FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1997
Commission file number: 0-18291
U.S. PAWN, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-0819941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7215 Lowell Boulevard
Westminster, CO 80030
(Address of principal executive offices)
(Zip Code)
(303) 657-3550
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value, 3,771,912 shares as of November 14, 1997.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. PAWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands)
ASSETS
------
September December
30, 1997 31, 1996
-------- --------
(Restated)
CURRENT ASSETS:
Cash $ 736 $ 677
Service charges receivable 744 575
Pawn loans 3,779 3,510
Accounts receivable, net 53 12
Notes receivable-related parties, net 90 74
Inventory 2,477 2,230
Prepaid expenses and other 275 191
------- ------
Total current assets 8,154 7,269
PROPERTY AND EQUIPMENT, at cost, net 1,550 1,361
INTANGIBLE ASSETS, net 792 852
OTHER ASSETS 32 29
------- ------
$10,528 $9,511
======= ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
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U.S. PAWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Amounts in thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September December
30, 1997 31, 1996
-------- --------
(Restated)
CURRENT LIABILITIES:
Accounts payable $ 144 $ 49
Customer layaway deposits 87 51
Accrued expenses 276 214
Due to stockholder of acquiree - 673
Income taxes payable - 17
Notes payable-related parties 927 639
Notes payable 1,123 781
Current portion of
long-term debt-related parties - 100
Current portion of long-term debt 84 95
------- -----
Total current liabilities 2,641 2,619
LONG-TERM DEBT, less current portion:
Long-term debt-related parties 292 308
Long-term debt 534 91
DEFERRED INCOME TAXES 103 113
------- ------
Total Liabilities 3,570 3,131
------- ------
COMMITMENTS AND CONTINGENCIES:
MINORITY INTEREST 31 42
------- ------
STOCKHOLDERS' EQUITY:
Redeemable preferred stock, 9.5%,
$10 par value, 1,000,000 authorized:
37,500 shares issued and outstanding 378 378
Common stock, no par value, 30,000,000 shares
authorized; 3,763,912 and 3,572,155
shares issued and outstanding 4,400 3,989
Additional paid-in capital 888 922
Retained earnings 1,261 1,049
------- ------
Total Stockholders' Equity 6,927 6,338
------- ------
$10,528 $9,511
======= ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
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U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1997 1996 1997 1996
---- ---- ---- ----
(Restated) (Restated)
REVENUES:
Sales $ 1,793 $ 1,446 $ 5,243 $ 4,289
Pawn service charges 1,449 1,175 4,327 3,367
Other income 23 15 73 67
------- ------- ------- -------
Total Revenues 3,265 2,636 9,643 7,723
------- ------- ------- -------
COST OF SALES AND EXPENSES:
Cost of sales 1,391 1,064 4,027 3,204
Operations 1,074 829 3,068 2,475
Administration 523 248 1,302 740
Interest 91 61 264 164
Depreciation and
amortization 103 68 293 187
------- ------- ------- -------
Total Cost of Sales
and Expenses 3,182 2,270 8,954 6,770
------- ------- ------- -------
INCOME FROM OPERATIONS 83 366 689 953
CONTRACT SETTLEMENT 220 -- 220 --
------- ------- ------- -------
INCOME(LOSS) FROM OPERATIONS
BEFORE INCOME TAXES (137) 281 469 953
PROVISION FOR INCOME TAXES 2 129 226 336
------- ------- ------- -------
NET INCOME(LOSS) BEFORE
MINORITY INTEREST (139) 237 243 617
MINORITY INTEREST -- (3) (4) (19)
------- ------- ------- -------
NET INCOME(LOSS) (139) 234 239 598
DIVIDENDS ON PREFERRED STOCK (9) (9) (27) (27)
------- ------- ------- -------
EARNINGS(LOSS) AVAILABLE FOR
COMMON STOCKHOLDERS $ (148)$ 225 $ 212 $ 571
======= ======= ======= =======
EARNINGS(LOSS) PER COMMON SHARE
AND COMMON SHARE EQUIVALENTS $(0.04) $ 0.06 $ 0.05 $ 0.17
------- ------- ------- -------
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES AND COMMON
SHARE EQUIVALENTS OUTSTANDING 3,881 3,528 3,945 3,363
======= ======= ======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
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U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended
Sept 30,
1997 1996
------- -------
(Restated)
CASH FLOWS FROM(TO) OPERATING ACTIVITIES:
Net income $ 239 $ 598
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 293 187
Deferred income taxes (12) (46)
Minority interest in subsidiary earnings 4 19
Changes in:
Service charges receivable (169) (17)
Inventory, excluding forfeited loan collateral 2,652 2,131
Accounts receivable (41) (24)
Prepaid expenses and other (83) (62)
Accounts payable 95 4
Accrued expenses 62 58
Income taxes payable (17) (17)
Customer layaway deposits 37 5
------- -------
Net Cash Provided by Operating Activities 3,060 2,836
------- -------
CASH FLOWS FROM(TO) INVESTING ACTIVITIES:
Pawn loans made (9,236) (7,391)
Pawn loans repaid 6,053 4,939
Purchase of property and equipment (408) (172)
Decrease(increase)in receivables-related parties (16) --
Decrease(increase) in other assets -- 243
Acquisition of minority interest in subsidiary (3) (68)
Acquisition of subsidiary company (15) (858)
------- -------
Net cash (Used) by Investing Activities (3,625) (3,307)
------- -------
CASH FLOWS FROM(TO) FINANCING ACTIVITIES:
Dividends paid (27) (27)
Issuance of notes payable and long-term debt 1,016 921
Payments on notes payable and long-term debt (242) (665)
Issuance of notes payable-related parties 409 19
Payments on notes payable-related parties (909) (33)
Issuance of common stock, net of offering costs 377 517
------- -------
Net Cash Provided by Financing Activities 624 732
------- -------
NET INCREASE IN CASH 59 261
CASH, beginning of period 677 282
------- -------
Cash, end of period $ 736 $ 543
------- -------
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 260 $ 164
======= =======
Income taxes $ 360 $ 406
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of forfeited loan collateral to
inventory $ 2,899 $ 2,514
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
U.S. PAWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements (the "financial
statements") include the accounts of U.S. Pawn, Inc. and its subsidiaries (the
"Company"). All material inter-company transactions have been eliminated upon
consolidation. The financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions for Form 10-QSB. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations, and cash flows of
the Company for the interim periods presented.
The results for the three and nine months ended September 30, 1997 are not
necessarily indicative of the results of operations for the full year. These
financial statements and related footnotes should be read in conjunction with
the financial statements and footnotes thereto included in the Company's Form
10-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 1996.
Certain amounts in the prior year's financial statements have been reclassified
for comparative purposes to conform with the current year. These
reclassifications had no effect on results of operations or retained earnings as
previously reported.
The three and nine months ended September 30, 1996 have been restated to reflect
a pooling of interests acquisition in 1997, which is more fully described in
Note 2 below.
NOTE 2 - ACQUISITIONS
On March 16, 1996, the Company acquired 80% of the outstanding common stock of
Advantage Pawn, 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.
On March 31, 1997, the Company acquired an additional 7% of the outstanding
common stock of Advantage for $15,146 in cash. The transaction was accounted for
using the purchase method of accounting.
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 in Cheyenne, Wyoming ("City
National"). 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.
On December 9, 1996, the Company acquired a 100% interest in Bobby's Pawnshop,
Inc. located in Las Vegas, Nevada in exchange for $700,000 in cash. The assets
acquired consist primarily of inventory and pawn loan receivables valued at
approximately $480,000. The transaction was accounted for using the purchase
method of accounting.
6
<PAGE>
U.S. PAWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - ACQUISITIONS(continued)
On February 26, 1997, the Company agreed to acquire 100% of the outstanding
common stock of Pawn Warehouse Outlet, Inc. ("PWOI") located in Papillion,
Nebraska in exchange for 75,666 shares of the Company's common stock valued at
$275,000. The transaction has been accounted for using the pooling of interests
method of accounting. PWOI began operations in February 1996, and accordingly,
the three and nine months ended September 30, 1996 have been restated to give
effect to the pooling with PWOI.
NOTE 3 - CONTRACT SETTLEMENT COSTS
On December 9, 1996, the Company agreed to issue approximately 250,000 shares
of it's common stock for 100% of the outstanding common stock of Pawnbroker,
Inc. d/b/a Quick Bill's ("Bill's") located in Henderson, Nevada. The merger was
accounted for as a pooling of interests. On or about August 26, 1997, the merger
failed and was reversed pursuant to a negotiated settlement between the Company
and Bill's stockholders. Accordingly, the financial statements have been
restated to exclude the accounts and operations of Bill's for all prior periods
presented.
NOTE 4 - INCOME TAXES
The provision for income taxes has been recorded based upon the Company's
estimate of the expected annualized effective tax rate for each interim period
presented. Deferred income taxes have been recorded in accordance with generally
accepted accounting principles under SFAS 109.
NOTE 5 - EARNING PER COMMON SHARE
Earnings per share is computed by dividing net income available to common
shareholders by the weighted average number of common stock and common stock
equivalents outstanding during each interim period presented. When common stock
equivalents have an anti-dilutive effect on earnings per share, they are
excluded from the calculation.
NOTE 6 - CONTINGENCIES
The Company is party to a number lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material effect on the Company's financial position.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
U.S. Pawn, Inc. (the "Company") is one of four publicly traded pawnshop
operators in the United States. The Company operates pawnshops that lend money
on the security of pledged tangible personal property (a transaction commonly
referred to as a "pawn loan"), for which the Company receives a pawn service
charge to compensate it for the pawn loan. The pawn service charge is calculated
as a percentage of the pawn loan amount, in a manner similar to which interest
is charged on a loan, and has generally ranged from 96% to 240% annually. The
pledged property is held through the term of the pawn loan, 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 pawnshop. The Company currently owns and
operates seventeen (17) pawnshops, of which twelve (12) are located Colorado,
three (3) in Wyoming, one (1) in Nevada, and one (1) in Nebraska.
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.
Expansion of Operations
As an integral part of its business strategy, the Company intends to continue
concentrating multiple pawnshops in single markets in order to improve market
penetration, enhance name recognition and reinforce market programs. Consistent
with this philosophy, the Company added 1, 4, 2, 2 and 3 stores to its
operations during Fiscal 1997, 1996, 1994, 1993 and 1992, respectively.
On March 16, 1996, the Company acquired 80% of the outstanding common stock of
Advantage Pawn, 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.
On March 31, 1997, the Company acquired an additional 7% of the outstanding
common stock of Advantage for $15,146 in cash. The transaction was accounted for
using the purchase method of accounting.
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 in Cheyenne, Wyoming ("City
National"). 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.
On December 9, 1996, the Company acquired a 100% interest in Bobby's Pawnshop,
Inc. located in Las Vegas, Nevada in exchange for $700,000 in cash. The assets
acquired consist primarily of inventory and pawn loan receivables valued at
approximately $480,000. The transaction was accounted for using the purchase
method of accounting.
8
<PAGE>
On December 9, 1996, the Company agreed to issue approximately 250,000 shares
of it's common stock for 100% of the outstanding common stock of Pawnbroker,
Inc. d/b/a Quick Bill's ("Bill's") located in Henderson, Nevada. The merger was
accounted for as a pooling of interests. On or about August 26, 1997, the merger
failed and was reversed pursuant to a negotiated settlement between the Company
and Bill's stockholders. Accordingly, the financial statements have been
restated to exclude the accounts and operations of Bill's for all prior periods
presented.
On February 26, 1997, the Company agreed to acquire 100% of the outstanding
common stock of Pawn Warehouse Outlet, Inc. ("PWOI") located in Papillion,
Nebraska in exchange for 75,666 shares of the Company's common stock valued at
$275,000. The transaction has been accounted for using the pooling of interests
method of accounting. PWOI began operations in February 1996, and accordingly,
the three and nine months ended September 30, 1996 have been restated to give
effect to the pooling with PWOI.
Profitability vs. Liquidity
The profitability and liquidity of the Company is affected by the amount of the
Company's outstanding pawn loans, which in turn is affected in part by the
Company's pawn loan decisions. The Company is generally able to influence the
frequency of pawn loan redemptions and forfeitures of pawn loan collateral by
increasing or decreasing the amount loaned in relation to the estimated resale
value of the pledged property. A more conservative loan policy, i.e. smaller
loans in relation to the pledged property's estimated resale value, generally
results in fewer and smaller transactions being entered into, a decrease in the
Company's aggregate loan balance and a decrease in pawn service charge income.
However, smaller loans also tend to increase loan redemptions and improve the
Company's liquidity. A conservative loan policy also tends to decrease the cost
of merchandise inventory, thereby improving the margins possible through resale
of forfeited loan collateral. Conversely, a more aggressive loan policy which
provides for larger loans in relation to the estimated resale value of the
pledged property generally results in increased pawn service charge income, but
also tends to increase loan forfeitures, thereby increasing the quantity of
inventory on hand and, unless the Company is able to increase inventory turns,
reducing the Company's liquidity.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1997 ("1997 Periods") Compared to
Three and Nine Months Ended September 30, 1996, Restated ("1996 Periods")
Revenues
Total revenues for the 1997 Periods increased by 24% and 25% to $3,265,000 and
$9,643,000 from $2,636,000 and $7,723,000 for the 1996 Periods, respectively.
During the 1997 Periods, same store operations (13 stores) generated revenues of
$2,724,000 and $8,113,000 and stores acquired after the 1996 Periods (4 stores)
contributed revenues of $541,000 and $1,530,000, respectively. The increase in
revenues reflects an improvement of 24% and 22% in merchandise sales to
$1,793,000 and $5,243,000 from $1,446,000 and $4,289,000, an improvement of 23%
and 28% in pawn service charges to $1,449,000 and $4,327,000 from $1,175,000 and
$3,367,000, and no material change in other income of $23,000 and $73,000. As a
percentage of total revenues, merchandise sales decreased to 54% from 55% and
pawn service charges increased to 45% from 44% during the 1997 Periods as
compared to the 1996 Periods. The shift in the revenue mix is due primarily to
slower inventory turns in the stores acquired after the 1996 Periods as compared
to same store operations. The Company expects that merchandise sales will
increase as a percentage of revenues as Company merchandising programs are fully
implemented in the acquired stores.
9
<PAGE>
Merchandise Sales
During the 1997 Periods, same store operations generated merchandise sales of
$1,429,000 and $4,379,000 and stores acquired after the 1996 Periods posted
merchandise sales of $364,000 and $864,000. For the 1997 Periods, the Company's
annualized inventory turnover rate was 2.3 and 2.3 times with a gross profit
margin on sales of 22.4% and 23.2% as compared to 2.5 and 2.6 times and 26.4%
and 25.3% for the 1996 Periods. The decrease in the gross profit on sales
percentage is due primarily to the Company's initial efforts to increase
inventory turns in stores acquired after the 1996 Periods through the
discounting of slower moving merchandise.
The Company expects its annualized inventory turnover rate to approximate 3.0
times and to produce gross margins on sales of more than 20% for the twelve
months ending December 31, 1997 (Fiscal 1997).
Pawn Service Charges
During the 1997 Periods, same store operations generated pawn service charges of
$1,278,000 and $3,673,000 and stores acquired after the 1996 Periods contributed
pawn service charges of $171,000 and $654,000. The Company's pawn loan balance
outstanding increased by 7.7% to $3,779,000 from $3,510,000 at December 31,
1996; and has increased by 27.4% from $2,966,000 at September 30, 1996. The
increase in the pawn loan balance outstanding is due primarily to stores
acquired after the 1996 Periods. New pawn loans written during the 1997 Periods
increased by 25% to $9,236,000 from $7,391,000 as compared to the 1996 Periods
due primarily to stores acquired after the 1996 Periods. The Company expects the
demand for pawn loans to remain strong for the remainder of Fiscal 1997.
The forfeiture rate for pawn loans (calculated as total current period new loans
plus previous period ending loan balance minus current period ending loan
balance in relationship to total forfeited amount during the period) increased
to 32% for the 1997 Periods from 29% as compared to the 1996 Periods. The
Company's forfeiture rate is slightly higher than industry comparisons primarily
due to the Company's aggressive loan policy which provides for slightly higher
loan to value ratios than competing pawn shops in an effort to attract more pawn
customers. The Company plans to continue this loan strategy for the reasonably
foreseeable future and expects the forfeiture rate to approximate 35% for Fiscal
1997.
Total Cost of Sales and Expenses
Total cost of sales and expenses for the 1997 Periods increased 40.2% and 32.2%
to $3,182,000 and $8,954,000 as compared to $2,270,000 and $6,770,000 for the
1996 Periods. As a percentage of total revenues, total cost of sales and
expenses for the 1997 Periods increased to 97.4% and 92.9% from 86.1% and 87.7%
as compared to the 1996 Periods. The increase in total cost of sales and
expenses as a percentage of total revenues is comprised primarily of a 6.6% and
3.9% increase in administration for the 1997 Periods as compared to the 1996
Periods. The Company will strive to reduce, whenever possible, cost of sales and
expenses as a percentage of total revenues in the future.
Operating Expenses
Operating expenses increased during the 1997 Periods by $245,000 and $593,000 or
30% and 24% to $1,074,000 and $3,068,000 from $829,000 and $2,475,000 as
compared to the 1996 Periods. The increase in operating expenses is due
primarily to stores acquired after the 1996 Periods. As a percentage of total
revenues, operating expenses for the 1997 Quarter increased to 32.9% from 31.4%
and decreased for the 1997 nine month period to 31.8% from 32.0%.
10
<PAGE>
Administration
Administrative overhead increased during the 1997 Periods by $275,000 and
$562,000 or 111% and 76% to $523,000 and $1,302,000 from $248,000 and $740,000
as compared to the 1996 Periods. As a percentage of total revenues,
administrative overhead increased to 16.0% and 13.5% from 9.4% and 9.6%. The
increase in administrative overhead is due primarily to staff additions in the
executive, internal audit, systems, accounting and training departments,
increased travel expenses incurred in overseeing stores acquired after the 1996
Periods, expenses related to the failed merger with Bill's and legal expenses
related to the Company's recent changes in its Board of Directors and senior
management. Management intends to reduce administrative expenses in the future
by all means necessary and is hopeful that such expenses can be returned to
previous levels as a percentage of total revenues. In addition, as its operating
programs are more fully implemented in the stores recently acquired, management
believes that administrative expenses as a percentage of total revenues can be
further decreased.
Other
Interest expense increased for the 1997 Periods due to the Company's increased
use of its bank line of credit and private debt financing. Depreciation expense
increased due to stores acquired after the 1996 Periods and new equipment
purchased to replace fully used older equipment.
Contract Settlement
On December 9, 1996, the Company agreed to issued approximately 250,000 shares
of it's common stock for 100% of the outstanding common stock of Pawnbroker,
Inc. d/b/a Quick Bill's ("Bill's") located in Henderson, Nevada. The merger was
accounted for as a pooling of interests. On or about August 26, 1997, the merger
failed and was reversed pursuant to a negotiated settlement between the Company
and Bill's stockholders under which the Company incurred a non-recurring charge
of $220,000.
Operating Results
Income from operations before income taxes for the 1997 Quarter decreased by 77%
to $83,000 from $366,000 as compared to the 1996 Quarter. Income from operations
before income taxes for the 1997 nine month period decreased by 28% to $689,000
from $953,000 as compared to the 1996 nine month period. After accounting for
the effects of the contract settlement of $220,000, income taxes, preferred
dividends and minority interest, net income(loss) for the 1997 Quarter decreased
166% to $(148,000) from $225,000 as compared to the 1996 Quarter. After
accounting for the effects of the contract settlement of $220,000, income taxes,
preferred dividends and minority interest, net income for the 1997 nine month
period decreased 63% to $212,000 from $571,000 as compared to the 1996 nine
month period. Management believes that its recent acquisitions have yet to
fulfill their full profit potential. With planned reductions in administrative
expenses, and as its marketing programs are more fully implemented in the coming
months in these pawn shops, management believes that economies of scale may be
achieved in supervision, purchasing, and administration.
Earnings Per Share
Earnings(loss) per share for the 1997 Periods equaled $(0.04) and $0.05 as
compared to $0.06 and $0.17 for the 1996 Periods. The weighted average number of
shares and common share equivalents outstanding increased by 10% and 17.3 % in
the 1997 Periods to 3,881,000 and 3,945,000 from 3,528,000 and 3,363,000 for the
1996 Periods. The increase in the number of weighted average shares and common
share equivalents outstanding is primarily due to the issuance of common shares
in connection with the acquisitions, additional common share equivalents due to
the increase in the average market price for the Company's stock during the 1997
Periods as compared to the 1996 Quarter, and exercises of stock purchase options
during the 1997 Quarter.
11
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LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital increased by 18.6% to $5,513,000 at September 30, 1997 from
$4,650,000 at December 31, 1996. Total assets increased during the 1997 Periods
by $1,017,000 mainly due to increases in pawn loans, inventories and equipment.
Total shareholders' equity increased during the 1997 Periods by $589,000 as a
result of profits, net of income taxes and preferred dividends, of $212,000 and
common stock transactions of $377,000.
The Company's operations have been financed from funds generated from
operations, bank borrowing, private borrowing, and public offerings. During the
1997 Periods, the Company raised sufficient capital to satisfy all capital
requirements.
During the 1997 Periods, the Company maintained a bank line of credit totaling
$1,000,000. As of September 30, 1997, the Company had borrowed $488,000 under
this credit facility. The agreement is renewable on an annual basis and is due
April 1, 1998.
The private borrowing which comprises $2,085,000 of the total liabilities are
due in 1997, 1998, 1999 and 2002 and there is strong indication that these notes
will not be renewed. The Company believes that it will be able to repay these
obligations on the maturity dates if not renewed from internally generated cash
flow and/or other sources of borrowing.
The Company plans to continue expanding its operating base with acquisitions of
existing pawn companies, but will review potential start-up locations that may
become available. The Company expects to fund this expansion and meet its
on-going working capital needs with internally generated funds, debt or equity
offerings if needed and additional lines of credit. There can be no assurance
however, that such debt or equity offerings and lines of credit will be
available to the Company.
The Company has experienced that new start-up stores generally result in
operating losses during the first three to twelve months of operations.
Leasehold improvements and equipment costs for new stores have ranged from
approximately $75,000 to $100,000 per store. Acquisition of existing pawn
companies generally result in immediate increases in operating income. However,
acquisitions also generally result in an increase in intangibles due to purchase
prices which may be in excess of the value of assets acquired. Such intangibles
are then amortized to expense over their estimated useful lives.
Inflation
The Company does not believe that inflation has had a material effect on the
loans made or unredeemed goods sold by the Company or on its results of
operations.
Seasonality
The Company's loan demand and sales follow slight seasonal trends, with loan
demand decreasing during the first calendar quarter and sales increasing during
the fourth calendar quarter.
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings
None.
ITEM 2. Changes in securities
None.
12
<PAGE>
ITEM 3. Defaults upon senior securities
None.
ITEM 4. Submission of matters to a vote of security holders
On June 20, 1997, the Company held its Annual Meeting of Shareholders ("Annual
Meeting"). At the Annual Meeting, the shareholders of the Company, by an
affirmative vote of a majority of the Company's issued and outstanding shares
present at the Annual Meeting, re-elected Melvin Wedgle and Charles C. Van Gundy
as directors of the Company.
ITEM 5. Other information
None.
ITEM 6. Exhibits and reports on Form 8-K
Reports on Form 8-K:
On November 14, 1997, the Company filed a report on Form 8-K to report the
following changes in the Company's Board of Directors and Senior Management:
On October 29, 1997, the Company accepted the resignations of Daniel B. Rudden,
Stanley M. Edelstein, Larry M. Snyder and Melvin Wedgle as members of the
Registrant's Board of Directors pursuant to the agreement contained in the
Schedule 14f(1) filed by the Registrant on September 26, 1997. The Registrant
also accepted the resignations of Melvin Wedgle as Chief Executive Officer and
President and Jack Simon as Secretary and Chief Financial Officer. All
resignations were effective as of October 29, 1997. Gary A. Agron, a Member of
the Board of Directors since 1989, remains as a Director.
Also on October 29, 1997, the Company appointed Charles C. Van Gundy as
Director, President and Chief Financial Officer, and Jack Skidell and Mark
Honigsfeld as Directors. Mr. Van Gundy, associated with the Company since
January 1992, served the Company as its Chief Financial Officer, Secretary, and
as a member of the Board of Directors from October 1994, until his resignation
in August of 1997.
Mr. Skidell is President and sole shareholder of Colin Winthrop & Co., Inc., a
New York based broker dealer. Mr. Skidell has been associated with the Company
as one of its investment bankers since 1989. Mr. Honigsfeld is Chairman of the
Board, Secretary and Chief Executive Officer of Compu-Dawn, Inc., a
NASDAQ-listed company. He also founded and served as Chief Executive Officer and
Chairman of the Board of Facelifters Home Systems, Inc., a NASDAQ-listed company
until April 1996 when it was acquired by a New York Stock Exchange company.
The newly constituted Board of Directors is composed of four individuals, three
of whom have been associated with the Company since at least 1992. Mr. Van Gundy
was an officer and director with the Company, responsible for its financial
controls and reporting, for more than five years prior to his appointment as its
President.
Exhibits:
Exhibit 1.1 - Settlement Agreement dated November 14, 1997.
Exhibit 27.1 - Financial Data Schedule.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: November 19, 1997 U.S. PAWN, INC.
------------------------------------------
(Registrant)
/s/ CHARLES C. VAN GUNDY
------------------------------------------
Charles C. Van Gundy
Chief Executive Officer
14
SETTLEMENT AGREEMENT
--------------------
THIS SETTLEMENT AGREEMENT entered into this 14th day of November, 1997, by
and between U.S. PAWN, INC., a Colorado corporation ("USP"), U.S. PAWN, NEVADA,
INC., a Colorado corporation and wholly-owned subsidiary of USP ("USPN"),
BOBBY'S PAWNSHOP, INC., d/b/a Bobby's Jewelry & Loan, a Nevada corporation and
wholly-owned subsidiary of USPN ("BOBBY'S"), PAWNBROKER, INC. d/b/a QUICK
BILL'S, Nevada corporation ("PAWNBROKER"), ROY M. YORK, an individual residing
in Clark County, Nevada ("DWH"), with reference to the following:
RECITALS
--------
WHEREAS, on or about December 9, 1996, USP entered into a letter of intent
with RMY and DWH with regard to the purchase and acquisition of PAWNBROKER and
the extension of offers of employment to RMY, DWH and their respective spouses
upon completion of the acquisition; and
WHEREAS, on or about December 10, 1996, USP entered into a letter of intent
with RMY and Mr. Robert T. Lord, Jr. for the purchase and acquisition of BOBBY'S
and the extension of an offer of employment to RMY; and
WHEREAS, the respective parties installed USP'S custom computers and
software at BOBBY'S and PAWNBROKER'S respective pawn shop locations; and
WHEREAS, on April 11, 1997, USPN, RMY and Mr. Lord executed a Stock
Purchase Agreement for the acquisition of BOBBY'S, and held the closing for such
transaction on that same date; in accordance with the Stock Purchase Agreement,
USPN and BOBBY'S entered into an Employment and Non-Compete Agreement with RMY
wherein RMY was employed as the Vice- President-Bobby's of USPN and BOBBY'S;
WHEREAS, at the same time as the closing of the BOBBY'S transaction, USPN
withheld the sum of Twenty Thousand Dollars ($20,000.00) ("Escrow Funds") from
RMY'S share of the sales proceeds as collateral for the computer hardware and
software installed at the PAWNBROKER shop location; and
WHEREAS, subsequent to the closing of the BOBBY'S transaction, and during
the course of negotiating the terms of the Agreement and Plan of Merger for the
acquisition of PAWNBROKER, a dispute arose between the parties regarding USPN'S
purchase of PAWNBROKER and USPN'S desire to terminate the services of RMY under
the Employment and Non-Compete Agreement referenced above pursuant to
allegations of "just cause" therein; and
WHEREAS, RMY has expressly denied the above allegations of "just cause" for
termination under the Employment and Non-Compete Agreement and RMY and DWH have
-1-
<PAGE>
further informed USP that they have incurred specific damages in reliance on the
letter of intent to acquire PAWNBROKER and material changes made to the
PAWNBROKER pawn shop operations in anticipation of the completion of such
acquisition; and
WHEREAS, the parties to this Settlement Agreement wish to resolve for all
times their differences concerning such matters and any claims or causes of
action regarding the same.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing Recitals, the mutual
covenants and conditions set forth herein, and other good and valuable
consideration, the receipt and sufficiency of which are acknowledged, the
parties agree as follows:
1. SETTLEMENT FUNDS. USP shall pay to RMY and DWH the sum of Two Hundred
Twenty Thousand Dollars ($220,000.00) as follows: USP and USPN shall jointly
execute a promissary note in the principal amount of $220,000.00, payable to RMY
or Kathleen I. York, with interest of eight percent (8%) per annum; accrued
interest on the note principal shall be paid monthly on the fifteenth (15th) day
of each month, beginning on December 15, 1997; USP and/or USPN shall make
principal payments in the amount of Fifty Thousand Dollars ($50,000.00) on each
of November 15, 1997, February 15, 1998, May 15, 1998, August 15, 1998, and
payment of the remaining balance of the principal shall be due and payable on
November 1, 1998. The promissary note shall be substantially in the form of the
promissary note attached hereto as Exhibit "A" and incorporated herein by
reference. All payments of principal and interest herein shall be tendered by
wire transfer pursuant to the wire instructions that may be provided at a later
date. RMY and DWH shall allocate the settlement funds between themselves, in
their sole discretion according to the respective interests of each in the
BOBBY'S transaction (and the employment agreement therein) and the PAWNBROKER
transaction.
2. COMPUTER HARDWARE AND SOFTWARE. PAWNBROKER shall purchase the computer
hardware and software ("computer system") installed at the PAWNBROKER pawn shop
location for the purchase price of Twenty Thousand Dollars ($20,000.00). Said
purchase price shall be paid by USP retaining the Escrow Funds referenced in the
Recitals above, as full and final payment for such system. USP shall promptly
deliver to PAWNBROKER a bill of sale for the computer system, together with any
and all operating manuals, registration materials, or other documentation on the
computer system in USP'S, USPN'S, and/or BOBBY'S possession.
A. From the time that this Agreement is initially signed by any party
until USP has delivered the above-referenced bill of sale and required
documentation, USP shall pay any and all monthly service fees with Vertical
Computer Systems, Inc. (approximately $110 per month) incurred by
PAWNBROKER, RMY or DWH for the use or operation of the computer system.
-2-
<PAGE>
B. The parties acknowledge and state that the computer system as
tendered has been modified and configured to conform with USP and/or USPN'S
operational systems and procedures, and that the some cost will be
necessarily incurred to remove such modifications and configurations. USP
agrees to pay PAWNBROKER the total sum of One Thousand Five Hundred Dollars
($1,500.00) as full and complete consideration for any configurations. Such
consideration shall be tendered on or before November 17, 1997 by wire
transfer, simultaneously with, but in addition to, the funds to be wire
transferred in Section 1 above. PAWNBROKER, RMY and DWH acknowledge and
agree that any cost of re-modifying or re-configuring the computer system,
or any cost of training on such computer system, over and above the
consideration paid by USP herein shall be their sole responsibility.
3. EMPLOYMENT OF RMY. Upon execution of the Settlement Agreement, RMY
shall tender, in written form, his resignation from employment with
USPN and BOBBY'S. Upon receipt of RMY'S resignation, USPN and/or
BOBBY'S shall promptly pay to RMY any and all compensation and
benefits accrued to RMY through the date of his resignation as
determined under the terms of the Employment and Non-Compete Agreement
executed on or about April 11, 1997. Upon payment of the accrued
compensation and benefits to RMY, the Employment and Non- Compete
Agreement shall be immediately cancelled and the parties to such
agreement shall be thereafter released from any obligations or
conditions contained therein.
4. INDEMNIFICATION OF PARTIES.
A. Except as provided in the subparagraph immediately below, USP, USPN
and BOBBY'S agree to indemnify RMY, and his heirs, assigns, agents, and
successors, from any and all liability, demands, claims, actions or causes
of action, assessments, losses, fines, penalties, costs, damages, and
expenses, including reasonable attorney's fees, costs and disbursements
(collectively "Damages") which arise out of or are connected with the
operations or transactions of USP, USPN, AND BOBBY'S that occurred on or
after April 11, 1997 ( the closing date of the BOBBY'S transactions),
including but not limited to the Lease and Lease Amendment existing between
BOBBY'S and the Welt Family Trust, and the Sublease Agreement existing
between BOBBY'S and Mr. Eduardo Rodrigues d/b/a AAAACE Jewelry.
B. Notwithstanding the subparagraph immediately above, USP, USPN and
BOBBY'S shall not be required to indemnify, and shall not be responsible
to, RMY, or his heirs, assigns, agents, and successors, for any Damages
sustained or incurred by RMY as a result of (i) any alleged criminal
activity committed by him during his tenure as an employee of USPN and/or
BOBBY'S, and for which RMY is convicted by a court of law; (ii) any civil
liability due to RMY'S intentional malicious or fraudulent acts within the
scope of his employment with USPN and BOBBY'S; and (iii) any civil
liability due to the extent that such Damages were not caused by the acts,
errors, omissions, or involvement, direct or indirect, intentional or
otherwise, of any other employee, agent, principal, or representative of
USP, USPN, and/or BOBBY'S.
-3-
<PAGE>
5. MUTUAL RELEASES. Except as herein provided, each respective party, for
himself and his respective heirs, successors, assigns, legal representatives,
officers, directors, stockholders, employees, agents, and affiliates, does
hereby release and discharge the other parties, and their respective heirs,
successors, assigns, legal representatives, officers, directors, stockholders,
employees, agents, and affiliates, from any and all liability now existing or
which may hereafter accrue, contingent or otherwise, from any and all claims,
demands, rights, causes of action, or other liability, whether known or unknown,
suspected or unsuspected, which he may have against the other parties involving
or in any way related to any and every claim alleged in the above-described
disputes, including any claims that may exist as a result of the letters of
intent referenced in the Recitals above. It is understood by the parties that
the facts in respect of which this agreement is made may subsequently prove to
be other than or different from the facts now known by any party or believed by
any party to be true, as set out in this agreement. Each of the parties
expressly accepts and assumes the risk of the facts proving to be so different,
and each of the parties agrees that all the terms of this agreement shall be in
all respects effective and not subject to termination or rescission by any such
difference in facts. Notwithstanding the above release and discharge, in the
event of a breach of this Settlement Agreement, each party reserves its rights
to all claims and causes of action arising from the above-described disputes and
to present the facts and circumstances of such disputes as evidence of
reasonableness or bad faith in any collateral proceeding. To the extent
applicable to any individual party, the mutual releases under this section shall
include a release of any marital or community property right that the spouse of
any married party may have in the claims and disputes settled by the terms of
this Agreement.
6. NON-DISPARAGEMENT OF RESPECTIVE PARTIES. Each party shall refrain from
making any false, misleading, ambiguous, slanderous, obscene, profane, vulgar,
repulsive or offensive statement or announcement to any person regarding any
other party to this Agreement, and shall further refrain from making any comment
or statement that is intended to or shall defame or disparage any other party to
this Agreement, or such party's business, products, services, officers,
directors, employees, or shareholders.
7. ADDITIONAL DOCUMENTS. From time to time, as and when reasonably
requested by a party hereto, each of the parties shall execute and deliver or
cause to be executed and delivered such other instruments and documents as may
be required, necessary or desirable in order to carry out the terms and
conditions of this Settlement Agreement. It is the stated intention of the
parties to this Settlement Agreement to settle in good faith, and each party
hereto agrees to use its best efforts to take, or cause to be taken, all actions
that may reasonably be required in order to effectuate the completion of this
Agreement.
8. NO ADMISSION OF LIABILITY. Each party recognizes and understands that no
party admits liability of any sort or to any extent by virtue of any
consideration given to another party pursuant to this Settlement Agreement, but,
-4-
<PAGE>
rather, recognizes and agrees that this Settlement Agreement has been entered
into for the sole purpose of compromising and settling the disputed claims,
discharging and terminating all claims of the parties, and avoiding the costs
and commitments of a formal court or arbitration proceeding. Accordingly, it is
expressly understood and agreed, as a condition hereof, that this agreement
shall not constitute or be construed to be an admission on the part of any party
hereto or as evidencing or indicating in any degree an admission of the truth or
correctness of any claims asserted.
9. NOTICES. Any notices permitted or required under this Agreement shall be
deemed given upon the date of personal delivery or 48 hours after deposit in the
United States mail, postage fully prepaid, return receipt requested, addressed
as follows:
TO USP, USPN, and/or
BOBBY'S: U.S. Pawn Nevada, Inc.
U.S. Pawn, Inc. c/o U.S. Pawn, Inc.
7215 Lowell Blvd. 7215 Lowell blvd.
Westminster, CO 80030 Westminster, CO 80030
Attn: Charles C. Van Gundy Attn: Charles C. Van Gundy
Bobby's Pawnshop, Inc
c/o U.S. Pawn, Inc.
7215 Lowell Blvd.
Westminster, CO 80030
Attn: Charles C. Van Gundy
With Copy to: Brent T. Slosky, Esq.
Brownstein Hyatt Farber & Strickland, P.C.
410 17TH Street, Twenty-Second Floor
Denver, CO 80202-4437
and
Larry Snyder, Esq.
3300 E. First Avenue, Suite 690
Denver, CO 80206-5809
TO RMY, DWH and/or
PAWNBROKER:
Roy M. York Dwight William Harper Pawnbroker, Inc.
508 S. Boulder Hwy. 508 S. Boulder Hwy. 508 S. Boulder Hwy.
Henderson, NV 89015 Henderson, NV 89015 Henderson, NV 89015
Attn: Roy York or
Dwight William Harper
With copy to: S. Craig Stone II, Esq.
Bryan A. Lowe Professional Law Corporation
4011 Meadows Lane, Suite 102
Las Vegas, NV 89107
or at any other address as any party may, from time to time, designate by notice
given in compliance with this section.
-5-
<PAGE>
10. WAIVER. Failure of either party at any time to require performance of
any provision of this Agreement shall not limit the party's right to enforce the
provision, nor shall any waiver of any breach of any provision be a waiver of
any succeeding breach of any provision or a waiver of the provision itself for
any other provision.
11. ARBITRATION. If at any time during the term of this Settlement
Agreement any dispute, difference, or disagreement shall arise upon or in
respect of the Settlement Agreement, and the meaning and construction hereof,
every such dispute, difference, and disagreement shall be referred to a single
arbiter agreed upon by the parties, or if no single arbiter can be agreed upon,
an arbiter or arbiters shall be selected in accordance with the rules of the
American Arbitration Association and such dispute, difference, or disagreement
shall be settled by arbitration in accordance with the then prevailing
commercial rules of the American Arbitration Association, and judgement upon the
award rendered by the arbiter may be entered in any court having jurisdiction
thereof.
12. ATTORNEY'S FEES. In the event an arbitration, suit or action is brought
by any party under this Agreement to enforce any of its terms, or in any appeal
therefrom, it is agreed that the prevailing party shall be entitled to
reasonable attorney's fees to be fixed by the arbitrator, trial court, and/or
appellate court.
13. CONSTRUCTION. This Settlement Agreement or any section thereof shall
not be construed against any party due to the fact that said Settlement
Agreement or any section thereof was drafted by said party. The recitals at the
beginning of this agreement are intended to be covenants of the parties and are
a material part of this agreement and binding on the parties. All article,
section and paragraph titles or captions contained in this Settlement Agreement
are for convenience only and shall not be deemed part of the context nor affect
the interpretation of this Settlement Agreement. All pronouns and any variations
thereof shall be deemed to refer to the masculine, feminine, neuter, singular or
plural as the identity of the party or parties may require.
14. ENTIRE AGREEMENT. This Settlement Agreement contains the entire
understanding between and among the parties and supercedes and replaces any
prior understandings and written or oral agreements among them respecting the
subject matter of this Settlement Agreement.
15. BINDING AGREEMENT. The terms, conditions, covenants and agreements
contained herein shall inure tot he benefit of and be binding upon the parties
hereto and their repective executors, administrators, assigns and legal
representatives.
16. SEVERABILITY. If any provision of this Settlement Agreement, or the
application of such provision to any person or circumstance, shall be held
invalid, the remainder of this Agreement, or the application of such provision
to persons or circumstances other than those as to which it is held invalid,
shall not be affected thereby.
///
-6-
<PAGE>
17. GOVERNING LAW AND VENUE. The parties agree that jurisdiction and venue
of any dispute concerning this Settlement Agreement shall exist in Clark County,
Nevada, and that this Settlement Agreement shall be construed under the laws of
the State of Nevada.
18. REPRESENTATION. Each party covenants and warrants to each other party
that each has had the benefit of legal representation and fully understands the
nature of this Settlement Agreement; and further waives any right, statutory or
otherwise, to dispute the scope of this Settlement Agreement on a basis that it
may extend to facts or claims of which such party is not actually aware.
-7-
<PAGE>
19. COUNTERPARTS. This Settlement Agreement may be executed in
counterparts, each of which will be deemed an original document, but all of
which will constitute a single document. This document shall not be binding on
or constitute evidence of a settlement agreement between the parties until such
time as an identical counterpart of this document has been executed by each
party and a copy thereof delivered to each party of this Settlement Agreement.
IN WITNESS WHEREOF, the parties hereby signify their agreement by their
signatures below.
U.S. PAWN, INC. U.S. PAWN NEVADA, INC.
By:/S/ Charles C. Van Gundy By:/S/ Charles C. Van Gundy
--------------------------- ---------------------------
Charles C. Van Gundy Charles C. Van Gundy
Chief Executive Officer Chief Executive Officer
BOBBY'S PAWNSHOP, INC.
d/b/a Bobby's Jewelry & Loan
By:/S/ Charles C. Van Gundy
---------------------------
Charles C. Van Gundy
Chief Executive Officer
ROY M. YORK DWIGHT WILLIAM HARPER PAWNBROKER, INC. d/b/a
QUICK BILL'S
/S/ Roy m. York /S/ Dwight William Harper By: /S/ Dwight William Harper
- --------------- ------------------------- -----------------------------
Dwight William Harper
President
-8-
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
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