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 June 30, 1998
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, 3,830,279 shares as of August 11, 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
------
June December
30, 1998 31, 1997
-------- --------
CURRENT ASSETS:
Cash $ 418 $ 791
Service charges receivable 542 534
Pawn loans 3,558 3,711
Accounts receivable, net 21 18
Income taxes receivable 222 356
Deferred income taxes 42 94
Inventory 2,062 2,343
Prepaid expenses and other 172 124
------- -------
Total current assets 7,037 7,971
PROPERTY AND EQUIPMENT, at cost, net 1,692 1,808
INTANGIBLE ASSETS, net 751 801
OTHER ASSETS 21 20
------- -------
$ 9,501 $10,600
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
2
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U.S. PAWN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Amounts in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June December
30, 1998 31, 1997
-------- --------
CURRENT LIABILITIES:
Line of credit $ -- $ 637
Accounts payable 74 48
Customer layaway deposits 70 70
Accrued expenses 260 494
Notes payable-related parties 676 802
Notes payable 273 579
Current portion of
long-term debt-related parties 153 103
Current portion of long-term debt 94 90
------- -------
Total current liabilities 1,600 2,823
LONG-TERM DEBT, less current portion:
Long-term debt-related parties 61 161
Long-term debt 682 731
DEFERRED INCOME TAXES 5 28
------- -------
Total Liabilities 2,348 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; 3,772,779 and 3,772,779
shares issued and outstanding 4,687 4,687
Additional paid-in capital 805 805
Retained earnings 1,283 987
------- -------
Total Stockholders' Equity 7,153 6,857
------- -------
$ 9,501 $10,600
======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
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<TABLE>
<CAPTION>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
---- ---- ---- ----
(Restated) (Restated)
REVENUES:
<S> <C> <C> <C> <C>
Sales $ 1,562 $ 1,635 $ 3,249 $ 3,251
Pawn service charges 1,289 1,338 2,631 2,724
Other income 18 23 32 44
------- ------- ------- -------
Total Revenues 2,869 2,996 5,912 6,019
------- ------- ------- -------
COST OF SALES AND EXPENSES:
Cost of sales 1,260 1,212 2,634 2,455
Operations 897 923 1,868 1,872
Administration 268 415 549 778
Depreciation and
amortization 99 110 195 189
------- ------- ------- -------
Total Cost of Sales
and Expenses 2,524 2,660 5,246 5,294
------- ------- ------- -------
INCOME FROM OPERATIONS 345 336 666 725
------- ------- ------- -------
OTHER (EXPENSES)
Interest (75) (86) (179) (157)
Loss on disposal
of fixed assets (10) -- (10) --
------- ------- ------- -------
Total other (expenses) (85) (86) (189) (157)
------- ------- ------- -------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 260 250 477 568
PROVISION FOR INCOME TAXES 94 92 163 211
------- ------- ------- -------
INCOME BEFORE MINORITY INTEREST 166 158 314 357
MINORITY INTEREST -- -- -- (4)
------- ------- ------- -------
NET INCOME 166 158 314 353
DIVIDENDS ON PREFERRED STOCK (9) (9) (18) (18)
------- ------- ------- -------
EARNINGS AVAILABLE
FOR COMMON STOCKHOLDERS $ 157 $ 149 $ 296 $ 335
======= ======= ======= =======
EARNINGS PER COMMON SHARE $ 0.04 $ 0.04 $ 0.08 $ 0.09
======= ======= ======= =======
EARNINGS PER COMMON SHARE,
ASSUMING DILUTION $ 0.04 $ 0.04 $ 0.08 $ 0.09
======= ======= ======= =======
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 3,773 3,764 3,773 3,649
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING,
ASSUMING DILUTION 3,929 4,012 3,879 3,952
======= ======= ======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
</TABLE>
<PAGE>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Six Months Ended
June 30,
------------------
1998 1997
------- -------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 314 $ 353
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 195 189
Deferred income taxes 29 (19)
Loss on disposal of fixed assets 10 --
Minority interest in subsidiary earnings -- 4
Changes in:
Service charges receivable (8) (51)
Inventory, excluding forfeited loan collateral 1,914 1,646
Accounts receivable (3) (19)
Income taxes receivable 134 --
Prepaid expenses and other (48) 24
Accounts payable 26 29
Accrued expenses (234) (47)
Income taxes payable -- 18
Customer layaway deposits -- 21
------- -------
Net Cash Provided by Operating Activities 2,329 2,148
------- -------
CASH FLOWS (TO) INVESTING ACTIVITIES:
Pawn loans made (5,305) (5,822)
Pawn loans repaid 3,825 3,895
Purchase of property and equipment (47) (377)
Proceeds from sale of fixed assets 8 --
Payments on notes receivable-related parties -- (18)
Purchase of minority interest in subsidiary -- (14)
Cash paid for pawn shop acquisitions -- (150)
Acquisition costs -- (30)
Decrease(increase) in other assets -- (16)
------- -------
Net cash (Used) by Investing Activities (1,519) (2,532)
------- -------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Dividends paid (18) (18)
Issuance of notes payable and long-term debt -- 923
Payments on notes payable and long-term debt (989) (211)
Issuance of notes payable-related parties 10 134
Payments on notes payable-related parties (186) (842)
Issuance of common stock, net of offering costs -- 374
------- -------
Net Cash Provided (Used) by Financing Activities (1,183) 360
------- -------
NET (DECREASE) IN CASH (373) (24)
CASH, beginning of period 791 677
------- -------
CASH, end of period $ 418 $ 653
======= =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 170 $ 155
======= =======
Income taxes $ -- $ 288
======= =======
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of forfeited loan collateral to
inventory $ 1,633 $ 1,713
======= =======
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 six months ended June 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
reclassification had no effect on results of operations or retained earnings as
previously reported.
The three and six months ended June 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 December 9, 1996, the Company agreed to issue approximately 250,000 shares of
its common stock for 100% of the outstanding common stock of Pawnbroker, Inc.
d/b/a Quick Bill's ("Bills") in Henderson, Nevada. 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
Bill's for all periods presented. On November 14, 1997, the merger was rescinded
by mutual agreement of the parties. Accordingly, the financial statements of the
Company for the three and six months ended June 30, 1997 have been restated from
previously reported amounts to exclude the accounts and operations of Bill's.
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
6
<PAGE>
U.S. PAWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - ACQUISITIONS (continued)
months ended June 30, 1997 included the accounts and operations of PWOI for all
periods presented. The financial statements of the Company for the three and six
months ended June 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 July 20, 1998 the Company completed the sale of its one pawnshop located in
Las Vegas, Nevada. Proceeds from the sale were approximately $690,000. The
assets transferred consisted of pawn loans, store equipment, a pawn license and
other general intangibles.
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 fifteen (15) pawnshops, of which
twelve (12) are located Colorado, one (1) in Wyoming, one (1) in Nevada, and one
(1) in Nebraska. Subsequent to the date of the financial statements, the Company
completed the sale of its one pawnshop located in Nevada. As of July 20, 1998,
the Company owns and operates fourteen (14) pawnshops.
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 management believes will
favorably respond to the Company's management systems.
Management believes that the Company is properly positioned to be successful in
the markets in which it operates in the near term. 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
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.
8
<PAGE>
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.
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. Accordingly, the consolidated
financial statements of the Company for June 30, 1997 have been restated from
previously reported amounts to exclude the accounts and operations of Bill's.
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.
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
include 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
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.
9
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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 Six Months Ended June 30, 1998 ("1998 Periods") Compared to Three and
Six Months Ended June 30, 1997, Restated ("1997 Periods")
Revenues
Total revenues for the 1998 Periods decreased by 4% and 2% to $2,869,000 and
$5,912,000 from $2,996,000 and $6,019,000 for the 1997 Periods. During the 1998
Periods, same store (the "Colorado Market") operations (12 stores) generated
revenues of $2,231,000 and $4,704,000 compared to $2,499,000 and $5,036,000
during the 1997 Periods. Stores acquired in other markets ("Other Market
Stores") generated revenues of $638,000 and $1,208,000 in the 1998 Periods (3
stores) compared to $497,000 and $983,000 during the 1997 Periods (5 stores).
The decrease in revenues for the six month period reflects no appreciable change
in merchandise sales, $3,249,000 compared to $3,250,000, a decrease of 3% in
pawn service charges to $2,631,000 from $2,724,000, and a 28 % decrease in other
income to $32,000 from $44,000. 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
$1,177,000 and $2,550,000 as compared to $1,354,000 and $2,729,000 during the
1997 Periods. Other Market Stores posted merchandise sales of $385,000 and
$699,000 for the 1998 Periods as compared to $281,000 and $522,000 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 19.3% and 18.9% as
compared to 2.2 and 2.3 times and 25.9% and 24.5% for the 1997 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. 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 2.7 times and to produce gross
margins on sales of approximately 20% 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
$1,040,000 and $2,129,000 as compared to $1,125,000 and $2,276,000 for the 1997
Periods. Other Market Stores contributed pawn service charges of $249,000 and
10
<PAGE>
$502,000 for the 1998 Periods compared to $213,000 and $448,000 for the 1997
Periods. The Company's pawn loan balance outstanding decreased $153,000 or 4.1%
to $3,558,000 from $3,711,000 at December 31, 1997. However, during the three
months ended June 30, 1998, the Company's pawn loan balance outstanding
increased by $190,000 to $3,558,000 from $3,368,000. The decrease in the pawn
loan balance during the 1998 six month period consisted primarily of a decrease
of $166,000 in the Colorado Market and an increase of $13,000 in Other Market
Stores. The decrease in the Company's pawn loans outstanding during the 1998 six
month period is primarily the result of a $517,000 or 8.9% decrease in new pawn
loans written during the 1998 six month period as compared to the 1997 six month
period. The decrease in new pawn loans written during the 1998 six month period
consisted primarily of a decrease of $699,000 in the Colorado Market, a net
decrease of $127,000 in the Wyoming and Nevada stores and new loans written in
the Nebraska store of $309,000. Management believes that the decrease in the
pawn loan balance 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. Management is currently analyzing the available market data further
to determine if a trend is developing. 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. As a result
of the conditions described above, the Company realized an annualized pawn
service charge equal to 148% for 1998 as compared to 153% 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 30% for 1998 as compared to 31% 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 5% and 1% to
$2,524,000 and $5,246,000 as compared to $2,660,000 and $5,294,000 for the 1997
Periods. As a percentage of total revenues, total cost of sales and expenses for
the 1998 three month period decreased to 88% from 89% as compared to the 1997
three month period. As a percentage of total revenues, total cost of sales and
expenses for the 1998 six month period increased to 89% from 88% as compared to
the 1997 six month period. The increase in total cost of sales and expenses as a
percentage of total revenues for the 1998 six month period is comprised
primarily of a 2% decrease in total revenues, a 7% increase in cost of sales, a
nominal decrease in operating expenses, a 29% decrease in administration, and a
3% 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 remained relatively the same during the 1998 Periods as
compared to the 1997 Periods. However, as a percentage of total revenues,
operating expenses increased slightly to 31.3% and 31.6% for the 1998 Periods as
compared to 30.8% and 31.1% for the 1997 Periods. The consolidation of the
Company's four store cluster in Wyoming into a single location was completed in
mid-February 1998. As a result, management anticipates that operating expenses
as a percentage of revenues for this market will decrease during the remainder
of Fiscal 1998.
11
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Administration
Administrative overhead decreased during the 1998 Periods by $147,000 and
$229,000 or 55% and 29% to $268,000 and $549,000 from $414,000 and $778,000 as
compared to the 1997 Periods. As a percentage of total revenues, administrative
overhead decreased to 9.3% for both 1998 periods from 13.8% and 12.9% as
compared to the 1997 Periods. The decrease in administrative overhead is due
primarily to reductions in salary expense and related employee benefits of
$161,000 and $68,000 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.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during the 1998 three month
period and increased during the 1998 six month period by $11,000 and $5,000,
respectively or 0.2% due to goodwill acquired as a result of acquisitions and
new equipment purchased to replace fully utilized equipment.
Other Expense
Interest expense for the 1998 three month period decreased and interest expense
for the 1998 six month period increased by $11,000 and $23,000, respectively.
The Company reduced its outstanding debt during Fiscal 1998 by $1,175,000.
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 a $10,000 loss during the 1998 three
month period on the disposal of equipment related to the consolidation of its
Wyoming operations.
Operating Results
Income from operations for the 1998 three month period increased by 4% to
$260,000 from $250,000 as compared to the 1997 three month period. Income from
operations for the 1998 six month period decreased by 5% to $477,000 from
$568,000 as compared to the 1997 six month period. After accounting for the
effects of income taxes, preferred dividends and minority interest, earnings
available for common stockholders for the 1998 three month period increased 5.6%
to $157,000 from $149,000 as compared to the 1997 three month period; and
decreased 11.7% to $296,000 from $335,000 as compared to the 1997 six month
period.
Earnings Per Share
Earnings per share, as well as earnings per share, assuming dilution for the
1998 Periods equaled $0.04 and $0.08 as compared to $0.04 and $0.09 for the 1997
Periods. The weighted average number of shares outstanding increased by 3.4% in
the 1998 Periods to 3,773,000 from 3,649,000 as a result of the issuance of
common shares in connection with the Nebraska acquisition and the exercise of
stock purchase options during Fiscal 1997. The weighted average number of shares
outstanding, assuming dilution decreased by 1.8% in the 1998 Periods to
3,879,000 from 3,952,000 in the 1997 Periods as a result of the exercise and/or
expiration of stock purchase options and warrants during Fiscal 1997, and the
relative changes in the price of the Company's common stock during 1998 as
compared to 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital increased by 5.6% to $5,437,000 at June 30, 1998 from $5,148,000
at December 31, 1997. Total assets decreased during the 1998 six month period by
$1,099,000 mainly due to decreases in cash, pawn loans, inventory and income tax
12
<PAGE>
receivables. Total stockholders' equity increased during the 1998 six month
period by $296,000 as a result of profits, 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.
During the 1998 three 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 $1,528,000 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.
13
<PAGE>
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.
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.
14
<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: August 12, 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)
15
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