1994 Quarter. The increase was
comprised primarily of a 5.7% increase in cost of goods sold as a direct result
of increased sales, a 12% increase in administrative expenses, offset by a 4.8%
decrease in operating expenses. Administrative expenses increased due primarily
to cost of living increases for administrative staff and the addition of two
employees in the training department. Operating expenses decreased over the
previous year due primarily to a decrease in store employee head count and a
reduction in store rents.
Interest expense increased to $70,000 from $55,000 due to additional
interest related to the restatement for the pooling of interest acquisition.
Depreciation expense increased due primarily to the replacement of fully
utilized computer equipment and leasehold improvements in the stores.
The Company's annualized inventory turnover rate for the 1995 Quarter was
3.3 times, compared to 4.1 for the 1994 Quarter. The decrease in inventory turns
is due primarily to less wholesaling of merchandise in the 1995 Quarter as
compared to the 1994 Quarter. Gross profit margin on sales for the 1995 Quarter
increased to 24.3% from 22.7% for the 1994 Quarter. The improvement in gross
profit margin is primarily attributable to a new incentive compensation plan
implemented at the beginning of the 1995 Quarter for store managers and customer
service personnel which rewards those employees for reaching and/or exceeding
profitability goals set by management.
18
<PAGE>
The forfeiture rate for pawn loans (total new loans this year plus previous
year ending loan balance, minus current year ending loan balance in relationship
to total forfeited amount during the year) for both the 1995 and 1994 Quarters
was 36% and is slightly above industry comparisons. The slightly higher than
industry forfeiture rate is due primarily to the Company's aggressive pawn loan
policy, which allows for slightly higher loan to value ratios than competing
pawn shops in an effort to attract more pawn customers. The Company intends to
continue its aggressive pawn loan policy for the reasonably foreseeable future.
The Company's pawn loans increased to $2,841,000, or 3.3%, during the 1995
Quarter from $2,748,000 at September 30, 1995.
Income Taxes
The Company changed its method of accounting for income taxes effective
October 1, 1992 in accordance with the Financial Accounting Standards Board
"Statement of Financial Accounting Standards No. 109" (SFAS109) (see Notes to
Financial Statements #11). The application of SFAS109 reflects the deferred tax
consequences of temporary differences between the bases of assets and
liabilities for financial and income tax reporting purposes. The Company
recognized income tax expense of $111,000 for the 1995 Quarter as compared to
$61,000 for the 1994 Quarter.
19
<PAGE>
Twelve Months Ended September 30, 1995, Restated ("Fiscal 1995") Compared To
Twelve Months Ended September 30, 1994 ("Fiscal 1994"), as previously reported.
Under the pooling of interest method of accounting for business
combinations, all prior periods presented in the financial statements must be
restated as if the combination were effective for all periods presented. Bill's
began operations in late December 1994 and therefore had no effect on Fiscal
1994 as previously reported.
The following selected and unaudited financial data is presented to
facilitate the discussion of Fiscal 1995:
<TABLE>
<CAPTION>
Restated
Twelve Months Twelve Months Effects of the
Sept. 30, 1995 Sept. 30, 1995 Restatement
-------------- -------------- -----------
(amounts in thousands of dollars or shares, except per share data)
<S> <C> <C> <C>
Revenues:
Sales 5,409 5,302 107
Pawn service charges 4,232 4,120 112
Other 87 87 -
------ ------ ------
Total revenues 9,728 9,509 219
Cost of Sales and Expenses:
Cost of sales 4,245 4,201 44
Operations 3,180 3,118 62
Administration 947 938 9
Interest 258 241 17
Depreciation 228 214 14
------ ------ ------
Total Cost of Sales
and Expenses 8,858 8,712 146
------ ------ ------
Income before Income Taxes 870 797 73
Income Taxes 268 268 -
------ ------ ------
Net Income 602 529 73
Dividends on Preferred Stock (36) (36) -
------ ------ ------
Net Income Available
for Common 566 493 73
====== ====== ======
Earnings per Common Share
and Common Share Equivalents .17 .16 .01
====== ====== ======
Weighted Average Number of
Common Shares and Common
Share Equivalents Outstanding 3,344 3,094 250
====== ====== ======
20
</TABLE>
<PAGE>
Total revenues for Fiscal 1995 increased by 7.5% to $9,728,000 compared
with $9,050,000 for Fiscal 1994. Revenues of $9,509,000 were generated by same
store operations (12 pawn shops) and $219,000 were related to the restatement
required by the pooling of interest acquisition in 1996 (1 store). The increase
in revenues reflects an improvement of 3.5% in merchandise sales to $5,409,000
from $5,226,000, an improvement of 14% in pawn service charges to $4,232,000
from $3,715,000 and a 20% decrease in other income to $87,000 from $109,000. As
a percentage of total revenues, merchandise sales decreased to 56% from 58% and
pawn service charges increased to 44% from 41% during Fiscal 1995 as compared to
Fiscal 1994. The shift in the revenue mix is primarily due to a higher aggregate
pawn loan balance outstanding during Fiscal 1995 as compared to Fiscal 1994.
During Fiscal 1994, merchandise sales of $762,000 and pawn service charges
of $201,000 were generated by the automobile pawn division which ceased
operations in late Fiscal 1994. Adjusted for these revenues, total revenues for
Fiscal 1995 from continuing operations increased 18% as compared to the prior
year.
Income from operations for Fiscal 1995 increased to $870,000 or 1,642%
compared to the prior year's results of $50,299. Earnings, net of income taxes
and preferred dividends, for Fiscal 1995 were $566,000 or $0.17 per share
compared to a loss of $(133,000) or $(0.04) per share for Fiscal 1994. Total
shares issued and outstanding at September 30, 1995 increased to 3,329,833 from
a prior year total of 2,958,663 due primarily to the sale of additional common
shares, the pooling of interest acquisition and the exercise of employee stock
options during Fiscal 1995. The weighted average number of common shares and
common stock equivalents outstanding increased by 13% to 3,344,230 from a prior
year total of 3,074,203.
Total cost of sales and expenses for Fiscal 1995 decreased by $467,000, or
5%, to $8,858,000 from $9,179,000 in Fiscal 1994, including restructuring costs.
The decrease was comprised primarily of a 9% decrease in cost of goods sold as a
direct result of increased sales margins, a 33% decrease in administrative
expenses and a 14% increase in operating expenses.
Administrative expenses decreased due primarily to staff reductions in the
executive, systems and training departments and savings in corporate office rent
expense and investor relations activities. Operating expenses increased over the
previous year due primarily to increases in store salaries and benefits related
to a new incentive compensation plan for store managers and customer service
personnel.
21
<PAGE>
Interest expense increased to $258,000 from $218,000 due to the Company's
continued use of a bank line of credit and borrowings from private investors.
The Company has available to it a bank line of credit of $650,000. Depreciation
expense increased due to the purchase of additional equipment and leasehold
improvements for the new stores opened during Fiscal 1994.
The Company's inventory turnover rate for Fiscal 1995 was 3.5 times,
compared to 3.8 times in the prior year. Gross profit margin on sales for Fiscal
1995 increased to 21% from 12% for Fiscal 1994. The improvement in gross profit
margin is primarily attributable to a new incentive compensation plan
implemented at the beginning of Fiscal 1995 for store managers and customer
service personnel which rewards those employees for reaching and/or exceeding
profitability goals set by management.
The forfeiture rate for pawn loans (total new loans this year plus previous
year ending loan balance, minus current year ending loan balance in relationship
to total forfeited amount during the year) increased to 36% in Fiscal 1995 from
34% in the prior year and is sightly above industry comparisons. The increase in
the forfeiture rate is due primarily to the aggressive pawn loan policy in use
for Fiscal 1995. An aggressive pawn loan policy provides for slightly higher
pawn loan to value ratios than competing pawn shops in an effort to attract more
pawn customers. The Company intends to continue its aggressive pawn loan policy
for the reasonably foreseeable future. The Company's pawn loans increased to
$2,611,526, a 4.3% increase, in Fiscal 1995 as compared to $2,503,264 at the end
of Fiscal 1994.
Income Taxes
The Company changed its method of accounting for income taxes effective
October 1, 1992 in accordance with the Financial Accounting Standards Board
"Statement of Financial Accounting Standards No. 109" (SFAS109) (see Notes to
Financial Statements #11). The application of SFAS109 reflects the deferred tax
consequences of temporary differences between the bases of assets and
liabilities for financial and income tax reporting purposes. The Company
recognized income tax expense of $268,000 for Fiscal 1995 as compared to an
income tax benefit of $32,000 for Fiscal 1994.
22
<PAGE>
Corporate Restructuring
During the fourth quarter of Fiscal 1994, the Company approved a
restructuring plan designed to reduce administrative expenses and improve gross
margins on sales of inventory. In furtherance of the plan, (i) administrative
staff was reduced in August 1994, (ii) an incentive compensation program for
store employees was put in place in October 1994, (iii) the corporate
administrative offices were relocated into less expensive space in December
1994, and (iv) the sale of the automobile pawn division was completed in
December 1994.
The following selected and unaudited financial data of the Company shows
the effects of the restructuring for Fiscal 1995 without giving effect in Fiscal
1995 for the pooling of Bill's:
<TABLE>
<CAPTION>
Fiscal Fiscal Increase
1995 1994 (Decrease) %
---- ---- ---------- ------
<S> <C> <C> <C> <C>
Revenues from:
Base stores(10) $8,811,759 $7,979,192 $ 832,567 10
New stores(2) 687,027 117,692 569,335 484
Auto Pawn 10,764 953,229 (942,465) (99)
---------- ---------- ---------- ----------
Total Revenues 9,509,550 9,050,113 459,437 5
---------- ---------- ---------- ----------
Cost of Sales 4,200,884 4,622,770 (421,886) (9)
Expenses for:
Base stores(10) 2,753,762 2,381,504 372,258 16
New stores(2,1) 341,733 109,685 232,048 216
Auto Pawn 22,468 185,455 (162,987) (87)
Administration 938,025 1,278,523 (340,498) (27)
Interest 241,011 218,472 22,539 10
Depreciation 214,225 190,462 23,763 12
Loss on sale of equip -- 12,943 (12,943) --
---------- ---------- ---------- ----------
Total cost of sales
and expenses 8,712,108 8,999,814 (287,706) (3)
---------- ---------- ---------- ----------
Operating income $ 797,442 $ 50,299 $ 747,143 1,485
========== ========== ========== ==========
</TABLE>
23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased by 39% from $3,465,000 at December 31, 1995 to
$4,813,000 at December 31, 1996. Total assets increased during 1996 by
$2,693,000 mainly due to increases in cash, pawn loans, service charges
receivable, and inventory related to the acquisitions of pawn shops during 1996.
Total liabilities increased by $843,000 during 1996 due primarily to amounts due
to a stockholder of an acquiree and increases in private debt at December 31,
1996. Total shareholders' equity increased by 27% or $1,808,000, as a result of
profits, net of income taxes, minority interest and preferred stock dividends,
in 1996 of $786,000, the issuance of common stock of $747,000, and $275,000 in
additional paid in capital.
The Company's operations have been financed from funds generated from
operations, bank borrowing, private borrowing, and private and public offerings.
In 1996, the Company raised sufficient capital to satisfy all capital
requirements.
The Company has a commercial bank line of credit totaling $650,000. As of
December 31, 1996 the Company owed $23,000 under this revolving credit facility.
The line of credit is on a year to year basis and is due on April 30, 1997.
Private borrowings which comprise $1,562,000 of the total liabilities due
at December 31, 1996 are due in 1997, 1998 and 1999, and there is no indication
that these borrowings will not be renewed.
The Company plans to continue expanding its operating base with
acquisitions of existing pawn shops but will also consider potential start-up
locations when they are available. The Company has experienced that new start-up
stores generally result in losses during their first three to fifteen months of
operations. Leasehold improvements and equipment costs for new pawn shops have
ranged from approximately $75,000 to $100,000 per store plus inventory of
$50,000 to $70,000. Conversely, the Company has experienced that acquisitions of
existing pawn shops generally have an immediate positive impact on earnings.
The Company expects to fund its expansion and meet its ongoing working
capital needs with internally generated funds, additional lines of credit and
debt and/or equity securities offerings. There can be no assurance, however,
that such sources of financing will be available to the Company. The Company has
received strong indications from its commercial bank that the line of credit
will be increased to $1,000,000. The Company has committed $673,000 of its
internal cash reserves to complete the acquisition of Bobby's. During 1997, the
Company expects to fund approximately $250,000 of anticipated increases in pawn
loan demand due to recent acquisitions out of internally generated cash flow.
24
<PAGE>
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 pawn loan balance and a decrease in pawn service charge
income. However, smaller pawn loans also tend to increase pawn loan redemptions
and improve the Company's liquidity. A conservative pawn loan policy also tends
to decrease the cost of merchandise inventory, thereby improving the margins
possible through resale of forfeited pawn loan collateral. Conversely, a more
aggressive pawn loan policy which provides for larger pawn 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 pawn 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.
Unprecedented and/or unexpected pawn loan demand tends to drain liquidity
reserves, and if other external sources of working capital are unavailable, the
implementation of a more conservative pawn loan policy and increasing inventory
turns will generate cash at the expense of profitability if not optimally
balanced.
Inflation
The Company does not believe that inflation has had a material effect on
the Company's results of operations.
Seasonality
The Company's pawn loan demand and sales follow slight seasonal trends.
Sales are generally highest during the fourth calendar quarter of the year,
while pawn loan demand is general lower during the first and second calendar
quarters than during the third and fourth calendar quarters.
25
<PAGE>
ITEM 8. - FINANCIAL STATEMENTS
26
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-5
Consolidated Statements of Changes in Stockholders' Equity F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors
U.S. Pawn, Inc.
Denver, Colorado
We have audited the accompanying consolidated balance sheets of U.S. Pawn, Inc.
and Subsidiaries as of December 31, 1996 and 1995 (restated) and the related
statements of operations, changes in stockholders' equity and cash flows for the
year ended December 31, 1996, the three months ended December 31, 1995
(restated) and the year ended September 30, 1995 (restated). These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Pawn, Inc. and
Subsidiaries as of December 31, 1996 and 1995 (restated) and the results of its
operations and its cash flows for the year ended December 31, 1996, the three
months ended December 31, 1995 (restated) and the year ended September 30, 1995
(restated) in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, U.S. Pawn, Inc.
completed a pooling of interests merger with Pawn Broker, Inc. DBA Quick Bills
in 1996 and accordingly the consolidated financial statements of U.S. Pawn, Inc.
have been restated to include the accounts and operations of Pawnbroker, Inc.
DBA Quick Bills for all periods presented prior to the merger.
February 13, 1997
Denver, Colorado
F-2
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (RESTATED)
(In Thousands Except Share Data)
ASSETS
1996 1995
------ ------
(Restated)
CURRENT ASSETS:
Cash $ 702 $ 303
Service charges receivable 572 393
Pawn loans 3,547 2,841
Accounts receivable, net 12 35
Notes receivable-related parties,
current portion 74 241
Inventory 2,161 1,440
Prepaid expenses and other 218 96
------ ------
Total Current Assets 7,286 5,349
PROPERTY AND EQUIPMENT, at cost, net 1,397 1,319
NOTES RECEIVABLE - related parties,
less current portion -- 69
INTANGIBLE ASSETS, net 852 135
OTHER ASSETS 49 19
------ ------
$9,584 $6,891
====== ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-3
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
DECEMBER 31, 1996 AND 1995 (RESTATED)
(In Thousands Except Share Data)
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
---------- -----------
(Restated)
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 23 $ 348
Accounts payable 29 31
Customer layaway deposits 47 41
Accrued expenses 244 231
Due to stockholders of acquiree 673 -
Notes payable, related parties 638 645
Notes payable 624 567
Current portion of long-term debt - related parties 100 -
Current portion of long-term debt 95 21
----------- -----------
Total Current Liabilities 2,473 1,884
----------- -----------
LONG-TERM DEBT:
Long-term debt - related parties,
less current portion 200 -
Long-term debt, less current portion 122 50
----------- -----------
Total Long-Term Debt 322 50
----------- -----------
DEFERRED INCOME TAXES 113 131
----------- -----------
Total liabilities 2,908 2,065
----------- -----------
MINORITY INTEREST 42 -
----------- -----------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Redeemable preferred stock, 9.5%, $10 par value, 1,000,000
shares authorized; 37,800 shares issued and outstanding 378 378
Common stock, no par value, 30,000,000 shares authorized;
3,746,489 and 3,337,322 shares issued and outstanding 3,989 3,242
Additional paid-in capital 1,097 822
Retained earnings 1,170 384
----------- -----------
Total Stockholders' Equity 6,634 4,826
----------- -----------
$ 9,584 $ 6,891
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U. S. PAWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE THREE MONTHS ENDED DECEMBER 31, 1995 (RESTATED)
AND THE YEAR ENDED SEPTEMBER 30, 1995 (RESTATED)
(In Thousands Except Earnings Per Share and Share Data)
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1996 1995 1995
------------ ------------- -------------
REVENUES: (Restated) (Restated)
<S> <C> <C> <C>
Sales $ 6,053 $ 1,550 $ 5,409
Pawn service charges 4,752 1,078 4,232
Other income 88 24 87
--------- --------- ---------
Total Revenues 10,893 2,652 9,728
--------- --------- ---------
COST OF SALES AND EXPENSES:
Cost of sales 4,481 1,174 4,245
Operations 3,467 782 3,180
Administration 1,094 267 947
Interest 149 54 199
Interest, related party 92 16 59
Depreciation and amortization 303 62 228
--------- --------- ---------
Total Expenses 9,586 2,355 8,858
--------- --------- ---------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 1,307 297 870
PROVISION FOR INCOME TAXES 463 111 268
--------- --------- ---------
INCOME BEFORE MINORITY INTEREST 844 186 602
MINORITY INTEREST (22) - -
--------- --------- ---------
NET INCOME 822 186 602
DIVIDENDS ON PREFERRED STOCK (36) (9) (36)
--------- --------- ---------
NET INCOME AVAILABLE
FOR COMMON STOCKHOLDERS $ 786 $ 177 $ 566
========= ========= =========
EARNINGS PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $ .22 $ .05 $ .17
========= ========= =========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING 3,619,150 3,352,857 3,344,230
========= ========= =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED SEPTEMBER 30, 1995 (RESTATED),
THE THREE MONTHS ENDED DECEMBER 31, 1995 (RESTATED), AND
THE YEAR ENDED DECEMBER 31, 1996
(In Thousands Except Share Data)
Preferred Stock Common Stock Additional Retained Treasury Stock
------------------ ------------------ Paid In Earnings ---------------
Shares Amount Shares Amount Capital (Deficit) Shares Amount Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994,
as previously reported 37,800 $ 378 3,027,408 $3,228 $ 831 $ (331) 68,745 $ (108) $3,998
Effect of pooling interests - - 250,000 1 - (25) - - (24)
------ ----- --------- ----- ------ ------ ------ ------ ------
Balance at September 30, 1994,
as restated 37,800 378 3,277,408 3,229 831 (356) 68,745 (108) 3,974
Exercise of common stock options - - 16,000 8 - - - - 8
Redemption of redeemable
common stock to treasury - - 25,966 51 - - 25,966 (51) -
Reissuance of treasury stock - - - - - (3) (40,200) 67 64
Conversion of redeemable
common stock - - 10,459 11 - - - - 11
Dividends on preferred stock - - - - - (36) - - (36)
Net income, as restated - - - - - 602 - - 602
------ ----- --------- ----- ------ ----- ----- ------ ------
Balance at September 30, 1995,
as restated 37,800 378 3,329,833 3,299 831 207 54,511 (92) 4,623
Cancellation of treasury stock - - (54,511) (92) - - (54,511) 92 -
Exercise of common stock options - - 62,000 35 - - - - 35
Dividends on preferred stock - - - - - (9) - - (9)
Option offering costs - - - - (9) - - - (9)
Net income, as restated - - - - - 186 - - 186
------- ----- --------- ----- ------ ----- ----- ------ ------
Balance at December 31, 1995,
as restated 37,800 378 3,337,322 3,242 822 384 - - 4,826
Exercise of common stock options - - 364,167 642 - - - - 642
Stock issued for acquisition - - 45,000 105 - - - - 105
Option offering costs - - - - (60) - - - (60)
Dividends on preferred stock - - - - - (36) - - (36)
Stock based compensation - - - - 109 - - - 109
Contribution of capital - - - - 226 - - - 226
Net income - - - - - 822 - - 822
------ ----- --------- ------ ------ ------ ----- ------ ------
Balance at December 31, 1996 37,800 $ 378 3,746,489 $3,989 $1,097 $1,170 - $ - $6,634
====== ===== ========= ====== ====== ====== ===== ====== ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-6
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996,
THE THREE MONTHS ENDED DECEMBER 31, 1995 (RESTATED)
AND THE YEAR ENDED SEPTEMBER 30, 1995 (RESTATED)
(In Thousands)
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1996 1995 1995
------------ ------------ -------------
<S> <C> <C> <C>
CASH FLOWS FROM (TO) OPERATING ACTIVITIES: (Restated) (Restated)
Net income $ 822 $ 186 $ 602
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 303 62 228
Interest receivable added to note receivable-related parties 15 -- --
Rent payments applied to note receivable-related party -- -- 27
Stock based compensation 109 -- --
Deferred income taxes (48) 16 106
Minority interest 22 -- --
Changes in:
Service charges receivable (3) (42) (24)
Inventory, excluding forfeited loan collateral 3,013 864 3,033
Accounts receivable 23 (9) 84
Prepaid expenses and other (260) 9 (1)
Accounts payable (18) 5 (27)
Accrued expenses (3) (91) 107
Customer layaway deposits 5 4 9
------- ------ ------
Net Cash Provided by Operating Activities 3,980 1,004 4,144
------- ------ ------
CASH FLOWS FROM (TO) INVESTING ACTIVITIES:
Pawn loans made (10,569) (2,475) (10,136)
Pawn loans repaid 7,058 1,523 6,487
Proceeds from sale of equipment 6 -- 11
Purchase of property and equipment (276) (34) (333)
Repayments of notes receivable 96 30 90
Advances on notes receivable-related parties -- -- (99)
Proceeds from notes receivable-related parties 245 1 5
Proceeds from sale of AutoPawn -- -- 37
Purchase of Advantage Pawn (68) -- --
Purchase of City National Pawn (225) -- --
Purchase of Bobbys Pawnshop (12) -- --
Acquisition costs (131) -- --
------- ------ ------
Net Cash (Used) by Investing Activities (3,876) (955) (3,938)
------- ------ ------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Dividends paid (36) (9) (36)
Issuance of notes payable and long-term debt 538 217 943
Payments on notes payable and long-term debt (1,166) (492) (804)
Payments on capital lease obligations -- -- (3)
Issuance of notes payable-related parties 385 22 50
Payments on notes payable-related parties (8) -- (30)
Purchase of treasury stock -- -- (51)
Reissuance of treasury stock -- -- 64
Sale of common stock, net of offering costs 642 25 9
Option offering costs (60) -- --
------- ------ ------
Net Cash Provided (Used) by Financing Activities 295 (237) 142
------- ------ ------
NET INCREASE (DECREASE) IN CASH 399 (188) 348
CASH, beginning of year 303 491 143
------- ------ ------
CASH, end of year $ 702 $ 303 $ 491
======= ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: See Note 15
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
F-7
</TABLE>
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Activity
- --------
U.S. Pawn, Inc., (the Company) was incorporated in the State of Colorado in
March 1980. The Company is engaged in acquiring, establishing and operating
pawnshops which lend money on the security of pledged tangible personal property
to residents of Colorado, Wyoming and Nevada. In addition, the Company offers
for resale the personal property from forfeited loans, as well as merchandise
purchased directly from customers and vendors. As of December 31, 1996, the
Company operated 12 pawnshops in Colorado, four pawnshops in Wyoming, and two
pawnshops in Nevada.
On July 21, 1995 the Company's board of directors approved a change in year end
from September 30 to December 31 for the year ending December 31, 1995. The
change in taxable year end has been approved by the Internal Revenue Service.
Effective February 1, 1996, the Company acquired 80% of the outstanding stock of
Advantage Pawn, Inc. (Advantage), a Wyoming corporation. 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 for an agreement not to compete. The
Company also agreed to guarantee $105,000 in liabilities of Advantage. The
operations of Advantage are consolidated with the Company only from the
applicable date of acquisition (see Note 16).
On August 2, 1996, the Company acquired the assets of City National, the
Division (City National) which consisted of three pawnshops; one in Ft. Collins,
Colorado and two in Cheyenne, Wyoming. Substantially all of the assets of the
three pawnshops were acquired for an aggregate purchase price of $775,000 (see
Note 16).
On December 9, 1996, the Company acquired all of the outstanding common stock of
Pawnbroker, Inc. DBA Quick Bills (Bills) for approximately 250,000 shares of
its common stock. The merger has been accounted for as a pooling of interests
and accordingly, the consolidated financial statements of the Company have been
restated to include the accounts and operations of Bills for all periods prior
to the merger. Bills operates one pawnshop located in Henderson, Nevada. (See
Note 2)
On December 9, 1996, the Company acquired all of the outstanding stock in
Bobbys Pawnshop, Inc. (Bobbys) for $700,000 in cash, of which $673,000 will be
paid in March 1997. The assets consist primarily of inventory and pawn loan
receivables which were valued at approximately $480,000. The excess of the
purchase price of approximately $220,000 has been recorded as goodwill and will
be amortized over 10 years. Bobbys operates one pawnshop in Las Vegas, Nevada.
(See Note 16.)
F-8
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Consolidation
- -------------
The Company and its subsidiaries in which it exercises control through majority
ownership is consolidated, and all intercompany accounts and transactions are
eliminated. The acquisitions of Advantage, City National and Bobbys have been
accounted for using the purchase method of accounting for business combinations
and accordingly, the results of operations of the acquirees are included in the
Company's financial statements only from the applicable date of acquisition. The
acquisition of Bills has been accounted for using the pooling method and the
financial statements of the Company have been restated to include the accounts
and operations for Bills for all periods prior to the merger.
Minority Interest
- -----------------
At December 31, 1996 the consolidated financial statements of the Company
include 100% of the assets, liabilities and equity of Advantage which is owned
80% by the Company. Since the Company is the majority stockholder in Advantage,
the remaining 20% ownership interests of the other stockholders have been
recorded as minority interest in the amount of $42,000 at December 31, 1996.
Pawn Loans and Income Recognition
- ---------------------------------
Pawn loans (loans) are generally made for a period of one to four months with
an automatic extension period (loan term) on the pledge of tangible personal
property. The pawn service charge is calculated as a percentage of the loan
amount based on the size and duration of the loan. Pawn service charges on loans
are recognized on a constant yield basis over the loan term.
If the loan is not repaid, the principal amount loaned plus accrued pawn service
charges become the carrying value (cost) of the forfeited collateral (inventory)
which is recoverable through sales to customers. Accordingly, the Company does
not record loan losses or charge-offs on defaulted loans.
Concentrations of Credit Risk
- -----------------------------
Financial instruments that potentially subject the Company to credit risk
include notes receivable-related parties amounting to $74,000 and $310,000 at
December 31, 1996 and 1995, respectively. The notes receivable are
collateralized by shares of common stock of the Company and real property.
There are no concentrations of credit risk with respect to trade receivables.
Ongoing credit evaluations of customers' financial condition are performed and,
generally, no collateral is required. The Company maintains reserves for
potential credit losses and such losses, in the aggregate, have not exceeded
management's expectations.
The Company maintains all cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced a loss in such
accounts.
F-9
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments
- ------------------------------------
Pawn loans are outstanding for a relatively short period, generally 120 days or
less. The rate of pawn service charge bears no relationship to interest rate
market movements. Pawn loans may not be resold to anyone but a licensed
pawnbroker. For these reasons, management believes that the fair value of pawn
loans approximates their carrying value.
The Company's bank credit facilities bear interest at rates which adjust
frequently based on market rate changes. Accordingly, management believes that
the fair value of that debt approximates its carrying value. The fair value of
investor notes payable was estimated based on market values for debt issues with
similar characteristics, or interest rates currently available for debt with
similar terms. Management believes that the fair value of those debts
approximates its carrying value.
Customer Layaways
- -----------------
Interim payments from customers on layaway sales are classified as customer
layaway deposits and subsequently recorded as income during the period in which
the final payment is received or when the deposit is forfeited.
Cash Equivalents
- ----------------
For purposes of reporting cash flows, the Company considers all funds with
original maturities of three months or less to be cash equivalents.
Inventory
- ---------
Inventory represents merchandise acquired from forfeited loans, merchandise
purchased directly from the public and new merchandise purchased from vendors.
Inventory is stated at the lower of cost (specific identification) or market.
Costs associated with the warehousing of merchandise totaling approximately
$102,000 and $61,000 at December 31, 1996 and 1995, respectively, are included
in inventory.
Property and Equipment
- ----------------------
Property and equipment are recorded at cost. Depreciation and amortization
expense is generally provided on a straight-line basis using estimated useful
lives of 5-10 years for equipment and 7-15 years for leasehold improvements.
Depreciation and amortization expense of property and equipment was $249,000,
$58,000 and, $213,000 for the year ended December 31, 1996, the three months
ended December 31, 1995 and the year ended September 30, 1995, respectively.
Intangible Assets
- -----------------
Intangible assets consist primarily of costs in excess of net assets of
pawnshops acquired and noncompete agreements with the previous owners of
pawnshops acquired. The costs in excess of net assets acquired and the
noncompete agreements are amortized on a straight-line basis over 10 years and
over the term of the agreement of 5 to 10 years, respectively. Amortization
expense of intangible assets was $54,000, $4,000 and $15,000 for the year ended
December 31, 1996, the three months ended December 31, 1995 and the year ended
September 30, 1995, respectively.
F-10
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
- ------------
The Company adopted Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes". Under this method, deferred income taxes
are recorded to reflect the tax consequences in future years of temporary
differences between the tax basis of the assets and liabilities and their
financial statement amounts at the end of each reporting period. Valuation
allowances will be established when necessary to reduce deferred tax assets to
the amount expected to be realized. Income tax expense is the tax payable for
the current period and the change during the period in deferred tax assets and
liabilities. The deferred tax assets and liabilities have been netted to reflect
the tax impact of temporary differences. The adoption of SFAS 109 did not have a
material effect on the Company's financial statements.
Earnings (Loss) Per Common Share
- --------------------------------
Earnings (loss) per common share is computed based upon the weighted average
number of common and dilutive common equivalent shares outstanding during the
period. Fully diluted and primary earnings per common share are the same amounts
for each of the periods presented. Dilutive common equivalent shares consist of
stock options and warrants and redeemable common stock (calculated using the
treasury stock method). In loss periods, dilutive common equivalent shares are
excluded as the effect would be anti-dilutive.
Stock-Based Compensation
- ------------------------
The Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard encourages, but does not require, companies to
recognize compensation expense for grants of stock, stock options, and other
equity instruments based on a fair-value method of accounting.
Companies that do not choose to adopt the new expense recognition rules of SFAS
No. 123 will continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion (APBO) No. 25, but will be required to
provide pro forma disclosures of the compensation expense determined under the
fair-value provisions of SFAS No. 123, if material. APBO No. 25 requires no
recognition of compensation expense for most of the stock-based compensation
arrangements provided by the Company, namely, broad-based employee stock
purchase plans and option grants where the exercise price is equal to the market
price at the date of grant.
The Company has adopted the disclosure provisions of SFAS No. 123 and will
continue to follow the accounting provisions of APBO No. 25 for stock-based
compensation and to furnish the proforma disclosures required under SFAS No.
123, if material.
Use of Estimates in the Preparation of Financial Statements
- -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting periods. Actual results could differ
from those estimates and assumptions.
F-11
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 2 - QUICK BILL'S MERGER
On December 9, 1996, the Company issued approximately 250,000 shares of its
common stock in exchange for all of the outstanding common stock of Pawnbroker,
Inc. DBA Quick Bills which is located in Henderson, Nevada. The merger has been
accounted for as a pooling of interests and accordingly, the consolidated
financial statements of the Company have been restated to include the accounts
and operations of Bills for all periods prior to the merger.
Bill's was a Subchapter S Corporation prior to the merger for income tax
purposes and therefore, did not pay U.S. federal income taxes. Bill's will be
included in the Company's U.S. federal income tax return effective December 9,
1996 and, therefore, a net deferred tax liability and corresponding charge to
income tax expense of $23,000 or $.01 per share was recorded upon closing to
reflect Bill's net taxable temporary differences.
Separate net revenues, net income and related per share amounts of the merged
entities are presented in the following table. In addition, the table includes
unaudited proforma net income, net income available for common stockholders and
net income per share amounts which reflect the elimination of nonrecurring
merger costs and expenses in 1996; and proforma adjustments to present income
taxes on the basis which they will be expected in future periods, and deferred
income tax expense for the change in tax status due to Bill's Subchapter-S
Election termination (in thousands).
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1996 1995 1995
------------- ------------ --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net revenues:
U.S. Pawn $ 10,676 $ 2,579 $ 9,509
Bill's 339 73 219
Merger adjustments - - -
------------ ------------ -------------
Total $ 11,015 $ 2,652 $ 9,728
============ ============ =============
Net income:
U.S. Pawn $ 739 $ 175 $ 529
Bill's 106 11 73
Bill's Subchapter S status (23) - -
Merger adjustments (1) (4) (26)
------------ ------------ -------------
Total $ 821 $ 182 $ 576
Less dividends on preferred stock (36) (9) (36)
------------- ------------- -------------
Net income available for
common stockholders $ 785 $ 173 $ 540
============ ============ =============
Net income per share:
As previously reported $ .19 $ .05 $ .16
============ ============ =============
Proforma $ .22 $ .05 $ .16
============ ============ =============
</TABLE>
In connection with the merger, $20,000 of merger costs and expenses ($13,000
after tax or $.01 per share) were incurred and have been charged to operations.
The merger costs and expenses consisted of legal, accounting, travel and
employee salaries.
F-12
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 2 - QUICK BILL'S MERGER (Continued)
During 1995, the Company changed its year end from September to December. Bill's
year end is December. Bill's financial statements for the year ended December
31, 1995 have been combined with the year end financial statements of the
Company for September 1995. The period October, November and December 1995 for
Bills has been included in the 12 months ended September 1995 and the three
months ended December 1995 in the Companys restated financial statements.
NOTE 3 - ACCOUNTS RECEIVABLE
Major classifications of accounts receivable at December 31, are as follows (in
thousands):
1996 1995
--------- ---------
Secured, employee receivable,
bearing interest at 8% $ - $ 11
Secured, employee receivable,
noninterest bearing 5 2
Trade receivables 12 25
Other receivables 6 29
--------- ---------
23 67
Less allowance for doubtful accounts (11) (32)
--------- ---------
$ 12 $ 35
========= =========
NOTE 4 - NOTES RECEIVABLE - RELATED PARTIES
As of December 31, 1996, the Company had a note receivable - related party
totaling $74,000, which consisted of advances due from a stockholder/officer.
This loan bears interest at 9% per year, is due on September 30, 1997 and is
collateralized by 75,000 shares of U.S. Pawn common stock personally owned by
the stockholder/officer.
As of December 31, 1995 the Company had $310,000 in notes receivable-related
parties which consisted of advances due from officers, stockholders and
employees. These loans bear interest substantially at 8% per year and are due on
various dates through October 1997. The notes are collateralized by the
Company's common stock, options to purchase the Company's common stock, vehicles
and second deeds of trust on real estate. As of December 31, 1995 $241,000 was
classified as current.
Interest income received from related parties was approximately $5,000, $1,000
and $35,000 for the year ended December 31, 1996, the three months ended
December 31, 1995 and the year ended September 30, 1995, respectively.
F-13
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31,(in thousands):
1996 1995
------- -------
Land $ 180 $ 180
Building 270 270
Equipment 1,302 1,006
Leasehold improvements 783 803
Vehicles 30 30
------- -------
2,565 2,289
Less accumulated depreciation and amortization (1,168) (970)
------- -------
$ 1,397 $ 1,319
======= =======
NOTE 6 INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, (in thousands):
1996 1995
------- -------
Goodwill $ 717 $ 191
Acquisition costs 84 --
Non-compete agreements 160 --
------- -------
961 191
Less accumulated amortization (109) (56)
------- -------
$ 852 $ 135
======= =======
NOTE 7 - ACCRUED EXPENSES
Accrued expenses consists of the following at December 31, (in thousands):
1996 1995
------- -------
Accrued salaries and payroll taxes $ 98 $ 72
Accrued property and sales taxes 85 70
Accrued interest - related parties 8 6
Accrued income taxes 29 81
Other 24 2
------- -------
$ 244 $ 231
======= =======
F-14
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 8 - LINE OF CREDIT
The Company has entered into an agreement with a bank to be provided a line of
credit of $650,000 due April 1, 1997; variable interest rate is 2% above the
banks base rate which was 11% at December 31, 1996, interest payable quarterly;
collateralized by accounts receivable, service charges receivable, pawn loans,
inventory, equipment, real estate and general intangibles; guaranteed by a
stockholder/officer. The loan restricts certain changes in the Company's
ownership structure, payments of dividends, dealings with insiders and restricts
incurring debt and disposable assets. The outstanding balance at December 31,
1996 and 1995 was $23,000 and $348,000, respectively.
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT
Notes Payable - Related Parties
- -------------------------------
The Company has notes payable to related parties, who are employees,
stockholders or family members, totaling $645,000 and $638,000 as of December
31, 1996 and 1995, respectively. These notes have interest rates of 8% to 15%
per annum, payable monthly and are unsecured. These notes are subordinated to
the bank line of credit.
Notes Payable
- -------------
The Company has notes payable due to various individuals prior to December 1997.
Interest on these notes is payable monthly, bi-monthly, quarterly, semi-annually
and annually at rates ranging from 12% to 15%. The notes are unsecured. The
outstanding balance at December 31, 1996 and 1995 was $624,000 and $567,000,
respectively.
Long-Term Debt - Related Parties
- --------------------------------
The Company has notes payable to related parties, who are stockholders or family
members, which are due on dates ranging from February 1997 to December 1999
totaling $300,000 as of December 31, 1996. Of the total notes payable to related
parties, $100,000 is due within one year of the original date of the notes and
$200,000 is classified long term. These notes have interest rates of 10% to 15%
per annum, due monthly and are unsecured. These notes are subordinated to the
current bank line-of-credit. As an inducement to enter into the notes payable,
the Company issued warrants for 9,000 shares of the Company's common stock,
exercisable at $4.00 per share through 1997. A deferred charge of $10,000 has
been recorded for the value of the warrants and will be amortized over the term
of the loan, which is three years. Amortization of $300 was expensed for the
year ended December 31, 1996. (See Note 13)
F-15
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT (Continued)
Maturities of long term debt, related party are as follows at December 31, (in
thousands):
1997 $ 738
1998 100
1999 100
----------
938
Less current portion (738)
----------
$ 200
==========
Long-Term Debt
- --------------
Long term debt consists of the following at December 31, (in thousands):
1996 1995
--------- ---------
Long-term debt to a finance company due
November 1999; interest rate of 10% and
monthly principal and interest payment of
$8,100; collateralized by computer equipment.
The note allows for up to $250,000 in
principal. As of December 31, 1996, the
Company has received $165,000. $ 145 $ --
Note payable to bank due January 2003;
variable interest rate of 1.75% above Key
Bank of Wyoming Prime Rate Index of 8.5% at
December 31, 1996; principal and interest of
$800 payable monthly; collateralized by
Inventory. 41 --
Note payable to an individual paid in 1996;
interest rate 15% per annum, due monthly;
unsecured. -- 50
Note payable to a finance company paid
November 1996; collateralized by computer
equipment. -- 21
F-16
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 9 - NOTES PAYABLE AND LONG-TERM DEBT (Continued)
1996 1995
--------- ---------
Note payable to bank due March 1999; variable
interest rate of 3% above First Security Bank
of Idaho Prime Rate Index of 8.25% at
December 31, 1996; principal and interest of
$1,300 payable monthly; unsecured; personally
guaranteed by stockholder. 31 --
--------- --------
217 71
Less current portion (95) (21)
--------- --------
$ 122 $ 50
========= ========
Maturities of long-term debt are as follows for each of the years ending
December 31, (in thousands):
1997 $ 95
1998 74
1999 23
2000 7
2001 8
Thereafter 10
-------
217
Less current portion (95)
-------
$ 122
=======
Interest expense incurred on notes payable and long-term debt was $109,000,
$52,000 and $241,000 at year ended December 31, 1996, the three months ended
December 31, 1995 and the year ended September 30, 1995. Included in interest
expense were amounts paid to related parties of approximately $92,000, $16,000
and $59,000 at year ended December 31, 1996, the three months ended December 31,
1995 and the year ended September 30, 1995, respectively.
F-17
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
The Company leases one pawnshop facility from the stockholder/officer and its
other pawnshop facilities from unrelated parties under operating leases expiring
in various years through 2002. Utilities, insurance and taxes are paid by the
Company for all of the pawnshop facilities. The majority of the operating leases
provide for an option to renew for one additional period of five years at the
fair market value at the time of renewal.
Future minimum lease payments under noncancelable leases are as follows for each
of the years ending December 31, (in thousands):
Related Non-Related
Party Parties Total
----- ------- -----
1997 $ 116 $ 430 $ 546
1998 105 347 452
1999 87 299 386
2000 87 225 312
2001 87 167 254
Thereafter 87 555 642
----- ----- -----
$ 569 $2,023 $2,592
===== ====== ======
Total future minimum lease payments above include a reduction of $9,000 for
noncancelable sublease payments.
The Company's stockholder/officer has personally guaranteed approximately
$297,000 of the above lease payments to nonrelated parties.
Rent expense was $604,000, $115,000 and $535,000 for the year ended December 31,
1996, the three months ended December 31, 1995 and the year ended September 30,
1995, respectively. Included in rent expense were amounts paid to the
stockholder/officer of $79,000, $20,000 and $124,000 for the year ended December
31, 1996, the three months ended December 31, 1995 and the year ended September
30, 1995, respectively.
Litigation
- ----------
The Company is a party to a number of lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material adverse effect on the Company's financial position.
Insurance
- ---------
For the most part, the Company does not maintain theft insurance for personal
property losses as management believes that the risk of loss does not justify
the premium cost of coverage. Insurance is provided to insure against casualty
loss and against general business liability claims. Costs resulting from
noninsured property losses will be charged against income upon occurrence. No
material amounts for uninsured property losses were charged to operations for
any of the periods presented.
F-18
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 11 - INCOME TAXES
The components of deferred tax assets and (liabilities) are as follows as of
December 31, (in thousands):
1996 1995
--------- ---------
Total deferred tax assets $ 28 $ 11
Total deferred tax (liabilities) (141) (142)
--------- ---------
Net deferred tax (liabilities) $ (113) $ (131)
========= =========
The tax effects of temporary differences that give rise to deferred tax assets
and (liabilities) are as follows as of December 31, (in thousands):
1996 1995
--------- ---------
Temporary differences:
Change in tax accounting
method for service
charges receivable $ (60) $ (88)
Service charges (23) -
Property and equipment (9) (24)
Inventory (38) (21)
Other 17 2
--------- ---------
$ (113) $ (131)
========= =========
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended Three Months Year Ended
December 31, December 31, September 30,
1996 1995 1995
------------- ------------- -------------
<S> <C> <C> <C>
Current $ 481 $ 128 $ 162
Deferred (18) (17) 106
------------- ----------- ------------
Provision $ 463 $ 111 $ 268
============= =========== ============
</TABLE>
F-19
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 11 - INCOME TAXES (Continued)
The components of deferred income tax (benefit) expense are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1996 1995 1995
----------- ------------- -------------
<S> <C> <C> <C>
Depreciation and amortization $ 21 $ (8) $ (28)
Change in tax accounting method
for service charges receivable (20) (8) (32)
Inventory warehousing costs (23) - (9)
Restructuring costs - - 42
Other 4 (1) 1
Utilization of net operating
loss carryforward - - 132
-------- --------- --------
$ (18) $ (17) $ 106
======== ========= ========
</TABLE>
Following is a reconciliation of the amount of income tax (benefit) expense that
would result from applying the statutory federal income tax rates to pre-tax
income and the reported amount of income tax expense for the periods ended (in
thousands):
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1996 1995 1995
------------ ------------- -------------
<S> <C> <C> <C>
Tax expense (benefit) at federal
statutory rates $ 457 $ 97 $ 271
Increase (decrease) resulting from:
State tax - net 57 15 3
Nondeductible items 4 - 1
Depreciation and amortization 33 (9) (13)
Change in tax accounting method for
pawn service charges 33 8 32
Reserve method for bad debts 7 3 3
Restructuring costs - - (43)
Inventory warehousing costs (15) - 9
Effect of pooling (39) - -
Minority interest (8) - -
Stock based compensation 5 - -
Other (53) 14 43
(Benefit) of net operating
loss carryforward - - (144)
---------- -------- ---------
$ 481 $ 128 $ 162
========== ======== =========
F-20
</TABLE>
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 11 - INCOME TAXES (Continued)
Effective October 1, 1992, the Company changed its income tax method of
accounting for pawn service charges from the cash basis to the accrual method of
accounting. The cumulative effect of this change of approximately $564,000 is
included in taxable income over six years on a straight-line basis beginning
September 30, 1993.
NOTE 12 - REDEEMABLE PREFERRED STOCK
The Company has authorized 1,000,000 shares of $10 par value, redeemable
preferred stock. The preferred stock is redeemable only at the Company's option
at par value. The preferred stock is nonvoting, cumulative, pays a monthly
dividend at an annual rate of 9.5% and has the same rights in the event of
liquidation as the common stockholders.
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS
Warrants
- --------
In connection with a July 1993 private placement offering, the Company issued to
an underwriter warrants to purchase up to 127,026 shares of common stock until
July 31, 1998 at an exercise price of $3.00 per share. No warrants have been
exercised at December 31, 1996.
In connection with $300,000 of notes payable issued during 1996, the Company
issued warrants to purchase up to 9,000 shares of the Companys common stock at
an exercise price of $4.00 per share through 1997. No warrants have been
exercised at December 31, 1996.
1988 Employee Incentive Stock Option Plan
- -----------------------------------------
In 1988 the Company's Board of Directors adopted the 1988 Employee Incentive
Stock Option Plan (1988 Plan) under which 125,000 shares of the Company's common
stock were reserved for issuance at prices not less than the fair market value
on the date of grant which were registered on September 11, 1990. For options
granted to an employee owning shares of common stock possessing more than 10% of
the total combined voting power of all classes of the Company's common stock,
the option price shall not be less than 110% of the fair market value of the
common stock on the date of grant. The options may be exercised 33 1/3% for each
year of continuous service beginning one year from the date of grant, unless
otherwise specified by the Company's board of directors. The options expire
within six years of the date of grant and must be exercised within four years
from the date of grant or within 90 days of termination.
During 1994, the Company's board of directors approved a proposal to increase
the number of shares reserved under the 1988 Plan by 1,074,833 which was later
rejected during 1995. On March 25, 1995, the Company's Board of Directors
increased the number of shares reserved under the 1988 plan to 275,000. On July
25, 1995, the Company registered the 150,000 additional shares reserved under
the 1988 Plan. On September 30, 1995, pursuant to its express authority under
the 1988 Plan, the Company's board of directors extended the expiration period
to ten years and the exercise period to eight years for certain options
previously granted under the 1988 Plan.
F-21
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (Continued)
A summary of stock option activity under the 1988 Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
------------------------------
Reserved Price Per
Shares Shares Share
------ ------ -----
<S> <C> <C> <C> <C>
Balance, September 30, 1994 1,175,000 461,250 $1.12-5.12
Reserved 150,000 -- --
Adjustment to reserve (1,074,833) -- --
Adjustment to grant -- (1,050,000) 1.81
Adjustment to expiration -- 649,875 --
Granted -- 138,665 2.06
Expired -- (125) --
--------- --------- ----------
Balance at September 30, 1995
and December 31, 1995 250,167 199,665 1.12-5.12
Exercised (5,667) (5,667) 1.87-2.06
Expired -- (13,333) --
--------- --------- ----------
Balance at December 31, 1996 244,500 180,665 $1.12-5.12
========= ========= ==========
</TABLE>
During 1994 the Company's board of directors granted options, subject to
stockholder approval, under the 1988 Plan for 600,000 shares of the Company's
common stock to the stockholder/officer and 450,000 shares of the Company's
common stock to an officer who was terminated in July 1994. The option for
450,000 shares was not submitted to the stockholders for approval as the officer
was terminated in July 1994, therefore, the option expired. The option for
600,000 shares was approved by the stockholders on March 25, 1995. However, the
Company's board of directors later determined that the 1988 Plan was not the
appropriate vehicle for the grant, and instead implemented the stockholders
intent through a separate option agreement (the "Executive Option").
At December 31, 1996, options for 180,665 shares were exercisable and 63,835
shares were available for future grants under the 1988 Plan.
1991 Directors' Stock Option Plans
- ----------------------------------
On October 21, 1991 the Company's Board of Directors adopted a Directors' Stock
Option Plan (Directors' Plan) effective October 16, 1989 under which 75,000
shares of the Company's common stock are reserved for issuance at prices not
less than the fair market value on the date of grant. All of the Company's
directors are eligible to participate. The options must be exercised within five
years following the date of grant or within 30 days of termination.
F-22
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (Continued)
A summary of stock option activity under the Directors' Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------
Reserved Price Per
Shares Shares Share
------ ------ -----
<S> <C> <C> <C>
Balance, September 30, 1994 75,000 62,500 $ 2.00-4.36
Expired -- (12,500) --
------ ------ -----------
Balance, September 30, 1995
and December 31, 1995 75,000 50,000 2.00-4.36
Exercised (12,500) (12,500) 2.00
------ ------ -----------
Balance, December 31, 1996 62,500 37,500 $ 2.00-4.36
====== ====== ===========
</TABLE>
At December 31, 1996 options for 37,500 shares were exercisable and 25,000 were
available for future grants under the Directors' Plan.
1995 Directors' Stock Option Plan
- ---------------------------------
On July 21, 1995 the Company's Board of Directors adopted the 1995 Directors'
Stock Option Plan (1995 Plan), subject to stockholder approval, under which
90,000 shares of the Company's common stock were reserved for issuance at prices
not less than the fair market value on the date of the Grant. For options
granted to a director owning shares of common stock possessing more than 10% of
the total combined voting power of all classes of the Company's common stock,
the option price shall not be less than 110% of the fair market value of the
common stock on the date of grant. All of the Company's directors were eligible
to participate. The options were to be exercised within 10 years from the date
of grant or within six months of termination. On June 22, 1996 the stockholders
approved the 1995 Plan.
A summary of stock option activity under the 1995 Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------
Reserved Price Per
Shares Shares Share
------ ------ -----
<S> <C> <C> <C>
Balance, December 31, 1995 90,000 90,000 $ 1.70
Granted (90,000) - -
Expired 12,000 (12,000) -
------ ------ --------
Balance, December 31, 1996 12,000 78,000 $ 1.70
====== ====== ========
</TABLE>
As of December 31, 1996, 78,000 options have been granted under the 1995 Plan
and 12,000 were available for future grants.
F-23
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (Continued)
1990 Management Incentive Stock Option Plan
- -------------------------------------------
In 1990 the Company's Board of Directors adopted the 1990 Management Incentive
Stock Option Plan (1990 Plan) under which 150,000 shares of the Company's common
stock were reserved for issuance at prices not less than the fair market value
of the common stock on the date of the grant. For options granted to a
management employee owning shares of common stock possessing more than 10% of
the total combined voting power of all classes of the Company's common stock,
the option price shall not be less than 110% of the fair market value of the
common stock on the date of the grant originally under the Plan. The options had
to be exercised 33 1/3% for each year of continuous service beginning one year
from the date of the grant, unless otherwise specified by the Company's board of
directors. The options must be exercised within three years from the date of
grant or within 30 days of termination. On July 25, 1995 the Company registered
150,000 shares previously granted under the 1990 Plan.
A summary of stock option activity under 1990 Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-----------------------------
Reserved Price Per
Shares Shares Share
------ ------ -----
<S> <C> <C> <C>
Balance, September 30, 1993 125,000 212,500 $.50-2.12
Reserve 112,500 -- --
Expired -- (62,500) --
------- ------- ---------
Balance, September 30, 1994 237,500 150,000 .50-.62
Reserved 25,000 -- --
Adjustment to reserve (112,500) -- --
Exercised (16,000) (16,000) .50
------ ------ --------
Balance, September 30, 1995 134,000 134,000 .50-.62
Exercised (62,000) (62,000) .50-.62
------ ------ -------
Balance, December 31, 1995 72,000 72,000 .62
Exercised (47,000) (47,000) .62
------ ------ --------
Balance, December 31, 1996 25,000 25,000 $ .62
====== ====== ========
</TABLE>
F-24
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (Continued)
During 1995 the Company's Board of Directors, pursuant to its express authority
under the 1990 Plan, extended option periods to August 1, 1996 for an option to
purchase 50,000 shares of the Company's common stock at $.625 per share and an
option to purchase 50,000 shares of the Company's common stock at $.50 per share
granted to a former employee/stockholder/officer who was terminated in July
1994. On September 30, 1995 the Company's board of directors, pursuant to its
express authority under the 1990 Plan, extended the expiration period to ten
years and the exercise period to eight years for an option to purchase 50,000
shares of the Company's common stock at $.625 per share previously granted to
the stockholder/officer.
At December 31, 1996 options for 25,000 shares were exercisable and no shares
were available for future grants under the 1990 Plan.
1994 Executive Option Plan
- --------------------------
On March 25, 1994, the stockholders approved a proposal authorizing the
Company's board of directors to grant the stockholder/officer options to
purchase up to 200,000 shares of the Company's common stock for $1.81 per share
exercisable until March 25, 2004, each year for three years commencing from
March 25, 1994. The number of shares granted in each year's option may be
further limited based upon the Company's operating results for the years ending
September 30, 1994, 1995 and 1996. No grant was made for the year ended
September 30, 1994 due to the Company's failure to meet the required minimum
profitability goal.
On September 30, 1995 the Company's board of directors granted an option to a
stockholder/officer for 125,000 shares of the Company's common stock at an
exercise price of $1.81 expiring within ten years of the date of grant or within
90 days of termination. The option was granted based on the Company achieving
certain profitability goals for the year ended September 30, 1995. During fiscal
year 1996, 94,000 options were exercised and 200,000 options were granted to the
stockholder/officer. At December 31, 1996, options for 231,000 were exercisable.
A summary of the stock option activity under the 1994 Executive Option Plan is
as follows:
<TABLE>
<CAPTION>
Outstanding Options
--------------------------
Reserved Price Per
Shares Shares Share
------ ------ -----
<S> <C> <C> <C>
Balance, September 30, 1994 200,000 -- $ 1.81
Reserved 125,000 -- --
Granted -- 125,000 1.81
------- ------- --------
Balance, September 30, 1995
and December 31, 1995 325,000 125,000 1.81
Exercised (94,000) (94,000) 1.81
Granted -- 200,000 1.81
------- ------- --------
Balance, December 31, 1996 231,000 231,000 $ 1.81
======= ======= ========
F-25
</TABLE>
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (Continued)
Consultants' Stock Option Plan
- ------------------------------
During 1996, the Company's Board of Directors adopted the 1996 Consultant's
Stock Option Plan under which 500,000 shares of the Companys common stock were
reserved for issuance at prices not less than 75% of the fair market value of
the common stock on the date of grant. Options may only be granted to
consultants (who may also be employees of the Company). The options are to be
granted by December 31, 2001 and are exercisable within one year of the date of
grant or within 30 days of termination.
A summary of stock option activity under the Consultant's plan is as follows:
<TABLE>
<CAPTION>
Outstanding Options
---------------------------------
Reserved Price Per
Shares Shares Share
------ ------ -----
<S> <C> <C> <C>
Initial reserved shares 500,000 - $ -
Granted (300,000) 300,000 1.5-3.5
Exercised - (205,000) 1.5-3.5
------- ------- -----------
Balance, December 31, 1996 200,000 95,000 $ 1.5-3.5
======= ======= ===========
</TABLE>
At December 31, 1996 options for 95,000 were exercisable and 200,000 options
were available for future grants under the 1996 plan. On January 17, 1997 the
board of directors extended the expiration date to May 7, 1997 for 65,000 option
shares previously granted to a consultant.
Stock Based Compensation
- ------------------------
The Company has several option plans which reserve shares of common stock for
issuance to employees, key employees and directors. The Company has adopted the
disclosure only provisions of Statement of Financial Accounting Standards No.
123 Accounting For Stock-Based Compensation (SFAS 123). Accordingly, no
compensation cost has been recognized for these stock option plans. Had
compensation cost for these plans been determined based on the fair value at the
date of grant for awards in the following period consistent with the provisions
of SFAS 123, the Companys net income and earnings per share would have been
reduced to the proforma amounts indicated below (in thousands except per share
data):
F-26
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 13 - COMMON STOCK, OPTIONS AND WARRANTS (Continued)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year ended
December 31, December 31, September 30,
1996 1995 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net income - as reported $ 822 $ 186 $ 602
Net income - proforma $ 822 $ 141 $ 492
Earnings per share - as reported $ .22 $ .05 $ .17
Earnings per share - pro forma $ .22 $ .04 $ .14
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
Expected dividend yield 0%
Expected stock price volatility 60%
Risk free interest rate 6.00%
Expected life of options 5-7 years
Expected vesting period 1.5 years
The weighted average fair value of options granted during the year ended
December 31, 1996, the three months ended December 31, 1995 and the year ended
September 30, 1995 was $1.96, $1.87 and $1.78, respectively.
NOTE 14 - RELATED PARTY TRANSACTIONS
In addition to transactions with related parties discussed throughout the notes
to financial statements, the following related party transactions have occurred:
Two stockholders/directors of the Company are attorneys who have provided
certain legal services to the Company. Legal fees incurred totaled approximately
$26,000, $5,000, and $27,000 for the year ended December 31, 1996, the three
months ended December 31, 1995 and the year ended September 30, 1995,
respectively.
A stockholder of the Company provided construction services to the Company in
the form of repairs, maintenance and leasehold improvements totaling $18,000 for
the year ended September 30, 1995.
In March of 1995 the Company purchased a building and land from a majority
stockholder/officer of the Company for $450,000 of which $143,000 was paid in
cash and the remaining $306,625 was applied to reduce the stockholder/officer's
note receivable (see Note 4).
F-27
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 15 - SUPPLEMENTAL INFORMATION TO STATEMENT OF CASH FLOWS FOR
NONCASH INVESTING AND FINANCING ACTIVITIES (In Thousands)
<TABLE>
<CAPTION>
Three Months
Year Ended Ended Year Ended
December 31, December 31, September 30,
1996 1995 1995
---------- ---------- -------------
<S> <C> <C> <C>
Cash paid during the
period for interest $ 240 $ 50 $ 224
========== ========= =========
Cash paid during the
period for income taxes $ 493 $ 209 $ -
========== ========= ========
Transfer of forfeited pawn loan
Collateral to inventory $ 3,409 $ 855 $ 3,019
========== ========= =========
Stockholder notes payable
contributed as additional
capital $ 226 $ - $ -
========== ========= =========
Acquisition of real property
for reduction in stock-
holder/officer note
receivable $ - $ - $ 306
========== ========= ==========
</TABLE>
F-28
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 16 - SUMMARIZED PROFORMA INFORMATION (UNAUDITED)
The following is an unaudited proforma presentation to reflect the activity for
all acquirees as if the acquisitions had occurred at the beginning of the
periods presented (in thousands except for per share data):
<TABLE>
<CAPTION>
For the Year For the Three For the Year
Ended Months Ended Ended
December 31, December 31, September 30,
1996 1995 1995
----------- ----------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES:
U.S. Pawn, Restated $ 10,893 $ 2,652 $ 9,728
Advantage 39 107 276
City National 578 414 1,089
Bobby's 454 138 540
----------- ------------ -------------
$ 11,964 $ 3,311 $ 11,633
=========== ============ =============
NET INCOME:
U.S. Pawn, Restated $ 822 $ 186 $ 602
Advantage 14 21 42
Less Advantage proforma
adjustments (4) (6) (23)
City National 93 60 157
Less City National proforma
adjustments (64) (36) (96)
Bobbys 53 23 48
Less Bobbys proforma
adjustments (9) (2) (9)
---------- ------------ -------------
Proforma net income (unaudited) $ 905 $ 246 $ 721
========== ============ =============
Proforma earnings per share
(unaudited) $ .24 $ .07 $ .20
========== ============ =============
</TABLE>
During 1995, the Company changed its year end from September to December.
Advantage, City National and Bobbys year ends are December. Unaudited
Summarized Information for acquirees for the year ended December 31, 1995 have
been combined with the year end summarized information of the Company for
September 30, 1995. The period October, November and December 1995 for the
acquirees have been included in the 12 months ended September 30, 1995 and the
three months ended December 31, 1995.
F-29
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 16 - SUMMARIZED PROFORMA INFORMATION (UNAUDITED) (Continued)
Proforma adjustments were made to amortize goodwill over 10 years, amortize
non-compete agreements over 5 years, reduce depreciation expense for leasehold
improvements not acquired, adjust rent expense as set forth in new lease
agreement, reflect interest expense on notes payable, and reflect additional
provision for income taxes.
NOTE 17 - SUBSEQUENT EVENTS
Exercise of Options Under Consulting and Stock Option Plan
- ----------------------------------------------------------
Through February 2, 1997 options for 95,000 shares of common stock were
exercised by a consultant for a total of $227,000 and an average price per share
of $2.39.
Through March 20, 1997, employees exercised options for 57,625 shares of common
stock for a total of $111,000 and an average price per share of $1.93.
Acquisition of Pawn Warehouse Outlet, Inc.
- ------------------------------------------
In February 1997 the Company agreed to acquire all of the outstanding common
stock of Pawn Warehouse Outlet, Inc. (Nebraska) for shares of the Companys
common stock totaling $275,000 in value. The acquisition has been accounted for
as a pooling of interests and accordingly, all consolidated financial statements
of the Company will be restated to include the accounts and operations for
Nebraska for all periods prior to the merger. Nebraska began doing business
during 1996.
The unaudited balance sheet as of December 31, 1996 which would reflect the
merger as if it occurred prior to December 31, 1996 is as follows (in
thousands):
<TABLE>
<CAPTION>
Proforma Proforma
U.S. Pawn Nebraska Adjustments Balance
--------- -------- ----------- -------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current assets $7,286 $ 298 $ -- $7,584
Property and equipment, net 1,397 9 -- 1,406
Other assets 901 -- -- 901
------ ------ ------ ------
Total Assets $9,584 $ 307 $ -- $9,891
====== ====== ====== ======
Current liabilities $2,473 $ 146 $ -- $2,619
Long-term debt 322 -- -- 322
Deferred income taxes 113 -- 10 123
Minority interest 42 -- -- 42
Stockholders' equity 6,634 161 (10) 6,785
------ ------ ------ ------
Total Liabilities
and Stockholders'
equity $9,584 $ 307 $ -- $9,891
====== ====== ====== ======
</TABLE>
F-30
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
====================================
NOTE 17 - SUBSEQUENT EVENTS (Continued)
Separate net revenues, net income and related per share amounts of the merged
entities are presented in the following table. In addition, the table includes
unaudited proforma net income and net income per share amounts which reflect the
elimination of non recurring merger costs and expenses in 1996 and proforma
adjustments to present income taxes on the basis on which they will be reported
in future periods (in thousands, except share data):
December 31,
1996
-------------
(Unaudited)
Net Revenues:
U.S. Pawn $ 10,893
Nebraska 404
Merger adjustments -
-------------
Total $ 11,297
=============
Net Income:
U.S. Pawn $ 822
Nebraska 2
Merger adjustments (33)
-------------
Total $ 791
=============
Net income per share:
As reported $ .22
=============
Proforma $ .20
=============
F-31
<PAGE>
ITEM 9. - DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------
During the Company's two most recent fiscal years and the three months
ended December 31, 1995, the Company's principal independent accountant did not
resign nor was the Company's independent accountant dismissed.
PART III
ITEM 10. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------------------------------------------------------------
Information with respect to this Item is incorporated herein by reference
to the Company's definitive proxy statement, to be disseminated on or before
April 30, 1997.
ITEM 11. - EXECUTIVE COMPENSATION
- ---------------------------------
Information with respect to this Item is incorporated herein by reference
to the Company's definitive proxy statement, to be disseminated on or before
April 30, 1997.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
Information with respect to this Item is incorporated herein by reference
to the Company's definitive proxy statement, to be disseminated on or before
April 30, 1997.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
Information with respect to this Item is incorporated herein by reference
to the Company's definitive proxy statement, to be disseminated on or before
April 30, 1997.
ITEM 14. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements:
---------------------
The following financial statements are included in Part II, Item 8 for the
year ended December 31, 1996, the three months ended December 31, 1995, the year
ended September 30, 1995, except the Balance Sheets, which are as of December
31, 1996 and 1995: Statements of Operations, Statements of Changes in
Stockholder's Equity, Statements of Cash Flows and Notes to Financial
Statements.
27
<PAGE>
2. Financial Statements Schedules: None.
--------------------------------------
3. Exhibits:
----------------
Exhibit #10.1 Stock Purchase Agreement - Advantage Pawn.
Exhibit #27.1 Financial Data Schedule.
(b) Reports on Form 8-K: During the twelve months covered by this report, the
Company filed two reports on form 8-K, one on April 8, 1996 to report the
acquisition of Advantage Pawn, Inc. and one on October 17, 1996 to report the
acquisition of City National, both of which are incorporated herein by
reference.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
March 27, 1997 on its behalf by the undersigned, thereto duly authorized.
U.S. PAWN, INC.
By /S/ MELVIN WEDGLE
----------------------------
Melvin Wedgle
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March , 1997.
Signature Capacity
- --------- --------
/S/ MELVIN WEDGLE
- ----------------------------- Chief Executive Officer and
Melvin Wedgle Director
/S/ CHARLES C. VAN GUNDY Chief Financial Officer,
- ----------------------------- (Principal Accounting Officer),
Charles C. Van Gundy Secretary and Director
/S/ GARY A. AGRON
- ----------------------------- Director
Gary A. Agron
/S/ DANIEL B. RUDDEN
- ----------------------------- Director
Daniel B. Rudden
/S/ STANLEY M. EDELSTEIN
- ----------------------------- Director
Stanley M. Edelstein
/S/ LARRY M. SNYDER
- ----------------------------- Director
Larry M. Snyder
29
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (the "Agreement") is entered into this 16th
day of March 1996, by and among U.S. Pawn Inc., a Colorado corporation
("Purchaser"), Advantage Pawn, a Wyoming corporation (the "Company"), and Robert
D. Phetteplace, James A. Andresen and Timothy J. Olsen. (Robert D. Phetteplace,
James A. Andresen and Timothy J. Olsen shall be hereinafter sometimes
individually referred to as a "Seller" and shall be hereinafter collectively,
jointly and severally referred to as the "Sellers").
RECITALS
WHEREAS, the Seller owns an aggregate of 3,000 shares of common stock of
the Company (the "Shares"), which are all the outstanding shares of the common
stock of the Company; and,
WHEREAS, the Sellers desires to sell, transfer and deliver 2,400 Shares to
the Purchaser and the Purchaser desires to purchase such Shares upon the terms
and conditions provided by this Agreement.
THEREFORE, in consideration of the Recitals, which shall constitute a
substantive part of this Agreement, the mutual covenants, promises, agreements,
representations and warranties hereinafter set forth and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
ARTICLE I
---------
SALE AND PURCHASE OF SHARES
---------------------------
1.1 SALE AND PURCHASE. Subject to the terms and conditions hereof, on the
Closing Date as defined below, the Sellers shall each sell, assign, transfer and
deliver to the Purchaser, and the Purchaser shall purchase from each of the
Sellers (the "Purchase"), 800 shares for a total of 2,400 shares, which the
Sellers represent will be owned by Sellers at the time of Closing. The Purchase
shall be evidenced by the delivery to the Purchaser of stock certificates
representing such Shares owned by the Sellers duly endorsed in blank or
accompanied by duly executed stock powers. Further, as part of the purchase and
sale, each of the Sellers has agreed to enter into employment agreements with
the Company as set forth in Section 2.1 below. Specifically contained in each of
the employment agreements referenced in Section 2.1 below is a covenant not to
compete which is an integral component of the purchase and sale of Seller's
Shares hereunder.
1.2 CLOSING. The Purchase shall be consummated at a closing to take
place at the offices of Purchaser on April 1, 1996 (the "Closing Date"), or such
other date as the parties shall agree.
<PAGE>
1.3 PURCHASE PRICE FOR SELLER'S SHARES. The consideration to be paid by the
Purchaser to the Sellers for the Seller's Shares shall be a total of One Hundred
Eighty-Seven Thousand Five Hundred Dollars ($187,500) payable at the closing as
follows: (a) Eighty-Two Thousand Five Hundred dollars ($82,500) in cash
delivered by Purchaser by certified or cashier's check, and (b) a number of
shares of the Common Stock of the Purchaser (the "Purchaser's Shares") equal to
the result obtained by dividing One Hundred Five Thousand Dollars ($105,000) by
the average closing price per share of the Common Stock of the Purchaser, as
reported by NASDAQ, for the ten (10) trading days immediately preceding the
Closing Date. Further, Purchaser agrees that it will guarantee an aggregate of
$105,000 of liabilities of the Company consisting of approximately $60,000 of
bank notes payable and approximately $45,000 of notes payable to private
parties.
1.4 PURCHASE PRICE FOR COVENANTS NOT TO COMPETE. The consideration to be
paid by the Purchaser to the Sellers for such Sellers to enter into covenants
not to compete as contained in each Seller's employment agreement referenced in
Section 2.1 below shall be Twenty-Two Thousand Five Hundred Dollars ($22,500)
payable Seven Thousand Five Hundred Dollars ($7,500) to each of the Sellers at
the Closing by Purchaser by certified or cashier's check.
ARTICLE II
----------
FURTHER AGREEMENTS
------------------
2.1 EMPLOYMENT AGREEMENT. On the Closing Date, the Company and Robert D.
Phetteplace, James A. Andresen and Timothy J. Olsen shall execute employment
agreements substantially in the form attached hereto as Exhibits A, B and C,
respectively.
2.2 BUY-SELL AGREEMENT. On the Closing Date, all parties to this Agreement
shall execute a Buy-Sell Agreement substantially in the form attached hereto as
Exhibit D.
2.3 AMENDED SHAREHOLDERS' AGREEMENT. On the Closing Date, all parties to
this Agreement shall execute an Amended Shareholders' Agreement substantially in
the form attached hereto as Exhibit E.
2.4 BOARD OF DIRECTORS. On and subsequent to the Closing Date and so long
as the Sellers own 20% of the outstanding shares of the Company's Common Stock,
the Sellers shall be entitled to appoint one (1) member to the Company's Board
of Directors.
2.5 SUBSCRIPTION AGREEMENTS. The Sellers represent that the Purchaser's
Shares that they are receiving as part of the purchase price as set forth in
Section 1.3 above, are restricted shares of common stock and not registered in
accordance with the Securities Act of 1933, as amended. The Sellers further
acknowledge that the Purchaser's Shares represent a speculative investment
wherein they could lose the entire value of such investment and further
represent and acknowledge those matters as set forth in the Subscription
Agreement attached hereto as Exhibit F. On the Closing Date, the Sellers shall
execute a Subscription Agreement substantially in the form of attached Exhibit
F.
2
<PAGE>
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES
------------------------------
3.1 GENERAL STATEMENT. The parties make the representations and warranties
to each other which are set forth in this Article III. The survival of all such
representations and warranties shall be in accordance with Section 8.1 hereof.
All representations and warranties of the parties are made subject to the
exceptions which are noted in the respective exhibits delivered by the parties
to each other concurrently herewith. Copies of all documents referenced in the
exhibits to this Agreement, other than documents filed by the Purchaser with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), shall be attached hereto.
3.2 REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to the Company and the Sellers, as of the date hereof and at the
Closing Date, as follows:
a. Organization. Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the State of Colorado.
b. Authorization of Transaction. Purchaser has the full power and
authority (including full corporate power and authority) to execute
and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of
Purchaser, enforceable in accordance with its terms and conditions.
c. Brokers' Fees. Purchaser has no liability or obligation to pay any
fees or commissions to any broker, finder, or agent engaged by the
Sellers or Company with respect to the transactions contemplated by
this Agreement.
3.3 REPRESENTATIONS AND WARRANTIES OF SELLERS AND COMPANY. Sellers and
Company, jointly and severally, represent and warrant to Purchaser as of the
date hereof and at the Closing Date, as follows:
a. Organization, Qualification and Corporate Power. Company is a
corporation duly incorporated, validly existing, and in good standing
under the laws of the State of Wyoming. Company is
3
<PAGE>
duly authorized to conduct business and is in good standing under the
laws of each jurisdiction where such qualification is required.
Company has the legal right, full corporate power and authority to
carry on the business in which it is engaged and to own and use the
properties owned and used by it. No actions, proceedings or
transactions have been commenced or undertaken by either the Company
or Seller which (i) give or would give rights to any person, other
than the Purchaser, in any of the Shares or any of the Company's
assets or (ii) interfere with the consummation of the transactions
contemplated by this Agreement. The Company has no subsidiaries.
b. Capitalization. The entire authorized capital stock of the Company
consists of 4,000 shares of common stock, of which 3,000 shares are
issued and outstanding. All of the issued and outstanding shares of
the Company have been duly authorized and are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized
options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments that could
require the Company to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or
similar rights with respect to the Company.
c. Ownership of Sellers Shares. Each Seller is the sole and exclusive
record and beneficial owner of 1,000 Shares. The Sellers possess and
on the Closing Date shall possess good and merchantable title to the
Sellers Shares, and own the Sellers Shares free and clear of any and
all security interests, agreements, restrictions, claims, liens,
pledges and encumbrances of any nature or kind. The Sellers have the
absolute and unconditional right to sell, assign, transfer and deliver
the Sellers Shares to the Purchaser in accordance with the terms of
this Agreement.
d. Authority and Binding Effect. The Company has the full corporate power
and each of the Sellers has the full power and authority to execute
and deliver this Agreement and each agreement referenced herein to
which they are a party and to consummate the transactions contemplated
by, and comply with their obligations under, such agreements. At their
execution, this Agreement and each agreement referenced herein to
which Company is a party, and the consummation by Company of its
obligations herein and therein, have been duly authorized by all
necessary corporate
4
<PAGE>
action of the Company. As of the Closing, this Agreement and each
agreement referred to herein to which Company is a party, if
required, will have approval by all of the Company's stockholders in
accordance with applicable law. This Agreement has been duly executed
and delivered by the Sellers and the Company, and the Sellers and the
Company will, at the Closing, duly execute and deliver the agreements
referenced herein to which they are a party. To the Sellers' and the
Company's best knowledge, this Agreement is a valid and binding
agreement of the Sellers and the Company. To Sellers' and Company's
best knowledge, this Agreement shall be enforceable against the
Sellers and the Company in accordance with its terms, except as such
enforceability may be limited by (A) bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally and (B) general principles of
equity regardless of whether such enforceability is considered in a
proceeding in equity or at law. To Sellers and Company's best
knowledge, no further action is required to be taken by the Sellers
or the Company, nor is it necessary for the Sellers or the Company to
obtain any action, approval or consent by or from any third persons,
governmental or other, to enable the Sellers or the Company to enter
into or perform its obligations under this Agreement and each
agreement referenced herein to which they are a party.
e. Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated
hereby, will (i) violate any constitution, statute, regulation, rule,
injunction, judgment, order, decree, ruling, charge, or other
restriction of any government, governmental agency, or court to which
Company is subject or any provision of the charter or bylaws of
Company or any shareholders' agreement under which the Company
operates in lieu of bylaws or (ii) conflict with, result in a breach
of, constitute a default under, result in the acceleration of, create
in any party the right to accelerate, terminate, modify, or cancel, or
require any notice under any agreement, contract, lease, license,
instrument, or other arrangement to which Company is a party or by
which it is bound or to which any of its assets is subject (or result
in the imposition of any security interest upon any of its assets),
except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation or failure to give notice
would not have a material adverse effect on Company or on the ability
of the parties to consummate the transactions contemplated by this
Agreement. Company does not
5
<PAGE>
need to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental
agency in order for the parties to consummate the transactions
contemplated by this Agreement, except where the failure to give
notice to file, or obtain any authorization, consent, or approval
would not have a material adverse effect on the Company or on the
ability of the parties to consummate the transactions contemplated by
this Agreement.
f. Financial Statements. The Seller has delivered to Purchaser financial
statements of the Company consisting of an unaudited balance sheet and
a related statement of income, as of and for the period ended December
31, 1995 (the "Financial Statements"). True, correct and complete
copies of the Financial Statements including weekly updates from
December 31, 1995 and through March 15, 1996, are attached as Exhibit
G hereto. Except as otherwise set forth in the footnotes contained
therein, the Financial Statements were prepared in accordance with
generally accepted accounting principles ("GAAP"). The Financial
Statements fairly present the financial condition of the Company and
the results of its operations as of the relevant dates thereof and for
the respective periods covered thereby. Except as set forth in the
Financial Statements, the Company does not have any debts,
obligations, liabilities or commitments of any nature, whether due or
to become due, absolute, contingent or otherwise, that, in accordance
with GAAP, are required to be disclosed in a balance sheet or the
footnotes thereto, and are not shown on the December 31, 1995 balance
sheet delivered pursuant hereto, other than liabilities incurred after
December 31, 1995 in the ordinary course of business and consistent
with past practice. Such post- December 31, 1995 liabilities are not
material in amount and have not had and are not expected to have,
individually or in the aggregate, a material adverse effect on the
financial condition or results of operations of the Company or the
business. As to each liability, debt, obligation or commitment, fixed
or contingent, that is set forth in the Financial Statements, the
Seller shall provide the following information, in writing as an
attachment to such Exhibit: (i) a summary description of the
liability, debt, obligation or commitment, together with copies of all
relevant documentation relating thereto, the amounts claimed and any
other action or relief sought and, if in connection with a claim, suit
or proceeding, the name of the claimant and all other parties involved
therewith and the identity of the court or agency in which such claim,
suit or proceeding is being prosecuted, and (ii) the best estimate of
6
<PAGE>
the Seller of the maximum amount, if any, which is likely to become
payable with respect to any contingent liability. For purposes hereof,
if no written estimate is provided, such best estimate shall be deemed
to be zero. Currently and at the time of closing, the Company has and
will have a minimum of $10,000 in cash on hand or in a bank account or
in a combination thereof. All outstanding notes receivable of the
Company are collectible.
g. Absence of Certain Changes. Except as set forth in Exhibit H hereto,
during the period from December 31, 1995 to the date hereof, there has
not been with respect to or affecting Company or its business: (i) any
amendment, termination or revocation, or any threat known to the
Sellers or the Company of any amendment, termination, or revocation,
of any material contract or agreement to which Company is, or during
the period ended March 16, 1996 was, a party or of any license, permit
or franchise required for the continued operation of the business as
it was conducted during the period ended March 16, 1996; (ii) except
for the transactions contemplated hereby, any sale, transfer,
mortgage, pledge or subjection to lien, charge or encumbrance of any
kind, of, on or affecting any of the Company's assets, except sales or
utilization of the Company's inventory that have been made in the
ordinary course of the Company's business and consistent with past
practices, and liens for current taxes not yet due and payable; (iii)
other than as contemplated in connection with the transactions
contemplated hereby, any increase in the compensation paid or payable
or in the fringe benefits provided to any employees of the Company,
(iv) any damage, destruction or loss, whether or not covered by
insurance, of any of the Company's assets; (v) the incurrence of any
indebtedness, either for borrowed money or in connection with any
purchase of assets that is not reflected in the December 31, 1995
balance sheet and individually or in the aggregate involves more than
$1,000, except in the ordinary course of business consistent with past
practices; (vi) any purchase or lease, or commitment for the purchase
or lease, of equipment, machinery, leasehold improvements or other
capital items not disclosed in the Financial Statements which involves
amounts exceeding $1,000 individually or $2,500 in the aggregate,
except in the ordinary course of business consistent with past
practices, or which is in excess of or represents a departure from the
normal, ordinary and usual requirements of the Company's business;
(vii) the execution by the Company of any agreement or contract that
is, or could reasonably be expected to become, material to the
business; or (viii) the occurrence subsequent to December 31, 1995
7
<PAGE>
of any other event or circumstance which, to the best knowledge of
the Seller or the Company, after due inquiry would materially and
adversely affect any of the Company's assets, the business, or the
ability of the Seller or the Company to consummate the transactions
contemplated hereby.
h. Title to and Adequacy of Company Assets. Except as disclosed on
Exhibit I hereto, the Company has, and at the Closing will have good,
complete and marketable title to all of the Company assets set forth
on Exhibit J attached hereto (the "Company Assets"), free and clear of
all mortgages, liens, security interests, encumbrances, pledges,
leases, equities, claims, charges, restrictions, conditions,
conditional sale contracts and any other adverse interests. Except as
set forth on Exhibit I, all of the Company Assets are in the exclusive
possession and control of the Company. The Company Assets constitute
substantially all the assets, properties, rights, privileges and
interests necessary for Purchaser to own and operate the Company's
business substantially in the same manner as it has been conducted by
the Company since inception.
i. Undisclosed Liabilities. To the best of Seller's and Company's
knowledge, the Company has no liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent,
whether accrued and unaccrued, whether liquidated or unliquidated, and
whether due or to become due), except for (i) liabilities set forth in
the face of the balance sheets dated as of December 31, 1995 and
outstanding on the Closing Date, and (ii) liabilities which have
arisen after December 31, 1995, in the ordinary course of business
(none of which results from, arises out of, relates to, is in the
nature of, or was caused by breach of contract, breach of warranty,
tort, infringement, or violation of law). Company has no liability
(whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, or whether due or to become due) for Taxes (as
defined below).
j. Brokers' Fees. Seller shall be responsible for and pay any fees or
commissions to any broker, finder, or agent engaged by Seller or
Company with respect to the transactions contemplated by this
Agreement.
k. Taxes. With respect to Taxes (as defined below):
(1) Company has filed, within the time and in the manner prescribed
by law, all returns, declarations, reports, estimates,
information returns and statements ("Returns") required to be
filed under federal, state, local or any foreign laws by Company
or such subsidiary, and all such Returns are true, correct and
complete in all material respects.
8
<PAGE>
(2) Company has within the time and in the manner prescribed by law,
paid (and until the Closing Date will, within the time and in the
manner prescribed by law, pay) all Taxes (as defined below) that
are due and payable.
(3) Company has established (and until the Closing Date will
establish) on its respective books and records reserves (to be
specifically designated as an increase to current liabilities)
that are adequate for the payment of all Taxes yet due and
payable.
(4) There are no liens for Taxes upon the assets of Company except
liens for Taxes not yet due.
(5) Company has not filed (and will not file prior to the Closing
Date) any consent agreement under Section 341(f) of the Code or
agree to have Section 341(f)(2) of the Code apply to any
disposition of the subsection (f) asset (as such term is defined
in Section 341(f)(4) of the Code) owned by Company.
(6) Except as set forth in attached Exhibit K (which shall set forth
the type of return, date filed, and date of expiration of the
statute of limitations), (i) no extensions of the statute of
limitations for the assessment of federal income taxes have been
granted for any federal income tax returns of Company and such
returns have been examined by the Internal Revenue Service for
all periods through December 31, 1995; (ii) no extensions of the
statute of limitations for the assessment of state, local or
foreign income taxes have been granted for any applicable Returns
of Company and such Returns have been examined by the appropriate
tax authorities for all periods through December 31, 1995; and
(iii) no deficiency for any Taxes has been proposed, asserted or
assessed against Company which has not been resolved and paid in
full.
9
<PAGE>
(7) There are no outstanding waivers or comparable consents regarding
the application of the statute of limitations with respect to any
Taxes or tax returns ("Return") that have been given by Company.
(8) Except as set forth in Exhibit L (which shall set forth the
nature of the proceeding, the type of return, the deficiencies
proposed or assessed and the amount thereof, and the taxable year
in question), no federal, state, local or foreign audits or other
administrative proceedings or court proceedings are presently
pending with regard to any Taxes or Returns.
(9) Company is not a party to any tax-sharing or allocation
agreement, nor does Company owe any amount under any tax-sharing
or allocation agreement.
(10) No amounts payable under any agreement will fail to be deductible
for federal income tax purposes by virtue of Section 280G of the
Code.
(11) Company has complied (and until the Closing Date will comply) in
all respects with all applicable laws, rules and regulations
relating to the payment and withholding of Taxes (including,
without limitation, withholding of Taxes pursuant to Sections
1441 or 1442 of the Code or similar provisions under any foreign
laws) and have, within the time and in the manner prescribed by
law, withheld from employee wages and paid over to the proper
governmental authorities, all amounts required to be so withheld
and paid over under all applicable laws.
(12) Company has never been (or has any liability for unpaid Taxes
because it once was) a member of an "affiliated group" within the
meaning of Section 1502 of the Code during any part of any
consolidated return year within any part of which year any
corporation other than Company was also a member of such
affiliated group.
10
<PAGE>
(13) For purposes of this Agreement, "Taxes" shall mean all taxes,
charges, fees, levies, or other assessments of whatever kind or
nature, including, without limitation, all net income, gross
income, gross receipts, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment,
excise, estimated, severance, stamp, occupancy or property taxes,
customs duties, fees, assessments or charges of any kind
whatsoever (together with any interest and any penalties,
additions to tax or additional amounts) imposed by any taxing
authority (domestic or foreign) upon or payable by Company or any
subsidiary.
l. Leases. Exhibit M is a list and brief description of each of the
facilities or real properties leased by the Company and used in its
business (the "Real Property Leases"). The description sets forth,
among other things, the address of each facility or real property
leased and the name and address of the landlord. Exhibit N also
contains a list of all leases under which the Company possesses or
uses personal property in connection with the conduct or operation of
its business. The personal property leases set forth in Exhibit N are
sometimes collectively referred to as the "Personal Property Leases."
True, correct and complete copies of the Real Property Leases and
Personal Property Leases (collectively, the "Leases") have been
delivered to Purchaser. All of the facilities covered by the Real
Property Leases have been delivered to Purchaser. All of the
facilities covered by the Real Property Leases are equipped in
substantial conformity with laws and governmental regulations
applicable to the Company or the business. The zoning of each parcel
of real property permits the presently existing improvements thereon
and continuation of the business presently conducted thereon and no
changes therein are pending or are threatened. To the best of the
Company's and Sellers' knowledge after due inquiry, no condemnation or
similar proceedings are pending or, to the best knowledge of the
Company and Seller, after due inquiry, threatened against any of the
real properties described on Exhibit M. Upon review of the Leases, to
the best knowledge of the Company and Sellers, none of the Leases
contains any provisions which, after the Closing Date, would (i)
hinder or prevent Purchaser from continuing to use any of the
properties or assets which are the subject of the Leases in the manner
11
<PAGE>
in which they are currently used or (ii) impose any additional costs
(other than scheduled rental increases) or burdensome requirements as
a condition to their continued use which are not currently in effect.
Except for the Leases, none of the Company's Assets are held under, or
used by the Company in connection with the Company's business pursuant
to, any lease or conditional sales contract.
m. Contracts, Agreements and Commitments. Exhibit O hereto contains an
accurate and complete list of all contracts, agreements, leases,
licenses and instruments, not otherwise disclosed in Exhibit M and N
to which the Company is a party or is bound and (i) which relate to
and materially affect any of the Company's Assets or the Company's
business, or (ii) which could hinder consummation of the transactions
contemplated by this Agreement or would affect Purchaser's title to or
it ability, after the Closing, to conduct the business as it has been
conducted by the Company since inception, 199__, or its ability to
dispose of any of the Company Assets following the Closing. Exhibits
M, N and O include, without limitation, all contracts and agreements
and all leases, licenses and instruments, which (i) grant a security
interest or permit or provide for the imposition of any lien,
mortgage, security interest or other encumbrance on, or provide for
the disposition of, any of the Company's Assets; (ii) require the
consent of any third party to the consummation by the Company or
Sellers of the transactions contemplated by this Agreement, or (iii)
would restrict the use or disposition by Purchaser after the Closing
of any of the Company's Assets. True, correct and complete copies of
all items so listed in Exhibits M, N and O have been furnished to
Purchaser. Each of such contracts, agreements, leases, licenses and
instruments so listed, or required to be so listed, in Exhibits M, N
and O is a valid and binding obligation of the Company or Sellers, as
applicable, and to the best knowledge of the Company and Sellers, the
other parties thereto, enforceable in accordance with their terms,
except as may be affected by bankruptcy, insolvency, moratorium or
similar laws affecting creditors' rights generally and general
principles of equity relating to the availability of equitable
remedies. Except as otherwise set forth in Exhibits M, N and O hereto,
there have not been any defaults by the Company or Sellers or, to the
best knowledge of the Company and Sellers after due inquiry, defaults
or any claims of default or claims of nonenforceability by the other
party or parties which, individually or in the aggregate, would have a
material adverse effect on the business or any of the Company's
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Assets, and, to the best of the Company's and Sellers' knowledge after
due inquiry, there are no facts or conditions that have occurred or
that the Company or Sellers (without independent investigation)
anticipate to occur which, through the passage of time or the giving
of notice, or both, would constitute a default by the Company or
Sellers, or by the other party or parties, under any of such
contracts, agreements, leases, licenses and instruments or would cause
a creation of a lien, security interest or encumbrance upon any of the
Company's Assets or otherwise materially and adversely affect any of
the Company's Assets or the business.
n. Employees and Plans. Company and Sellers have furnished to Purchaser a
list of each compensation arrangement for each employee. Company has
no employee pension plan, employee profit sharing plan or employee
welfare benefit plan subject to the Employee Income Retirement
Security Act of 1974 or any other employee pension plan, employee
profit sharing plan and employee welfare benefit plan.
o. Receivables. All notes receivable of Company from and advanced as set
forth on Schedule 1 attached hereto and made a part hereof are
collectible.
p. Licenses. Company owns and holds all licenses and permits necessary or
required by applicable law in order to conduct its business as now
conducted and, if required, the Company and Sellers shall take all
actions necessary to transfer such licenses and permits to the
Purchaser.
q. Statutes. All transactions of the Company and Sellers of any nature
have been entered into and/or completed in accordance with all
applicable statutes, laws, rules, codes, regulations, and ordinances.
r. Labor Unions. There are no agreements with any labor union, other
labor organization or labor representatives applicable to or covering
the employees of the Company, nor are any discussions or negotiations
in anticipation of any such agreement presently under way or
anticipated, nor has there been any request made to enter any such
negotiations or to hold any type of election relating to
employer/employee relations or bargaining.
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s. Environmental Laws. The premises currently occupied by the Company
satisfy all local ordinances and Wyoming statutes and the Company has
complied in all material respects with all environmental laws,
including hazardous or toxic waste disposal laws and regulations
applicable to the Company and its business.
t. Compliance with Law/Permits. The Company is in compliance with all,
and is not in violation of any, law, ordinance, order, decree, rule or
regulation of any governmental agency or authority, the violation of
or noncompliance with which could have a material adverse effect on
the business or the Company's Assets taken as a whole. There are no
unresolved (i) proceedings or investigations instituted or, to the
best knowledge of the Company or Sellers after due inquiry,
threatened, by any such governmental authorities against the Company
or, to the best knowledge of the Company or Sellers (without
independent investigation), relating to the business, or (ii)
citations issued or, to the best knowledge of the Company or Sellers
after due inquiry, threatened against the Company or its business,
including under any federal or state regulation or otherwise, which
could have, individually or in the aggregate, a material adverse
effect on the business or the Company's Assets taken as a whole, or
interfere with the maintenance, or the transfer or reissuance to
Purchaser, of the permits, licenses, franchises, certificates,
authorizations or any right to operate held by the Company.
u. Litigation and Proceedings. Except as set forth in Exhibit P hereto,
there is no action, suit, proceeding or investigation, or any counter
or cross-claim in an action brought by or on behalf of the Company or
Sellers, whether at law or in equity, or before or by any governmental
department, commission, board, bureau, agency or instrumentality,
domestic or foreign, or before any arbitrator of any kind, that is
pending or, to the best knowledge of the Company or Sellers after due
inquiry, threatened, against the Sellers, which (i) could reasonably
be expected to affect adversely the Company's or Sellers' ability to
perform its obligations under this Agreement or the agreements
referenced herein or complete any of the transactions contemplated
hereby or thereby, or (ii) involves the reasonable possibility of any
judgment or liability, or which may become a claim, against Purchaser,
the Company, its business or any of the Company's Assets prior to or
subsequent to the Closing Date. The Company is not subject to any
judgment, order, writ, injunction, decree or award of any court,
arbitrator or governmental department, commission, board, bureau,
agency or instrumentality having jurisdiction over Company, any of its
assets or the business.
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ARTICLE IV
----------
COVENANTS
---------
4.1 CONDUCT OF BUSINESS OF COMPANY PENDING THE CLOSING. Sellers and Company
agree that from the date hereof and prior to the Closing Date or earlier
termination of this Agreement.
a. Full Access. Sellers and Company shall permit representatives of
Purchaser to have full access to all premises, properties,
personnel, books, records, contracts and documents pertaining to
Company;
b. Operation of Business. Neither the Company nor the Sellers will
engage in any practice, take any action, or enter into any
transaction outside the ordinary course of business. Without
limiting the generality of the foregoing neither the Company nor
the Sellers:
(1) will authorize or effect any change in its charter or
shareholders' agreement under which the Company operates in
lieu of bylaws;
(2) will grant any options, warrants, or other rights to
purchase or obtain any of its capital stock or issue, sell,
or otherwise dispose of any of its capital stock.
(3) will declare, set aside, or pay any dividend or distribution
with respect to its capital stock (whether in cash or in
kind), or redeem, repurchase, or otherwise acquire any of
its capital stock;
(4) will issue any note, bond, or other debt security or create,
incur, assume, or guarantee any indebtedness for borrowed
money or capitalized lease obligation;
(5) will impose any security interest upon any of its assets;
(6) will make any capital investment in, make any loan to, or
acquire the securities or assets of any other person outside
the ordinary course of business;
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(7) will make any change in employment terms for any of its
directors, officers, and employees outside the ordinary
course of business; and,
(8) will commit to any of the foregoing.
c. Exclusivity. Neither Sellers nor Company shall solicit, initiate
or encourage the submission of any proposal or offer from any
person relating to the acquisition of all or substantially all of
the capital stock or assets of Company. Sellers and Company shall
notify the Purchaser immediately if any person makes any
proposal, offer, inquiry or contact with respect to any of the
foregoing.
4.2 THIRD PARTY CONSENTS. Each party to this Agreement shall use its best
efforts to obtain, as soon as reasonably practicable, all permits,
authorizations, consents, waivers and approvals from third parties or
governmental authorities necessary to consummate this Agreement and the
transactions contemplated hereby or thereby, including, without limitation, any
permits, authorizations, consents, waivers and approvals required in connection
with the Agreement.
ARTICLE V
---------
CONDITIONS TO CLOSING
---------------------
5.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE PURCHASE. The
respective obligations of each party to consummate the purchase and the other
transactions contemplated by this Agreement (collectively, the "Transaction")
shall be subject to the fulfillment of all of the following conditions precedent
at or prior to the Closing Date:
a. No injunction, order, or decree by any federal, state or foreign
court which prevents the consummation of the Transaction shall
have been issued;
b. No statute or regulation shall exist or be enacted which would
prevent consummation of the Transaction; and,
c. All governmental consents and approvals required for Transaction
shall have been obtained.
5.2 CONDITIONS TO OBLIGATIONS OF SELLERS TO EFFECT THE TRANSACTION. The
obligation of Sellers to effect the Transaction is subject to fulfillment of all
of the following conditions precedent at or prior to the Closing Date.
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a. All representations and warranties in Section 3.2 shall be true
and correct in all material respects;
b. Purchaser shall have performed and complied with all covenants
under this Agreement;
c. The Employment Agreements substantially in the form attached
hereto as Exhibits A, B and C, shall be executed by Sellers as
applicable, and the Company;
d. The Buy-Sell Agreement, substantially in the form attached hereto
as Exhibit D shall have been executed by all parties to this
Agreement;
e. The Amended Shareholders' Agreement, substantially in the form
attached hereto as Exhibit E, shall have been executed by all
parties to this Agreement;
f. The Subscription Agreement, substantially in the form attached
hereto as Exhibit F, shall have been executed by the Sellers.
5.3 CONDITIONS TO OBLIGATIONS OF PURCHASER TO EFFECT THE TRANSACTION. The
obligation of Purchaser to effect the Transaction is subject to the fulfillment
of all of the following conditions precedent at or prior to the Closing Date:
a. All representations and warranties made in this Agreement by the
Company and Seller are true and correct;
b. Company and Sellers shall have performed and complied with all
covenants under this Agreement;
c. No action, suit or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling or change would (A) prevent consummation of any of
the transactions contemplated by this Agreement, (B) cause any of
the transactions contemplated by this Agreement, (C) affect
adversely the right of Purchaser to own the capital stock of the
Company or (D) materially and adversely affect the right of the
Company to own its assets and to operate its business (and no
such injunction, judgment, order, decree, ruling or charge shall
be in effect);
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d. The Employment Agreements, substantially in the form attached
hereto as Exhibit A, B and C, shall be executed by Sellers as
applicable, and the Company;
e. The Buy-Sell Agreement, substantially in the form attached hereto
as Exhibit D, shall be executed by all parties to this Agreement;
f. The Amended Shareholders' Agreement, substantially in the form
attached hereto as Exhibit E, shall be executed by all parties to
this Agreement;
g. All consents and approvals necessary for the Transaction shall
have been obtained; and
h. No material adverse change has occurred in the business,
operations or prospects of the Company.
5.4 CONTINGENCIES. In addition to the foregoing, this Agreement and
Purchaser's obligation to perform hereunder is specifically contingent upon and
subject to the Purchaser's satisfaction, in its sole discretion, with its due
diligence examination of the following which will be performed and completed by
Purchaser or its agents within fifteen (15) business days of the execution of
this Agreement:
a. An accounting and audit verification of all assets and
liabilities of the Company by agents of Purchaser satisfactory to
all parties.
b. Verification of the corporate status of the Company with the
Wyoming Secretary of State.
c. Review of corporate articles of incorporation, bylaws, minutes of
any meetings of shareholders and/or board of directors, and stock
certificate records and/or ledgers of the Company which will be
provided to Purchaser upon execution of this Agreement.
d. Review of pawn and other required business licenses of the
Company to conduct business in the state and local governmental
jurisdictions.
e. Any other business review procedures and/or documents required to
close the Transaction as may be required or recommended by legal,
accounting and/or tax advisors for any party.
If the Purchaser is not satisfied, in Purchaser's sole opinion, with its
review of any of the above, the Purchaser may terminate this Agreement in
writing on or before twenty (20) business days from the execution of this
Agreement in which event this Agreement and all obligations of the Purchaser
hereunder shall terminate.
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ARTICLE VI
----------
INDEMNIFICATION
---------------
6.1 GENERAL INDEMNIFICATION COVENANTS. Subject to the provisions of
Sections 6.3 and 6.4, Sellers, jointly and severally, shall unconditionally
indemnify, save and keep Purchaser and its affiliates, successors and permitted
assigns (including Company) (the "Purchaser Indemnitees"), harmless against and
from all liability, demands, claims, actions or cause of action, assessments,
losses, fines, penalties, costs, damages and expenses, including reasonable
attorneys' fees, disbursements and expenses (collectively, "Damages"), sustained
or incurred by any of the Purchaser Indemnitees as a result of, arising out of,
or by virtue of any misrepresentation, breach of any warranty or representation,
or non-fulfillment of any agreement or covenant on the part of Company or
Sellers, whether contained in this Agreement or any exhibit or schedule hereto
or in any closing document delivered by Company or Sellers or Purchaser in
connection herewith to the extent such Damages (excluding obligations of Sellers
under Section 6.2 and Section 6.8) exceed One Thousand dollars ($1,000) in the
aggregate.
6.2 TAX INDEMNITY.
a. Sellers, jointly and severally, hereby unconditionally agrees to
pay, indemnify, defend and hold Purchaser and Company harmless
from and against any and all Taxes of Company and its
subsidiaries with respect to any period (or any portion thereof)
up to and including the Closing Date, except for Taxes of Company
which are reflected on the federal income tax return of the
Company as originally filed with the Internal Revenue Service for
the period ended on or about the Closing Date, together with all
reasonable legal fees, disbursements, and expenses incurred by
Purchaser and Company in connection therewith.
b. Purchaser shall prepare and file any Return of Company which is
required to be filed after the Closing Date and which relates to
any period (or portion thereof) up to and including the Closing
Date. Promptly after notice from Purchaser to Sellers at any time
prior to the date any payment for Taxes attributable to any such
Return is due or payment for Taxes with respect to any Return
must be made, an amount equal to the excess, if any, of (i) the
aggregate amount of Taxes that are due with respect to any
taxable period or periods ending on or before the Closing Date,
and Taxes that would have been due with respect to a taxable
period beginning before and ending after the Closing Date if such
period had ended
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on the Closing Date over (ii) the amount of such Taxes of Company
which are reflected on the federal income tax return of the
Company as originally filed with the Internal Revenue Service for
the period ended on or about the Closing Date shall be paid by
Seller to Purchaser by wire transfer of immediately available
funds within three business days.
c. The indemnity provided for in this Section 6.2 shall be
independent of any other indemnity provision hereof and, anything
in this Agreement to the contrary, notwithstanding, shall survive
until the expiration of the applicable statutes of limitation for
the Taxes referred to herein, and any Taxes subject to the
indemnification for Taxes set forth in this Section 6.2 shall not
be subject to the provisions of Section 6.1 or 6.4 hereof.
6.3 CONDITIONS OF INDEMNIFICATION PURSUANT TO SECTION 6.1.
a. Promptly following the receipt by a Purchaser Indemnitee of
notice of a demand, claim, action, assessment or proceeding made
or brought by a third party, including a governmental agency (a
"Third Party Claim"), the Purchaser Indemnitee receiving the
notice of the Third Party Claim (i) shall notify Sellers of its
existence, setting forth the facts and circumstances of which
such Purchaser Indemnitee has received notice, and (ii) if the
Purchaser Indemnitee giving such notice is a person entitled to
indemnification under this Article VI (an "Indemnified Party"),
specifying the basis hereunder upon which the Indemnified Party's
claim for indemnification is asserted.
b. The Indemnified Party shall, upon reasonable notice by Sellers,
tender the defense of a Third Party Claim to Sellers. If Sellers
accepts responsibility for the defense of a Third Party Claim,
then Sellers shall have the exclusive right to contest, defend
and litigate the Third Party Claim and shall have the exclusive
right, in his discretion exercised in good faith and upon the
advice of counsel, to settle any such matter, either before or
after the initiation of litigation, at such time and upon such
terms as he deems fair and reasonable, provided that at least ten
(10) days prior to any such settlement, he shall give written
notice of his intention to settle to the Indemnified Party. The
Indemnified Party shall have the right to be represented by
counsel at its own expense in any defense conducted by Sellers.
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c. Notwithstanding the foregoing, in connection with any settlement
by Sellers, no Indemnified Party shall be required to (i) enter
into any settlement (A) that does not include the delivery by the
claimant or plaintiff to the Indemnified Party of a release from
all liability in respect of such claim or litigation, (B) if the
Indemnified Party shall, in writing to Sellers within the ten
(10) day period prior to such proposed settlement, disapprove of
such settlement proposal and desire to have Sellers tender the
defense of such matter back to the Indemnified Party, or (C) that
requires an Indemnified Party to take any affirmative actions as
a condition of such settlement, or (ii) consent to the entry of
any judgment that does not include a full dismissal of the
litigation or proceeding against the Indemnified Party with
prejudice; provided, however, that should the Indemnified Party
disapprove of a settlement proposal pursuant to Clause (B) above,
the Indemnified Party shall thereafter have all the
responsibility for defending, contesting and settling such Third
Party Claim but shall not be entitled to indemnification by
Sellers to the extent that, upon final resolution of such Third
Party Claim, Sellers' liability to the Indemnified Party but for
this provision exceeds what Sellers' liability to the Indemnified
Party would have been if Sellers were permitted to settle such
Third Party Claim in the absence of the Indemnified Party
exercising its right under Clause (B) above.
d. If, in accordance with the foregoing provisions of this Section
6.4, an Indemnified Party shall be entitled to indemnification
against a Third Party Claim, and if Sellers shall fail to accept
the defense of a Third Party Claim which has been tendered in
accordance with this Section 6.4, the Indemnified Party shall
have the right, without prejudice to its right of indemnification
hereunder, in its discretion exercised in good faith and upon the
advice of counsel, to contest, defend and litigate such Third
Party Claim, and may settle such Third Party Claim, either before
or after the initiation of litigation, at such time and upon such
terms as the Indemnified Party deems fair and reasonable,
provided that at least ten (10) days prior to any such
settlement, written notice of its intention to settle is given to
Sellers. If, pursuant to this Section 6.4, the Indemnified Party
so defends or settles a Third Party Claim for which it is
entitled to indemnification hereunder, as hereinabove provided,
the Indemnified Party shall be reimbursed by Sellers for the
reasonable attorneys' fees and other expenses of defending the
Third Party Claim which are incurred from time to time, forthwith
following the presentation to Sellers of itemized bills for said
attorneys' fees and other expenses. No failure by Sellers to
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acknowledge in writing his indemnification obligations under this
Article VI shall relieve him of such obligations to the extent
they exist.
6.4 CERTAIN TAX AND OTHER MATTERS.
a. If, in connection with the audit of any Return, a proposed
adjustment is asserted in writing with respect to any Taxes of
Company for which Sellers are required to indemnify Purchaser
pursuant to Section 6.2(a) hereof, Purchaser shall notify Sellers
of such proposed adjustment within twenty (20) days after the
receipt thereof. Upon notice to Purchaser or Company within
twenty (20) days after receipt of the notice of such proposed
adjustment from Purchaser or Company, Sellers may assume (at
Sellers' own cost and expense) control of and contest such
proposed adjustment.
b. Alternatively, if Sellers request within twenty (20) days after
receipt of notice of such proposed adjustment from Purchaser or
Company, as the case may be, shall contest such proposed
adjustment, Sellers shall be obligated to pay all reasonable
out-of- pocket costs and expenses (including legal fees and
expenses) which Purchaser or Company may incur in so contesting
such proposed adjustment as such costs and expenses are incurred,
and Purchaser shall have the full right to contest such proposed
adjustment and shall be entitled to settle or agree to pay in
full such proposed adjustment (in its sole discretion) and
thereafter pursue its rights under this Agreement. Sellers shall
pay to Purchaser all indemnity amounts in respect of any such
proposed adjustment within thirty (30) days after written demand
to Sellers therefor, or, if Sellers have assumed control of the
contest of such proposed adjustment as provided above (or has
requested Purchaser or Company to contest such proposed
adjustment within the time provided above), within thirty (30)
days after such proposed adjustment is settled or a Final
Determination has been made with respect to such proposed
adjustment.
c. For purposes of this Section 6.5, a "Final Determination" shall
mean (i) the entry of a decision of a court of competent
jurisdiction at such time as an appeal may no longer be taken
from such decision or (ii) the execution of a closing agreement
or its equivalent between the particular taxpayer and the
Internal Revenue Service, as provided in Section 7121 and Section
7122, respectively, of the Code, or a corresponding agreement
between the particular taxpayer and the particular state or local
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taxing authority. The obligation of Sellers to make any indemnity
payment pursuant to Section 6.2(a) shall be premised on the
receipt by Sellers from Purchaser or Company of a written notice
setting forth the relevant portion of any Final Determination,
and in cases where the amount of the indemnity payment exceeds
twenty-five thousand dollars ($25,000), a certified statement by
a nationally recognized accounting firm setting forth the amount
of the indemnity payment (and in all other cases, a similar
statement certified by the chief financial officer of Purchaser)
and describing in reasonable detail the calculation thereof.
6.5 CERTAIN INFORMATION. Purchaser, Sellers and Company agree to furnish or
cause to be furnished to each other (at reasonable times and at no charge) upon
request as promptly as practicable, such information (including access to books
and records) pertinent to Company and assistance relating to Company as is
reasonably necessary for the preparation, review and audit of financial
statements, the preparation, review, audit and filing of any Tax Return, the
preparation for any audit or the prosecution or defense of any claim, suit or
proceeding relating to any proposed adjustment or which may result in Sellers
being liable under the indemnification provisions of this Article VI provided,
that access shall be limited to items pertaining solely to Company or its
subsidiaries. Sellers shall grant to Purchaser access to all Tax Returns filed
with respect to Company.
6.6 RELEASE BY SELLERS. Sellers hereby release and discharge Purchaser and
Company and each of its officers and directors from, and agrees and covenants
that in no event will Sellers commence any litigation or other legal or
administrative proceeding against, Purchaser, Company, or any of their officers
or directors, whether in law or equity, relating to any and all claims and
demands, known and unknown, suspected and unsuspected, disclosed and
undisclosed, for damages, actual or consequential, past, present and future,
arising out of or in any way connected with his ownership or alleged ownership
of common stock of Company prior to the Closing Date, other than claims or
demands arising out of the transactions contemplated by this Agreement.
6.7 INDEMNITY OF PURCHASER. Purchaser agrees to indemnify and hold Seller
harmless from all liability, demands, claims, causes of action, damages and
expenses sustained or incurred by Seller as a result of (a) the breach by
Purchaser of any warranty in Section 3.2, (b) obligations under leases of
Company with respect to which Company is not in default on the Closing Date and
have been furnished to Purchaser prior to the Closing Date.
ARTICLE VII
-----------
TERMINATION, AMENDMENT AND WAIVER
---------------------------------
7.1 TERMINATION. This Agreement may be terminated at any time prior to the
Closing Date:
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a. By mutual consent of Purchaser and Sellers; or,
b. By either Purchaser or Sellers if (i) the Purchase shall not have
been consummated on or before April 1, 1996 (the "Termination
Date"), (ii) any governmental or regulatory body, the consent of
which is a condition to the obligations of Purchaser and Company
to consummate the transactions contemplated hereby, shall have
determined not to grant its consent and all appeals of such
determination shall have been taken and have been unsuccessful,
or (iii) any court of competent jurisdiction in the United States
or any State shall have issued an order, judgment or decree
(other than a temporary restraining order) restraining, enjoining
or otherwise prohibiting the consummation of the Transaction and
such order, judgment or decree shall have become final and
nonappealable.
7.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by
either Purchaser or Sellers, as provided in Section 7.1, this Agreement shall
forthwith become void and there shall be no liability on the part of either
Purchaser or Company or their respective officers and directors. Nothing in this
Section 7.2 shall relieve any party from liability for any breach of this
Agreement.
7.3 AMENDMENTS AND WAIVERS. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by all of the
parties. No waiver by any party of any default, misrepresentation, or breach of
warranty or covenant hereunder, whether intentional or not, shall be deemed to
extend to any prior or subsequent default, misrepresentation, or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
ARTICLE VIII
------------
MISCELLANEOUS
-------------
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
warranties, covenants and agreements made by any party in this Agreement or
pursuant hereto shall survive the closing of the Purchase until March 31, 1999,
except for the representations, warranties, covenants and agreements contained
in Sections 3.3(k), 3.3(n), and 6.2(a) of this Agreement which shall survive the
Purchase until the expiration of the applicable statutes of limitations with
respect to such matters. All claims made by Purchaser by virtue of any such
representations, warranties, covenants and agreements shall be made under, and
subject to the limitations set forth in, Article VI hereof.
8.2 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement
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without the prior approval of the other parties; provided, however, that any
party may make any public disclosure it believes in good faith is required by
applicable law or any listing or trading agreement concerning its
publicly-traded securities (in which case the disclosing party will use its
reasonable best efforts to advise the other party prior to making the
disclosure).
8.3 NOTICES. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient as set forth
below:
If to the Company: Advantage Pawn
102 West 17th Street
Cheyenne, WY 82001
Copy To: U.S. Pawn, Inc.
7215 Lowell Boulevard
Westminster, CO 80030
James A. Andresen
5053 Greybull Avenue
Cheyenne, WY 82009
If to the Purchaser: U.S. Pawn, Inc.
7215 Lowell Boulevard
Westminster, CO 80030
Copy To: Larry M. Snyder, Esq.
3300 E. First Avenue, #690
Denver, CO 80206
If to the Sellers: James A. Andresen
5053 Greybull Avenue
Cheyenne, WY 82009
Robert D. Phetteplace
222 E. 6th Avenue
Cheyenne, WY 82001
Timothy J. Olsen
1617 Freemont
Cheyenne, WY 82001
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Copy to: Kelly S. Davis, Esq.
Majestic Building, Suite 400
1603 Capital Avenue
Cheyenne, WY 82001
Any party may send any notice, request, demand, claim or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other parties
notice in the manner herein set forth.
8.4 ENTIRE AGREEMENT. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the parties and supersedes any
prior understandings, agreements, or representations by or among the parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
8.5 NON-WAIVER. The failure of any party to insist upon performance of any
terms, covenants or conditions shall not be construed as a subsequent waiver of
any such terms, covenants, or conditions.
8.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
8.7 SEVERABILITY. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
8.8 GOVERNING LAW. This Agreement shall be governed by and construed
exclusively in accordance with the domestic laws of the State of Colorado
without giving effect to any choice or conflict of law provision or rule
(whether of the State of Colorado or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of
Colorado.
8.9 ARBITRATION. Any controversy or claim arising out of this Agreement
shall be resolved by binding arbitration in accordance with the rules of the
American Arbitration Association and the prevailing party, in addition to the
award provided by such arbitration, shall be entitled to attorney's fees and
costs associated with such arbitration.
8.10 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon and
inure to the benefit of the parties named herein and their respective successors
and permitted assign either this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the other parties.
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8.11 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
8.12 EXPENSES. Each of the parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
IN WITNESS WHEREOF, the parties have executed this Stock Purchase Agreement
on the date first above written.
PURCHASER: U.S. PAWN, INC.
By: /S/ MELVIN WEDGLE
-----------------------------------
MELVIN WEDGLE
Chief Executive Officer
COMPANY: ADVANTAGE PAWN
By: /S/ ROBERT D. PHETTEPLACE
------------------------------------
Robert D. Phetteplace, President
SELLERS:
/S/ JAMES A. ANDRESEN
---------------------------------------
James A. Andresen
/S/ ROBERT D. PHETTEPLACE
---------------------------------------
Robert D. Phetteplace
/S/ TIMOTHY J. OLSEN
---------------------------------------
Timothy J. Olsen
27
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 702
<SECURITIES> 0
<RECEIVABLES> 4,216
<ALLOWANCES> (11)
<INVENTORY> 2,161
<CURRENT-ASSETS> 7,286
<PP&E> 2,565
<DEPRECIATION> (1,168)
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<CURRENT-LIABILITIES> 2,473
<BONDS> 322
0
378
<COMMON> 3,989
<OTHER-SE> 2,267
<TOTAL-LIABILITY-AND-EQUITY> 9,584
<SALES> 6,053
<TOTAL-REVENUES> 10,893
<CGS> 4,481
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<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 1,307
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<CHANGES> 0
<NET-INCOME> 844
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
