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, 1998
Commission file number: 0-18291
U.S. PAWN, INC.
---------------
(Exact name of registrant as specified in its charter)
Colorado 84-0819941
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7215 Lowell Boulevard
Westminster, CO 80030
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(Address of principal executive offices)
(Zip Code)
(303) 657-3550
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(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, 3,806,910 shares as of November 16, 1998.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. PAWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share data)
ASSETS
------
September December
30, 1998 31, 1997
-------- --------
CURRENT ASSETS:
Cash $ 834 $ 791
Service charges receivable 409 534
Pawn loans 3,051 3,711
Accounts receivable, net 12 18
Income taxes receivable 109 356
Deferred income taxes 67 94
Inventory 2,039 2,343
Prepaid expenses and other 180 124
------- -------
Total current assets 6,701 7,971
PROPERTY AND EQUIPMENT, at cost, net 1,626 1,808
INTANGIBLE ASSETS, net 324 801
DEFERRED INCOME TAXES 8 --
OTHER ASSETS 20 20
------- -------
$ 8,679 $10,600
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
September December
30, 1998 31, 1997
-------- --------
CURRENT LIABILITIES:
Line of credit $ -- $ 637
Accounts payable 38 48
Customer layaway deposits 63 70
Accrued expenses 316 494
Notes payable-related parties 327 802
Notes payable 146 579
Current portion of
long-term debt-related parties 50 103
Current portion of long-term debt 88 90
------- -------
Total current liabilities 1,028 2,823
LONG-TERM DEBT, less current portion:
Long-term debt-related parties -- 161
Long-term debt 666 731
DEFERRED INCOME TAXES -- 28
------- -------
Total Liabilities 1,694 3,743
------- -------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Redeemable preferred stock, 9.5%,
$10 par value, 1,000,000 authorized:
37,800 shares issued and outstanding 378 378
Common stock, no par value, 30,000,000 shares
authorized; 3,826,910 and 3,772,779
shares issued and outstanding 4,852 4,687
Additional paid-in capital 805 805
Retained earnings 950 987
------- -------
Total Stockholders' Equity 6,985 6,857
------- -------
$ 8,679 $10,600
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
<TABLE>
<CAPTION>
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,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
(Restated) (Restated)
REVENUES:
<S> <C> <C> <C> <C>
Sales $ 1,378 $ 1,793 $ 4,627 $ 5,043
Pawn service charges 1,102 1,449 3,733 4,173
Other income 18 23 50 68
------- ------- ------- -------
Total Revenues 2,498 3,265 8,410 9,284
------- ------- ------- -------
COST OF SALES AND EXPENSES:
Cost of sales 1,239 1,391 3,872 3,846
Operations 900 1,074 2,768 2,946
Administration 268 523 818 1,301
Depreciation and
amortization 262 108 457 297
------- ------- ------- -------
Total Cost of Sales
and Expenses 2,669 3,096 7,915 8,390
------- ------- ------- -------
INCOME FROM OPERATIONS (171) 169 495 894
------- ------- ------- -------
OTHER (EXPENSES)
Interest (59) (91) (238) (248)
Loss on contract settlement -- (220) -- (220)
Loss on disposal
of fixed assets (10) -- (20) --
------- ------- ------- -------
Total other (expenses) (69) (311) (258) (468)
------- ------- ------- -------
INCOME(LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST (240) (142) 237 426
PROVISION FOR INCOME TAXES 84 2 247 213
------- ------- ------- -------
INCOME(LOSS)BEFORE MINORITY INTEREST (324) (144) (10) 213
MINORITY INTEREST -- -- -- (4)
------- ------- ------- -------
NET(LOSS) INCOME (324) (144) (10) 209
DIVIDENDS ON PREFERRED STOCK (9) (9) (27) (27)
------- ------- ------- -------
EARNINGS(LOSS) AVAILABLE
FOR COMMON STOCKHOLDERS $ (333) $ (153) $ (37) $ 182
======= ======= ======= =======
EARNINGS(LOSS) PER COMMON SHARE $ (0.09) $ (0.04) $ (0.01) $ 0.05
======= ======= ======= =======
EARNINGS(LOSS) PER COMMON SHARE,
ASSUMING DILUTION $ (0.09) $ (0.04) $ (0.01) $ 0.05
======= ======= ======= =======
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 3,808 3,764 3,785 3,696
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING,
ASSUMING DILUTION 3,808 3,764 3,785 3,908
======= ======= ======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
</TABLE>
<PAGE>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months
Ended Sept 30,
--------------
1998 1997
-------- --------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ (10) $ 209
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 457 297
Deferred income taxes (9) (13)
Loss on disposal of fixed assets 20 --
Minority interest in subsidiary earnings -- 4
Changes in:
Service charges receivable 35 (179)
Inventory, excluding forfeited loan collateral 2,825 2,448
Accounts receivable 6 (41)
Income taxes receivable 247 --
Prepaid expenses and other (56) (56)
Accounts payable (11) 116
Accrued expenses (178) 60
Income taxes payable -- --
Customer layaway deposits (7) 41
------- -------
Net Cash Provided by Operating Activities 3,319 2,886
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Pawn loans made (7,643) (8,973)
Pawn loans repaid 5,427 5,904
Purchase of property and equipment (63) (399)
Proceeds from sale of fixed assets 8 --
Payments on notes receivable-related parties -- (16)
Proceeds from sale of pawn shop assets 681 --
Purchase of minority interest in subsidiary -- (18)
Cash paid for pawn shop acquisitions -- (150)
Acquisition costs -- (30)
Decrease(increase) in other assets -- (11)
------- -------
Net cash (Used) by Investing Activities (1,590) (3,693)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (27) (27)
Issuance of notes payable and long-term debt -- 1,016
Payments on notes payable and long-term debt (1,284) (108)
Issuance of notes payable-related parties 10 409
Payments on notes payable-related parties (552) (801)
Issuance of common stock, net of offering costs 167 377
------- -------
Net Cash Provided (Used) by Financing Activities (1,686) 866
------- -------
NET INCREASE IN CASH 43 59
CASH, beginning of period 791 677
------- -------
CASH, end of period $ 834 $ 736
======= =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 226 $ 260
======= =======
Income taxes $ -- $ 360
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of forfeited loan collateral to
inventory $ 2,521 $ 2,825
======= =======
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 condensed 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, 1998 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, 1997.
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, 1997 have been restated to present
as a purchase an acquisition completed during 1997 which had been previously
reported as a pooling of interests and to reflect a rescinded merger previously
reported as a pooling of interests. (See Note 2).
NOTE 2 - ACQUISITIONS
On June 17, 1997, the Company acquired all of the outstanding common stock of
Pawn Warehouse Outlet, Inc. ("PWOI") located in Papillion, Nebraska in exchange
for an aggregate purchase price of $435,000. Under the agreement, the sellers
received 75,666 shares of the Company's common stock valued at $275,000 and cash
in the amount of $160,000 in payment of a note payable due to one of the
sellers. The purchase price has been allocated to assets based on their fair
market value net of liabilities assumed. The purchase price in excess of the
assets acquired of approximately $196,000 has been recorded as goodwill. Under
the purchase method of accounting, the results of PWOI have been included in the
Company's financial statements since the date of acquisition. In the June 30,
1997 financial statements the merger was accounted for as a pooling of
interests, and accordingly, the financial statements for the three and six
months ended June 30, 1997 included the accounts and operations of PWOI for all
6
<PAGE>
periods presented. The financial statements of the Company for the three and
nine months ended September 30, 1997 have been restated from previously reported
amounts to exclude the accounts and operations of PWOI and to reflect the merger
using the purchase method of accounting.
NOTE 3 - INCOME TAXES
The provision for income taxes has been recorded based upon the Company's
estimate of the expected annualized effective tax rate for each interim period
presented. Deferred income taxes have been recorded in accordance with generally
accepted accounting principles under SFAS 109.
NOTE 4 - EARNING PER COMMON SHARE
During 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share is computed based upon the
weighted average number of common shares outstanding during the period. Diluted
earnings per share consists of the weighted average number of common shares
outstanding plus the dilutive effects of options and warrants calculated using
the treasury stock method. In loss periods, dilutive common equivalent shares
are excluded as the effect would be anti-dilutive. All prior period earnings per
share data has been restated to reflect the requirements of SFAS 128.
NOTE 5 - 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.
NOTE 6 - SUBSEQUENT EVENTS
On November 10, 1998, the Company entered into a non-binding letter of intent to
acquire through merger or otherwise Cash-N-Pawn International, Ltd., a
Minneapolis, Minnesota based pawn shop operator with ten locations in three
states.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
U.S. Pawn, Inc. (the "Company") is one of five 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. As of the date of the financial
statements, the Company owned and operated fourteen (14) pawnshops, of which
twelve (12) are located Colorado, one (1) in Wyoming, 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 specific geographic areas in order to
achieve economies of scale in supervision, improve market penetration, enhance
name recognition and reinforce market programs. Currently the Company has 86% of
its store locations clustered in Colorado with 79% of its stores in the Denver,
Colorado Metropolitan Area ("Denver"). The Company's recent growth has resulted
from the acquisition of existing pawn shops that at the time of the
acquisition(s) management believed would favorably respond to the Company's
management systems.
As of the date of this report, management believes that the Company is properly
positioned to be successful in the markets in which it operates in the near term
except for the Omaha, Nebraska area in which it currently owns and operates one
store. This store is currently scheduled for sale or closure. Management intends
to continue its analysis of the markets in which it currently operates and may
decide to expand or contract in its current market areas or enter new markets
which management feels will further its operating strategies.
Management believes that while expanding its market share through the careful
acquisition of existing locations may be more cost efficient than opening new
pawn shops, establishing new pawn shops should be an important part of any
expansion strategy. Management believes that additional pawn shops in market
clusters will provide economies of scale in supervision, purchasing,
administration and marketing. The Company's primary pawn shop acquisition
8
<PAGE>
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.
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 acquisition candidates or pawn shop
locations, (iii) higher pawn loan demand which will reduce the Company's
available capital for expansion, and (iv) general economic conditions. There can
be no assurance that future expansion can be continued on a profitable basis.
Management's ability to establish, identify, acquire or profitably manage
additional locations or successfully integrate their operations without
substantial costs, delays or other unanticipated problems is a risk factor for
future expansion. There can be no assurance that any new pawn shops established
or any entity that the Company acquires will achieve profitability that
justifies the Company's investment. Establishing new locations and/or
acquisitions involve a number of risks, which may include: adverse short-term
effects on the Company's reported operating results and cash flows; diversion of
management's attention; dependence on retraining, hiring and training key
personnel; and the effects of amortization of intangibles. Such risks could have
adverse effects on the Company's operations and financial performance. As the
Company expands, the Company will be required to supplement its existing
management team in order to effectively manage the acquired entities and
successfully implement its acquisition and operating strategies.
Recent Store Activity
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 merger was accounted for as a pooling of
interests, and accordingly, the consolidated financial statements of the Company
for June 30, 1997 included the accounts and operations of Bill's for all periods
therein presented. On November 14, 1997, the merger was rescinded by mutual
agreement of the parties. The agreement to rescind the merger obligated the
Company to pay $220,000 to Bill's shareholders.
On June 17, 1997, the Company acquired 100% of the common stock in Pawn
Warehouse Outlet, Inc. ("PWOI") located in Omaha, Nebraska for an aggregate
purchase price of $435,000. The sellers received 75,666 shares of the Company's
common stock valued at $275,000 and cash in the amount of $160,000 in payment of
a PWOI note payable due to one of the sellers. The purchase price has been
allocated to assets based on their fair market value net of liabilities assumed.
The purchase price in excess of assets acquired of $196,000 was recorded as
goodwill. The operating results of PWOI have been included in the Company's
consolidated financial statements since the date of acquisition. As a result of
POWI's unsatisfactory performance since its acquisition and the Company's
decision not to expand in the Omaha, Nebraska market, POWI is currently
scheduled to be sold or closed and its assets liquidated in the coming months. A
charge to earnings of $171,000 for the impairment of goodwill and a charge of
$60,000 for inventory allowance have been recorded in the three months ended
September 30, 1998. Neither charge is currently deductible for income tax
purposes.
On March 10, 1998, the Company executed a letter of intent to sell certain
assets of its one pawn shop in Las Vegas, Nevada. The assets to be transferred
included the pawn loans, pawn license, trade fixtures and trade name of Bobby's
Pawn Shop, Inc. The Company acquired Bobby's Pawn Shop, Inc. in a purchase
transaction in December 1996. The transaction was contingent upon, among other
things, the purchaser securing the necessary approvals for the transfer of the
9
<PAGE>
pawn license and the assignment of the Company's operating lease for the
location. The transaction was completed and the assets were transferred to the
purchaser on July 20, 1998. An inventory allowance of $54,000 was recorded in
the three months ended September 30, 1998. A gain on the transaction for income
tax purposes was recognized of approximately $250,000.
Letter of Intent
On November 10, 1998, the Company entered into a non-binding letter of intent to
acquire through merger or otherwise Cash-N-Pawn International, Ltd., a
Minneapolis, Minnesota based pawn shop operator with ten locations in three
states. As of the date of this report, final terms remained under negotiation.
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.
10
<PAGE>
RESULTS OF OPERATIONS
The following selected, unaudited financial data for the nine months ended
September 30, 1998 and 1997 for each market in which the Company operates or
operated during the nine months ended September 30, 1998 is presented below to
facilitate management's discussion and analysis ( all amounts, except per share
data, in thousands):
<TABLE>
<CAPTION>
Colorado Wyoming Nevada Nebraska Consolidated
-------- ------- ------ -------- ------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $ 3,752 $ 4,127 $ 317 $ 666 $ 243 $ 172 $ 315 $ 80 $ 4,627 $ 5,043
Pawn service
charges 3,149 3,453 181 405 239 262 164 52 3,733 4,173
Other 45 45 1 12 3 5 1 5 50 68
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Revenues 6,946 7,625 499 1,084 485 439 480 137 8,410 9,284
Cost of sales 2,872 3,148 256 536 344 106 400 55 3,872 3,846
Operations 2,217 2,226 177 411 132 224 242 85 2,768 2,946
Admin 809 1,301 -- -- 9 -- -- -- 818 1,301
Depreciation
and amortization 200 218 43 51 23 22 191 6 457 297
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses 6,098 6,893 476 998 508 352 833 147 7,915 8,390
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations 848 732 23 86 (23) 86 (353) (10) 495 894
Other
(expenses) (238) (454) (10) (1) (10) (14) -- 1 (258) (468)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes 610 278 13 85 (33) 72 (353) (9) 237 426
Income taxes 222 94 6 68 38 34 (19) 16 247 213
Minority
interest -- -- -- 4 -- -- -- -- -- 4
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income(loss) 388 184 7 13 (71) 37 (334) (25) (10) 209
Dividends on
preferred stock (27) (27) -- -- -- -- -- -- (27) (27)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Earnings(loss)
for common
shares $ 361 $ 157 $ 7 $ 13 $ (71) $ 37 $ (334) $ (25) $ (37) $ 182
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Earnings (loss)
per share $ .10 $ .05 $ -- $ -- $ (.02) $ .01 $ (.09) $ (.01) $ (.01) $ .05
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Three and Nine Months Ended September 30, 1998 ("1998 Periods") Compared to
Three and Nine Months Ended September 30, 1997, Restated ("1997 Periods")
Revenues
Total revenues for the 1998 Periods decreased by 31% and 9% to $2,498,000 and
$8,410,000 from $3,265,000 and $9,284,000 for the 1997 Periods. During the 1998
Periods, same store (the "Colorado Market") operations (12 stores) generated
11
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revenues of $2,243,000 and $6,946,000 compared to $2,589,000 and $7,625,000
during the 1997 Periods. Stores acquired in other markets ("Other Market
Stores") generated revenues of $255,000 and $1,464,000 in the 1998 Periods (3
stores) compared to $676,000 and $1,659,000 during the 1997 Periods (5 stores).
The decrease in revenues for the nine month period reflects an 8% drop in
merchandise sales, $4,627,000 compared to $5,043,000, a decrease of 11% in pawn
service charges to $3,733,000 from $4,173,000, and a 26% decrease in other
income to $50,000 from $68,000. As a percentage of total revenues, merchandise
sales remained at 55% and pawn service charges remained at 45% during the 1998
Periods as compared to the 1997 Periods. This revenue mix is consistent with the
Company's expectations.
Merchandise Sales
During the 1998 Periods, the Colorado Market generated merchandise sales of
$1,202,000 and $3,752,000 as compared to $1,397,000 and $4,127,000 during the
1997 Periods. Other Market Stores posted merchandise sales of $176,000 and
$875,000 for the 1998 Periods as compared to $396,000 and $916,000 for the 1997
Periods. For the 1998 Periods, the Company's annualized inventory turnover rate
was 2.3 and 2.4 times with a gross profit margin on sales of 10.1% and 16.3% as
compared to 2.2 and 2.3 times and 22.4% and 23.7% for the 1997 Periods. However,
in the markets in which the Company expects operations to continue (Colorado and
Wyoming), the Company experienced annualized inventory turns of 2.2 and 2.3
times with a gross profit margin on sales of 21.9 % and 23.1% during the 1998
Periods. The decrease in the gross profit on sales percentage is due primarily
to the Company's continuing efforts to liquidate ageing and less salable
merchandise inventory that accumulated in prior periods and inventory allowances
of $54,000 and $60,000 recorded for its Nevada and Nebraska operations during
the three month 1998 period, respectively. Gross profit on sales percentages may
continue to remain below historical comparisons as management endeavors to
liquidate the remaining categories of older inventories. The Company expects its
annualized inventory turnover rate to approximate 2.5 times and to produce gross
margins on sales of approximately 18% for the twelve months ending December 31,
1998 (Fiscal 1998).
Pawn Service Charges
During the 1998 Periods, the Colorado Market generated pawn service charges of
$1,020,000 and $3,150,000 as compared to $1,178,000 and $3,453,000 for the 1997
Periods. Other Market Stores contributed pawn service charges of $82,000 and
$583,000 for the 1998 Periods compared to $271,000 and $720,000 for the 1997
Periods. The Company's pawn loan balance outstanding decreased $660,000 or 17.8%
to $3,051,000 from $3,711,000 at December 31, 1997. During the three months
ended September 30, 1998, the Company's pawn loan balance outstanding decreased
by $507,000 or 14.2% to $3,051,000 from $3,558,000. The decrease in the pawn
loan balance during the 1998 nine month period consisted primarily of a decrease
of $263,000 in the Colorado Market, a decrease of $38,000 in Wyoming, a decrease
of $8,000 in Nebraska and the sale of $350,000 worth of pawn loans in Nevada.
The decrease in the Company's pawn loans outstanding during the 1998 Periods is
primarily the result of a decrease of $784,000 and $1,330,000 in new pawn loans
written during the 1998 Periods as compared to the 1997 Periods. The decrease in
new pawn loans written during the 1998 Periods consisted primarily of a decrease
of $484,000 and $1,170,000 in the Colorado Market, a decrease of $81,000 and
$163,000 in Wyoming, a decrease of $168,000 and $246,000 in Nevada and a
decrease of $51,000 and an increase of $249,000 in Nebraska. Management believes
that the decrease in the pawn loan balance in its Colorado Market during 1998 is
due primarily to the strong overall economy in its Colorado Market, which may
have had the effect of dampening the demand for pawn loans. The decrease in the
Company's Wyoming store is attributable to the consolidation of that market from
four pawnshops into one. The decrease in the Company's Nevada market is
attributable to the sale of the Company's one store in Las Vegas on July 20,
1998. The decrease in the Company's Nebraska market is attributable to the
unsatisfactory performance of the Company's one pawn shop there since it was
acquired in June of 1997 and the decision to close and/or sell this pawnshop.
12
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Management is currently analyzing the available market data further in order to
more fully understand the trend which appears to be developing in its Colorado
Market. Strategies to increase the number of pawn loans written are currently
under evaluation. Management is anticipating that pawn loan demand may remain
weak for the remainder of fiscal 1998 and perhaps into fiscal 1999. As a result
of the conditions described above, the Company realized an annualized pawn
service charge on average pawn loans outstanding during the period equal to 147%
for 1998 as compared to 156% for the 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) decreased
to 31% for 1998 as compared to 32% for 1997. The Company's forfeiture rate is
believed to be 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 33% for Fiscal
1998.
Total Cost of Sales and Expenses
Total cost of sales and expenses for the 1998 Periods decreased 14% and 6% to
$2,669,000 and $7,915,000 as compared to $3,096,000 and $8,390,000 for the 1997
Periods. As a percentage of total revenues, total cost of sales and expenses for
the 1998 three month period increased to 107% from 95% as compared to the 1997
three month period. As a percentage of total revenues, total cost of sales and
expenses for the 1998 nine month period increased to 94% from 90% as compared to
the 1997 nine month period. The increase in total cost of sales and expenses as
a percentage of total revenues for the 1998 nine month period is comprised
primarily of 9% decrease in total revenue, a 5% increase in cost of sales, a 1%
increase in operating expenses, a 4% decrease in administration, and a 2%
increase in depreciation and amortization. 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 decreased by $174,000 or 16% during the 1998 three month
period as compared to the 1997 three month period; and decreased by $178,000 or
6% during the 1998 nine month period as compared to the 1997 nine month period.
However, as a percentage of total revenues, operating expenses increased to
36.0% and 33% for the 1998 Periods as compared to 33% and 32% for the 1997
Periods. The increase in operating expenses as a percentage of revenues for the
1998 Periods is primarily attributable to the decrease in revenues for the 1998
Periods. As many operating expenses are fixed, i.e., they do not fluctuate as
revenues fluctuate, the expense to revenue ratio will in some cases increase.
Administration
Administrative overhead decreased during the 1998 Periods by $255,000 and
$483,000 or 49% and 37% to $268,000 and $818,000 from $523,000 and $1,301,000 as
compared to the 1997 Periods. As a percentage of total revenues, administrative
overhead decreased to 10.7% and 9.7% for the 1998 Periods from 16.0% and 14.0%
as compared to the 1997 Periods. The decrease in administrative overhead is due
primarily to reductions in salary expense and related employee benefits of
$275,000 and $208,000 in other administrative expense categories during 1998 as
compared to 1997. Management anticipates that administrative overhead as a
percentage of total revenues will remain at 1998 Periods levels for the
remainder of Fiscal 1998.
13
<PAGE>
Depreciation and Amortization Expense
Depreciation and amortization expense increased during the 1998 Periods by
$154,000 and $160,000 as compared to the 1997 three month period. The increase
consists primarily of the impairment of unamortized long-lived intangible assets
related to the Company's Nebraska operation of $171,000.
Other Expense
Interest expense for the 1998 Periods decreased by $33,000 and $10,000,
respectively. The Company has reduced its outstanding debt during Fiscal 1998 by
$1,836,000. Management anticipates further debt repayments during the remainder
of Fiscal 1998 and, as a result, interest expense for Fiscal 1998 to decrease as
compared to Fiscal 1997. The Company recognized an aggregate loss of $20,000
during the 1998 nine month period on the disposal of equipment related to the
consolidation of its Wyoming operations and the sale of its Nevada store.
Operating Results
Income(loss) from operations for the 1998 three month period decreased by 200%
to $(171,000)from $169,000 as compared to the 1997 three month period. Income
from operations for the 1998 nine month period decreased by 45% to $495,000 from
$894,000 as compared to the 1997 nine month period. After accounting for the
effects of income taxes, preferred dividends and minority interest,
earnings(losses) available for common stockholders for the 1998 three month
period increased 118% to $(333,000) from $(153,000) as compared to the 1997
three month period; and decreased 120% to $(37,000) from $182,000 as compared to
the 1997 nine month period.
Income Taxes
The current provision for income taxes includes an estimated tax liability of
$152,000 related to non deductible amortization of long-lived intangible assets
related to the Company's Nebraska operations and a difference between the basis
for purposes of income tax and financial statements in connection with the sale
of certain assets related to the Company's sale of its Las Vegas, Nevada store.
These items represent permanent differences between book and tax calculations.
Earnings Per Share
Earnings(loss) per share, as well as earnings(loss) per share, assuming dilution
for the 1998 Periods equaled $(0.09) and $(0.01) as compared to $(0.04) and
$0.05 for the 1997 Periods. The weighted average number of shares outstanding
increased by 2.4% in the 1998 Periods to 3,785,000 from 3,696,000 as a result of
the issuance of common shares in connection with the Nebraska acquisition and
the exercise of stock purchase options and warrants during Fiscal 1998 and 1997.
In loss periods , the weighted average number of shares outstanding, assuming
dilution does not include the dilutive effects of outstanding stock purchase
options and warrants, as including such effects would be anti-dilutive.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital increased by 10.2% to $5,673,000 at September 30, 1998 from
$5,148,000 at December 31, 1997. Total assets decreased during the 1998 nine
month period by $1,921,000 mainly due to decreases in pawn loans, service
charges receivable, inventory, income tax receivables and intangible assets.
Total liabilities decreased by $2,049,000 at September 30, 1998 to $1,694,000
from $3,743,000 at December 31, 1997 mainly due to the Company's ability to
repay $1,836,000 of debt. Total stockholders' equity decreased during the 1998
nine month period by $37,000 as a result of losses, net of income taxes and
preferred dividends.
The Company's operations have been financed from funds generated from
operations, bank borrowing, private borrowing, and public offerings. During the
1998 Periods, the Company raised sufficient capital to satisfy all capital
requirements.
14
<PAGE>
During the 1998 nine month period, the Company had maintained a bank line of
credit totaling $1,000,000. The agreement was fully paid on its maturity date of
April 4, 1998. The Company is currently seeking a renewal of this credit
facility or a new banking relationship.
The private borrowing which comprises $973,000 of the total liabilities are due
in 1998 through 2002. Management intends to repay the majority of these
obligations as they mature from internally generated funds or other borrowings.
The Company plans to continue expanding its operating base with acquisitions of
existing pawn shops and the development of new locations by actively seeking
such acquisitions and locations. 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 shops
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.
ITEM 3. Defaults upon senior securities
None.
ITEM 4. Submission of matters to a vote of security holders
On June 17, 1998, the Company held its Annual Meeting of Shareholders
("Meeting"). At the Meeting, the shareholders of the Company, by an affirmative
vote of a majority of the Company's outstanding shares present at the Meeting,
elected Charles C. Van Gundy, Jack Skidell and Mark Honigsfeld as directors of
the Company.
15
<PAGE>
ITEM 5. Other information
None.
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibit #27.1 Financial Data Schedule.
(b) Reports on Form 8-K: During the three and six month periods covered by
this report the Company filed no reports on Form 8-K.
16
<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, 1998 U.S. PAWN, INC.
----------------------
(Registrant)
/s/ Charles c. Van Gundy
------------------------------
Charles C. Van Gundy
President
Chief Executive Officer
Chief Financial Officer
(Principal Accounting Officer)
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