SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement [ ] Confidential, for Use of
the Commission Only
(as Permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-I I (c) or ss.240.14a-12
- - --------------------------------------------------------------------------------
U.S. PAWN, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, no par value per share
Series B Preferred Stock, $10.00 par value per share
(2) Aggregate number of securities to which transaction applies:
750,000 shares of Common Stock
Various number of shares of Series B Preferred Stock dependent upon
price per share of Common Stock at closing of Merger
<PAGE>
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0- II (Set forth the amount on which the
filing fee is calculated and state how it was determined):
The underlying value of the transaction consisting of a combination of
750,000 shares of Common Stock, a cash payment of $550,000, a Note of
the Registrant's wholly owned subsidiary and shares of the
Registrant's Series B Preferred Stock is to be a maximum of
$7,000,000.
(4) Proposed maximum aggregate value of transaction:
$7,000,000
(5) Total fee paid: $1,400
[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: None
(2) Form, Schedule or Registration Statement No.: Not Applicable
(3) Filing Party: Not Applicable
(4) Date Filed: Not Applicable
<PAGE>
U.S. PAWN, INC.
7215 Lowell Boulevard
Westminster, Colorado 80030
(303) 657-3550
September ___, 1999
To Our Shareholders:
We are pleased to announce that our company, U.S. Pawn, Inc. has agreed to
merge with Cash-N-Pawn International, Ltd., ("Cash-N-Pawn") which owns and
operates 10 pawnshops in Minnesota, Missouri and Indiana. We need your approval
to complete this transaction. You are cordially invited to attend a special
meeting of our shareholders ("Meeting") on September _____, 1999, at 9:30 a.m.
local time at the law offices of Brownstein, Hyatt & Farber, P.C., Suite 2200,
410 17th Street, Denver, Colorado 80202.
At the Meeting, you will be asked to consider and vote on the following
proposals:
(1) To approve and adopt the Agreement and Plan of Merger (the
"Agreement") by and among U.S. Pawn, Inc., U.S. Pawn CNP Holdings,
Inc., ("Holdings") our wholly-owned subsidiary and Cash-N-Pawn.
(2) To elect two new directors to a six-person Board of Directors. Our
four current directors will continue and the two new directors who
have been nominated by Cash-N-Pawn, are being presented for election
as Class I directors with terms expiring at the annual meeting of
shareholders in 2001.
(3) To approve the adoption of the Amended Cash-N-Pawn International, Ltd.
1995 Long Term Incentive Plan (the "CNP Plan") pursuant to which all
options thereunder represent options to purchase up to 250,000 shares
of U.S. Pawn Common Stock.
The Board of Directors unanimously recommends that you vote for all proposals.
------------------------------------------------------------------------------
The proposals relate to the proposed merger described in the proxy
materials attached to this letter. We may abandon any proposal if you do not
approve all proposals. We also have the right to abandon the merger at any time,
subject to the terms and conditions of the Agreement and applicable law. If all
proposals are abandoned, the Agreement will be terminated and the Board of
Directors will not be changed.
If the proposals are approved:
o Cash-N-Pawn will merge with and into Holdings and will become our
wholly-owned subsidiary;
o The holders of Cash-N-Pawn common stock will be entitled to receive a
pro-rata portion of the merger consideration (the "Merger
Consideration") which consists of:
(1) 750,000 shares of our restricted Common Stock;
<PAGE>
(2) a cash payment of $550,000; and
(3) additional consideration with an aggregate value of $2,575,000
(based on the price of our Common Stock around the date of
closing being $2.50 per share) consisting of Holdings' promissory
notes (with our guarantee) ("Notes") and our 7% Series B
Convertible Preferred Stock ("Preferred Stock") with the exact
amount and mix of Notes and Preferred Stock yielding a combined
annual return of approximately 9.5% being determined after
closing as described herein.
The above consideration is subject to various adjustments (based on the
price of our Common Stock around the date of closing) so that the total dollar
value of all consideration received by Cash-N-Pawn common shareholders before
the additional adjustments noted below, is no less than $4,700,000 and no more
than $5,000,000.
In addition, the Merger Consideration may be adjusted as described herein
(i) for conversions of Cash-N-Pawn's Series A 11% Senior Subordinated
Convertible Debentures into Cash-N-Pawn common stock prior to the date of
closing and (ii) based upon the value of Cash-N-Pawn's net assets as of the date
of closing, as determined after the closing.
For tax considerations, the exact mix of Notes and Preferred Stock will be
determined following the other adjustments listed. The interest rate on the
Notes will then be determined, based on the mix of Notes and Preferred Stock.
Finally, certain outstanding warrants and options for Cash-N-Pawn common
stock will be converted or exchanged into similar warrants and options for our
Common Stock.
Shareholders do not have dissenters' rights under Colorado law in
connection with the merger.
You may revoke a proxy at any time before it is exercised by delivering a
written revocation to us, by substituting a new proxy signed at a later date, or
by requesting in person at the Meeting that the proxy be returned.
You should rely only on the information contained in these proxy materials.
We have not authorized anyone to provide you with information that is different.
Cash-N-Pawn has supplied all information pertaining to Cash-N-Pawn and its
subsidiaries and affiliates contained in these proxy materials.
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON. REGARDLESS OF
WHETHER YOU PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY CARD AND RETURN IT AS PROMPTLY AS POSSIBLE IN THE ENCLOSED
ENVELOPE. NO POSTAGE IS REQUIRED IF THE PROXY IS MAILED IN THE UNITED STATES.
By order of the Board of Directors,
Charles C. Van Gundy,
Chief Executive Officer
<PAGE>
U.S. PAWN, INC.
7215 Lowell Boulevard
Westminster, Colorado 80030
(303) 657-3550
NOTICE OF SHAREHOLDERS' MEETING
U.S. Pawn, Inc. ("U.S. Pawn") will hold a special meeting of shareholders
("Meeting") at the law offices of Brownstein, Hyatt & Farber, P.C., Suite 2200,
410 17th Street, Denver, Colorado 80202 at 9:30 a.m. local time on September ,
1999, or at any adjournment or postponement of such Meeting. September___, 1999
is the record date for the determination of shareholders entitled to notice of
and to vote at the Meeting, which has the following purposes:
A. Cash-N-Pawn Merger. At the Meeting, shareholders will be asked to
consider and vote upon the following proposals:
(1) To approve and adopt the Agreement and Plan of Merger (the
"Agreement") by and among the Company, U.S. Pawn CNP Holdings,
Inc., ("Holdings") a wholly-owned subsidiary of U.S. Pawn, and
Cash-N-Pawn International, Ltd. ("Cash-N-Pawn").
(2) To elect two new directors to a six-person Board of Directors.
Our four current directors will continue and the two new
directors who have been nominated by Cash-N-Pawn, are being
presented for election as Class I directors with terms expiring
at the annual meeting of shareholders in 2001.
(3) To approve the adoption of the Amended Cash-N-Pawn International,
Ltd. 1995 Long Term Incentive Plan ("CNP Plan") pursuant to which
all options thereunder represent options to purchase up to
250,000 shares of U.S. Pawn Common Stock.
B. Other Business. At the Meeting, the shareholders may also transact other
business that properly comes before the Meeting or any adjournment or
postponement of it. The Board of Directors is not aware of any other business
that will be presented for consideration at the Meeting.
The proposals relate to the proposed merger ("Merger") described in the
proxy materials attached to this notice. You should read all of the proxy
materials carefully. We may abandon any proposal if the shareholders do not
approve all proposals. We also reserve the right to abandon the Merger at any
time, subject to the terms and conditions of the Agreement and applicable law.
If all proposals are abandoned, the Agreement will be terminated and the Board
of Directors will not be changed.
<PAGE>
If the proposals are approved:
o Cash-N-Pawn will merge with and into Holdings and become a
wholly-owned subsidiary of U.S. Pawn;
o The holders of Cash-N-Pawn common stock will be entitled to receive a
pro-rata portion of the Merger Consideration which consists of:
(1) 750,000 shares of our restricted Common Stock;
(2) a cash payment of $550,000; and
(3) additional consideration with an aggregate value of $2,575,000
(based on the price of our Common Stock around the date of
closing being $2.50 per share) consisting of Holdings' promissory
notes (with our guarantee) ("Notes") and our 7% Series B
Convertible Preferred Stock ("Preferred Stock") with the exact
amount and mix of Notes and Preferred Stock yielding a combined
annual return of approximately 9.5% being determined after
closing as described herein.
The above consideration is subject to various adjustments (based on the
price of our Common Stock around the date of closing) so that the total dollar
value of all consideration received by Cash-N-Pawn common shareholders before
the additional adjustments noted below, is no less than $4,700,000 and no more
than $5,000,000.
In addition, the Merger Consideration may be adjusted as described herein
(i) for conversions of Cash-N-Pawn's Series A 11% Senior Subordinated
Convertible Debentures into Cash-N-Pawn common stock prior to the date of
closing and (ii) based upon the value of Cash-N-Pawn's net assets as of the date
of closing, as determined after the closing.
For tax considerations, the exact mix of Notes and Preferred Stock will be
determined following the other adjustments listed. The interest rate on the
Notes will then be determined, based on the mix of Notes and Preferred Stock.
Finally, certain outstanding warrants and options for Cash-N-Pawn common
stock will be converted or exchanged into similar warrants and options for our
Common Stock.
After the Merger occurs, and assuming that 750,000 shares of U.S. Pawn's
Common Stock are issued in connection with the Merger but no shares of Common
Stock are issued upon exercise of outstanding stock options, common stock
purchase warrants or the conversion of any other securities, the Cash-N-Pawn
shareholders who participate in the Merger will own approximately 17% of U.S.
Pawn's issued and outstanding Common Stock and the current U.S. Pawn
shareholders' equity interests will be reduced to approximately 83% of the U.S.
Pawn's issued and outstanding Common Stock.
<PAGE>
The Board of Directors (1) believes that the Merger will provide
significant value to U.S. Pawn and its shareholders by offering opportunities
for growth using and expanding the Cash-N-Pawn locations, (2) has determined
that the Merger is in the best interests of U.S. Pawn and its shareholders, and
(3) unanimously recommends that you vote for the proposals.
Approval of the Agreement requires the affirmative vote of the holders of a
majority of U.S. Pawn's issued and outstanding shares of Common Stock present
and entitled to vote at the Meeting. Directors will be elected by a plurality of
the shares present and entitled to vote at the Meeting. The presence in person
or by proxy of shareholders owning a majority of the issued and outstanding
shares of the Common Stock constitutes a quorum for the Meeting.
U.S. Pawn will pay all of the expenses involved in preparing, assembling
and mailing these proxy materials, along with the costs of soliciting proxies.
In addition to solicitation by mail, directors, officers and regular employees
of U.S. Pawn may solicit proxies by telephone or personal interview. They will
receive no additional compensation for these services. U.S. Pawn will also make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of the
shares held of record by such persons. U.S. Pawn may reimburse such persons for
reasonable out-of-pocket expenses they incur in doing so.
Whether or not you plan to attend the Meeting, please fill in the
appropriate blanks, sign and date the enclosed proxy card and return it in the
enclosed envelope. If you attend the Meeting and wish to vote in person, you can
withdraw your proxy before the Meeting. Under Colorado law, if you choose not to
vote, your abstention (and broker non-votes) will be treated as a "no" vote for
purposes of determining whether the Merger is approved, provided that if a
quorum is present, abstentions and broker non-votes will have no effect on the
voting for the election of directors.
Sincerely,
Charles C. Van Gundy
Chief Executive Officer
September__, 1999
<PAGE>
September ___, 1999
U.S. PAWN, INC.
7215 Lowell Boulevard
Westminster, Colorado 80030
(303) 657-3550
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD SEPTEMBER ___, 1999
This Proxy Statement is furnished to the holders of U.S. Pawn no par value
common stock (the "Common Stock") in connection with the solicitation of proxies
by U.S. Pawn's Board of Directors for a special meeting (the "Meeting") of our
shareholders to be held at the law offices of Brownstein, Hyatt & Farber, P.C.,
Suite 2200, 410 17th Street, Denver, Colorado 80202, at 9:30 a.m., local time,
on September ___, 1999, or at any adjournment or postponement thereof. U.S. Pawn
anticipates that this Proxy Statement and the accompanying form of proxy will be
first mailed or given to shareholders on or about September ___, 1999.
At the Meeting, holders of the Common Stock will be asked to consider and
vote upon the proposals relating to the Merger of U.S. Pawn CNP Holdings, Inc.
("Holdings"), our wholly owned subsidiary and Cash-N-Pawn International, Ltd.
("Cash-N-Pawn") which owns and operates 10 pawnshops in Minnesota, Missouri and
Indiana. The proposals are summarized in the letter to shareholders and Notice
of Shareholders' Meeting to which this Proxy Statement is attached. This Proxy
Statement covers the proposals in greater detail and informs shareholders about
U.S. Pawn, Holdings, Cash-N-Pawn and their plans.
PLEASE READ THE PROXY STATEMENT CAREFULLY AND VOTE BY FILLING IN THE
APPROPRIATE BLANKS, SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT
IN THE ENCLOSED ENVELOPE.
<PAGE>
TABLE OF CONTENTS
PAGE
----
SUMMARY........................................................................1
The Parties to the Agreement..........................................1
The Meeting...........................................................2
The Merger............................................................3
The Agreement.........................................................4
THE MEETING....................................................................5
Voting and Record Date................................................5
Proxies...............................................................5
Dissenters' Rights....................................................6
Costs of Solicitation.................................................6
PROPOSAL 1: APPROVAL AND ADOPTION OF THE AGREEMENT............................6
THE MERGER.....................................................................6
General...............................................................6
Background and Reasons for the Merger.................................7
Recommendation of the Board of Directors..............................8
Regulatory Approvals..................................................8
Accounting Treatment..................................................9
Material Tax Consequences.............................................9
Interests of Certain Persons in the Merger............................9
Effect of the Merger on U.S. Pawn's Shareholders.....................10
Plans for Operation of U.S. Pawn Following the Merger................10
THE AGREEMENT.................................................................10
The Merger...........................................................10
Effective Date.......................................................10
Terms of the Merger..................................................10
Representations, Warranties and Covenants............................14
Conditions to Closing................................................14
Certain Operative Agreements.........................................15
Indemnification; Right of Set Off Against Notes......................16
Conduct of the Parties' Business.....................................17
Termination..........................................................17
MARKET PRICE DATA AND RELATED MATTERS
REGARDING U.S. PAWN.........................................................18
Common Stock Information.............................................18
Stock Repurchase.....................................................18
Dividends............................................................19
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AND STATEMENTS OF OPERATIONS................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION OF U.S. PAWN......................................................27
Results of Operations................................................27
i
<PAGE>
Liquidity and Capital Resources......................................32
Computer Systems-The Year 2000 Issue.................................34
INFORMATION ABOUT U.S. PAWN...................................................35
Current Operations...................................................36
Business Strategy....................................................36
Operating Controls...................................................37
Pawn Operations......................................................37
Resale Operations....................................................38
Competition..........................................................39
Regulation...........................................................40
Employees............................................................42
Properties...........................................................42
Insurance............................................................42
Litigation...........................................................42
SELECTED CONSOLIDATED FINANCIAL DATA OF CASH-N-PAWN ..........................43
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION OF CASH-N-PAWN....................................................45
Overview.............................................................45
Results from Operations..............................................45
Income Taxes.........................................................47
Liquidity and Capital Resources......................................47
INFORMATION ABOUT CASH-N-PAWN INTERNATIONAL, LTD..............................48
General..............................................................48
Business Operations..................................................48
Employees and Training...............................................50
Computer Network, Record Keeping and Security........................50
Year 2000 Issues.....................................................51
Marketing............................................................51
Store Locations......................................................51
Business Strategy....................................................52
Competition..........................................................53
Pawn Shop Regulation.................................................54
Market Price of Cash-N-Pawn; Additional Information..................55
Dividends............................................................55
Legal Proceedings....................................................55
PROPOSAL 2: ELECTION OF THE BOARD OF DIRECTORS...............................56
MANAGEMENT OF U.S. PAWN.......................................................56
Post-Merger Management of U.S. Pawn..................................56
Background of the Post-Merger Management of U.S. Pawn................57
Key Employee.........................................................58
Current Directors and Executive Officers of U.S. Pawn................59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF U.S. PAWN.................................................61
ii
<PAGE>
EXECUTIVE COMPENSATION OF U.S. PAWN...........................................63
Employment Agreements, Termination of Employment
and Change-in-Control Arrangements.................................64
Stock Options and Warrants...........................................65
PROPOSAL 3: APPROVAL OF THE ADOPTION OF THE AMENDED CASH-N-PAWN,
INTERNATIONAL, LTD. 1995 LONG TERM INCENTIVE PLAN...........................66
DESCRIPTION OF CAPITAL STOCK OF U.S. PAWN.....................................67
Authorized and Outstanding Capital Stock.............................67
Common Stock.........................................................67
Preferred Stock......................................................68
Common Stock Purchase Warrants.......................................69
Options..............................................................69
OTHER MATTERS.................................................................71
SHAREHOLDER PROPOSALS FOR
THE 2000 ANNUAL MEETING OF SHAREHOLDERS.....................................71
AVAILABLE INFORMATION.........................................................71
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS..................................F-1
EXHIBIT 1 AGREEMENT AND PLAN OF MERGER
INCLUDING ALL EXHIBITS AND APPENDICES......................................I-1
EXHIBIT 2 AMENDED CASH-N-PAWN INTERNATIONAL, LTD.
1995 LONG TERM INCENTIVE PLAN.............................................II-1
iii
<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this Proxy
Statement. It is not complete and does not contain all of the information you
should consider before voting. You should read the entire Proxy Statement
carefully, including the financial statements and notes to the financial
statements, and the Exhibits, before voting. Portions of this Proxy Statement
contain certain "forward-looking" statements which can be identified by the use
of forward-looking terms such as "expect" "estimate" "anticipate," and "believe"
or by discussions of strategy, future operating results or events. These
forward-looking statements are subject to risks and uncertainties that may cause
U.S. Pawn's actual results, performance or achievements to differ materially
from those discussed in the forward-looking statements. These risks and
uncertainties include, among others: difficulties associated with integrating
the operations of U.S. Pawn and Cash-N-Pawn; competition; availability of
suitable locations for pawnshops; costs associated with governmental
regulations; risk of uninsured losses; availability and terms of capital;
changes in business strategy; as well as other factors as detailed throughout
this Proxy Statement and in U.S. Pawn's reports filed with the Securities and
Exchange Commission. Forward-looking statements are made as of the date of this
Proxy Statement, and U.S. Pawn cannot assure that the future results covered by
the forward-looking statements will be achieved.
The Parties to the Agreement
- - ----------------------------
U.S. Pawn. U.S. Pawn was incorporated in Colorado in March 1980 and is
engaged in acquiring, establishing and operating pawnshops that lend money on
the security of pledged tangible personal property. U.S. Pawn is one of five
publicly traded pawnshop operators in the United States and owns and operates 13
pawnshops with 12 pawnshops in Colorado and 1 in Wyoming.
U.S. Pawn's principal executive offices are located at 7215 Lowell
Boulevard, Westminster, Colorado 80030 and its telephone number is (303)
657-3550.
Cash-N-Pawn. Cash-N-Pawn was incorporated in the state of Minnesota in 1993
and is engaged in acquiring, establishing and operating pawnshops that lend
money on the security of pledged tangible personal property. Cash-N-Pawn
currently owns and operates 10 pawnshops with five pawnshops in Minnesota, two
pawnshops in Missouri and three pawnshops in Indiana.
Cash-N-Pawn's principal executive offices are located at 1000 Shelard
Parkway, Suite 405, Saint Louis Park, MN 55426, and its telephone number is
(612) 525-0854.
1
<PAGE>
The Meeting
- - -----------
Time, Date and Place. The Meeting will be held on September __, 1999 at the
law offices of Brownstein, Hyatt & Farber, P.C., Suite 2200, 410 17th Street,
Denver, Colorado 80202 commencing at 9:30 a.m. local time.
Matters to be Considered at the Meeting. At the Meeting, U.S. Pawn's
shareholders will be asked to consider and vote upon:
(1) approval and adoption of the Agreement, and
(2) the election of Jack D. Hartsoe and Stanford M. Baratz to U.S. Pawn's
Board of Directors; Charles C. Van Gundy, Jack Skidell, Gary A. Agron
and Ross L. Murphy will continue to be directors of U.S. Pawn.
(3) approval of the adoption of the Amended Cash-N-Pawn International,
Ltd. 1995 Long Term Incentive Plan (the "CNP Plan") pursuant to which
all options thereunder represent options to purchase up to 250,000
shares of U.S. Pawn Common Stock.
The proposals relate to the Merger described in this proxy. We may abandon
any proposal if the shareholders do not approve all proposals. We have the right
to abandon the Merger at any time, subject to the terms and conditions of the
Agreement and applicable law. If all proposals are abandoned, the Agreement will
be terminated and the Board of Directors will not be changed.
Record Date, Shares Entitled to Vote. Holders of record of shares of Common
Stock at the close of business on September ___, 1999 are entitled to notice of
and to vote at the Meeting. At the record date, U.S. Pawn had 3,686,285 shares
of Common Stock outstanding and entitled to vote.
Voting Rights. Each holder of shares of Common Stock is entitled to one
vote per share with respect to all matters.
Votes Required. Approval of the Agreement requires the affirmative vote of
the holders of a majority of U.S. Pawn's issued and outstanding shares of Common
Stock present and entitled to vote at the Meeting. Directors will be elected by
a plurality of the shares present and entitled to vote at the Meeting. The
presence in person or by proxy of shareholders owning a majority of the issued
and outstanding shares of the Common Stock constitutes a quorum for the Meeting.
Abstentions and broker non-votes will be treated as a "no" vote for purposes of
determining whether approval of each proposal has been obtained, provided that
if a quorum is present, abstentions and broker non-votes will have no effect on
the voting for the election of directors.
Revocability of Proxies. Any shareholder may revoke a proxy at any time
before it is exercised by delivering a written revocation to U.S. Pawn, by
substituting a new proxy executed at a later date, or by requesting, in person,
before the Meeting that the proxy be returned.
2
<PAGE>
The Merger
- - ----------
Background and Reasons for the Merger. The Merger represents the
culmination of numerous steps taken by U.S. Pawn over the past months to find a
strategic partner to expand U.S. Pawn's operations.
Recommendation of the Board of Directors. The Board of Directors has
unanimously approved the Merger and the transactions described in this Proxy
Statement and recommends to U.S. Pawn's shareholders that they vote FOR the
approval of all proposals.
Regulatory Approvals. No federal or state regulatory requirements must be
complied with or approval obtained by U.S. Pawn in connection with the Merger
except that (i) the issuance of the securities forming a part of the Merger will
require certain filings with Nasdaq and filings pursuant to state and federal
securities laws and (ii) certain pawn and firearm licenses of Cash-N-Pawn will
generally require local, city, county, state or federal approval in connection
with the Merger.
Accounting Treatment. The Merger will be accounted for under the purchase
method of accounting applying the provisions of Accounting Principles Board
Opinion No. 16 ("APB 16"), pursuant to which tangible and intangible assets and
liabilities assumed are recorded based on their estimated fair value at the date
of the consummation of the acquisition.
Certain Income Tax Consequences. The Merger is expected to be qualified as
a tax free reorganization. If it is so qualified, it will be a non-taxable
transaction to U.S. Pawn that will result in no direct federal or state income
tax consequences to the U.S. Pawn's shareholders.
Interests of Certain Persons in the Merger. Certain members of U.S. Pawn's
current and proposed Board of Directors and management have or may have an
interest in the Merger that is in addition to or different from the interests of
shareholders generally.
Dissenting Shareholders' Rights. Pursuant to the Colorado Business
Corporation Act, holders of the Common Stock have no dissenting shareholder
rights regarding the Merger.
Effect of the Merger on U.S. Pawn's Shareholders. If the Merger is
consummated, the shareholders of U.S. Pawn will retain their equity interests in
U.S. Pawn, although their equity interests will be reduced to approximately 83%
of the outstanding common stock of U.S. Pawn assuming 750,000 shares of U.S.
Pawn's Common Stock are issued in connection with the Merger, but no shares of
Common Stock are issued upon exercise of outstanding stock options, common stock
purchase warrants or the conversion of any other securities. Based on such
assumptions, the holders of Cash-N-Pawn common stock who participate in the
Merger will hold approximately 17% of U.S. Pawn's outstanding Common Stock
following the Merger. The consummation of the Merger will not result in any
changes in the rights of shareholders of U.S. Pawn.
3
<PAGE>
Plans for Operation of U.S. Pawn Following the Merger. Following the
closing of the Merger, U.S. Pawn will continue to operate its 13 pawnshops and
Cash-N-Pawn's 10 pawnshops and plans to acquire or develop additional pawnshops.
U.S. Pawn plans to retain its corporate office in the Denver, Colorado
metropolitan area.
The Agreement
- - -------------
On May 6, 1999, U.S. Pawn entered into the Agreement pursuant to which U.S.
Pawn agreed to acquire Cash-N-Pawn by merging Cash-N-Pawn with and into
Holdings, whereby Cash-N-Pawn will become a wholly-owned subsidiary of U.S.
Pawn.
All holders of Cash-N-Pawn common stock who participate in the Merger will
be entitled to receive consideration with an aggregate value of no less than
$4,700,000 and no greater than $5,000,000, consisting of shares of U.S. Pawn's
Common Stock, cash, and a combination of Holdings' promissory notes and U.S.
Pawn Series B Preferred Stock. The total purchase price is subject to certain
adjustments, including but without limitation adjustments for conversions of
Cash- N-Pawn's Series A 11% Senior Subordianted Convertible Debentures into
Cash-N-Pawn common stock prior to the date of closing as described herein and
certain adjustments based on the value of Cash-N-Pawn's net assets as of
closing.
In addition, outstanding options and warrants for Cash-N-Pawn's common
stock (up to a maximum of 242,350 shares for options under the CNP Plan and
49,090 shares for warrants) will be converted or exchanged, as the case may be,
for similar options or warrants to purchase U.S. Pawn's Common Stock. The
exercise price for such options and warrants for U.S. Pawn's Common Stock will
be the greater of the closing price of U.S. Pawn's Common Stock on the date of
closing and $2.375 per share. U.S. Pawn will register, if not already
registered, U.S. Pawn's Common Stock issuable upon exercise of the above
described options.
Conditions of the Merger. The respective obligations of U.S. Pawn and
Cash-N-Pawn to consummate the Merger are subject to the satisfaction or waiver
(where permissible) of certain conditions, including, but not limited to:
(1) approval of the holders of at least 60% of Cash-N-Pawn common stock
and not more than 5% of such holders perfecting their dissenting
rights in accordance with Minnesota law; and
(2) approval of the Agreement and related transactions by the shareholders
of U.S. Pawn.
Amendment or Waiver. The parties may amend or waive any term or condition
of the Agreement in writing at any time without notice to or consent of either
of the U.S. Pawn or Cash-N- Pawn shareholders.
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Termination and Other Provisions. The Agreement contains certain
representations, warranties, covenants, conditions and indemnification
provisions. The Agreement may be terminated whether before or after approval of
the Merger by the shareholders of U.S. Pawn or the shareholders of Cash-N-Pawn,
(1) at any time by mutual consent of U.S. Pawn and Cash-N-Pawn; (2) if a
material breach of the Agreement has occurred by either party and the other
party has not waived such breach; or (3) by either party if the closing has not
occurred on or before December 31, 1999.
THE MEETING
Voting and Record Date
- - ----------------------
The Board of Directors has fixed September ___, 1999 as the record date for
the Meeting. Only persons who hold the Common Stock of record as of the record
date will be entitled to notice of and to vote at the Meeting. As of the record
date, there were 3,686,285 shares of the Common Stock outstanding and entitled
to vote.
Each shareholder on the record date is entitled to cast one vote per share,
exercisable in person or by a properly executed proxy at the Meeting.
The presence at the Meeting, in person or by a proxy, of the holders of a
majority of the shares of Common Stock outstanding on the record date will
constitute a quorum at the Meeting. Votes will be counted by inspectors
appointed by U.S. Pawn. Shares represented by proxies that reflect abstentions
or include "broker non-votes" will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum. A broker
non-vote occurs when a registered broker holding customer securities in street
name has not received voting instructions from the beneficial owner regarding
any "non-routine" matter as so designated by that broker's self-regulatory
organization. The approval and adoption of the Agreement requires the
affirmative vote of the holders of a majority of the outstanding shares of U.S.
Pawn's Common Stock present and entitled to vote at the Meeting. Directors will
be elected by a plurality of the shares present and entitled to vote at the
Meeting. Abstentions and broker non-votes will be treated as "no" votes for
purposes of determining whether approval of the Agreement has been obtained,
provided that if a quorum is present, abstentions and broker non-votes will have
no effect on the voting for the election of directors.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE AGREEMENT AND
RECOMMENDS A VOTE FOR APPROVAL OF THE AGREEMENT, ELECTION OF THE TWO DIRECTORS
NOMINATED BY CASH-N- PAWN, AND APPROVAL OF THE ADOPTION OF THE AMENDED CNP PLAN.
Proxies
- - -------
All shares of Common Stock represented at the Meeting by properly executed
proxies received prior to or at the Meeting, and not duly and timely revoked,
will be voted at the Meeting in accordance with the choices marked by the
shareholders. Unless a contrary choice is marked, or if the proxy is left blank
as to choice, the shares will be voted FOR approval of the Agreement, election
of the two directors nominated by Cash-N-Pawn and approval of the adoption of
the CNP Plan.
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The Board of Directors is not aware of any other matters to be presented at
the Meeting. If other matters properly come before the Meeting, the persons
designated in the proxy intend to vote the shares represented thereby in
accordance with their best judgment.
Any proxy may be revoked by the person giving it at any time before it is
voted. Proxies may be revoked by (1) filing with the Secretary of U.S. Pawn at
or before the taking of the vote at the Meeting a written revocation bearing a
later date than the proxy, (2) duly executing a later-dated proxy relating to
the same shares and delivering it to the Secretary of U.S. Pawn before the
taking of the vote at the Meeting, or (3) attending the Meeting and voting in
person.
Dissenters' Rights
- - ------------------
Under the Colorado Business Corporation Act, U.S. Pawn shareholders are not
entitled to dissenters' rights regarding the Merger.
Costs of Solicitation
- - ---------------------
U.S. Pawn will pay all of the expenses involved in preparing, assembling
and mailing these proxy materials, along with the costs of soliciting proxies.
In addition to solicitation by mail, directors, officers and regular employees
of U.S. Pawn may solicit proxies by telephone or personal interview. They will
receive no compensation for their services other than their regular
compensation. U.S. Pawn will also make arrangements with brokerage houses and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of the shares held of record by such persons. U.S. Pawn
may reimburse such persons for reasonable out-of-pocket expenses they incur in
doing so.
PROPOSAL 1: APPROVAL AND ADOPTION OF THE AGREEMENT
THE MERGER
General
- - -------
At the closing of the Merger:
o Cash-N-Pawn will merge with and into Holdings and become a
wholly-owned subsidiary of U.S. Pawn;
o The holders of Cash-N-Pawn common stock will be entitled to receive a
pro-rata portion of the Merger Consideration which consists of:
(1) 750,000 shares of our restricted Common Stock;
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(2) a cash payment of $550,000; and
(3) additional consideration with an aggregate value of $2,575,000
(based on the price of our Common Stock around the date of
closing being $2.50 per share) consisting of Holdings' promissory
notes (with our guarantee) ("Notes") and our 7% Series B
Convertible Preferred Stock ("Preferred Stock") with the exact
amount and mix of Notes and Preferred Stock yielding a combined
annual return of approximately 9.5% being determined after
closing as described herein.
The above consideration is subject to various adjustments (based on the
price of our Common Stock around the date of closing) so that the total dollar
value of all consideration received by Cash-N-Pawn common shareholders before
the additional adjustments noted below, is no less than $4,700,000 and no more
than $5,000,000.
In addition, the Merger Consideration may be adjusted as described herein
(i) for conversions of Cash-N-Pawn's Series A 11% Senior Subordinated
Convertible Debentures into Cash-N-Pawn common stock prior to the date of
closing and (ii) certain adjustments based upon the value of Cash- N-Pawn's net
assets as of the date of closing, as determined after the closing.
For tax considerations, the exact mix of Notes and Preferred Stock will be
determined following the other adjustments listed. The interest rate on the
Notes will then be determined, based on the mix of Notes and Preferred Stock.
Finally, certain outstanding warrants and options for Cash-N-Pawn common
stock will be converted or exchanged into similar warrants and options for our
Common Stock.
After the Merger occurs, and assuming that 750,000 shares of U.S. Pawn's
Common Stock are issued and no shares of Common Stock are issued upon exercise
of outstanding stock options, common stock purchase warrants or the conversion
of any other securities, the Cash-N-Pawn shareholders who participate in the
Merger will own approximately 17% of U.S. Pawn's issued and outstanding Common
Stock and the current U.S. Pawn shareholders' equity interests will be reduced
to approximately 83% of the U.S. Pawn's issued and outstanding Common Stock.
At the Effective Date, the symbol for the Common Stock on the NASDAQ
SmallCap Market will remain "USPN."
Background and Reasons for the Merger
- - -------------------------------------
Management believes that expanding U.S. Pawn's market share through the
careful acquisition of existing pawnshops and the opening of new pawn shops
provides the best opportunity to meet its strategic objectives. Moreover,
concentrating multiple pawn shops in specific locations are expected to provide
economies of scale in supervision, purchasing, administration and marketing.
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U.S. Pawn's primary pawn shop acquisition criteria includes the level of
competence of the pawn shop's current management, the number of annual pawn
transactions, the outstanding pawn loan balances, the quality and quantity of
pawn shop inventory, the number of competitive pawn shops in the market area,
lease terms and physical condition of the pawn shop.
Cash-N-Pawn's strategy is similar to U.S. Pawn's as evidenced by its
concentration of pawn shops in three states. Combining U.S. Pawn and Cash-N-Pawn
is expected to add experienced and capable management to U.S. Pawn and allow the
combined business to realize significant economies of scale. In addition, the
location of Cash-N-Pawn's pawn shops are non-competitive to U.S. Pawn and offer
markets which will generally provide for higher pawn service charges than in
U.S. Pawn's markets.
Recommendation of the Board of Directors
- - ----------------------------------------
The Board of Directors believes that the Merger is in the best interests of
U.S. Pawn, has unanimously approved the Agreement and recommends that U.S.
Pawn's shareholders vote FOR approval of the Agreement.
In reaching its conclusions, the Board of Directors considered:
o A wide range of expansion options, none of which were as attractive as
the Merger;
o U.S. Pawn's current financial performance, business operations and
prospects;
o The terms and conditions of the Agreement;
o The market acceptance, track record and potential for expansion of
Cash-N-Pawn pawn shop locations;
o The experience and reputation of Cash-N-Pawn and its management;
o The recommendation of U.S. Pawn's management with respect to the
Merger; and
o The effect of the Merger on U.S. Pawn's shareholder value.
U.S. Pawn's Board also considered risks relating to the Merger, including
risks associated with operating multiple pawn shops in widely dispersed
locations and the liquidity and capital resources of U.S. Pawn following the
Merger.
Regulatory Approvals
- - --------------------
No federal or state regulatory requirements must be complied with or
approval obtained by U.S. Pawn in connection with the Merger except that (i) the
issuance of the securities forming a part of the Merger will require certain
filings with Nasdaq and filings pursuant to state and federal securities laws
and (ii) certain pawn and firearm licenses of Cash-N-Pawn will generally require
local, city, county, state or federal approval in connection with the Merger.
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Accounting Treatment
- - --------------------
The Merger will be accounted for under the purchase method of accounting
applying the provisions of Accounting Principles Board Opinion No. 16 ("APB
16"), pursuant to which tangible and intangible assets and liabilities assumed
are recorded based on their estimated fair value at the date of the consummation
of the acquisition.
Material Tax Consequences
- - -------------------------
The Merger is intended to qualify as a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended. If it is so qualified, it will
be a non-taxable transaction to U.S. Pawn that will not result in any direct
federal or state income tax consequences to the U.S. Pawn shareholders. The
parties will not obtain a tax counsel opinion or IRS letter ruling regarding the
tax treatment of the Merger. If the Merger fails to qualify as a reorganization,
then Cash-N-Pawn and subsequently Holdings as successor will recognize gain or
loss in the Merger in an amount equal to the excess of the fair market value of
its assets over its tax basis in such assets at the effective time.
THE FOREGOING DISCUSSION IS INTENDED ONLY AS A GENERAL SUMMARY OF CERTAIN
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER AND DOES NOT PURPORT TO BE A
COMPLETE ANALYSIS OR LISTING OF ALL POTENTIAL TAX EFFECTS RELEVANT TO THE
MERGER.
Interests of Certain Persons in the Merger
- - ------------------------------------------
In considering the recommendation of the Board of Directors with respect to
the Agreement, shareholders should be aware that certain members of U.S. Pawn's
current and proposed Board and management have or may have interests in the
Merger that are in addition to or different from the interests of shareholders
generally.
Employment Agreement with Charles C. Van Gundy. As of the Effective Date,
U.S. Pawn will extend its employment agreement with Charles C. Van Gundy,
currently U.S. Pawn's President and Chief Executive Officer, for an additional
one year to December 31, 2001.
Receipt of Shares of Common Stock and Options for Common Stock by
Cash-N-Pawn Director Nominees. Assuming no Cash-N-Pawn debentures are converted
and no dissenters' rights are perfected, the two Cash-N-Pawn nominees to be
directors of U.S. Pawn, Messrs. Jack D. Hartsoe and Stanford M. Baratz, will
receive 72,500 shares and 3,480 shares, respectively, of Common Stock (excluding
shares issuable upon the exercise of options or warrants) in exchange for their
Cash-N- Pawn securities, on the same basis as all other Cash-N-Pawn shareholders
and will be entitled to purchase 86,000 shares and 34,400 shares, respectively,
of U.S. Pawn's Common Stock, under currently outstanding options and warrants.
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Effect of the Merger on U.S. Pawn's Shareholders
- - ------------------------------------------------
If the Merger is consummated, the shareholders of U.S. Pawn will retain
their equity interests in U.S. Pawn, although their equity interests will be
reduced to approximately 83% of the outstanding common stock of U.S. Pawn
assuming 750,000 shares of U.S. Pawn's Common Stock is issued in connection with
the Merger but no shares of common stock are issued upon exercise of outstanding
stock options, common stock purchase warrants or the conversion of any other
securities. Based on such assumptions, the holders of Cash-N-Pawn common stock
who participate in the Merger will hold approximately 17% of U.S. Pawn's
outstanding Common Stock following the Merger. The consummation of the Merger
will not result in any changes in the rights of shareholders of U.S. Pawn.
Plans for Operation of U.S. Pawn Following the Merger
- - -----------------------------------------------------
Following the closing of the Merger, U.S. Pawn will continue to operate its
13 pawnshops and Cash-N-Pawn's 10 pawnshops and expects to acquire or develop
additional pawnshops.
THE AGREEMENT
The following is a brief summary of certain provisions of the Agreement.
You should read the following summary and the Agreement attached as Exhibit A
for a full understanding of the Agreement.
The Merger
- - ----------
The Agreement provides that, subject to certain conditions including but
not limited to the approval by U.S. Pawn's shareholders, Cash-N-Pawn will merge
into Holdings and become a wholly-owned subsidiary of U.S. Pawn. The articles of
incorporation and by-laws of U.S. Pawn will not be changed.
Effective Date
- - --------------
Subject to the terms and conditions of the Agreement, the Merger will
become effective upon the filing and acceptance of the Certificate of Merger and
the Articles of Merger, respectfully, with the Secretaries of State of Minnesota
and Colorado.
Terms of the Merger
- - -------------------
General. On the Effective Date, (1) Cash-N-Pawn will merge with and into
Holdings and become a wholly-owned subsidiary of U.S. Pawn and (2) U.S. Pawn's
Board of Directors will be increased to six members, two of whom are nominees of
Cash-N-Pawn and will be elected at the Meeting pursuant to the Agreement.
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Merger Consideration; Exchange of Cash-N-Pawn Common Stock for Cash and
Securities of U.S. Pawn. Upon the Effective Date, holders of Cash-N-Pawn Common
Stock will be entitled to receive a pro rata portion of the Merger Consideration
which consists of:
(1) 750,000 shares of our restricted Common Stock;
(2) a cash payment of $550,000; and
(3) additional consideration with an aggregate value of $2,575,000 (based
on the price of our Common Stock around the date of closing being
$2.50 per share) consisting of Holdings' promissory notes (with our
guarantee) ("Notes") and our 7% Series B Convertible Preferred Stock
("Preferred Stock") with the exact amount and mix of Notes and
Preferred Stock yielding a combined annual return of approximately
9.5% being determined after closing as described herein.
Holders who perfect their dissenter's right will be entitled to receive
only cash, as determined under Minnesota statutes, and any securities
representing their pro rata portion of the Merger Consideration will not be
issued.
Adjustment of the Merger Consideration. Adjustment to the Merger Consideration
will be made in the following order:
(A) Cap and Floor. To the extent that the total value of the Merger
Consideration is less than $4,700,000 or greater than $5,000,000 (because the
average closing price of U.S. Pawn's Common Stock for the five trading days
immediately preceding the day two days prior to the closing date is less than
$2.10 or greater than $2.50, respectively), the components of the Merger
Consideration will be adjusted upwards or downwards, until the total value of
the Merger Consideration is $4,700,000 or $5,000,000, as applicable. If the
total value of the Merger Consideration is less than $4,700,000, the amount of
Aggregate Additional Consideration shall be increased to the extent that the
value of the Merger Stock is less than $1,575,000. If the total value of the
Merger Consideration is greater than $5,000,000, first: the amount of Aggregate
Additional Consideration shall be decreased to the extent that the value of the
Merger Stock is greater than $1,875,000, and second: if the Aggregate Additional
Consideration has been reduced to zero and the total value of the Merger
Consideration is still greater than $5,000,000, the Cash, and then the Merger
Stock, will be reduced until the total value of Merger Consideration is
$5,000,000.
(B) Conversion of Cash-N-Pawn's Convertible Notes. Cash-N-Pawn has
$2,000,000 of Series A 11% Senior Subordinated Convertible Debentures
outstanding (the "Cash-N-Pawn 11% Debt"). The Cash-N-Pawn 11% Debt is
convertible, at the option of its holders, into Cash-N-Pawn common stock prior
to the Merger. Pursuant to the terms of the Merger, holders of the Cash-N-Pawn
11% Debt who are "accredited investors" may exchange such debentures for 11%
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Senior Subordinated Convertible Debentures of U.S. Pawn ("U.S. Pawn 11%
Debentures"), the terms of which are described below. If a holder does not
exchange its Cash-N-Pawn 11% Debt for U.S. Pawn 11% Debentures, such holder can
retain its debenture without a post-Merger conversion right or convert its
debenture. To the extent that the holders of the Cash-N-Pawn 11% Debt elect to
convert such debt into Cash-N-Pawn common stock prior to the Merger, the Merger
Consideration constituting the Aggregate Additional Consideration will be
increased (i) $1.17 for every $1.00 of principal amount of the Cash-N-Pawn 11%
Debt that is converted up to a maximum of $588,235 of converted Cash-N-Pawn 11%
Debt and (ii) $1.00 for every $1.00 of principal amount of Cash-N-Pawn 11% Debt
above the $588,235 that is converted.
(C) Balance Sheet Adjustments. The Aggregate Additional Consideration will
be reduced dollar-for-dollar for certain reductions, if any, in Cash-N-Pawn's
net assets as reflected on a Closing Date Balance Sheet.
(D) Tax Adjustment. For tax reasons relating to taxable and tax-free
reorganizations, the allocation of the Aggregate Additional Consideration
between Notes and Preferred Stock will be determined such that the value of the
Merger Stock plus the par value of the Preferred Stock shall equal at least 40%
of the total Merger Consideration as adjusted.
(E) Note Interest Rate. Finally, the interest rate on the Notes will be
determined such that the blended annual yield of the Notes and the Preferred
Stock, if any, will be equal to approximately 9.5%.
The provisions for adjustment of the Merger Consideration are set forth as
Appendix A to the Agreement.
Terms of the Class B Preferred Stock. Holders of the Class B Preferred
Stock will not be entitled to vote with the holders of Common Stock. The holder
of each issued and outstanding share of Class B Preferred Stock shall be
entitled to receive quarterly dividends in cash at the rate of 7% per annum on
the par value of the Class B Preferred Stock, which shall be $10.00 per share.
The value of each share of Class B Preferred Stock (calculated as its par value
plus any accrued but unpaid dividends, the "Preferred Stock Value") shall be
convertible into Common Stock at any time at the holders' option pursuant to the
applicable conversion rate, which shall be $4.00 per share of Common Stock for
the first five years and $2.00 per share of Common Stock thereafter, subject to
certain restrictions and adjustments. U.S. Pawn may require the holders of Class
B Preferred Stock to convert the Class B Preferred Stock into Common Stock at
the applicable conversion rate if the closing price of the Common Stock equals
or exceeds $4.50 per share for a period of ninety consecutive days. In addition,
U.S. Pawn may redeem the Class B Preferred Stock at the Class B Preferred Stock
Value at any time after the second anniversary of the Merger. The terms of the
Class B Preferred Stock are attached as Exhibit B to the Agreement.
Terms of the Notes. The Notes will be made by Holdings and guaranteed by
U.S. Pawn. The Notes will have a term of five years from the date of closing
(the "Maturity Date"). The Notes will not be secured by any collateral. The
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payment of the Notes by Holdings will be subordinate to payment of Holdings'
debt outstanding on the date of closing, debt from borrowings from a bank or
financial institution whenever incurred and any debt to U.S. Pawn whenever
incurred. The Notes will be senior in right of payment to any other Holdings'
indebtedness. Holdings will have no debt prior to the Merger, but will assume
all of Cash-N-Pawn's debt at closing, which will be senior to the Notes.
Interest at a rate determined as described above will be payable in arrears on
the accrued principal on each March 31, June 30, September 30 and December 31
and any accrued and unpaid interest together with the principal will be payable
on the Maturity Date. The Notes may be prepaid at any time without penalty.
U.S. Pawn's guarantee will be subordinate to all of U.S. Pawn's
indebtedness for borrowed money, whenever incurred. The forms of the Notes and
Guaranty are attached as Exhibit C to the Agreement.
Terms of the U.S. Pawn Debentures. U.S. Pawn 11% Debentures may be issued
in a principal amount not to exceed $2,000,000. The U.S. Pawn 11% Debenture will
be offered only to accredited investors who elect to exchange11% Debentures of
Cash-N-Pawn currently outstanding for a like principal amount of U.S. Pawn 11%
Debentures. Principal will be due and payable on July 1, 2001, unless the U.S.
Pawn 11% Debentures are converted into common stock of U.S. Pawn or are redeemed
by U.S. Pawn in accordance with their terms. Eleven percent (11%) interest per
annum shall accrue beginning on the date of issue, and shall be paid quarterly
on the first day of January , April, July and October of each year, commencing
on the first interest payment date after the closing of the Merger. Accrued and
unpaid interest amounts, if any, will not be converted into U.S. Pawn's common
stock, but will be paid in cash at the time of the conversion (if any) of the
U.S. Pawn 11% Debentures.
The U.S. Pawn 11% Debentures will be unsecured and will be subordinated in
right of payment to all senior indebtedness. There is no restriction in the U.S.
Pawn 11% Debentures on the amount of senior indebtedness which U.S. Pawn can
incur. The U.S. Pawn 11% Debentures are convertible at anytime at the option of
the holder, in whole or in part, into shares of common stock of U.S. Pawn at a
per share conversion price of $6.00 per share. U.S. Pawn has agreed to provide
holders of U.S. Pawn 11% Debentures certain "piggy-back" registration rights
with respect to the shares of U.S. Pawn common stock issuable upon conversion.
Each U.S. Pawn 11% Debenture may be redeemed or prepaid at anytime, in
whole but not in part, at the election of U.S. Pawn at 100% of the principal
amount. U.S. Pawn is required to give holders notice prior to redemption and
during such notice period, the holders will have the right to convert the U.S.
Pawn 11% Debentures into shares of U.S. Pawn common stock.
Conversion of Cash-N-Pawn's Options and Warrants. Outstanding options and
warrants for Cash-N-Pawn's Common Stock (up to a maximum of 242,350 shares for
options under the CNP Plan and 49,090 shares for warrants) will be converted or
exchanged, as the case may be, for similar options or warrants to purchase U.S.
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Pawn's Common Stock. The exercise price for such options and warrants for U.S.
Pawn's Common Stock will be the greater of the closing price of U.S. Pawn's
Common Stock on the date of closing and $2.375 per share. U.S. Pawn will
register, if not already registered, U.S. Pawn's Common Stock issuable upon
exercise of the above described options.
Representations, Warranties and Covenants
- - -----------------------------------------
The Agreement contains certain representations and warranties of U.S. Pawn,
Holdings and Cash-N-Pawn normal and customary to similar transactions. The
representations and warranties describe as to each company among other things:
(1) its capitalization, (2) its organization, valid existence and good standing
(3) its power and authority to enter into, perform and consummate the Agreement,
(4) it obtaining all necessary governmental permits, licenses and consents, (5)
the disclosure of litigation, if any, (6) that neither the execution and
delivery of the Agreement nor the consummation of the transactions contemplated
by the Agreement will conflict with, or result in a breach of any agreement or
cause the acceleration of any obligation or violate any law, (7) that the
Agreement has been duly authorized and, upon the shareholders approving the
Agreement, it will be legally binding, (8) the presentation of financial
statements prepared in accordance with generally accepted accounting principles,
(9) that it has complied with applicable laws, and (10) that it has not
knowingly omitted or failed to disclose material facts relating to that party or
its operations necessary to make the statements made not misleading.
Conditions to Closing
- - ---------------------
The obligations of U.S. Pawn to consummate the Merger are subject to the
prior satisfaction of certain conditions including (among others) that: (1) no
court or regulatory or governmental authority has issued an order against any of
the parties which would be violated by the consummation of the Agreement, (2)
there have been no material changes in the parties' businesses, (3) the Merger
has been approved by each party's shareholders, (4) all representations and
warranties of Cash-N-Pawn in the Agreement are true and correct in all material
respects prior to closing and Cash-N-Pawn has performed all obligations and
complied with all covenants required to be performed or complied with on or
prior to closing, (5) certain current shareholders of Cash-N-Pawn have signed a
proxy and lock-up agreement, (6) Cash-N-Pawn has obtained all necessary
regulatory and other approvals and consents (including the approval for U.S.
Pawn to hold all of the licenses currently held by Cash-N-Pawn), (7) holders of
not more than 5% of the outstanding common stock of Cash-N-Pawn have perfected
their dissenters' rights under the Minnesota Business Corporation Act, and (8)
the lender providing Cash-N-Pawn's current line of credit has consented to
continue such line of credit on substantially similar terms after the Merger.
The obligations of Cash-N-Pawn to consummate the Merger are subject to the
prior satisfaction of certain conditions including (among others) that (i) no
court or regulatory or governmental authority has issued an order against any of
the parties which would be violated by the consummation of the transactions
contemplated by the Agreement (2) there have been no material changes in the
parties' businesses, (3) the Merger has been approved by each party's
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shareholders, (4) all representations and warranties of U.S. Pawn and Holdings
in the Agreement are true and correct in all material respects prior to closing
and U.S. Pawn and Holdings have performed all obligations and complied with all
covenants required to be performed or complied with on or prior to closing, (5)
the release of all guarantees and indebtedness for the benefit of Cash-N-Pawn by
current stockholders of Cash-N-Pawn, or the indemnification of such stockholders
by U.S. Pawn and Holdings shall have been obtained, and (6) all necessary action
has been taken to ensure that Cash-N-Pawn is entitled to nominate two directors
of U.S. Pawn.
Certain Operative Agreements
- - ----------------------------
Employment Agreements. The Agreement requires U.S. Pawn to enter into
employment agreements through December 31, 2001 with Jack D. Hartsoe and Alan L.
Cross. The Agreement also requires U.S. Pawn, as a condition to Cash-N-Pawn's
obligation to consummate the Merger, to extend the term of the employment
agreement of Charles C. Van Gundy, currently U.S. Pawn's President and Chief
Executive Officer, for one additional year to December 31, 2001.
Upon completion of the Merger, Mr. Hartsoe will be President and Chief
Operating Officer of Holdings, and will become President, Chief Operating
Officer and a Director of U.S. Pawn. As a condition to the merger, Mr. Hartsoe
must enter into a new employment agreement with U.S. Pawn which provides for
employment through December 31, 2001, with one year annual renewals thereafter
unless either party determines to cancel or renegotiate the agreement. The
agreement provides for (1) a base salary of $124,500, to be reviewed annually on
January 1, beginning in 2001, and increased at the discretion of the Board of
Directors of U.S. Pawn, (2) a car allowance of $1,000 per month, (3) benefits,
as payable to other management personnel, (4) participation in the stock option
plan with grants of options to purchase 67,000 shares of U.S. Pawn to vest on
December 31, 2001 and future grants as determined by the U.S. Pawn Compensation
Committee, and (5) a cash bonus for fiscal year 2000 of $10,000 guaranteed and
$10,000 at the discretion of the Board of U.S. Pawn, and for subsequent years
based on a formula to be negotiated between U.S. Pawn and Mr. Hartsoe.
Upon completion of the Merger, Mr. Cross will be Secretary/Treasurer of
Holdings and will become Chief Financial Officer of U.S. Pawn. As a condition to
the Merger, Mr. Cross must enter into a new employment agreement with U.S. Pawn
which provides for employment through December 31, 2001, with one year annual
renewals thereafter unless either party determines to cancel or renegotiate the
agreement. The agreement provides for (1) a base salary of $100,000, to be
reviewed annually on January 1, beginning in 2001, and increased at the
discretion of the Board of Directors of U.S. Pawn, (2) a car allowance of $1,000
per month, (3) benefits, as payable to other management personnel, (4)
participation in the stock option plan with grants of options to purchase 67,000
shares of U.S. Pawn stock to vest on December 31, 2001 and future grants as
determined by the U.S. Pawn Compensation Committee, and (5) a cash bonus for
fiscal year 2000 of $10,000 guaranteed and $10,000 at the discretion of the
Board of U.S. Pawn, and for subsequent years based on a formula to be negotiated
between U.S. Pawn and Mr. Cross.
15
<PAGE>
Each of the employment agreements between U.S. Pawn and Messrs. Hartsoe and
Cross will provide that they may be terminated by either party for cause upon
written notice and failure to cure or without cause. In the event an employment
agreement is terminated by U.S. Pawn without cause or by the employee for cause,
U.S. Pawn shall continue payments under that agreement for that year (subject to
certain reductions) and shall either pay the employee a lump sum equal to the
value of his unexercised options or shall cause all such options to vest and
shall extend the exercisability of his options for two years from the date of
termination.
Messrs. Hartsoe and Cross will also enter into Confidentiality and
Noncompetition Agreements whereby they will agree not to compete with U.S. Pawn
or its subsidiaries during the term of their employment and for three years
thereafter within a radius of 50 miles of any existing or proposed store of U.S.
Pawn, and will not solicit any employees to compete with U.S. Pawn during the
term of their employment and for two years thereafter.
Proxy and Lock-Up Agreement. The Agreement requires certain current
stockholders of Cash-N-Pawn (who collectively hold 63% of Cash-N-Pawn's shares
currently outstanding) to enter into a proxy and lock-up agreement, which
provides that such stockholders may not sell their shares of U.S. Pawn's Common
Stock before the earlier of (1) two years after the closing date, (2) the date
on which U.S. Pawn has more than seven directors on its Board of Directors, or,
(3) the date of U.S. Pawn's 2001 annual meeting if Cash-N-Pawn's designees stand
for election to U.S. Pawn's Board of Directors at such annual meeting and are
not elected. The lock-up agreement further states that as exceptions, such
stockholders may (A) transfer shares of U.S. Pawn's Common Stock: (1) by
operation of law; or (2) by will or laws governing descent and distribution and
(B) sell in any 3 month period a number of shares of Common Stock which does not
exceed 25% of the number of shares owned of record or beneficially by such
shareholder. The lock-up agreement also grants an irrevocable proxy to U.S.
Pawn's Board of Directors to vote all of the shares of Common Stock of the
stockholder subject to the lock-up agreement during the period covered by the
lock-up agreement.
Indemnification; Right of Set Off Against Notes.
- - ------------------------------------------------
The Agreement provides that, notwithstanding any investigation by any party
prior to the closing of the Merger, U.S. Pawn and Holdings on one hand, and
Cash-N-Pawn on the other hand, will indemnify, defend and hold harmless each
other and their officers, directors, employees and affiliates from and against
all damages of such party, caused by (1) any breach of any representation or
warranty of the indemnifying party contained in or made pursuant to the
Agreement and (2) any breach of the covenants and agreements made by the
indemnifying party. The indemnification obligations of Cash-N-Pawn are subject
to the following limitations: (1) no claim will be for a single loss less than
$1,000, (2) no amount shall be payable unless and until the aggregate amount of
such indemnifiable claims exceed $100,000 in which event 50% of the first
$100,000 of such amount shall be payable by Cash-N-Pawn and any amount in excess
of $100,000 shall all be payable by Cash-N- Pawn, in each case solely as
set-offs against the Notes, and (3) Cash-N-Pawn's aggregate liability for
indemnification will not exceed the greater of 10% of the aggregate value of the
16
<PAGE>
Merger Consideration or $500,000. For purposes of the set-off against any
payments under the Notes, a committee comprised of Craig Avery, James Ostenson
and Stanford M. Baratz will represent the interests of the holders of the Notes.
The expenses of such committee may be included in any set-off amount. No set-off
may be made against the Notes unless this committee gives its written approval
or a final court order is issued.
Conduct of the Parties' Business
- - --------------------------------
Until the Effective Date, U.S. Pawn and Cash-N-Pawn have agreed to conduct
their business in the ordinary course and in substantially the same manner as
the businesses were conducted prior to the Merger and to use reasonable efforts
to preserve their business organizations, executive officers, employees,
suppliers and customers.
Termination
- - -----------
The Agreement may be terminated whether before or after approval of the
Agreement by the shareholders of U.S. Pawn or the shareholders of Cash-N-Pawn,
(1) at any time by mutual consent; (2) by either party if a material breach of
the Agreement has occurred; or (3) by either party if the closing has not
occurred by December 31, 1999.
17
<PAGE>
MARKET PRICE DATA AND RELATED MATTERS
REGARDING U.S. PAWN
Common Stock Information
- - ------------------------
U.S. Pawn has approximately 1,300 holders of record of its Common Stock.
The Company's Common Stock has been traded on the Nasdaq SmallCap Market
("Nasdaq") under the symbol "USPN" since May 10, 1989. On September ____, 1999,
the closing price of U.S. Pawn's Common Stock was $ ___ per share.
The following table sets forth, for the quarters indicated the range of
high and low sales prices of U.S. Pawn's Common Stock as reported by Nasdaq.
Common Stock
By Quarter Ended: High Low
----------------- ---- ---
Fiscal 1999
-----------
September 30, 1999 (through September __, 1999) $___ $___
June 30, 1999 $3.25 $2.25
March 31, 1999 $3.88 $1.41
Fiscal 1998
-----------
December 31, 1998 $2.19 $1.16
September 30, 1998 $3.94 $1.88
June 30, 1998 $4.38 $3.00
March 31, 1998 $4.00 $2.75
Fiscal 1997
-----------
December 31, 1997 $4.06 $2.87
September 30, 1997 $3.69 $1.87
June 30, 1997 $4.44 $3.12
March 31, 1997 $5.00 $3.62
The above quotations were reported by Nasdaq and reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Stock Repurchase
- - ----------------
U.S. Pawn's Board of Directors has agreed that U.S. Pawn will not
repurchase any of its outstanding shares of Common Stock through the closing of
the Merger.
18
<PAGE>
Dividends
- - ---------
U.S. Pawn has never paid cash dividends on its Common Stock and intends to
retain earnings, if any, for use in the operation and expansion of its business.
The amount of future dividends, if any, will be determined by the Board of
Directors based upon U.S. Pawn's earnings, financial condition, capital
requirements and other conditions.
U.S. Pawn has issued 37,800 shares of its $10.00 par value Series A
Redeemable Preferred Stock (the "Series A Preferred"). Holders of Series A
Preferred receive monthly dividends of 9.5% per annum on the par value.
Dividends are cumulative from the date of issue. As part consideration for the
Merger, U.S. Pawn may issue shares of its $10.00 par value Series B Convertible
Preferred Stock ("Series B Preferred Stock"), if required as Aggregate
Additional Consideration. The holders will be entitled to receive quarterly
dividends in cash at the rate of 7% per annum on the par value of the Series B
Preferred Stock. The terms of the Series B Preferred Stock are described under
the heading "Description of Capital Stock of U.S. Pawn".
UNAUDITED PRO FORMA
BALANCE SHEET AND STATEMENTS
OF OPERATIONS
The unaudited pro forma balance sheet as of March 31, 1999 gives effect to
the business combination of U. S. Pawn, Inc. and Cash-N-Pawn International, Ltd.
as if it occurred effective March 31, 1999.
The unaudited pro forma statements of operations for the year ended
December 31, 1998 and the three months ended March 31, 1999 give effect to the
business combination of U. S. Pawn, Inc. and Cash-N-Pawn International, Ltd. as
if it occurred effective January 1, 1998 and January 1, 1999, respectively.
These financial statements include the related pro forma adjustments
described in the notes thereto. The transactions between U. S. Pawn, Inc. and
Cash-N-Pawn International, Ltd. have been accounted for as a combination of
companies under the purchase method of accounting. These pro forma statements
are not necessarily indicative of the results of operations or the financial
positions as they may be in the future or as they might have been had the
transaction become effective on the above mentioned dates.
The unaudited pro forma statements of operations and the unaudited pro
forma balance sheet should be read in conjunction with the separate historical
financial statements and notes thereto of U. S. Pawn, Inc. and Cash-N-Pawn
International, Ltd. (contained in this Proxy Statement.)
19
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC.
Unaudited Pro Forma Balance Sheet
March 31, 1999
Cash-N-Pawn
U.S. International,
Pawn, Inc. Ltd. Total
---------- ---- -----
Assets
------
Current assets
<S> <C> <C> <C>
Cash $ 1,041,000 $ 235,000 $ 1,276,000
Service charges receivable 336,000 277,000 613,000
Pawn loans 2,591,000 1,213,000 3,804,000
Accounts receivable, net 14,000 28,000 42,000
Income tax refund receivable 133,000 -- 133,000
Deferred income taxes 73,000 94,000 167,000
Inventory, net 1,711,000 1,885,000 3,596,000
Prepaid expenses and other 226,000 91,000 317,000
------------ ------------ ------------
Total current assets 6,125,000 3,823,000 9,948,000
------------ ------------ ------------
Property and equipment, net 1,537,000 873,000 2,410,000
Intangible assets 318,000 169,000 487,000
Deferred income taxes -- 565,000 565,000
Other assets 20,000 19,000 39,000
------------ ------------ ------------
$ 8,000,000 $ 5,449,000 $ 13,449,000
============ ============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Line-of-credit $ -- $ -- $ --
Accounts payable 70,000 100,000 170,000
Customer deposits 34,000 94,000 128,000
Accrued expenses 337,000 714,000 1,051,000
Current portion of notes payable - related party 85,000 202,000 287,000
Current portion of notes payable 85,000 1,004,000 1,089,000
Current portion of long-term debt -- 590,000 590,000
------------ ------------ ------------
Total current liabilities 611,000 2,704,000 3,315,000
------------ ------------ ------------
Notes payable - related party, less current portion -- -- --
Notes payable, less current portion 664,000 -- 664,000
Debentures -- 2,003,000 2,003,000
Deferred rent -- 20,000 20,000
Deferred income taxes 1,000 -- 1,000
------------ ------------ ------------
Total liabilities 1,276,000 4,727,000 6,003,000
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity
Redeemable preferred stock 378,000 -- 378,000
Additional paid-in capital -- 2,143,000 2,143,000
Common stock 5,462,000 26,000 5,488,000
Retained earnings 884,000 (1,447,000) (563,000)
------------ ------------ ------------
Total stockholders' equity 6,724,000 722,000 7,446,000
------------ ------------ ------------
$ 8,000,000 $ 5,449,000 $ 13,449,000
============ ============ ============
Table continues on next page.
20
<PAGE>
U.S. PAWN, INC.
Unaudited Pro Forma Balance Sheet
March 31, 1999
(Continued)
Pro Forma Adjustments
------------------------ Consolidated
Debit Credit Total
----- ------ -----
Assets
------
Current assets
Cash $ -- $ 550,000(3) $ 726,000
Service charges receivable 10,000(6) -- 623,000
Pawn loans -- -- 3,804,000
Accounts receivable, net -- -- 42,000
Income tax refund receivable -- -- 133,000
Deferred income taxes -- -- 167,000
Inventory, net 13,000(6) -- 3,609,000
Prepaid expenses and other -- -- 317,000
------------ ------------ ------------
Total current assets 23,000 550,000 9,421,000
------------ ------------ ------------
Property and equipment, net -- -- 2,410,000
Intangible assets 4,517,000(3) 139,000(2) 4,865,000
Deferred income taxes -- -- 565,000
Other assets -- -- 39,000
------------ ------------ ------------
$ 4,540,000 $ 689,000 $ 17,300,000
============ ============ ============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Line-of-credit $ -- $ 544,000(1) $ 544,000
Accounts payable -- -- 170,000
Customer deposits -- -- 128,000
Accrued expenses -- -- 1,051,000
Current portion of notes payable - related party -- -- 287,000
Current portion of notes payable 541,000(1) -- 548,000
Current portion of long-term debt -- -- 590,000
------------ ------------ ------------
Total current liabilities 541,000 544,000 3,318,000
------------ ------------ ------------
Notes payable - related party, less current portion -- -- --
Notes payable, less current portion -- 3,710,000(3) 4,374,000
Debentures 3,000(1) --
2,000,000(2) -- --
Deferred rent -- -- 20,000
Deferred income taxes -- -- 1,000
------------ ------------ ------------
Total liabilities 2,544,000 4,254,000 7,713,000
------------ ------------ ------------
Commitments and contingencies
Stockholders' equity
Redeemable preferred stock -- 778,000(3) 1,156,000
Additional paid-in capital 2,143,000(3) -- --
Common stock 2,693,000(3) 2,667,000(2)
2,062,000(3) 7,524,000
Retained earnings 806,000(2) 2,253,000(3)
23,000(6) 907,000
------------ ------------ ------------
Total stockholders' equity 5,642,000 7,783,000 9,587,000
------------ ------------ ------------
$ 12,726,000 $ 12,726,000 $ 17,300,000
============ ============ ============
21
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC.
Unaudited Pro Forma Statement of Operations
For the Three Months Ended March 31, 1999
Cash-N-Pawn
U.S. International,
Pawn, Inc. Ltd. Total
---------- ---- -----
Revenue
<S> <C> <C> <C>
Sales $ 1,307,000 $ 1,552,000 $ 2,859,000
Pawn service charges 1,020,000 504,000 1,524,000
Other income 21,000 21,000 42,000
----------- ----------- -----------
Total revenue 2,348,000 2,077,000 4,425,000
----------- ----------- -----------
Operating expense
Cost of sales 1,026,000 1,077,000 2,103,000
Operations 852,000 692,000 1,544,000
Administration 245,000 108,000 353,000
Depreciation and amortization 85,000 43,000 128,000
----------- ----------- -----------
Total operating expenses 2,208,000 1,920,000 4,128,000
----------- ----------- -----------
Income from operations 140,000 157,000 297,000
Other income (expenses)
Interest (28,000) (142,000) (170,000)
Interest, related parties (4,000) -- (4,000)
Other -- (41,000) (41,000)
----------- ----------- -----------
Total other income (expenses) (32,000) (183,000) (215,000)
----------- ----------- -----------
Income (loss) before income taxes and cumulative
change in accounting method
108,000 (26,000) 82,000
Income tax expense (benefit) 31,000 (8,000) 23,000
----------- ----------- -----------
Income (loss) before cumulative effect of accounting change 77,000 (18,000) 59,000
Cumulative effect of accounting change -- -- --
----------- ----------- -----------
Net income (loss) 77,000 (18,000) 59,000
Dividends on preferred stock (9,000) -- (9,000)
----------- ----------- -----------
Net income (loss) available to common stockholders $ 68,000 $ (18,000) $ 50,000
=========== =========== ===========
Earnings (loss) per common share - basic $ .02
===========
Earnings (loss) per common share - diluted $ .02
===========
Weighted average shares outstanding - basic 3,685,410
===========
Weighted average shares outstanding - diluted 3,717,029
===========
Table continues on next page.
22
<PAGE>
U.S. PAWN, INC.
Unaudited Pro Forma Statement of Operations
For the Three Months Ended March 31, 1999
(Continued)
Pro Forma Adjustments
------------------------ Consolidated
Debit Credit Total
----- ------ ------------
Revenue
Sales $ -- $ -- $ 2,859,000
Pawn service charges -- 10,000(6) 1,534,000
Other income -- -- 42,000
----------- ----------- -----------
Total revenue -- 10,000 4,435,000
----------- ----------- -----------
Operating expenses
Cost of sales -- 13,000(6) 2,090,000
Operations -- -- 1,544,000
Administration -- -- 353,000
Depreciation and amortization 56,000(5) -- 184,000
----------- ----------- -----------
Total operating expenses 56,000 13,000 4,171,000
----------- ----------- -----------
Income from operations 56,000 23,000 264,000
Other income (expenses)
Interest 92,000(4) 6,000(1)
-- 71,000(2) (185,000)
Interest, related parties -- -- (4,000)
Other -- -- (41,000)
----------- ----------- -----------
Total other income (expenses) 92,000 77,000 (230,000)
----------- ----------- -----------
Income (loss) before income taxes and cumulative
change in accounting method
148,000 100,000 34,000
Income tax expense (benefit) 3,000(7) -- 26,000
----------- ----------- -----------
Income (loss) before cumulative effect of accounting change 151,000 103,000 8,000
Cumulative effect of accounting change -- -- --
----------- ----------- -----------
Net income (loss) 151,000 103,000 8,000
Dividends on preferred stock 15,000(4) -- (24,000)
----------- ----------- -----------
Net income (loss) available to common stockholders $ 166,000 $ 103,000 $ (16,000)
=========== =========== ===========
Earnings (loss) per common share - basic
$ --
===========
Earnings (loss) per common share - diluted
$ --
===========
Weighted average shares outstanding - basic 4,435,410
===========
Weighted average shares outstanding - diluted 4,435,410
===========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC.
Unaudited Pro Forma Statement of Operations
For the Year Ended December 31, 1998
U.S. Cash-N-Pawn
Pawn, Inc. International, Ltd. Total
---------- ------------------- -----
Revenue
<S> <C> <C> <C>
Sales $ 6,217,000 $ 5,746,000 $ 11,963,000
Pawn service charges 4,785,000 2,939,000 7,724,000
Other income 66,000 75,000 141,000
------------ ------------ ------------
Total revenue 11,068,000 8,760,000 19,828,000
------------ ------------ ------------
Operating expenses
Cost of sales 5,313,000 4,745,000 10,058,000
Operations 3,703,000 2,791,000 6,494,000
Administration 1,146,000 752,000 1,898,000
Depreciation and amortization 534,000 -- 534,000
------------ ------------ ------------
Total operating expenses 10,696,000 8,288,000 18,984,000
------------ ------------ ------------
Income from operations 372,000 472,000 844,000
Other income (expenses)
Interest (183,000) (583,000) (766,000)
Interest, related parties (103,000) -- (103,000)
Other (25,000) 1,000 (24,000)
------------ ------------ ------------
Total other income (expenses) (311,000) (582,000) (893,000)
------------ ------------ ------------
Income (loss) before income taxes and cumulative
change in accounting method
61,000 (110,000) (49,000)
Income tax expense (benefit) 196,000 (31,000) 165,000
------------ ------------ ------------
Income (loss) before cumulative effect of accounting change (135,000) (79,000) (214,000)
Cumulative effect of accounting change -- (365,000) (365,000)
------------ ------------ ------------
Net income (loss) (135,000) (444,000) (579,000)
Dividends on preferred stock (36,000) -- (36,000)
------------ ------------ ------------
Net income (loss) available to common stockholders $ (171,000) $ (444,000) $ (615,000)
============ ============ ============
Earnings (loss) per common share - basic and diluted $ (.05)
============
Weighted average shares outstanding - basic and diluted 3,782,844
============
Table continues on next page.
24
<PAGE>
U.S. PAWN, INC.
Unaudited Pro Forma Statement of Operations
For the Year Ended December 31, 1998
(Continued)
Pro Forma Adjustments
------------------------------ Consolidated
Debit Credit Total
----- ------ ------------
Revenue
Sales $ -- $ -- $ 11,963,000
Pawn service charges -- -- 7,724,000
Other income -- -- 141,000
------------ ------------ ------------
Total revenue -- -- 19,828,000
------------ ------------ ------------
Operating expense
Cost of sales -- -- 10,058,000
Operations -- -- 6,494,000
Administration -- -- 1,898,000
Depreciation and amortization 226,000(5) -- 760,000
------------ ------------ ------------
Total operating expenses 226,000 -- 19,210,000
------------ ------------ ------------
Income from operations 226,000 -- 618,000
Other income (expenses)
Interest 368,000(4) 24,000(1)
284,000(2) (826,000)
Interest, related parties -- -- (103,000)
Other -- -- (24,000)
------------ ------------ ------------
Total other income (expenses) 368,000 308,000 (953,000)
------------ ------------ ------------
Income (loss) before income taxes and cumulative
change in accounting method
594,000 308,000 (335,000)
Income tax expense (benefit) 104,000(7) -- 269,000
------------ ------------ ------------
Income (loss) before cumulative effect of accounting change 668,000 308,000 (604,000)
Cumulative effect of accounting change -- 365,000(6) --
------------ ------------ ------------
Net income (loss) 668,000 673,000 (604,000)
Dividends on preferred stock 58,000(4) -- (94,000)
------------ ------------ ------------
Net income (loss) available to common stockholders $ 756,000 $ 673,000 $ (698,000)
============ ============ ============
Earnings (loss) per common share - basic and diluted
$ (.15)
============
Weighted average shares outstanding - basic and diluted
4,532,844
============
</TABLE>
25
<PAGE>
Notes to Unaudited Pro Forma Financial Statements
The following adjustments are related to the business combinations between U.S.
Pawn, Inc. (USPN) and Cash-N-Pawn International, Ltd (CNP).
1. To record conversion of 15% convertible debt to draw on line-of-credit and
the related change in interest expense.
2. To record conversion $2,000,000, 11% convertible debentures at a discounted
conversion rate of 75% and the related reduction in interest expense. In
addition, the unamortized debt placement costs are written off.
3. To Record the acquisition by USPN of CNP. To finance the acquisition, USPN
issued 750,000 shares of common stock for $2,062,500 (assuming $2.75 market
value per share), 77,750 shares of preferred stock at $777,500, incurred
$3,710,000 of debt and paid $550,000 in cash at closing. The purchase price
has been allocated as follows:
Balance Sheet Category Valuation
---------------------- ---------
Cash $ 235,000
Pawn loans 1,490,000
Inventory 1,885,000
Deferred taxes 659,000
Intangibles 30,000
Property and equipment 873,000
Other 138,000
-----------
5,310,000
Liabilities assumed (2,727,000)
-----------
2,583,000
Consideration given (7,100,000)
-----------
Excess purchase price recorded as goodwill $ 4,517,000
===========
4. To record preferred stock dividend and interest expense based upon the
above acquisition consideration.
5. To record amortization on goodwill which is amortized over 20 years.
6. To conform method of accounting to parent.
7. Pro forma income tax adjustment at the statutory rate of 34%.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION OF U.S. PAWN
Results of operations for the three months ended March 31, 1999 ("1st Quarter
1999") compared to three months ended March 31, 1998 ("1st Quarter 1998")
- - --------------------------------------------------------------------------------
Revenues. Total revenues for the 1st Quarter 1999 decreased by 23% to
$2,348,000 from $3,043,000 for the 1st Quarter 1998. During the 1st Quarter
1999, same store operations (13 stores) generated revenues of $2,348,000
compared to $2,667,000 during the 1st Quarter 1998. Stores either consolidated,
closed or sold during the 1st Quarter 1998 (4 stores) generated revenues of
$376,000 in the 1st Quarter 1998. The decrease in revenues for the 1st Quarter
1999 reflects a 22% drop in merchandise sales, $1,307,000 compared to
$1,687,000, a decrease of 24% in pawn service charges to $1,020,000 from
$1,342,000, and a 46% increase in other income to $21,000 from $14,000. As a
percentage of total revenues, merchandise sales increased to 56% from 55% and
pawn service charges decreased to 43% from 44% during 1999 as compared to the
1st Quarter 1998. This revenue mix is consistent with the U.S. Pawn's
expectations.
Merchandise Sales. During the 1st Quarter 1999, same store operations
generated merchandise sales of $1,307,000 as compared to $1,500,000 during the
1st Quarter 1998. Stores either consolidated, closed or sold during the 1st
Quarter 1998 posted merchandise sales of $187,000 for the 1st Quarter 1998. For
the 1st Quarter 1999, U.S. Pawn's annualized inventory turnover rate was 2.3
times with a gross profit margin on sales of 21.5% as compared to 2.4 times and
18.5% for the 1st Quarter 1998. The increase in the gross profit on sales
percentage is primarily attributable to the liquidation of merchandise inventory
at or below cost from the Nevada (sold) and Nebraska (closed) stores during the
1st Quarter 1998. U.S. Pawn expects its annualized inventory turnover rate to
approximate 2.5 times and to produce gross margins on sales of 20% or higher for
the twelve months ending December 31, 1999 ("1999").
Pawn Service Charges. During the 1st Quarter 1999, same store operations
generated pawn service charges of $1,020,000 as compared to $1,154,000 for the
1st Quarter 1998. Stores either consolidated, closed or sold during the 1st
Quarter 1998 contributed pawn service charges of $188,000 for the 1st Quarter
1998. U.S. Pawn's pawn loan balance outstanding decreased $159,000 or 6% to
$2,591,000 from $2,750,000 at December 31, 1998. Based on historical
comparisons, such a decrease is not uncommon during the Company's first quarter.
New pawn loans written decreased by $478,000 during the 1st Quarter 1999 as
compared to the 1st Quarter 1998. The decrease in new pawn loans written during
the 1st Quarter 1999 consisted primarily of a decrease of $58,000 in same store
operations and a decrease of $420,000 in stores either consolidated, closed or
sold during the 1st Quarter 1998. Management believes that the decrease in the
pawn loan balance in same store operations is due primarily to the strong
overall economy in Colorado ( which may have had the effect of dampening the
demand for pawn loans) and increased competitive conditions for small consumer
loans.
27
<PAGE>
Management is continually analyzing available market data and selecting
strategies designed to increase the number of pawn loans written. Several
strategies implemented during the first quarter have had an early positive
effect on pawn loans outstanding during the second quarter. Management is
hopeful that demand for pawn loans will increase during the remainder of 1999.
U.S. Pawn realized an annualized pawn service charge on average pawn loans
outstanding during the period equal to 153% for the 1st Quarter 1999 as compared
to 152% for the 1st Quarter 1998.
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) was 30% for
the 1st Quarter 1999 and the 1st Quarter 1998. U.S. Pawn's forfeiture rate is
believed to be in line with industry comparisons, but less than U.S. Pawn's
expectations. U.S. Pawn plans to re-emphasize its aggressive loan policy which
provides for slightly higher loan to value ratios than competing pawn shops in
an effort to attract more pawn customers. U.S. Pawn plans to emphasize this loan
strategy for the reasonably foreseeable future and anticipates the forfeiture
rate to approximate 35% for 1999.
Total Cost of Sales and Expenses. Total cost of sales and expenses for the
1st Quarter 1999 decreased 19% to $2,208,000 as compared to $2,722,000 for the
1st Quarter 1998. As a percentage of total revenues, total cost of sales and
expenses for 1998 increased to 94% from 90% as compared to the 1st Quarter 1998.
The increase in total cost of sales and expenses as a percentage of total
revenues for the 1st Quarter 1999 is comprised primarily of a 1% decrease in
cost of sales, a 4% increase in operating expenses, and a 1% increase in
administration.
U.S. Pawn will strive to reduce, whenever possible, cost of sales and
expenses as a percentage of total revenues in future periods.
Operating Expenses. Operating expenses decreased by $348,000 or 25% during
the 1st Quarter 1999 as compared to the 1st Quarter 1998. However, as a
percentage of total revenues, operating expenses increased to 36% for the 1st
Quarter 1999 as compared to 32% for the 1st Quarter 1998. The increase in
operating expenses as a percentage of revenues for the 1st Quarter 1999 is
primarily attributable to the decrease in revenues for the 1st Quarter 1999. 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 1st Quarter
1999 by $36,000 or 13% to $245,000 from $281,000 as compared to the 1st Quarter
1998. As a percentage of total revenues, administrative overhead increased to
10% for the 1st Quarter 1999 from 9% as compared to the 1st Quarter 1998. The
decrease in administrative overhead is due primarily to reductions in salary
expense and related employee benefits during the 1st Quarter 1999 as compared to
the 1st Quarter 1998.
Depreciation and Amortization Expense. Depreciation and amortization
expense decreased during the 1st Quarter 1999 by $11,000 as compared to the 1st
Quarter 1998. The decrease relates primarily to the write-off of long-lived
intangible assets during the 1st Quarter 1998.
28
<PAGE>
Other Expense. Interest expense for the 1st Quarter 1999 decreased by
$72,000. The Company reduced its outstanding debt during the twelve months ended
December 31, 1998 by $2,194,000 and by $75,000 during the 1st Quarter 1999.
Operating Results. Income from operations before income taxes for the 1st
Quarter 1999 decreased by 50% to $108,000 from $217,000 as compared to the 1st
Quarter 1998. After accounting for the effects of income taxes and preferred
dividends, earnings attributable to common stockholders for the 1st Quarter 1999
decreased 51% to $68,000 from $139,000 as compared to the 1st Quarter 1998.
Earnings Per Share. Earnings per share for the 1st Quarter 1999 equaled
$0.02 as compared to $0.04 for the 1st Quarter 1998. The number of common shares
outstanding decreased during the 1st Quarter 1998 by 88,000 as a result of the
issuance of 59,000 common shares from the exercise of employee options and
underwriter warrants and the repurchase of 147,000 common shares by U.S. Pawn.
Results of operations for the year ended December 31, 1998 ("1998") compared to
the year ended December 31, 1997 ("1997")
- - --------------------------------------------------------------------------------
The following selected, unaudited financial data drawn from U.S. Pawn's
audited statements for the years ended December 31, 1998 and 1997 for each
market in which U.S. Pawn operates or operated during the years ended December
31, 1998 and 1997 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>
Total Revenues 9,380 10,343 623 1,354 485 691 580 356 11,068 12,744
Cost of sales 4,025 4,408 313 713 344 279 631 255 5,313 5,655
Operations 2,966 3,062 242 647 147 288 348 128 3,703 4,125
Admin 1,146 1,751 -- -- -- -- -- -- 1,146 1,751
Depreciation
and amortization 265 323 5 205 23 28 193 12 534 568
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total expenses 8,402 9,544 608 1,565 514 595 1,172 395 10,696 12,099
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations 978 799 15 (211) (29) 96 (592) (39) 372 645
Other
(expenses) (292) (571) (10) (18) (9) (19) -- (2) (311) (610)
Income (loss) before
income taxes 686 228 5 (229) (38) 77 (592) (41) 61 35
Income taxes 245 129 17 (105) 78 17 (144) 8 196 49
Minority
interest -- -- -- 9 -- -- -- -- -- 9
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income(loss) 441 99 (12) (115) (116) 60 (448) (49) (135) (5)
29
<PAGE>
Colorado Wyoming Nevada Nebraska Consolidated
-------------- ---------------- ----------------- ----------------- --------------
1998 1997 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Dividends on
preferred stock (36) (36) -- -- -- -- -- -- (36) (36)
----- ----- ----- ------- ------- ------ ------- ------ ----- -----
Earnings(loss)
for common
shares $ 405 $ 63 $ (12) $ (115) $ (116) $ 60 $ (448) $ (49) $(171) $ (41)
----- ----- ----- ------- ------- ------ ------- ------ ----- -----
Earnings (loss) per
share $ .10 $ .02 $-- $ (.03) $ (.03) $ .01 $ (.12 ) $ (.01) $(.05) $(.01)
----- ----- ----- ------- ------- ------ ------- ------ ----- -----
</TABLE>
Revenues. Total revenues for 1998 decreased by 13% to $11,068,000 from
$12,744,000 for 1997. During 1998, same store (the "Colorado Market") operations
(12 stores) generated revenues of $9,380,000 compared to $10,343,000 during
1997. Stores in other markets ("Other Market Stores") generated revenues of
$1,688,000 in 1998 (3 stores) compared to $2,401,000 during 1997 (5 stores). The
decrease in revenues for 1998 reflects a 12% drop in merchandise sales,
$6,217,000 compared to $7,058,000, a decrease of 15% in pawn service charges to
$4,785,000 from $5,640,000, and a 41% increase in other income to $65,000 from
$46,000. As a percentage of total revenues, merchandise sales increased to 56%
from 55% and pawn service charges decreased to 43% from 44% during 1998 as
compared to 1997. This revenue mix is consistent with U.S. Pawn's expectations.
Merchandise Sales. During 1998, the Colorado Market generated merchandise
sales of $5,187,000 as compared to $5,719,000 during 1997. Other Market Stores
posted merchandise sales of $1,030,000 for 1998 as compared to $1,339,000 for
1997. For 1998, U.S. Pawn's annualized inventory turnover rate was 2.6 times
with a gross profit margin on sales of 15% as compared to 2.6 times and 20% for
1997. However, in the markets in which U.S. Pawn's operations will continue into
1999 (Colorado and Wyoming), U.S. Pawn experienced annualized inventory turns of
2.5 times with a gross profit margin on sales of 22.2 % during 1998. The
decrease in the gross profit on sales percentage is primarily attributable to
the liquidation of merchandise inventory at or below cost from the Nevada (sold)
and Nebraska (closed) stores during 1998. U.S. Pawn expects its annualized
inventory turnover rate to approximate 2.5 times and to produce gross margins on
sales of 20% or higher for 1999.
Pawn Service Charges. During 1998, the Colorado Market generated pawn
service charges of $4,135,000 as compared to $4,592,000 for 1997. Other Market
Stores contributed pawn service charges of $650,000 for 1998 compared to
$1,048,000 for 1997. U.S. Pawn's pawn loan balance outstanding decreased
$961,000 or 26% to $2,750,000 from $3,711,000 at December 31, 1997. The decrease
in the pawn loan balance during 1998 consisted primarily of a decrease of
$374,000 in the Colorado Market, a decrease of $70,000 in Wyoming, a decrease of
$169,000 in Nebraska (closed) and a decrease of $348,000 in Nevada (sold).
The decrease in U.S. Pawn's pawn loans outstanding during 1998 is primarily
the result of a decrease of $2,147,000 in new pawn loans written during 1998 as
compared to 1997. The decrease in new pawn loans written during 1998 consisted
30
<PAGE>
primarily of a decrease of $1,484,000 in the Colorado Market, a decrease of
$280,000 in Wyoming, a decrease of $462,000 in Nevada (sold) and an increase of
$79,000 in Nebraska (closed). 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), increased competitive conditions for small
consumer loans, and the diversion of management's attention to issues related to
the Nevada and Nebraska stores. The decrease in U.S. Pawn's Wyoming store is
attributable to the consolidation of that market from four pawnshops into one.
The decrease in U.S. Pawn's Nevada market is attributable to the sale of U.S.
Pawn's one store in Las Vegas on July 20, 1998. The decrease in U.S. Pawn's
Nebraska market is attributable to the unsatisfactory performance of U.S. Pawn's
one pawn shop there since it was acquired in June of 1997 and the decision to
close this pawnshop during fourth quarter of 1998.
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 into fiscal 1999. As a result of the conditions described above,
U.S. Pawn realized an annualized pawn service charge on average pawn loans
outstanding during the period equal to 148% for 1998 as compared to 158% 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 32% for 1998 as compared to 33% for 1997. U.S. Pawn's forfeiture rate is
believed to be in line with industry comparisons, but less than U.S. Pawn's
expectations. U.S. Pawn plans to re-emphasize its aggressive loan policy which
provides for slightly higher loan to value ratios than competing pawn shops in
an effort to attract more pawn customers. U.S. Pawn plans to emphasize this loan
strategy for the reasonably foreseeable future and anticipates the forfeiture
rate to approximate 35% for Fiscal 1999.
Total Cost of Sales and Expenses. Total cost of sales and expenses for 1998
decreased 12% to $10,696,000 as compared to $12,099,000 for 1997. As a
percentage of total revenues, total cost of sales and expenses for 1998
increased to 97% from 95% as compared to 1997. The increase in total cost of
sales and expenses as a percentage of total revenues for 1998 is comprised
primarily of a 4% increase in cost of sales, a 1% increase in operating
expenses, a 4% decrease in administration, and a 1% increase in depreciation and
amortization. U.S. Pawn will strive to reduce, whenever possible, cost of sales
and expenses as a percentage of total revenues in future periods.
Operating Expenses. Operating expenses decreased by $422,000 or 10% during
1998 as compared to 1997. However, as a percentage of total revenues, operating
expenses increased to 33% for 1998 as compared to 32% for 1997. The increase in
operating expenses as a percentage of revenues for 1998 is primarily
attributable to the decrease in revenues for 1998. 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.
31
<PAGE>
Administration. Administrative overhead decreased during 1998 by $605,000
or 35% to $1,146,000 from $1,751,000 as compared to 1997. As a percentage of
total revenues, administrative overhead decreased to 10% for 1998 from 14% as
compared to 1997. The decrease in administrative overhead is due primarily to
reductions in salary expense and related employee benefits of $355,000 and
$250,000 in other administrative expense categories during 1998 as compared to
1997.
Depreciation and Amortization Expense. Depreciation and amortization
expense decreased during 1998 by $34,000 as compared to the 1997. The decrease
consists primarily of a decrease of $58,000 for the Colorado Market stores, a
decrease of $152,000 in Wyoming, a decrease of $5,000 in Nevada, and an increase
of $181,000 due to the impairment of unamortized long-lived intangible assets
related to U.S. Pawn's Nebraska operation.
Other Expense. Interest expense for 1998 decreased by $65,000. U.S. Pawn
reduced its outstanding debt during 1998 by $2,194,000. U.S. Pawn recognized an
aggregate loss of $25,000 during 1998 on the disposal of equipment related to
the consolidation of its Wyoming operations and the sale of its Nevada store.
Operating Results. Income from operations for 1998 decreased by 42% to
$372,000 from $645,000 as compared to 1997. After accounting for the effects of
income taxes, preferred dividends and minority interest, (losses) attributable
to common stockholders for 1998 increased 317% to $(171,000) from $(41,000) as
compared to 1997.
Income Taxes. The current provision for income taxes includes an estimated
tax liability of $139,000 related to non deductible amortization of certain
intangible assets and a difference between the basis for purposes of income tax
versus financial accounting in connection with the sale of certain assets of
U.S. Pawn's Las Vegas, Nevada store. These items represent permanent differences
between book and tax calculations.
Loss Per Share. (Loss) per share for 1998 equaled $(0.05) as compared to
$(0.01) for 1997. The number of common shares outstanding decreased during 1998
by 87,369 as a result of the issuance of 59,375 common shares from the exercise
of employee options and underwriter warrants and the repurchase of 146,744
common shares by U.S. Pawn. The weighted average number of shares outstanding
increased by 1.4% in 1998 to 3,783,000 from 3,731,000. 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 increased by 5% to $5,407,000 at December 31, 1998 from
$5,148,000 at December 31, 1997. Total assets decreased during 1998 by
$2,532,000 mainly due to decreases in pawn loans, service charges receivable,
inventory, income tax receivables and intangible assets. Total liabilities
decreased by $2,331,000 at December 31, 1998 to $1,412,000 from $3,743,000 at
December 31, 1997 mainly due to U.S. Pawn's ability to repay $2,194,000 of debt.
32
<PAGE>
Total stockholders' equity decreased during 1998 by $201,000 as a result of
losses, net of income taxes and preferred dividends of $171,000 and a net
decrease of $30,000 from common stock transactions.
U.S. Pawn's operations have been financed from funds generated from
operations, bank borrowing, private borrowing, and public offerings. During
1998, U.S. Pawn raised sufficient capital to satisfy its capital requirements.
During 1998, U.S. Pawn maintained a bank line of credit totaling
$1,000,000. The agreement was fully paid on its maturity date of April 4, 1998.
U.S. Pawn is currently seeking a renewal of this credit facility or a new
banking relationship.
The private borrowings which comprise $711,000 of the total liabilities are
due in 1999 through 2002. Management intends to repay the majority of these
obligations as they mature from internally generated funds or other borrowings.
Following the Merger with Cash-N-Pawn, U.S. Pawn plans to continue to
expand its operating base with acquisitions of existing pawn shops and the
development of new locations by actively seeking such acquisitions and
locations. U.S. Pawn expects to fund this expansion and meet its on-going
working capital needs with internally generated funds, debt and/or equity
offerings if needed and lines of credit. There can be no assurance however, that
such debt or equity offerings and lines of credit will be available to U.S.
Pawn.
U.S. Pawn 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.
Profitability vs. Liquidity. The profitability and liquidity of U.S. Pawn
is affected by the amount of U.S. Pawn's outstanding pawn loans, which in turn
is affected in part by U.S. Pawn's pawn loan decisions. U.S. Pawn 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 U.S. Pawn's aggregate pawn loan balance and a decrease in pawn
service charge income. However, smaller pawn loans also tend to increase pawn
loan redemptions and improve U.S. Pawn's liquidity. A conservative pawn loan
policy also tends to decrease the cost of merchandise inventory, thereby
improving the margins possible through resale of forfeited pawn loan collateral.
Conversely, a more aggressive pawn loan policy which provides for larger pawn
loans in relation to the estimated resale value of the pledged property
generally results in increased pawn service charge income, but also tends to
increase pawn loan forfeitures, thereby increasing the quantity of inventory on
hand and, unless U.S. Pawn is able to increase inventory turns, reducing U.S.
Pawn's liquidity.
33
<PAGE>
Unprecedented and/or unexpected pawn loan demand tends to drain liquidity
reserves, and if other external sources of working capital are unavailable, the
implementation of a more conservative pawn loan policy and increasing inventory
turns will generate cash at the expense of profitability if not optimally
balanced.
Inflation. U.S. Pawn does not believe that inflation has had a material
effect on U.S. Pawn's results of operations.
Seasonality. U.S. Pawn's pawn loan demand and sales follow slight seasonal
trends. Sales are generally highest during the fourth calendar quarter of the
year, while pawn loan demand is general lower during the first and second
calendar quarters than during the third and fourth calendar quarters.
Computer Systems-The Year 2000 Issue
- - ------------------------------------
Many computers, software programs and other equipment with embedded
computer chips ("systems") in use today utilize two digits to specify the year,
such as "98" for 1998 (the "Y2K Issue"). As a result of the Y2K Issue, such
systems may recognize a date using "00" as the year 1900 rather than the year
2000. In some cases, the date "00" may cause system(s) failure(s) or
miscalculations causing disruptions of U.S. Pawn's operations.
In early 1998, U.S. Pawn began formulating a comprehensive plan to assess
U.S. Pawn's Y2K issues. The plan calls for the identification of those systems,
both internal and external, which are critical to U.S. Pawn's ability to
continue normal operations, the assessment of any required remediation
(including any upgrading, modification and replacement of computer hardware and
software and adequate testing to ensure Y2K compliance), and the resources
needed to bring those critical systems into Y2K compliance.
The internal systems under evaluation include U.S. Pawn's point-of-sale,
accounting, data processing, telephone and other miscellaneous information
technology systems, as well as alarm systems, security cameras, printers, HVAC
units, fax machines, credit card processing equipment, and modems. U.S. Pawn
believes that it has identified the internal systems that are susceptible to
failures or potential processing errors as a result of the Y2K Issue. U.S. Pawn
is concentrating its Y2K efforts on these systems. U.S. Pawn believes it has
completed its Y2K identification assessment for critical internal systems,
however, testing for Y2K compliance will be an on-going process.
U.S. Pawn has identified its pawn shop operating system as its only
critical internal business system. U.S. Pawn's pawn shop operating system is
comprised of computer hardware and peripheral equipment such as printers and
modems and pawn shop management software. These components are provided by
third-party vendors. The pawn shop management software has been upgraded for Y2K
compliance and is currently being tested. The upgraded software is currently
34
<PAGE>
scheduled to be installed in each of U.S. Pawn's locations by August 31, 1999.
U.S. Pawn believes that its computer hardware and related peripherals are
currently Y2K compliant based upon representations made by the providers of such
equipment. U.S. Pawn also believes that its accounting and payroll software
systems are Y2K compliant and testing to ensure such compliance will be
completed by August 31, 1999.
U.S. Pawn is reviewing, and has initiated written communications with other
third parties providing goods or services, such as financial institutions and
utility companies, which may be critical to U.S. Pawn's operations to: (i)
ascertain the extent to which U.S. Pawn may be exposed to adverse effects for
any failure by such third parties to remediate their Y2K issues; and (ii)
resolve, to the extent practicable, such problems. However, U.S. Pawn has no
control over and has only limited ability to influence such third parties' Y2K
compliance. The failure of such third parties to achieve Y2K compliance in a
timely manner and the potential inability to replace such a third party
provider, could adversely impact U.S. Pawn's operations.
U.S. Pawn currently estimates that the total identifiable cost of its Y2K
compliance effort will not exceed $150,000. As of December 31, 1998, U.S. Pawn
has expended approximately $41,000 of this estimate to obtain upgraded software
licenses and partially pay for installation of this software. The remaining
costs include possible replacement of computer hardware and/or software, other
equipment, additional installation charges and testing procedures. U.S. Pawn
does not track personnel costs associated with its Y2K compliance effort. U.S.
Pawn expects to fund Y2K expenditures from internal sources.
Based on the progress made to date and its time-table for further progress
in attaining Y2K compliance, U.S. Pawn does not currently anticipate any
significant risks associated with its Y2K issues. However, management believes
that it is not possible to determine with absolute certainty that all Y2K issues
pertaining to U.S. Pawn have or will be identified and corrected. Because the
assessment of its Y2K issues is ongoing, U.S. Pawn has yet to determine the most
reasonably likely worst case scenario relating to Y2K issues, and has yet to
complete a comprehensive contingency plan with respect to its Y2K issues. U.S.
Pawn anticipates completing its Y2K comprehensive contingency plan by September
30, 1999.
INFORMATION ABOUT U.S. PAWN
Current Operations
- - ------------------
U.S. Pawn is engaged in acquiring, developing and operating pawn shops that
lend money on the security of pledged tangible personal property. Pawn shops
provide a convenient source for consumer loans and a ready market for the resale
of previously-owned merchandise acquired by U.S. Pawn when customers do not
repay pawn loans. U.S. Pawn 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 based on the size and term of the pawn loan and has generally ranged
from 120% to 240% annually, as permitted by state laws and local ordinances. The
pledged property is held through the term of the pawn loan contract, which
35
<PAGE>
generally is 30 to 120 days, unless 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 renews the
pawn loan, the property is forfeited to U.S. Pawn and becomes inventory
available for sale in the pawn shop. For the years ended December 31, 1998 and
1997, U.S. Pawn realized an annualized average pawn service charge equal to 148%
and 158% of pawn contracts outstanding, respectively.
The pawnshop industry in the United States is highly fragmented and in the
early stages of consolidation. The five publicly traded pawn shop companies
operate approximately 8% of the total United States pawn shops. Management
believes that there are significant opportunities for growth through the
acquisition of existing pawn shops, the opening of new pawn shops, and the
improvement of productivity in pawn shop operations through the application of
modern management techniques.
Business Strategy
- - -----------------
U.S. Pawn intends to identify specific geographic areas in which to
concentrate multiple pawn shops in order to achieve economies of scale in
supervision, improve market penetration, enhance name recognition and reinforce
market programs. Currently, U.S. Pawn has 85% of its store locations clustered
in the Denver, Colorado metropolitan area. U.S. Pawn's recent management
activity focused on identifying those of its pawn shops in existence at the
beginning of 1998 that management believed were located in markets that offered
the best opportunity for profitable operations. Consistent with this focus, U.S.
Pawn consolidated its operations into thirteen pawn shops during 1998.
Management believes that expanding U.S. Pawn's market share through the
careful acquisition of existing pawnshops and the opening of new pawn shops
provides the best opportunity to meet its strategic objectives. Moreover,
concentrating multiple pawn shops in specific locations will provide the
economies of scale described above. U.S. Pawn's primary pawn shop acquisition
criteria include the level of competence of the pawn shop's management, the
number of annual pawn transactions, the outstanding pawn loan balances, the
quality and quantity of pawn shop inventory, the number of competitive pawn
shops in the market area, lease terms and physical condition of the pawn shop.
U.S. Pawn expects to finance the acquisition or development of additional
pawn shops through internal cash flow, additional lines of credit and debt or
equity financing. U.S. Pawn cannot assure, however, that these sources of
financing will be available. Furthermore, a number of factors may limit U.S.
Pawn's ability to increase its number of pawn shops including, (1) unanticipated
operating losses or increases in overhead expenses, (2) unavailability of
acceptable acquisition candidates or pawn shop locations, (3) higher pawn loan
demand which will reduce U.S. Pawn's available capital for expansion, and (4)
general economic conditions. There can be no assurance that any future expansion
can be continued on a profitable basis.
Management's ability to identify, acquire or profitably manage additional
locations or successfully integrate U.S. Pawn's operations without substantial
costs or delays is a risk factor for future expansion. There can be no assurance
36
<PAGE>
that any entity U.S. Pawn acquires will achieve profitability. Acquisitions
involve a number of risks, which may include: adverse short-term effects on U.S.
Pawn's reported operating results and cash flows; diversion of management's
attention; dependence on hiring and training key personnel; and the financial
statement effects of amortization of intangibles. Such risks could have adverse
effects on U.S. Pawn's operations and financial performance. As U.S. Pawn
expands, it will be required to supplement its existing management team in order
to effectively manage any acquired entities and implement its acquisition and
operating strategies.
Operating Controls
- - ------------------
U.S. Pawn has an organizational structure that management believes can
support a larger operating base. Store locations are monitored on a daily basis
from corporate headquarters through an online, real time computer network
system. U.S. Pawn also has an internal audit staff that monitors U.S. Pawn's
perpetual inventory system, lending practices, and regulatory compliance.
Management believes that U.S. Pawn's current operating and financial controls
and its computer systems are adequate for its current operating base and for
planned growth in the near term. However, U.S. Pawn's management information and
point of sale systems will require extensive improvement to support long-term
store growth. Management intends to complete its current analysis of such
requirements, both software and hardware, and begin development and installation
of these systems improvements within the next eighteen months.
Pawn Operations
- - ---------------
Goods pledged to secure pawn loans generally consist of jewelry, tools,
televisions, stereos, musical instruments and guns. The pledged personal
property is offered by the customer to provide security for the repayment of the
pawn loan. Pawn loans cannot be made with personal liability to the customer,
and therefore, U.S. Pawn does not investigate the creditworthiness of the
customer, but relies on the pledged personal property and the possibility of its
forfeiture as a basis for its credit decision. U.S. Pawn receives a pawn service
charge to compensate it for extending the pawn loan. Pawn service charges
contributed approximately 43% and 44% to U.S. Pawn's total operating revenues
for 1998 and 1997, respectively.
At the time a pawn transaction is entered into, a pawn contract agreement,
commonly referred to as a pawn ticket, is delivered to the customer that sets
forth, among other items, the name and address of the pawn shop and the
customer, the customer's identification number from a valid driver's license,
military or other official identification, a description of the pledged goods,
including applicable serial numbers, and the amount advanced, the pawn service
charge, the maturity date of the pawn loan, total amount that must be paid to
redeem the pledged goods on the maturity date and the monthly percentage rate of
the pawn service charge.
The amount which U.S. Pawn is willing to finance is typically based on a
percentage of the pledged personal property's estimated resale value. The
sources for U.S. Pawn's determination of the resale value include catalogs, blue
books, newspaper advertisements and previously made similar pawn transactions.
The pledged property is held through the term of the pawn loan, which generally
37
<PAGE>
is 30 to 120 days, unless earlier paid or renewed. In the majority of cases, the
customer pays the pawn loan amount and accrued service charge in full, redeeming
the pledged property, or pays the accrued service charge and renews the pawn
loan. In the event the customer does not pay or renew the pawn loan, the
unredeemed collateral is forfeited to U.S. Pawn and becomes inventory available
for sale in the pawn shop. U.S. Pawn does not record pawn loan losses or
charge-offs inasmuch as, if the pledged property is not redeemed, the pawn loan
amount plus the accrued service charge becomes the inventory cost of the
forfeited collateral that is recovered through the resale operations described
below.
The recovery of the pawn loan amount and accrued service charges, as well
as realization of gross profit on sales of inventory, is dependent on U.S.
Pawn's initial assessment of the property's estimated resale value. Improper
assessment of the resale value of the collateral when extending a pawn loan can
result in reduced marketability of the property and resale of the property for
an amount less than the pawn loan amount plus accrued service charge. However,
historically, U.S. Pawn has experienced gross profits from sales of inventory.
U.S. Pawn generated gross profit margins on the sale of inventory of
approximately 15% and 20% for 1998 and 1997, respectively.
At December 31, 1998, U.S. Pawn had 24,645 pawn loans outstanding with an
aggregate balance of $2,750,000, or an average of $111.58 per pawn loan
outstanding. At December 31, 1997, U.S. Pawn had 30,346 pawn loans outstanding
with an aggregate balance of $3,711,000, or an average of $122.29 per pawn loan
outstanding. U.S. Pawn believes that the reduction in pawn loans was primarily
the result of a robust full employment economy. U.S. Pawn monitors and maintains
record keeping in connection with its pawn loans through a specialized computer
hardware and software system.
During 1998 and 1997, approximately 32% and 33%, respectively, of pawn
loans were not redeemed, with the forfeited pledged property added to U.S.
Pawn's sales inventory. For 1998 and 1997, U.S. Pawn's annualized yield on its
average pawn loan balance outstanding was 148% and 158%, respectively.
Management believes that its profitability is dependent upon, among other
factors, its employees' ability to make pawn loans that achieve optimum
redemption rates, to be effective sales people and to provide superior customer
service. U.S. Pawn provides an incentive compensation plan for its store level
employees based on managerial and financial performance.
Resale Operations
- - -----------------
U.S. Pawn sells used goods acquired when a pawn loan is not repaid and new
goods purchased from vendors. New goods, which historically represent less than
1% of U.S. Pawn's total inventory, consist primarily of accessory merchandise
which enhances the marketability of inventory, such as settings for precious
stones. Sales of new and used goods were approximately 56% and 55% of U.S.
Pawn's total operating revenues for 1998 and 1997, respectively.
38
<PAGE>
U.S. Pawn does not provide its customers with warranties on used
merchandise purchased from U.S. Pawn.
U.S. Pawn permits customers to purchase inventory on a "lay-away" plan
whereby the customer purchases an item by making an initial cash deposit
representing a part of the selling price and agrees to make additional,
non-interest bearing payments of the balance of the selling price in accordance
with a specified schedule. U.S. Pawn then sets aside the lay-away item until the
selling price is paid in full. Should the customer fail to make a required
payment, the item may be returned to inventory and previous payments forfeited
to U.S. Pawn. Revenues derived from layaway plans historically amount to less
than 1% of total revenues.
U.S. Pawn provides an allowance for inventory valuation of its merchandise
held for resale based on management's evaluation of the marketability of the
merchandise. Management's evaluation takes into consideration the age of slow
moving merchandise on hand and mark downs necessary to liquidate slow moving
merchandise. At December 31, 1998, total merchandise held for resale was
$1,789,000 after reduction for a valuation allowance of $190,000.
Competition
- - -----------
U.S. Pawn believes that the primary elements of competition in the pawnshop
industry are store location, the ability to loan competitive amounts on items
pawned, management of the store level employees and quality customer service. In
addition, as the pawnshop industry consolidates, U.S. Pawn believes that the
ability to compete effectively will be based on strong management, regional
market focus, automated management information systems, and access to capital.
Many of U.S. Pawn's competitors have greater financial resources than U.S. Pawn.
In connection with its lending of money, U.S. Pawn competes with other pawn
shops and with certain other financial institutions such as consumer finance
companies, which generally lend money on an unsecured as well as on a secured
basis. Other lenders may lend money on terms more favorable than U.S. Pawn.
The pawn shop industry is highly fragmented and U.S. Pawn believes that
there are over 10,000 pawn shops in the United States, the great majority of
which are managed by independent owner-operators. Some of these independent
operators own multiple pawn shops, and a few companies (that are generally
regional operators) own more than 50 pawn shops. Including U.S. Pawn, there are
five publicly held pawn shop chains of which U.S. Pawn has the fewest pawn shops
and the smallest amount of assets, revenues, net worth and personnel. In U.S.
Pawn's Colorado market, which comprises 85% of all Company locations, there are
approximately 180 competitor pawn shops including 24 pawn shops operated by
another publicly held pawn shop chain, 16 of which are in the Denver
metropolitan area. To U.S. Pawn's knowledge, there are no other pawn shop
operators based in Colorado that operate more pawn shops than U.S. Pawn.
In connection with its resale of tangible personal property, U.S. Pawn
competes with numerous retail and wholesale stores, including jewelry shops, gun
stores, discount stores, consumer electronics stores and other pawn shops. U.S.
Pawn encounters significant competition in all aspects of its business.
39
<PAGE>
Regulation
- - ----------
U.S. Pawn's pawn shop operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations in the markets in which it operates. Set forth below
is a summary of the various regulations applicable to U.S. Pawn's operations.
Colorado. In Colorado pawn shops must be licensed by the city in which the
pawn shop is located, as well as by the state. Maximum allowable service charge
rates may be set by both city ordinance, as well as state statute. Pawn shop
licenses may be revoked by state or local authorities for certain defined
improper conduct. For instance, under Colorado state law, a pawnbroker, may not
accept a pledge from a person under the age of 18 years; make any agreement
requiring the personal liability of the customer; accept any waiver of any right
or protection accorded to a pledgor under Colorado state law; fail to exercise
reasonable care to protect pledged goods from loss or damage; fail to return
pledged goods to a pledgor upon payment of the full amount due; make any charge
for insurance in connection with a pawn transaction; enter into any pawn
transaction that has a maturity date of more than 90 days; display for sale in
storefront windows or sidewalk display cases, pistols, swords, canes, blackjacks
or similar weapons; or purchase used or second hand personal property unless a
record is established containing the name, address and identification of the
seller, a complete description of the property, including serial number, and a
signed statement that the seller has the right to sell the property. Under
applicable state law, the maximum allowable pawn service charges for Colorado
pawn loans are 240% annually for pawn loans under $50 and 120% annually for pawn
loans of $50 and over. Local municipalities in which U.S. Pawn operates may also
regulate pawn service charges within their jurisdictions. The City and County of
Denver is the only Colorado municipality in which U.S. Pawn operates that
deviates from the Colorado statute pertaining to pawn service charges. The
maximum allowable pawn service charges for Denver pawn loans are 120% annually.
Wyoming. In Wyoming pawnshops must be licensed by the city in which the
pawn shop is located, as well as by the state. Maximum allowable service charge
rates may be set by both city ordinance, as well as state statute. Pawn shop
licenses may be revoked by state or local authorities for certain defined
improper conduct. For instance, under Wyoming state law, a pawnbroker may not
accept a pledge from a person under the age of 18 years; make any agreement
requiring the personal liability of the customer; accept any waiver of any right
or protection accorded to a pledgor under Wyoming state law; fail to exercise
reasonable care to protect pledged goods from loss or damage; fail to return
pledged goods to a pledgor upon payment of the full amount due; make any charge
for insurance in connection with a pawn transaction; enter into any pawn
transaction that has a maturity date of more than 120 days or less than two
months from the transaction date; fail to disclose information concerning the
pawn transaction to its customers pursuant to applicable provisions of Federal
Regulation Z of the Truth in Lending Act and the Wyoming Uniform Consumer Credit
Code; fail to display in a conspicuous place on its premises the days and hours
40
<PAGE>
during which a redemption may be made; engage in false or misleading advertising
concerning the terms or conditions of credit with respect to a pawn transaction;
or purchase used or second hand personal property unless a record is established
containing the name, address, accurate description and identification of the
seller, a complete description of the property, including serial number, and a
signed statement that the seller has the right to sell the property. Under
applicable state law, the maximum allowable pawn service charges for Wyoming,
pawn loans are 240% annually and the amount lent in any one pawn transaction to
any one customer may not exceed $3,000. Local municipalities in which U.S. Pawn
operates may also regulate pawn service charges within their jurisdictions. The
City of Cheyenne, where U.S. Pawn's Wyoming pawn shop is located, deviates from
the Wyoming statute pertaining to pawn service charges. The maximum allowable
pawn service charges for Cheyenne pawn loans are set forth below:
On That Part of
Unpaid Principal Balance
Maximum Annual Rate Which is Between
------------------- ----------------
240% $ 0 to $ 200
120% $ 200 to $ 400
60% $ 400 to $1,000
18% $1,000 to $3,000
Firearms. All U.S. Pawn's pawn shops must comply with federal regulations
promulgated by the Department of the Treasury, Bureau of Alcohol, Tobacco and
Firearms which require, among other things, each pawn shop dealing in guns to
maintain a permanent written record of all guns received or disposed. During
Fiscal 1994, U.S. Pawn implemented procedures which comply with all rules and
regulations promulgated by federal, state and local authorities under the Brady
Handgun Violence Prevention Act of 1993 (the "Brady Bill") which requires, among
other things, a background investigation of any person purchasing or redeeming a
Handgun prior to completion of the transaction. U.S. Pawn does not sell or deal
in ammunition for firearms. As a matter of policy, U.S. Pawn does not sell
handguns to the general public in any of its stores operating in the Denver
Colorado metropolitan area (the "Denver Area"), but rather, wholesales all
forfeited handguns from Denver Area stores to licensed gun dealers and in
October 1998, U.S. Pawn discontinued accepting handguns as collateral for pawn
loans in the Denver area stores.
In order to avoid the acquisition of stolen merchandise, all U.S. Pawn's
pawn shops voluntarily or pursuant to municipal ordinance provide the local
police department with daily copies of all transactions involving pawn loans and
over-the-counter purchases. These daily transaction reports are designed to
provide the police with a detailed description of the merchandise including
serial numbers, if any, and the name and address of the owner obtained from a
valid identification card. A copy of the pawn ticket is provided to local law
enforcement agencies for processing by the National Crime Investigative Computer
to determine rightful ownership. Goods held to secure pawn loans or goods
purchased which are determined to belong to an owner other than the pledgor or
seller are subject to recovery by the rightful owner upon application to the
police department and satisfactory evidence of ownership. In connection with
pawn shops acquired by U.S. Pawn, there is a risk that acquired merchandise may
be subject to claims of rightful owners. Historically, U.S. Pawn has not
experienced a material number of rightful owner claims.
41
<PAGE>
U.S. Pawn has experienced no material losses by theft or casualty. U.S.
Pawn maintains liability and casualty insurance and insurance against employee
theft at each of its pawn shop locations. U.S. Pawn does not maintain insurance
against robbery and burglary, as the risk of loss does not justify the premium
cost of coverage.
Employees
- - ---------
U.S. Pawn currently employs 85 employees, including its executive officers.
Properties
- - ----------
U.S. Pawn's executive offices are located at 7215 Lowell Boulevard in
Westminster, Colorado pursuant to a five year lease which commenced April 1,
1992 at a monthly rental of $2,800 with two options to renew for five years.
U.S. Pawn believes that its executive office facilities are adequate for its
needs in the foreseeable future. Upon the closing of the Merger, U.S. Pawn
intends to maintain its current executive offices together with the current
executive offices of Cash-N-Pawn until such time as the Cash-N-Pawn executive
officers can be centralized in Westminster, Colorado.
U.S. Pawn owns the real estate and buildings housing two of its Denver,
Colorado pawn shops and currently leases its other pawn shops at monthly rentals
between $2,200 and $7,000 on lease terms between three and eight years. U.S.
Pawn expects to lease most of its pawn shops in order to use its working capital
for pawn loans.
Insurance
- - ---------
U.S. Pawn maintains liability and casualty insurance and insurance against
employee theft at each of the pawn shop locations. U.S. Pawn does not maintain
insurance against robbery and burglary, as the risk of loss does not justify the
premium cost of coverage.
Litigation
- - ----------
U.S. Pawn is not a party to any pending or threatened material legal
proceedings.
42
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA OF CASH-N-PAWN
Selected consolidated financial data of Cash-N-Pawn is presented below for,
and as of the end of, each of the years ended December 31, 1998 and 1997, and
the three-month periods ended March 31, 1999 and 1998. Year end financial data
are derived from the Consolidated Financial Statements of Cash-N-Pawn
International Ltd. and its subsidiaries. The Consolidated Financial Statements
have been audited by Schechter Dokken Kanter Andrews & Selcer Ltd., as indicated
in their report included as part of the Consolidated Financial Statements
attached as part of this Proxy Statement. The selected consolidated financial
data should be read in conjunction with the Consolidated Financial Statements
and notes thereto of Cash-N-Pawn, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
AND RESULTS OF OPERATION OF CASH-N-PAWN," and the unaudited pro-forma
Consolidated Balance Sheet and Statements of Operations, each as attached to or
included in this Proxy Statement.
Statement of Operations Data:
Three Months
Year Ended December 31 Ended March 31
-------------------------- --------------------------
1998 1997 1999 1998
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Retail sales $ 5,746,048 $ 5,503,333 $ 1,551,627 $ 1,505,022
Cost of Sales 4,745,405 4,334,460 1,077,497 1,197,926
----------- ----------- ----------- -----------
Gross Profit 1,000,643 1,168,873 474,130 307,096
Pawn service charges 2,939,386 2,587,828 504,100 698,755
Miscellaneous 75,187 11,002 21,546 11,632
----------- ----------- ----------- -----------
Revenues, net of cost of sales 4,015,216 3,767,703 999,776 1,017,483
Store operating expenses 2,791,318 2,772,141 692,050 654,395
Loss on store closing -- 119,535 -- --
----------- ----------- ----------- -----------
Store operating income 1,223,898 876,027 307,726 363,088
General and administrative expenses 751,901 605,768 150,513 152,524
Litigation settlement costs -- 295,000 -- --
----------- ----------- ----------- -----------
Operating income (loss) 471,997 (24,741) 157,213 210,564
----------- ----------- ----------- -----------
Other income (expense):
Interest (520,379) (447,219) (126,533) (114,920)
----------- ----------- ----------- -----------
Amortization of debenture costs (62,539) (62,539) (15,900) (15,900)
Other 881 (5,493) (40,919) --
----------- ----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of accounting changes (110,040) (539,992) (26,139) 79,744
Income tax benefit (expense) 30,791) 185,926 7,800 (27,910)
----------- ----------- ----------- -----------
43
</TABLE>
<PAGE>
<TABLE>
Three Months
Year Ended December 31 Ended March 31
----------------------- ----------------------
1998 1997 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of
accounting changes (79,249) (354,066) (18,339) 51,834
--------- --------- --------- ---------
Cumulative effect of accounting changes
Net of $236,414 tax benefit $(364,689) -- -- (364,689)
--------- --------- --------- ---------
Net loss $(443,938) $(354,066) (18,339) $(312,845)
========= ========= --------- ---------
Pro forma net loss assuming
retroactive application of accounting
changes (unaudited) -- $(376,246) -- --
--------- ========= --------- ---------
Balance Sheet Data:
Three Months
At December 31 At March 31
------------------------ -----------
1998 1997 1999
---------- ---------- ----------
Pawn loans $1,269,919 $1,231,262 $1,213,322
Inventories 1,975,339 2,314,553 1,884,837
Other current assets 880,858 970,479 724,895
Other assets 1,679,015 1,635,094 1,625,977
Total assets 5,805,131 6,151,388 5,449,031
Current liabilities 2,496,939 2,307,354 2,704,473
Long term liabilities 2,568,178 2,660,082 2,022,883
Shareholder's equity 740,014 1,183,952 721,675
Other Data:
Number of stores at end of period 10 10 10
Gross profit margin on sales 17.4% 21.2% 30.6%
Percentage of revenues net of
cost of sales from:
Retail sales less cost of sales 24.9% 31.0% 47.4%
Pawn service charges 73.2% 68.7% 50.4%
Interest expense as a percent of
revenues net cost of sales 13.0% 11.9% 12.7%
</TABLE>
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION OF CASH-N-PAWN
The following discussion should be read in conjunction with the Cash-N-Pawn
consolidated financial statements and related notes thereto included elsewhere
in this Proxy statement.
Overview
- - --------
Cash-N-Pawn's revenues are derived from pawn service charges, which include
fees for interest, storage, security, insurance, appraisal of pawned items, an
internal review of the customer's prior transactions and document charges (the
"pawn service charges"), relating to the lending activity of the pawnshops, and
from the sale of merchandise acquired from forfeited pawn loans and items
purchased directly from the public, supplemented by purchases from wholesale
vendors.
In the event that the borrower does not pay or renew his loan after 90 to
120 days (depending upon applicable law), the unredeemed collateral is forfeited
and becomes inventory available for sale in the pawnshop. The amount of the
original loan plus all accrued pawn service charges becomes the carrying cost of
the inventory. Pawn service charges are accrued at the applicable rate as income
up to a maximum of 25% of the loan principal.
Results from operations for the three months ended March 31, 1999 Compared to
the Three Months Ended March 31, 1998
- - --------------------------------------------------------------------------------
Effective January 1, 1998, Cash-N-Pawn adjusted its accounting methods as
described below under the discussion of "Pawn Service Charges" for the fiscal
years ended 1997 and 1998.
Retail Sales and Gross Profit. Retail sales increased by approximately
$46,000 from $1,505,022 for the first three months of 1998 to $1,551,627 for the
first three months of 1999, an increase of approximately 3%. Gross profit as a
percent of sales increased from approximately 20.4% in the first three months of
1998 to approximately 30.6% for the same period in 1999, while gross profits
increased in total $167,034, from $307,096 in 1998 to $474,130 in 1999.
Pawn Service Charges. Pawn service charges decreased by approximately
$195,000, from $698,755 for the first three months of 1998 to $504,100 for the
same period in 1999. Cash-N-Pawn's loan balance outstanding on March 31, 1999
was $1,213,322. Pawn service charges constituted slightly under 69% of net
revenue for the first three months of 1998 and slightly over 50% for the same
period in 1999.
Revenues, Net of Cost of Sales. Revenues net of cost of sales decreased
slightly from $1,017,483 in the first three months of 1998 to $999,776 for the
same period in 1999.
Store Operating Expenses. Store operating expenses increased by about
$38,000, rising from $654,395 in the first three months of 1998 to $692,050 in
the same period in 1999. Operating expenses increased as a percent of net
revenue from 64% for 1998 to 69% in 1999. This increase was primarily a result
of increases in store employee compensation, as well as increases in rent and
payday loan charge-offs, all as measured against slightly lower net revenue.
45
<PAGE>
General and Administrative Expenses. General and administrative expense
decreased from $152,524 to $150,513 between the first three months of 1998 and
the first three months of 1999.
Interest Expense. Interest expense increased from $114,920 in the first
three months of 1998 to $126,533 for the same period in 1999. This increase was
a result of the higher level of borrowings required to fund the increase in the
average pawn loan balance. As a percentage of net revenue, interest expense
increased from approximately 11.3% to 12.6% between the first three months of
1998 and the first three months of 1999.
Results from operations for the year ended December 31, 1998 ("1998") Compared
to Year Ended December 31, 1997 ("1997").
- - --------------------------------------------------------------------------------
Retail Sales and Gross Profit. Retail sales increased by almost $243,000
from 1997 to 1998, an increase of 4.4%. The sales of the nine stores open during
both entire years achieved an increase of 2.8% in sales from 1997 to 1998. (The
tenth store opened in May 1997.) The gross profit as a percent of sales
decreased from 21.2% in 1997 to 17.4% in 1998, while gross profits decreased in
total from $1,169,000 in 1997 to $1,001,000 in 1998.
Pawn Service Charges. Pawn service charges increased by 13.6% from 1997 to
1998, from $2,587,828 to $2,939,386. This increase reflects the growth in
beginning loan balances from $822,639 on January 1, 1997 to $1,231,262 on
January 1, 1998. Cash-N-Pawn's loan balance outstanding on January 1, 1999 was
$1,269,919. Pawn service charges constituted 68.7% of net revenue in 1997 and
73.2% in 1998. Due to a change in accounting methods in 1998 (as described
below), more of the income from forfeited pawn loans is recognized as retail
profit upon the sale of the forfeited item. Retail sales currently account for
approximately half of net revenue. The nine stores open during both entire years
had an increase of 9% in pawn service charges from 1997 to 1998.
Cash-N-Pawn's total pawn service charges range from 18% to 25% per month on
its typical pawn loans. Certain larger loans have a lower, specially negotiated
rate. Management assumes that an overall blended rate for pawn service charges
equal to approximately 20% per month will be maintainable in the foreseeable
future. Cash-N-Pawn changed its method for accruing pawn service charges
effective in 1998 so as to stop the accrual when the amount accrued equals 25%
of the loan amount. This results in more of the income from forfeited pawn loans
not being recognized until the sale of the forfeited item.
Revenues, Net of Cost of Sales. Revenues net of cost of sales increased
almost 7% growing from $3,767,703 in 1997 to $4,015,216 in 1998.
Store Operating Expenses. Store operating expense increased slightly,
rising from $2,772,141 in 1997 to $2,791,318 in 1998. However, as a percent of
revenue net of cost of sales, operating expenses decreased from 73.6% for 1997
to only 69.5% in 1998. This positive trend reflects the fact that store
operating expenses (many of which are fixed costs) increased at a slower rate
than revenues net of cost of sales.
46
<PAGE>
General and Administrative Expenses. General and administrative expense
increased from $605,768 to $751,901 between 1997 and 1998. This increase was
primarily a result of increased professional fees and other costs incurred in
1998 related to the Merger.
Interest Expense. Interest expense increased from $447,219 in 1997 to
$520,379 in 1998. This increase was a result of the higher level of borrowings
required to fund the increase in the average pawn loan balance as well as the
costs associated with opening a new store in mid-year 1997. As a percentage of
net revenue, interest expense increased from approximately 12% to 13% between
1997 and 1998.
Income Taxes
- - ------------
Cash-N-Pawn had deferred tax assets of $651,000 and $380,586 at December
31, 1998 and 1997, respectively, primarily due to net operating losses, change
in accounting methods for pawn service charges, and intangible assets recorded
only for tax purposes.
At December 31, 1998, Cash-N-Pawn had net operating loss carryforwards of
approximately $585,000 which are available to offset future federal and state
taxable income. These loss carryforwards begin to expire in fiscal year 2011.
Undergoing an ownership change as defined in Section 382 of the Internal Revenue
Code, such as the Merger with U.S. Pawn, means that Cash-N-Pawn's net operating
loss carryforwards, generated prior to the ownership change will be subject to
an annual limitation which will reduce or defer the utilization of these losses
for tax purposes.
Liquidity and Capital Resources
- - -------------------------------
Cash-N-Pawn's investment in corporate infrastructure and store openings and
acquisitions has been financed with funds generated by borrowings, a private
equity placement in the Summer/Fall of 1995 and a private placement of
Cash-N-Pawn 11% Debt in 1996. As of March 31, 1999, Cash-N-Pawn had a cash
balance of $234,512; bank borrowings of $1,046,212; $2,000,000 principal amount
of Cash-N-Pawn 11% Debt outstanding; $543,660 of 15% Debentures outstanding; and
subordinated notes payable of $202,000. Additionally, Cash-N-Pawn had $20,275 of
deferred rent and a capitalized lease obligation of $7,084. As of May 31, 1999,
Cash-N-Pawn repaid $200,000 principal amount of 15% Debentures. As of June 30,
1999, Cash-N-Pawn had bank borrowings of $1,953,119 and unused borrowing
capacity of $361,503.
The profitability and liquidity of Cash-N-Pawn will be affected by the
amount of Cash-N-Pawn's pawn loans outstanding, which is in turn affected in
part by Cash-N-Pawn's lending practices. Management believes it will generally
be able to tighten and loosen its lending practices as needed by adjusting the
amount loaned as a percentage of the estimated resale value of the pledged
property, as opposed to adjusting the borrower's cost of funds (i.e. the pawn
service charge rate). Tighter lending practices generally result in smaller
loans in relation to the estimated resale value of the pledged property, fewer
and smaller loan transactions, a decrease in Cash-N-Pawn's average aggregate
pawn loan balances and a decrease in income from pawn service charges. However,
47
<PAGE>
smaller loans in relation to the pledged property's estimated resale value tends
to increase loan redemptions and improve Cash-N-Pawn's liquidity. An increase in
average pawn loan balances through providing larger loans in relation to the
estimated resale value of the pledged property can result in an increase in
Cash-N-Pawn's pawn service charge income, but increases in average pawn loan
balances can also result in increased instances of loan forfeitures, which
increase the cost and quantity of inventory on hand and reduce Cash-N-Pawn's
liquidity unless Cash-N-Pawn is able to maintain inventory turns.
INFORMATION ABOUT
CASH-N-PAWN INTERNATIONAL, LTD.
General
- - -------
Cash-N-Pawn International, Ltd., a Minnesota corporation, was founded in
November 1993 to develop a professionally managed chain of pawnshops.
Cash-N-Pawn International Ltd. and its wholly-owned subsidiaries (collectively,
"Cash-N-Pawn") currently own and operate ten stores located in the
Minneapolis-St. Paul, Minnesota, the Indianapolis, Indiana, and the St. Louis,
Missouri areas. Cash-N-Pawn's revenues are generated from pawn service charges
(comprised of interest, storage, service and other charges) relating to the
lending operations of its stores and from the sale of merchandise, consisting of
unredeemed collateral from forfeited loans and goods purchased from the general
public and from wholesale vendors. Cash-N-Pawn's executive offices are located
at 1000 Shelard Parkway, Suite 405, Saint Louis Park, Minnesota 55426, and the
telephone number is (612) 525-0854.
If the Merger is completed, Cash-N-Pawn International, Ltd. will be merged
with and into U.S. Pawn CNP Holdings, Inc. ("Holdings") and will cease its
separate existence. Holdings, a Colorado corporation, will survive as a
wholly-owned subsidiary of U.S. Pawn, Inc. ("U.S. Pawn") and as the parent of
the current Cash-N-Pawn operating subsidiaries. If the Merger is completed, it
is currently expected that U.S. Pawn will continue to operate the current
Cash-N-Pawn business as described; however, those decisions will be controlled
by the management and Board of Directors of U.S. Pawn, not Cash-N-Pawn.
If the Merger is not completed, Cash-N-Pawn will continue its current
business operations and plans, which are described below.
Business Operations
- - -------------------
Major Services. Cash-N-Pawn is currently engaged in two businesses: lending
money in pawn transactions and selling previously owned and new merchandise at
discount prices. Currently, Cash-N-Pawn's net revenue is recognized almost
equally from these two segments. Management believes that to increase revenues,
it must increase its pawn loan base while maintaining the current yield on pawn
loans.
Pawn Transactions. A pawn loan is typically a relatively small,
non-recourse loan, collateralized by personal property of the borrower. The
pawnbroker does not investigate the creditworthiness of a borrower, but rather,
48
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the pawnbroker lends a customer an amount based on a percentage of the value the
pawn broker believes the collateral will bring from a sale, as well as the
probability of redemption of the item and the ease with which the item will sell
if not redeemed. Cash-N-Pawn normally lends its customer approximately 50% of
the estimated resale value of the pawned item, with the average loan being
approximately $80. All pawn loans over $400 must be approved by the area manager
or Cash-N-Pawn's CEO. The loans are financed with the pawnshop's capital and
bank credit.
Valuation of electronics and similar items are generally based upon, among
other things, demand for such article, valuation guides (e.g. blue book),
newspapers, catalogues, previously made similar loan transactions or other
in-store valuation methods. Gold and diamond testing equipment is used to
authenticate jewelry.
Cash-N-Pawn charges its customers interest on the pawn loan as well as
certain fees, which include fees for storage, security, insurance, appraisal of
pawned items, an internal review of the customer's prior transactions and
document charges (collectively, with the interest charge, the "pawn service
charges"). Cash-N-Pawn accrues pawn service charges at required statutory rates
to a maximum of 25% of the loan value. For loans not repaid, the forfeited
collateral ("inventory") is valued at loan principal plus the 25% pawn service
charges accrued.
Generally, Cash-N-Pawn makes a 30 day loan. Cash-N-Pawn accrues a full
month's pawn service charges as the loan is made (a portion of which may be
rebated if the loan is prepaid). However, the customer may extend the loan for
an additional 30 days by paying pawn service charges at the end of the month.
After the first month, charges are prorated. Merchandise can be redeemed by
repaying the loan plus the accrued pawn service charges. If the customer does
not return, the loan goes into default and the collateral is forfeited after a
grace period. Such grace period is typically determined at the municipal level
and ranges from 30 to 90 days in Cash-N-Pawn's markets. After the grace period,
Cash-N-Pawn may sell the pawned item as part of its inventory.
While pawn loans are generally well collateralized, if a customer defaults,
Cash-N-Pawn must sell the goods to recoup its principal. This entails the cost
of carrying the goods for the period prior to sale, including the required grace
period, which may amount to several months.
Pawnshops are subject to rigorous reporting requirements at both the local
and state levels. When an item is pawned, a pawnbroker must report to the local
authorities information about the pawned item such as a description, a serial or
identification number and the identification of the person pawning the item.
Such information is input into, and compared with, a national network maintained
by the authorities of merchandise that has been stolen. If an item is identified
as stolen, the local or state authorities seize the item from the pawnshop, and
the pawnshop loses its collateral on the pawn loan.
Retail Sales. In addition to making pawn loans, Cash-N-Pawn also is a
value-oriented retailer of previously-owned, refurbished and sometimes new
merchandise. Cash-N-Pawn obtains inventory from unredeemed collateral and from
general public and wholesale sources.
49
<PAGE>
Cash-N-Pawn's store managers and area managers regularly compare their
retail prices with competitors' prices by reviewing advertisements of other
retail operations and actually visiting competitive operations. A manager can
adjust prices immediately to remain competitive. Cash-N-Pawn offers a limited 30
day warranty on many items sold, which allows customers to exchange an item for
store credit in certain circumstances. Cash-N-Pawn currently averages a gross
profit margin of approximately 30% on merchandise sold at retail.
Products sold include jewelry, consumer electronics, tools, video games and
equipment, musical instruments, and CD's. Approximately 85% of Cash-N-Pawn's
retail revenue is derived from the top three categories of merchandise which
include jewelry, consumer electronics and tools.
Cash-N-Pawn no longer makes pawn loans on guns in any store except for
Terre Haute, Indiana, where it accepts only sporting rifles and shotguns, no
handguns. Cash-N-Pawn sells sporting rifles and shotguns to its retail customers
only at this location, which is in a relatively rural setting. Again, no
handguns are sold. Cash-N-Pawn has and will maintain an Alcohol, Tobacco and
Firearms license for the Terre Haute location.
Other Services. Cash-N-Pawn also engages in the business of check cashing
and making so called "payday loans" in Indiana and in check cashing in Missouri.
Each requires a license from the state or local authorities. Currently, these
comprise approximately four percent of net revenues for Cash-N-Pawn's Indiana
operations and three percent for the Missouri stores.
Employees and Training
- - ----------------------
Cash-N-Pawn currently employs 47 full-time employees, including its
executive officers and has 15 part-time employees.
Each store is organized with a manager supervising all aspects of the
store's operations, including the responsibility for training assistant managers
and other personnel. In addition, there are currently two area managers, who
supervise the overall operation of their market area and report to the vice
president of operations.
Computer Network, Recordkeeping and Security.
- - ---------------------------------------------
Cash-N-Pawn has a PC based operating system that handles all pawns and
point-of-sale transactions, maintains a loan/redemption database, reports all
store inventory and the cost of goods sold through a perpetual inventory system
and provides bar-coding for all pawn collateral and inventory. Each store has
terminal displays at the retail counter that allows store personnel to access
the store's inventory and the credit histories of repeat customers. The systems
at each store are tied to the corporate office via modem and can be accessed by
management at any time.
In addition, each store must maintain specific records to comply with local
municipal licensing regulations. Typically, this includes driver's license
information with a picture of the customer and a detailed description of the
goods pawned or sold to the store.
50
<PAGE>
Each store is monitored by a Sonitrol(R) security system during non-store
hours, glass breakage detectors, audio and video surveillance and other advanced
security devices. All of the devices are tied into a central monitoring system
and are backed up by battery and cellular phone service in the event that
telephone or other lines are cut.
Year 2000 Issues
- - ----------------
Cash-N-Pawn licenses computer software systems for use in recording,
documenting and monitoring its pawn transactions, sales, inventory, cost of
sales, accounting and overall store operations. Cash-N-Pawn believes that such
licensed software is the only software material to its operations and that it is
Year 2000 Compliant. Such belief is based solely upon assurances of the vendor
and Cash-N-Pawn has not independently evaluated the reliability of such
assurances. In addition, Cash-N-Pawn has been told by the provider of its
security system that such system is Year 2000 Compliant. Although Cash-N-Pawn
has no reason to doubt the truth of such assurances, there can be no assurance
that its software and security system will be completely Year 2000 Compliant.
The failure to be Year 2000 Compliant could adversely impact Cash-N-Pawn's
operations.
"Year 2000 Compliant" as used in this document means designed to be used
prior to, during and after the calendar year 2000 A.D., and will accurately
receive, provide and process date/time data (including, but not limited to,
calculating, comparing, and sequencing) from, into and between the 20th and 21st
centuries, including the years 1999 and 2000, and leap-year calculations, and
will not malfunction, cease to function or provide invalid or incorrect results
as a result of date/time data, to the extent that other information technology,
used in combination with such item, properly exchanges date/time data with it.
In addition, Cash-N-Pawn has not questioned, or done any independent
investigation of, its material vendors, suppliers, lenders or other business
relations as to their ability to become Year 2000 Compliant. Cash-N-Pawn has not
prepared any contingency plans in case its systems, or those of third parties,
prove not to be Year 2000 Compliant. The failure of such parties to be Year 2000
Compliant could adversely impact Cash-N-Pawn's operation.
Marketing
- - ---------
Cash-N-Pawn uses marketing and advertising efforts which consist of
television and radio ads, yellow page advertising, ads in local newspapers and
community newsletters, flyers and direct mailings to selected income groups.
Cash-N-Pawn currently does not have any registered trademark or servicemark in
relation to its name.
Store Locations
- - ---------------
Since its inception in November 1993, Cash-N-Pawn has opened or purchased
the stores set forth below. Stores generally operate at a loss in the first year
of operation.
51
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Date Square
Location Opened Footage
-------- ------ -------
1 Hopkins, MN 12/93 5,000
2 St. Paul, MN 05/94 8,400
3 Fridley, MN 06/94 4,800
4 St. Paul, MN 09/94 5,000
5 Indianapolis, IN 01/95 12,000
6 Indianapolis, IN 11/95 7,500
7 St. Louis, MO (1) 06/95 8,000
8 St. Louis, MO (2) 11/95 5,000
9 Terre Haute, IN 09/96 5,000
10 Brooklyn Center, MN 05/97 5,800
(1) Store purchased by Cash-N-Pawn as an operating store.
(2) Store purchased by Cash-N-Pawn as an operating store, but moved
to a new location.
Cash-N-Pawn closed its operation in Kansas City in August 1997. A loss of
approximately $120,000 was recognized on closing.
A new 7,000 square foot store is expected to open in Minneapolis in late
1999. Cash-N-Pawn has received a conditional use permit from the City of
Minneapolis for the store and has a letter agreement with a landlord to enter
into a rental lease for the building.
In November 1999, Cash-N-Pawn will move its Fridley store to a newly
constructed location also in Fridley.
Cash-N-Pawn currently leases space for its main office and all but one of
its retail stores which it owns. The leases expire at various times over the
next five years. Most of the leases require the Company to pay its pro rata
share of real estate taxes and utilities in addition to base rent, and contain
renewal options for multiple year periods.
Business Strategy
- - -----------------
Cash-N-Pawn currently operates ten retail pawn shops and is in the process
of opening one additional store. Cash-N-Pawn's strategy is to continue to open
or acquire and develop new stores in its current market areas in Minnesota and
Missouri and to expand into other markets where recent changes in the laws
regarding pawn charges provide the potential for growth opportunities. However,
any such expansion is subject to sufficient financing being available.
There is currently no expansion financing proposed if the Merger is not
completed. If the Merger does not close and sufficient financing is not
available, Cash-N-Pawn will not be able to open new stores and adequately
finance initial pawn loan inventories for such stores. In such event,
Cash-N-Pawn's ability to grow or to refinance its debts would be adversely
affected.
52
<PAGE>
If the Merger is completed, U.S. Pawn and Cash-N-Pawn intend to expand in
their current market areas, as well as expand into other markets, as
opportunities arise. If the Merger is completed, management currently
anticipates that the joint cash flow and borrowing capacity of the two companies
will provide adequate financing for such expansion; however, there can be no
assurance that sufficient funds will be available.
Since its inception in November 1993, Cash-N-Pawn has opened eight new
pawnshops and acquired two pawnshops which are currently in operation. The
historical cost to establish each of Cash-N-Pawn's pawnshops has ranged between
$225,000 and $450,000, averaging approximately $300,000 in start-up costs. Such
start-up costs include initial inventory, store improvements, equipment, cash to
finance initial pawn loans, a contingency reserve and other pre-opening costs.
In addition to start-up costs, Cash-N-Pawn anticipates that each store will
require approximately $50,000 to $100,000 during the first 12 to 18 months of
operation for growth in pawn loans and inventory.
Historically, it has taken on the average approximately six to eight months
after opening a store for such store to begin operating profitably and on the
average approximately 18 months after opening a store until the store starts to
generate overall positive cash flow. Management believes that it takes
approximately three to four years for a pawnshop to reach full maturity.
Competition
- - -----------
Management believes, there are over 10,000 pawnshops in the United States
owned primarily by independent operators. Cash-N-Pawn believes Minneapolis-St.
Paul and St. Louis are markets that are fragmented and dominated by independent
operators or that have not been saturated by the larger pawnshop chains.
Cash-N-Pawn believes, however, that certain national chains could increase their
penetration in the St. Louis market. Indianapolis has been very developed by
chain stores.
In recent years, several pawnshop chains have begun operations in the
United States, including five publicly traded chains: Cash America
International, Inc.; EZCORP, Inc.; First Cash, Inc.; U.S. Pawn; and Pawn Mart.
Management believes that existing pawnshop chains of more than 10 stores account
for only a small percentage of current total pawnshop revenue, because pawnshop
chains account for a small percentage of the current total pawnshops.
To a certain extent, Cash-N-Pawn also competes with other types of
financial institutions such as consumer finance companies, which generally lend
on an unsecured as well as secured basis. Other lenders may and do lend money on
an unsecured basis, at interest rates which are lower than the total pawn
service charges of Cash-N-Pawn, and on other terms more favorable than those
offered by Cash-N-Pawn.
Competitive factors in Cash-N-Pawn's retail operations include the ability
to provide the customer a variety of merchandise at lower prices. However, on
the retail level, Cash-N-Pawn competes with numerous other retailers who have
significantly greater financial resources than Cash-N-Pawn. Cash-N-Pawn's
competitors, in connection with the sale of merchandise, include numerous retail
53
<PAGE>
and wholesale stores, such as jewelry stores, discount retail stores, consumer
electronics stores, other pawnshops and other retailers of previously owned
merchandise.
In the 1990's, companies such as Play It Again Sports(R) (sports
equipment), Funcoland(R) (games, including electronic), 2nd Wind(R) (exercise
equipment), Once Upon A Child(R) (children's clothing), and numerous consignment
shops have risen to prominence as retailers of quality used merchandise. While
Cash-N-Pawn recognizes that it must compete with these stores for retail
business, it intends to take advantage of what it perceives as a growing
acceptance and demand for value oriented merchandise.
Pawnshop Regulation
- - -------------------
Pawn shops are regulated by state and local laws and regulations. In
connection with the Merger, U.S. Pawn will have to be approved by each licensing
agency in order to operate the stores currently operated by Cash-N-Pawn. U.S.
Pawn's qualifications will be reviewed, including the good character of its
management, the operating history of the current U.S. Pawn stores, and its
financial position. The Agreement requires, as a condition to closing, that such
approvals have been received.
In Minnesota, the location of five current and one proposed Cash-N-Pawn
stores, legislation, enacted in 1996, limits the amount of interest charged by a
pawnbroker to three percent per month. In addition, Minnesota, like Indiana and
Missouri, allows a "reasonable fee for storage and service" in relation to the
pawn loan. These include fees for storage, security, insurance, appraisal of
pawned items, an internal review of the customer's prior transactions and
document charges. Total pawn service charges in Minnesota are based on a sliding
scale ranging from 9.25% per month or less on loans of more than $2,000, and a
maximum of 30% per month on loans of $50 or less. On loans between $50 and $500
(where most of Cash-N-Pawn loans fall), the pawn service charge rate is between
20% and 25% per month.
Missouri, the location of two of Cash-N-Pawn's pawnshops, limits the amount
of interest that may be charged on a pawn loan to two percent per month.
Missouri also allows reasonable fees, which include fees for storage, security,
insurance, appraisal of pawned items, an internal credit check on prior
customers and document charges (collectively, with interest charge, the "pawn
service charges"). In Missouri, Cash-N-Pawn's total pawn service charges when
expressed as a percentage of the principal amount of the pawn loan, are
approximately 20% per month.
In Indiana, the location of three of Cash-N-Pawn's pawnshops, the
pawnbroker may choose from one of two interest rate formulas. The first formula
allows a pawnbroker to charge an interest rate of 36% per year for loans of $870
or less, an interest rate of 21% per year for loans larger than $870 but less
than or equal to $2,900, and an interest rate of 15% per year for loans of more
than $2,900. In the alternative, the pawnbroker in Indiana may charge an
interest rate of 21% per year on all pawn loans. Indiana also limits the
additional fees to 20% of the face amount of the loan per month. In Indiana,
Cash-N-Pawn's total pawn service charges when expressed as a percentage of the
principal amount of the pawn loan, are approximately 20% per month.
54
<PAGE>
Minnesota, Indiana and Missouri also regulate pawnbroking municipally.
Municipalities generally require that the terms of the loan contract must be
specified on a pawn ticket, a copy of which a customer receives. The ticket
lists the customer's name and address, type of identification provided by the
borrower, a description of the pledged goods with the applicable serial numbers,
amount loaned, maturity date, the interest rate, pawn service charges and the
amount that must be paid to redeem the item. The last requirement ensures that
the customer understands the consequences of the pawn charge. Pawnshops must
file daily or weekly police reports listing all items pawned and identification
of the individual pawning the goods. The pawnbroker must also file such a report
when purchasing an item from the public.
Market Price of Cash-N-Pawn; Additional Information
- - ---------------------------------------------------
There is no trading market for any of the outstanding Cash-N-Pawn
securities. Cash-N-Pawn is not subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended, and accordingly does not file
reports, proxy statements and other information with the Securities and Exchange
Commission.
Dividends
- - ---------
Cash-N-Pawn has not paid cash dividends on its common stock. If the Merger
is not completed, Cash-N-Pawn does not anticipate paying any cash dividends in
the foreseeable future. In addition, the Cash-N-Pawn 11% Debt contains a
restriction on Cash-N-Pawn's ability to declare or pay dividends on common stock
prior to the payment in full of the Cash-N-Pawn 11% Debt. The Cash-N-Pawn 11%
Debt also restrict Cash-N-Pawn's ability to incur or pay dividends on certain
preferred stock of Cash-N-Pawn. If all Cash-N-Pawn 11% Debt are not converted or
exchanged, such restrictions will remain in place with respect to Holdings'
ability to pay cash dividends on its common stock to U.S. Pawn.
Legal Proceedings
- - -----------------
In November 1996, a class action suit was brought against Cash-N-Pawn
alleging it had violated Minnesota Statutes relating to usurious rates of
interest, rebates of unearned interest, disposition of customers' collateral,
and unlawful and deceptive trade practices. Cash-N-Pawn denies these
allegations; however, to avoid the expense and disruption of protracted
litigation, in January 1998 Cash-N-Pawn reached a settlement regarding the
allegations. Terms of the settlement include a cash payment of $85,000 (which
has been made), plus a minimum of $75,000 of scrip that can be redeemed at
Cash-N-Pawn's stores. If the minimum amount of script certificates are not
redeemed, additional cash payments may be required. Management believes that no
more than the minimum amount of scrip will be redeemed. Accordingly, Cash-N-Pawn
recorded a charge of $295,000 in 1997 to cover the total estimated costs and
expenses associated with the settlement.
55
<PAGE>
PROPOSAL 2: ELECTION OF THE BOARD OF DIRECTORS
Under the Agreement, U.S. Pawn's Board of Directors as of the Effective
Date will include U.S. Pawn's two directors nominated by Cash-N-Pawn, Jack D.
Hartsoe and Stanford M. Baratz. In addition, the four directors, Charles C. Van
Gundy, Jack Skidell, Gary A. Agron, and Ross L. Murphy remain directors.
The Board of Directors recommends the election of Messers. Hartsoe and
Baratz to the Board of Directors. Directors will be elected by a plurality of
the shares of Common Stock present and entitled to vote at the Meeting.
MANAGEMENT OF U.S. PAWN
Post-Merger Management of U.S. Pawn
- - -----------------------------------
As of the Effective Date, U.S. Pawn's Board of Directors will consist of
six individuals. The terms of the directors are staggered whereby Messrs. Van
Gundy and Skidell will hold office until the Annual Meeting of Shareholders in
2000, the two individuals nominated for election as directors, Messrs. Hartsoe
and Baratz, if elected, will hold office until the Annual Meeting of
Shareholders in 2001 and Messrs. Agron and Murphy will hold office until the
Annual Meeting of Shareholders in 2002. Cumulative voting is not permitted in
the election of directors. In the absence of instructions to the contrary, the
person named in the accompanying Proxy will vote in favor of the election of all
persons named below as U.S. Pawn's nominees for directors of U.S. Pawn. Each
nominee has consented to be named herein and to serve if elected. It is not
anticipated that any nominee will become unable or unwilling to accept
nomination or election, but if such event occurs, the person named in the Proxy
intends to vote for the election in his stead of such person as the Board of
Directors of U.S. Pawn may recommend.
The following table sets forth certain information as to the persons who
will continue to serve or who are nominated to serve as directors and certain
information regarding the executive officers of U.S. Pawn after the Merger.
Name Age Office
- - ---- --- ------
Charles C. Van Gundy 46 Chief Executive Officer and
Director
Jack Skidell 56 Director
Gary A. Agron 54 Director
Ross L. Murphy 48 Director
Jack D. Hartsoe (1) 49 President, Chief Operating Officer
and Director
Stanford M. Baratz (1) 44 Director
Ronald A. Mitola 44 Vice President of Operations and
Secretary
Alan L. Cross 54 Chief Financial Officer
Gerry Polito 62 Manager of Eastern Operations
(1). Nominated as director
56
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Background of the Post-Merger Management of U.S. Pawn
- - -----------------------------------------------------
Charles C. Van Gundy has been employed by U.S. Pawn since January 1992. His
positions within U.S. Pawn have included Vice President of Accounting, Vice
President and Chief Financial Officer, and Secretary. Mr. Van Gundy currently
serves as U.S. Pawn's Chief Executive Officer, President, and Chief Financial
Officer and is responsible for the overall operations of U.S. Pawn. Mr. Van
Gundy earned his Bachelor of Science degree in accounting and finance from
Metropolitan State College of Denver in 1979, and subsequently studied law at
the University of San Diego School of Law until 1981. From 1982 to 1992 he
served as an accounting officer for various mutual fund, high technology and
economic redevelopment organizations. Since August 1996, he has also been
director and officer of Medical Management Systems, Inc., a publicly-held
company currently seeking acquisition opportunities. From November 1995 until
May 1997, Mr. Van Gundy was a director and officer of Lahaina Acquisitions,
Inc., a publicly-held company seeking acquisition opportunities. Since June
1999, Mr. Van Gundy has served as a member of the Board of Directors of the
National Pawnbrokers Association. He devotes substantially all of his time to
U.S. Pawn's affairs.
Jack Skidell has been President and sole shareholder of Colin Winthrop &
Co., Inc., a New York based broker-dealer, registered under Section 15 of the
Securities Exchange Act of 1934 since 1990. In addition, Mr. Skidell was
President of Shelter Rock Securities Corporation, a broker-dealer registered
under Section 15 of the Securities Exchange Act of 1934 which voluntarily ceased
to do business as a broker-dealer in 1990. He devotes as much time as is
necessary to U.S. Pawn's affairs.
Gary A. Agron earned his Bachelor of Arts degree from the University of
Colorado in 1966 and his Juris Doctorate degree from the University of Colorado
School of Law in 1969. Since 1969, he has been engaged in the private practice
of law in Denver, Colorado, and since 1974, has specialized exclusively in
securities law. Mr. Agron has acted as U.S. Pawn's securities counsel since
1988. He is a director of Xedar Corporation, a publicly-held high technology
research and development firm and Meadow Valley Corporation, a publicly-held
heavy construction contractor. He devotes such time as is necessary to U.S.
Pawn's affairs.
Ross L. Murphy has been the Chief Executive Officer and Chairman of the
Board of Directors of BancoPro, Inc., an OTC Bulletin Board specialty lender
based in Tempe, Arizona since 1994. Mr. Murphy earned his Bachelor of Business
Administration Degree from the University of Texas in 1973. Mr. Murphy owned and
was Executive Vice President responsible for daily operations of a chain of
retail furniture stores for 16 years. Mr. Murphy later acquired Haymco Marketing
where he was Sales Manager and responsible for its overall operations. Mr.
Murphy is currently an investment banker with Eaton Mews in Tempe, Arizona and
is responsible for raising capital for BancPro, Inc. He devotes such time as is
necessary to U.S. Pawn's affairs.
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<PAGE>
Jack D. Hartsoe Mr. Hartsoe has been Chief Executive Officer and director
of Cash-N-Pawn since its inception in 1993. Mr. Hartsoe was also a co-founder of
Cash-N-Pawn. Prior to that time, Mr. Hartsoe was a Regional Manager for Cash
America, the largest pawnshop chain in the United States. Mr. Hartsoe started
working for Cash America in May of 1985, at which time, Cash America had only
six stores. He helped develop the chain's store accounting and inventory
systems. In November 1993, Mr. Hartsoe moved to Minnesota to become president,
director co-founder and part owner of Cash-N-Pawn. Since joining Cash-N-Pawn, he
has opened new stores for Cash-N-Pawn in Minnesota, and has expanded into
Indiana and Missouri. Mr. Hartsoe is on the Board of the National Pawnbrokers
Association and on the Board of Directors of the Minnesota Pawnbrokers
Association. After the Merger, Mr. Hartsoe will be President and Chief Operating
Officer of Holdings, and will become President, Chief Operating Officer and a
Director of U.S. Pawn.
Stanford M. Baratz. Mr. Baratz has been a director of Cash-N-Pawn since
November 1995. Mr. Baratz is the founder and president of Baratz Financial,
Inc., a Minneapolis based financial consulting firm established in 1994
specializing in capital structure consulting for small and medium size
midwestern companies. From 1985-1994, Mr. Baratz was partner and executive vice
president of Welsh Companies, Minnesota's largest property management firm. Mr.
Baratz will become a Director of U.S. Pawn after the Merger.
Alan L. Cross. Mr. Cross has been the Chief Financial Officer of
Cash-N-Pawn since October 1995. From March of 1993 through mid-1995, Mr. Cross
Served as Chief Financial Officer of NuSports Systems, Inc. From February 1992
until March 1993, Mr. Cross served as the Chief Financial Officer and Executive
Vice President for Quantum Communications Group, Inc. For the period from
September 1990 to January 1992, Mr. Cross pursued independent business ventures
in the Twin Cities. Prior to that, Mr. Cross was a Certified Public Accountant
with the public accounting firm of Arthur Andersen & Co. for twenty years, the
last ten of which he was a partner in the firm. Mr. Cross holds a law degree and
masters in business administration from the University of South Dakota. After
the Merger, Mr. Cross will be Secretary / Treasurer of Holdings and will become
the Chief Financial Officer of U.S. Pawn.
Ronald A. Mitola has been employed by the Company since May of 1992 and has
over ten years experience in the pawn industry. In July of 1994, he became
General Manager responsible for the day to day operations of the Company's store
locations. In January of 1997, he was promoted to Vice President of Operations
and was elected to the office of Secretary in November of 1997. He devotes
substantially all of his time to the Company's affairs.
Key Employee
- - ------------
Gerry Polito. Mr. Polito is Vice President of Operations for Cash-N-Pawn.
He was employed by Cash-N-Pawn from June 1996 to July 1997 and from August 1998
to the present. From July 1997 to August 1998, Mr. Polito was on a leave of
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<PAGE>
absence from Cash-N-Pawn. During that period, he worked for Value Pawn, a
Florida company. Before joining Cash-N-Pawn, Mr. Polito was employed for
approximately eight years by Cash America International, a New York Stock
Exchange company. Mr. Polito served as a Divisional Vice President for Cash
America, responsible for the development of the Florida and Georgia markets,
which grew to 64 stores during that period. Prior to Cash America, Mr. Polito
spent 18 years with H.J. Wilson's, a large catalog showroom operation with
approximately 350 stores in 30 states. At H.J. Wilson's he served as a Vice
President of Store Operations. Mr. Polito earned his bachelor's degree from the
University of Miami, Florida.
Current Directors and Executive Officers of U.S. Pawn
- - -----------------------------------------------------
The following table sets forth information regarding U.S. Pawn's current
executive officers and directors:
<TABLE>
<CAPTION>
Name Age Office Director Since
---- --- ------ --------------
<S> <C> <C> <C>
Charles C. Van Gundy (1) 46 Chief Executive Officer, 1994
President, Chief Financial Officer
and Director
Jack Skidell (1)(2) 56 Director 1997
Gary A. Agron (2) 54 Director 1989
Ross L. Murphy (1)(2) 48 Director 1998
Ronald A. Mitola 44 Vice President of 1997
Operations and Secretary
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
</TABLE>
The Board of Directors is divided into three classes with the term of each
class staggered. At each annual meeting of the shareholders of U.S. Pawn
successors of the class of directors whose term expires at that annual meeting
are elected for a three-year term. Any director elected to fill a vacancy or
newly created directorship resulting from an increase in the authorized number
of directors holds office for a term that coincides with the remaining term of
that class. The Board of U.S. Pawn currently consists of four directors, two of
whom are Class II directors and two of whom are class III directors, therefore
the two directors nominated will be Class I directors who will hold office until
the Annual Meeting of Shareholders in 2001.
At the Meeting, the shareholders will elect two Class I directors of U.S.
Pawn. If elected, each will hold office until the annual meeting to be held in
the year 2001 and thereafter until his successor is elected and has qualified.
59
<PAGE>
Officers of U.S. Pawn are elected by, and serve at the discretion of, the Board
of Directors. None of the above individuals has any family relationship with any
other director or executive officer. A director not employed by U.S. Pawn
receives $1,000 for attending each Board of Directors' Meeting and is reimbursed
for out-of-pocket expenses. In addition, each non-employee director is granted
an option to purchase 12,500 common stock shares of U.S. Pawn at the fair market
value of the underlying securities on the date of the grant at the time each
director initially joins the Board. U.S. Pawn has standing audit and
compensation committees, but no standing nominating committee.
The Audit Committee, composed of Messrs. Van Gundy, Skidell and Murphy,
makes recommendations concerning the engagement of the independent auditors,
reviews with the auditors the plans and results of the audit engagement,
approves professional services provided by the auditors, reviews the
independence of the auditors, and reviews the adequacy of U.S. Pawn's internal
accounting controls. The Audit Committee met two times in 1998.
The Compensation Committee, composed of Messrs. Skidell, Agron and Murphy,
determines compensation for U.S. Pawn's executive officers and administers any
stock option or incentive compensation plan established by U.S. Pawn. The
Compensation Committee met two times in 1998.
U.S. Pawn had five meetings of its Board of Directors in 1998, attended by
all directors.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT OF U.S. PAWN
Security Ownership of Certain Beneficial Owners and Management
- - --------------------------------------------------------------
The following table sets forth certain information as of the record date
concerning stock ownership of U.S. Pawn's Common Stock by each director,
director nominee and officer, by all persons who hold of record or are known by
U.S. Pawn to hold beneficially of record 5% or more of the outstanding shares of
U.S. Pawn Common Stock and by all directors, director nominees and officers as a
group.
Except as otherwise noted, the persons named in the table own the shares
beneficially and of record and have sole voting and investment power with
respect to all shares of Common Stock shown as owned by them, subject to
community property laws, where applicable. The table also reflects all shares of
Common Stock which each individual has the right to acquire within 60 days from
the date hereof upon exercise of stock options or common stock purchase
warrants.
Shareholdings
Name and Address Number Percent
---------------- ------ -------
Charles C. Van Gundy (1) 246,750 5.9%
7215 Lowell Blvd
Westminster, CO 80030
Jack Skidell (2) 103,969 2.5%
500 N. Broadway # 159
Jericho, NY 11753
Gary A. Agron (3) 36,500 0.9%
5445 DTC Parkway, Suite 520
Englewood, CO 80111
Ross L. Murphy (4) 17,500 0.4%
3923 S. McClintock Drive #410
Tempe, AZ 85282
Ronald A. Mitola (5) 100,000 2.4%
7215 Lowell Blvd.
Westminster, CO 80030
Rodney W. Smith 356,225 8.5%
P.O. Box 7022
Tyler, TX 75711
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<PAGE>
Jack D. Hartsoe (6) -0- 0%
1000 Shelard Parkway
Suite 405
Saint Louis Park, MN 55426
Stanford M. Baratz (6) -0- 0%
1000 Shelard Parkway
Suite 405
Saint Louis Park, MN 55426
All officers and directors 504,719 12.11%
and director nominees
as a group(seven in number) (1)(2)(3)(4)(5)(6)
(1) Includes currently exercisable stock options to purchase 1,250 shares
at $5.13 per share until January 20, 2002, 20,000 shares at $2.06 per
share until March 24, 2005, 8,000 shares at $1.70 per share until
December 28, 2005, 12,500 shares at $4.38 per share until January 17,
2007, 75,000 shares at $3.24 per share until October 29, 2007 and
100,000 shares at $1.38 per share until January 1, 2009.
(2) Includes currently exercisable stock options to purchase 4,500 shares
at $4.00 per share until December 31, 1999 12,500 shares at $3.24 per
share until October 29, 2007 and 10,000 shares at $2.63 per share
until July 1, 2009.
(3) Includes currently exercisable stock options to purchase 12,500 shares
at $2.00 per share until October 23, 2000, 8,000 shares at $1.70 per
share until December 28, 2005 and 10,000 shares at $2.63 per share
until July 1, 2009.
(4) Includes currently exercisable stock options to purchase 12,500 shares
at $2.39 per share until August 13, 2008 and 5,000 shares at $2.63 per
share until July 1, 2009.
(5) Includes currently exercisable stock options to purchase 20,000 shares
at $2.06 per share until March 24, 2005, 40,000 shares at $3.50 per
share until March 4, 2008 and 40,000 shares at $1.38 per share until
January 1, 2009.
(6) Messrs. Hartsoe and Baratz are director nominees who currently do not
own any shares of U.S. Pawn Common Stock but upon the Merger, assuming
no Cash-N- Pawn Debentures are converted and no Cash-N-Pawn
dissenters' rights are perfected, will receive 72,000 shares and 3,480
shares, respectively, of Common Stock (excluding shares upon the
exercise option or warrants) in exchange for their Cash-N- Pawn common
stock. In addition, they will be entitled to purchase 86,000 shares
and 34,400 shares respectively, of U.S. Pawn's Common Stock under
currently outstanding options and warrants.
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<PAGE>
EXECUTIVE COMPENSATION OF U.S. PAWN
The following tables set forth compensation with respect to the Chief
Executive Officer of U.S. Pawn for the fiscal years indicated in each table:
Summary Compensation Table
Long-Term
Fiscal Other Compensation
Name and Position Year Salary Compensation Stock Options(#)
- - ----------------- ---- ------ ------------ ----------------
Charles C. Van Gundy (1) 1998 $150,000 -0- -0-
Chief Executive 1997 $125,000 -0- 87,500
Officer, President and 1996 $ 86,000 -0- -0-
Chief Financial Officer
Melvin Wedgle (2) 1997 $178,500 -0- -0-
President and 1996 $157,000 -0- -0-
Chief Executive Officer
(1) Mr. Van Gundy was elected Chief Executive Officer and President on
October 29, 1997. Prior to October 29, 1997, Mr. Van Gundy served as
U.S. Pawn's Chief Financial Officer.
(2) Mr. Wedgle resigned as President and Chief Executive Officer on
October 29, 1997.
<TABLE>
<CAPTION>
Option Grants In Last Fiscal Year
Potential Realizable Value
% of at Assumed Annual
Total Exercise Rates of Stock Price
Granted Price Appreciation for Option
Options In Fiscal Per Share Expire Term
Name Granted Year $5/sh Date 5% of($ 10% of ($)
- - ---- ------- ---- ----- ---- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Van Gundy -0- - - - - -
</TABLE>
<TABLE>
<CAPTION>
Aggregate Option Exercises In Last Fiscal Year
And Fiscal Year End Option Values
Value of Unexercised
Number of Unexercised Options in-the-Money Option at
Shares acquired At Fiscal Year End Fiscal Year End (2)
Name On Exercised(#) Value Realized ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- - ---- --------------- -------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Charles C. Van Gundy -0- $ -0- 116,750 -0- $ -0- $ -0-
(1) Represents the difference, if any, between the market value of the
Company's Common Stock at exercise and the exercise price of the options.
63
</TABLE>
<PAGE>
(2) Represents the difference, if any, between the market value of U.S. Pawn's
Common Stock on December 31, 1998 and the exercise price of the options.
Employment Agreements, Termination of Employment and Change-in-Control
Arrangements
- - --------------------------------------------------------------------------------
U.S. Pawn and Mr. Van Gundy have entered into an employment agreement, the
terms of which run through December 31, 2001. Provisions of the agreement
include: (1) an annual base salary of $150,000 subject to a possible increase
for the last year of the term with the increase to be determined by the
Company's Compensation Committee; (2) the right to receive incentive
compensation during each fiscal year covered by the agreement up to a maximum of
50% of annual base salary and as determined by criteria set by the Board with a
minimum cash bonus for fiscal year 2000 of $10,000 guaranteed; (3) an option to
purchase 75,000 common shares of U.S. Pawn's Common Stock at an exercise price
of $3.24 per share, which in the event of a change in control of U.S. Pawn or
constructive termination, Mr. Van Gundy could cause U.S. Pawn to repurchase at a
price equal to the difference between the exercise price and the closing price
of U.S. Pawn's Common Stock on the effective date of termination or to extend
the exercisability of the option under other circumstances; (4) the right to
earn up to 100,000 and 75,000 options to purchase common shares of U.S. Pawn
based on performance criteria set by the Board, which have been earned and
vested, with an exercise price of $1.375 per share and which, in the event of a
change in control of U.S. Pawn or constructive termination, Mr. Van Gundy could
cause U.S. Pawn to repurchase at a price equal to the difference between the
exercise price and the closing price of U.S. Pawn's common stock on the
effective date of termination or to extend the exercisability of the option
under other circumstances; (5) continuation of salary payments for the greater
of the remainder of the term of the agreement or for one year and a lump sum
payment equal to 50% of annual base salary in the event of termination without
cause by U.S. Pawn as defined in the agreement; (6) continuation of salary
payments equal to one year's salary in the event of a change in control of U.S.
Pawn; and (7) continuation of salary payments during periods of disability as
defined in the agreement.
U.S. Pawn and Mr. Mitola have entered into an employment agreement, the
term of which runs through December 31, 2001. Provisions of the agreement
include: (i) an annual base salary of $90,000; (2) the right to receive
incentive compensation during each fiscal year covered by the agreement up to a
maximum of 50% of annual base salary and as determined by criteria set by the
Board with a minimum cash bonus for fiscal year 2000 of $10,000 guaranteed; (3)
an option to purchase 40,000 common shares of U.S. Pawn at an exercise price of
$3.50 per share, and 30,000 shares at $1.53 per share, which in the event of a
change in control of U.S. Pawn or constructive termination, Mr. Mitola could
cause U.S. Pawn to repurchase at a price equal to the difference between the
exercise price and the closing price of U.S. Pawn's common stock on the
effective date of termination or to extend the exercisability of the option
under other circumstances; (4) continuation of salary payments not to exceed
more than an aggregate amount equal to one year's salary in the event of
termination without cause by U.S. Pawn as defined in the agreement or in the
event of a change in control of U.S. Pawn; and (5) continuation of salary
payments during periods of disability as defined in the agreement.
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<PAGE>
Stock Options and Warrants
- - --------------------------
On December 14, 1988, U.S. Pawn's shareholders approved an Incentive Stock
Option Plan (the "Plan") for the benefit of U.S. Pawn's employees. U.S. Pawn
believes that the Plan provides an appropriate incentive to certain employees to
maintain a continued interest in the operation and future of U.S. Pawn. The
terms of the Plan provide that U.S. Pawn is authorized to grant options to
purchase shares of Common Stock to selected employees including officers and
directors upon the unanimous consent of all of U.S. Pawn's directors. U.S. Pawn
will select the optionees and determine the terms and conditions of the stock
option grant. However, the purchase price to be paid by optionees for the option
shares will not be less than the fair market value of the option shares on the
date of grant. Employees owning more than 10% of the outstanding shares of any
class of securities of U.S. Pawn must be granted options at a purchase price of
at least 10% of the fair market value of the shares on the date of the grant. No
option can be exercised for a period of twelve months following the date of
grant, and the employee must exercise options during employment or within 30
days of termination of employment. U.S. Pawn has registered the shares
underlying the options under the Securities Act of 1933, as amended, so that the
shares will be freely tradeable when issued. The options are granted for a term
of six years, and during such term, may be exercised 33.3% after one year and an
additional 33.3% during each of the succeeding two years. A total of 125,000
shares of U.S. Pawn's authorized but unissued Common Stock had been reserved for
possible issuance pursuant to the Plan. On March 25, 1995, U.S. Pawn's Board of
Directors increased the number of shares of U.S. Pawn's authorized but unissued
Common Stock reserved for possible issuance pursuant to the Plan to 275,000
shares. On July 25, 1995, U.S. Pawn registered the increase in shares reserved
for possible issuance pursuant to the Plan.
To date, options totaling 358,040 shares have been issued under the Plan,
exercisable at $0.68 to $5.12 per share, options totaling 106,999 shares have
been exercised at $0.68 to $2.56 per share and options totaling 115,999 have
expired, leaving options totaling 135,042 shares outstanding.
On July 21, 1995, U.S. Pawn established the 1995 Directors' Stock Option
Plan (the "Directors' Plan") authorizing the issuance of up to 90,000 shares
under the Directors' Plan. To date, options totaling 127,500 shares have been
issued under the Director's Plan, exercisable at $1.70 to $3.24 per share,
options totaling 24,000 have been exercised at $1.70 per share and options
totaling 54,500 shares have expired, leaving options totaling 49,000 shares
outstanding.
On January 27, 1996, U.S. Pawn adopted the 1996 Consultant's Stock Option
Plan (the "Consultant Plan") under which 500,000 shares of U.S. Pawn's Common
Stock have been reserved for issuance at prices not less than 75% of the fair
market value of the option stock on the date of grant. To date, options totaling
375,000 shares have been issued under the Consultant's Plan, exercisable at
$1.50 to $3.50 per share, options totaling 300,000 shares have been exercised at
$ 1.50 to $3.50 per share, leaving options totaling 75,000 shares outstanding.
65
<PAGE>
In conjunction with the Merger, U.S. Pawn has agreed, subject to
shareholder approval, to adopt the CNP Plan whereby the 250,000 shares of
Cash-N-Pawn Common Stock subject to the Plan will be replaced by 250,000 shares
of U.S. Pawn Common Stock.
PROPOSAL THREE:
APPROVAL OF THE ADOPTION OF THE AMENDED CASH-N-PAWN
INTERNATIONAL, LTD. 1995 LONG TERM INCENTIVE PLAN
Upon the Merger, Holdings will succeed to the Amended Cash-N-Pawn
International, Ltd. 1995 Long Term Incentive Plan (the "CNP Plan"). U.S. Pawn
has agreed that its shares of Common Stock will be substituted, share for share,
for shares of Cash-N-Pawn common stock issuable pursuant to the CNP Plan. In May
1999, the U.S. Pawn Board approved the adoption of the CNP Plan and the issuance
of U.S. Pawn Common Stock pursuant to the CNP Plan in lieu of the issuance of
Cash-N-Pawn common stock.
The CNP Plan for key employees and directors provides for the reservation
of 250,000 shares of Cash-N-Pawn common stock to be issued pursuant to awards
granted thereunder. An amendment to increase the number of shares from 210,000
to 250,000 was approved by the Board of Directors of Cash-N-Pawn as of December
31, 1998, subject to approval by the Cash-N-Pawn shareholders.
The CNP Plan is administered by the Compensation Committee of the
Cash-N-Pawn Board of Directors (the "Committee"). Key employees of Cash-N-Pawn
are eligible to receive awards of options to purchase common stock, stock
appreciation rights, restricted stock of Cash-N-Pawn , or performance awards, or
any combination thereof, pursuant to the CNP Plan. The Committee has the
discretion to select eligible employees to whom awards will be granted and
establish the type, price, amount, size and terms of the awards, subject in all
cases to the provisions of the CNP Plan and the applicable provisions of the
Internal Revenue Code of 1986, as amended.
Options may be inventive stock options qualified under Section 422 of the
Code ("Incentive Stock Options"), options not so qualified ("Nonqualified Stock
Options") or a combination of both. The exercise price of an Incentive Stock
Option cannot be less than 100% of the fair market value of the common stock on
the date the option is granted, except that if the optionee owns 10% or more of
the voting rights of all of Cash-N-Pawn's stock, the exercise price of an
Incentive Stock Option cannot be less than 110% of the fair market value of the
common stock on the date the Option is granted.
Options to purchase 242,350 shares of Cash-N-Pawn common stock have been
granted at prices between $2.00 and $3.00 per share. Such options expire if
unexercised between December 31, 2005 and December 31, 2008, or earlier upon
termination of employment with Cash-N-Pawn. No options have been exercised. As
part of the shares granted under the CNP Plan, Jack Hartsoe has been granted
options to purchase 36,000 shares at an exercise price of $3.00 per share and
options to purchase 50,000 shares subject to the closing of the Merger, at the
greater of the value of Cash-N- Pawn Common Stock on the closing date of the
Merger or $2.00 per share; and Alan Cross has been granted options to purchase
60,000 shares at $3.00 per share and 10,000 shares at $2.00 per share.
66
<PAGE>
A condition to the Merger is that the CNP Plan be amended to provide that
such options shall be exercised for an equal number of shares of registered U.S.
Pawn Common Stock. After the Effective Date of the Merger, such options will be
exercisable at a per share price equal to the greater of $2.375 or the closing
price of U.S. Pawn Common Stock on the closing date. All other terms and
conditions will remain substantially the same.
In order to assure that the CNP Plan is treated as an incentive stock
option plan, U.S. Pawn shareholders must adopt the CNP Plan. Accordingly, U.S.
Pawn's Board of Directors unanimously recommends a vote "FOR" the approval of
the CNP Plan, as amended, effective upon the Merger.
DESCRIPTION OF CAPITAL STOCK OF U.S. PAWN
Authorized and Outstanding Capital Stock
- - ----------------------------------------
U.S. Pawn's Articles of Incorporation authorize the Board of Directors of
U.S. Pawn to issue 30,000,000 shares of Common Stock, no par value per share,
and 1,000,000 shares of Preferred Stock, par value $10.00 per share, in one or
more series or classes and to determine the rights, powers, preferences,
limitations and restrictions of such series or class. The Board of Directors has
designated 37,800 shares of Preferred Stock as Series A Redeemable Preferred
Stock, the terms of which are discussed below. In connection with the Merger,
the Company has authorized a Series B Convertible Preferred Stock which may be
issued as partial Merger Consideration. U.S. Pawn will file a Certificate of
Designation describing the terms and number of shares of Series B Convertible
Preferred Stock, some of which terms are discussed below.
Common Stock
- - ------------
Under the Articles of Incorporation, holders of Common Stock are entitled
to receive such dividends as may be legally declared by the Board of Directors.
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, including the
election of directors. There is no right to cumulate votes in the election of
directors. Holders of Common Stock have no preemptive or redemption rights and
have no right to convert their Common Stock into any other securities. Upon
liquidation, dissolution or winding up of U.S. Pawn, holders of Common Stock
will be entitled to share ratably in the net assets of U.S. Pawn available for
distribution to common shareholders. The rights of the holders of the Common
Stock are subject to the rights of certain classes of Preferred Stock (discussed
below) and such other rights as the Board of Directors may hereafter confer on
the holders of Preferred Stock; accordingly such rights conferred on holders of
any additional shares of Preferred Stock that may be issued in the future under
the Articles of Incorporation may adversely affect the rights of holders of the
Common Stock. All of the outstanding shares of Common Stock are fully paid and
non-assessable. At _______, 1999, there were 3,686,285 shares of Common Stock
outstanding.
67
<PAGE>
Preferred Stock
- - ---------------
The Preferred Stock may, without action by the shareholders of U.S. Pawn,
be issued by the Board of Directors from time to time, in one or more series for
such consideration and with such relative rights, privileges and preferences as
the Board may determine. Accordingly, the Board has the power to fix the
dividend rate and to establish the provisions, if any, relating to voting
rights, redemption rate, sinking fund, liquidation preferences and conversion
rights for any series of Preferred Stock issued in the future.
Series A Redeemable Preferred Stock. On December 18, 1988, the Board of
Directors approved the issuance of 37,800 shares of its $10.00 par value Series
A Redeemable Preferred Stock of U.S. Pawn (the "Series A Preferred"). Holders of
Series A Preferred are entitled to receive dividends of 9.5% per annum on the
par value. Dividends are cumulative from the date of issue. The Series A
Preferred is redeemable for $10.00 per share at the option of U.S. Pawn at any
time, in whole or in part, for cash on at least 30 days notice. The holders of
the Series A Preferred have no voting rights except as otherwise required by the
Colorado Business Corporation Act (the"Act") and applicable law and have no
preemptive or other rights to subscribe for any other shares or securities.
Series B Convertible Preferred Stock. As part consideration for the Merger,
U.S. Pawn, depending upon the final make-up of the consideration for the Merger,
may issue shares of its $10.00 par value Series B Convertible Preferred Stock
("Series B Preferred Stock"). The holders of the Series B Preferred Stock, if
any, will not be entitled to vote with the holders of Common Stock except as
otherwise required by the Act and applicable law. The holders will be entitled
to receive quarterly dividends in cash at the rate of 7% per annum on the par
value of the Series B Preferred Stock. The value of each share of Series B
Preferred Stock (calculated as its par value plus any accrued but unpaid
dividends, the "Preferred Stock Value") will be convertible into Common Stock at
any time at the holders' option at $4.00 per share of Common Stock for five
years following the Effective Date, and at $2.00 per share of Common Stock
thereafter, subject to certain restrictions and adjustments. U.S. Pawn may
require the holders of Series B Preferred Stock to convert the Series B
Preferred Stock into Common Stock at the applicable conversion rate if the
closing price of the Common Stock equals or exceeds $4.50 per share for 90
consecutive days. Upon mandatory conversion, U.S. Pawn has agreed to register
the converted shares of U.S. Pawn Common Stock under the Securities Act of 1933,
as amended (the "Act"), so that such shares are freely tradeable unless such
shares may be sold pursuant to Rule 144 under the Act. U.S. Pawn may redeem the
Series B Preferred Stock at the Preferred Stock Value at any time after two
years from the Effective Date upon at least 30 days notice. Shares are
convertible prior to such redemption. No cash dividends or distributions may be
made on any shares of U.S. Pawn capital stock until all dividend payments on the
Series B Preferred Stock have been made. Upon liquidation, the Preferred Stock
Value on the Series B Preferred Stock will be paid before payments on any other
capital stock of U.S. Pawn are made.
.
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<PAGE>
The terms of the Series B Preferred Stock are attached as Exhibit B to the
Agreement.
Common Stock Purchase Warrants
- - ------------------------------
Note Warrants. At ________, 1999 there were 9,000 common stock purchase
warrants outstanding ("Note Warrants"). Each Note Warrant entitles the holder to
purchase one share of Common Stock at $4.00 per share until January 1, 2000.
Note Warrants may be redeemed, in whole or in part, at the option of U.S. Pawn,
upon 30 days notice, at a redemption price equal to $0.01 per Note Warrant at
any time if the closing price of U.S. Pawn's Common Stock on the Nasdaq SmallCap
Market averages at least $6.00 per share for 20 consecutive trading days.
Exchange of Cash-N-Pawn Warrants. As part of the Merger, outstanding
warrants for Cash- N-Pawn's common stock (up to a maximum of 49,090 shares) will
be exchanged for similar warrants to purchase U.S. Pawn's Common Stock at an
exercise price which will be the greater of the closing price of U.S. Pawn's
Common Stock on the Effective Date of the Merger and $2.375 per share. The
warrants will expire between October 16, 2000 and October 16, 2001.
Options
- - -------
Incentive Stock Option Plan. In 1988, U.S. Pawn established an Incentive
Stock Option Plan (the "Plan") for the benefit of the Company's employees. The
terms of the Plan provide that U.S. Pawn is authorized to grant options to
purchase shares of Common Stock to selected employees including officers and
directors upon the unanimous consent of all of U.S. Pawn's directors. U.S. Pawn
selects the optionees and determines the terms and conditions of the stock
option grant. However, the purchase price to be paid by the optionees for the
option shares is not less than the fair market value of the shares on the date
of the grant. Employees owing more than 10% of the outstanding shares of any
class of securities of U.S. Pawn must be granted options at a purchase price of
at least 110% of the fair market value of the shares on the ate of the grant. No
option can be exercised for a period of twelve months following the date of
grant, and the employee must exercise options during employment or within 30
days of termination of employment. U.S. Pawn has registered the shares
underlying the options under the Securities Act of 1933, as amended, so that the
shares are freely tradeable when issued. The options are granted for a term of
six years, during such term, may be exercised 33.3% after one year and an
additional 33.3% during each of the succeeding two years. At total of 125,000
shares of U.S. Pawn's authorized but unissued Common Stock had been reserved for
possible issuance pursuant to the Plan. On March 25, 1995, U.S. Pawn's Board of
Directors increased the number of shares of its authorized but unissued Common
Stock reserved for possible issuance pursuant to the Plan to 275,000 shares. On
July 25, 1995, U.S. Pawn registered the increase in shares reserved for possible
issuance pursuant to the Plan. As of ____, 1999, options totaling 398,040 shares
have been issued under the Plan, exercisable at $0.68 to $5.12 per share,
options totaling 106,999 shares have been exercised at $0.68 to $2.56 per share
and options totaling 115,999 have expired, leaving options totaling 175,042
shares outstanding.
69
<PAGE>
1995 Directors' Stock Option Plan. In 1995, U.S. Pawn established the 1995
Directors' Stock Option Plan (the "Directors' Plan") which was approved by the
shareholders in June 1996. On July 21, 1995, each director then serving was
granted options to purchase up to 15,000 shares of U.S. Pawn Common stock in
equal installments over a three year period beginning September 30, 1995 at
prices not less than the fair market value of the option shares on the date of
grant and exercisable for no more than ten years from date of grant. Any
director owning more than 10% of the total combined voting power of all classes
of stock of U.S. Pawn must be granted options at a purchase price of at least
110% of the fair value of the option shares on the date of grant. Each
installment granted to each director was subject to further limitation based
upon U.S. Pawn achieving certain percentages of after tax net income to total
revenues for the three fiscal years ending September 30, 1995, and December 31,
1996 and 1997. For the years ended September 30, 1995 and December 31, 1996 and
1997, each director participating in this arrangement has been issued options to
purchase a total of 8,000 shares of U.S. Pawn's Common Stock at $1.70 per share
exercisable any time until December 28, 2005. On October 29, 1997, Messrs.
Honigsfeld and Skidell were granted an option to purchase 12,500 Common Shares
each exercisable at $3.24 per share until October 29, 2007 in consideration of
their appointment to the Board. Effective August 13, 1998, Mr. Murphy was
granted an option to purchase 12,500 shares exercisable at $2.39 per share until
August 13, 2008. On July 1, 1999, Messrs. Agron and Skidell were granted options
to purchase 10,000 shares each and Mr. Murphy was granted an option to purchase
5,000 shares all of which options are exercisable at $2.63 per share until July
1, 2009. As of _______, 1999, options totaling 127,500 shares have been
exercised at $1.70 per share and options totaling 54,500 shares have expired,
leaving options totaling 49,000 shares outstanding.
1996 Consultant's Stock Option Plan. In 1996, U.S. Pawn adopted the 1996
Consultant's Stock Option Plan (the "Consultants Plan") under which 500,000
shares of U.S. Pawn's Common Stock have been reserved for issuance at prices not
less than 75% of the fair market value of the option on the date of grant. On
February 7, 1996, U.S. Pawn registered all shares reserved under the Consultant
Plan. As of _________, 1999, options totaling 475,000 shares have been issued
under the Consultant's Plan, exercisable at $1.38 to $3.50 per share, options
totaling 300,000 shares have been exercised at $1.50 to $3.50 per share, leaving
options totaling 175,000 shares outstanding.
Conversion of Cash-N-Pawn Options. As part of the Merger and as more fully
discussed as Proposal Three of this Proxy, outstanding options for Cash-N-Pawn's
common stock (up to a maximum of 242,350 shares) issued under the CNP Plan will
be converted to similar options to purchase U.S. Pawn's Common Stock at an
exercise price which will be the greater of the closing of U.S. Pawn's Common
Stock on the Effective Date of the Merger and $2.375 per share. The options will
expire on various dates ranging from December 31, 2005 to December 31, 2008. The
CNP Plan will be amended to provide that the 250,000 shares authorized under
that plan will be converted to 250,000 shares of U.S. Pawn Common Stock. U.S.
Pawn has agreed to register under the Securities Act of 1933, within 30 days
after the closing of Merger, the shares under the CNP Plan so that such shares
of U.S. Pawn Common Stock will be freely tradeable when issued.
70
<PAGE>
OTHER MATTERS
U.S. Pawn's Board of Directors knows of no other matters to be presented
for action at the Meeting. As stated in the accompanying proxy card, if any
other business should come before the Meeting, the proxy has discretionary
authority to vote the shares according to his best judgment, including, without
limitation, a motion to adjourn or postpone the Meeting to another time or place
for the purpose of soliciting additional proxies in order to approve the
Agreement or otherwise.
SHAREHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING OF
SHAREHOLDERS
U.S. Pawn anticipates that its 2000 Annual Meeting will be held in July
2000. Therefore, proposals of shareholders of U.S. Pawn intended to be presented
at the 2000 Annual Meeting must be received by U.S. Pawn not later than January
31, 2000 to be considered for inclusion in U.S. Pawn's proxy statement and form
of proxy relating to that meeting.
AVAILABLE INFORMATION
U.S. Pawn is subject to the informational requirements of the Exchange Act
and, in accordance therewith, is required to file reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and the
Commission's regional offices at Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of the reports, proxy statements and other information
can be obtained from the Public Reference Section of the Commission, Washington,
D.C. 20549, at prescribed rates. The Commission maintains a Web site on the
Internet at http://www.sec.gov that contains reports, proxies, information
statements, and registration statements and other information filed with the
Commission through the EDGAR system. The Common Stock of U.S. Pawn is traded on
the Nasdaq SmallCap Market (symbol "USPN") and such reports, proxy statements
and other information concerning U.S. Pawn also can be inspected at the offices
of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
By order of the Board of Directors
Charles C. Van Gundy
Chief Executive Officer
September ____, 1999
71
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
U.S. PAWN, INC.
TO BE HELD SEPTEMBER __, 1999
The Undersigned hereby appoints Charles C. Van Gundy as the lawful agent
and Proxy of the undersigned (with all the powers the undersigned would posses
if personally present, including full power of substitution), and hereby
authorizes him to represent and to vote, as designated below, all the shares of
Common Stock of U.S. Pawn, Inc. held of record by the undersigned on September
___, 1999, at the Special Meeting of Shareholders to be held September ___,
1999, or any adjournment or postponement thereof.
1. APPROVAL AND ADOPTION OF THE AGREEMENT AND PLAN OF MERGER BY AND AMONG
U.S. PAWN, INC., U.S. PAWN CNP HOLDINGS, INC. AND CASH-N-PAWN
INTERNATIONAL, LTD.
FOR _____ AGAINST _____ ABSTAIN _____
2. ELECTION OF DIRECTORS
_______ FOR the election as a director of all nominees listed below
(except as marked to the contrary below).
_______ WITHHOLD AUTHORITY to vote for all nominees listed below.
NOMINEES: Jack D. Hartsoe and Stanford M. Baratz
INSTRUCTION: To withhold authority to vote for individual nominees, write their
names in the space provided below.
3. APPROVAL OF THE ADOPTION OF THE AMENDED CASH-N-PAWN INTERNATIONAL, LTD
1995 LONG TERM INCENTIVE PLAN
FOR _____ AGAINST _____ ABSTAIN _____
It is understood that when properly executed, this proxy will be voted in
the manner directed herein by the undersigned shareholder. WHERE NO CHOICE IS
SPECIFIED BY THE SHAREHOLDER THE PROXY WILL BE VOTED FOR THE PROPOSALS SET FORTH
IN 1, 2 AND 3 ABOVE.
<PAGE>
The undersigned hereby revokes all previous proxies relating to the shares
covered hereby and confirms all that said Proxy may do by virtue hereof.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated:______________ ______________________________
Signature
PLEASE MARK, SIGN DATE
AND RETURN THE PROXY
CARD PROMPTLY USING THE
ENCLOSED ENVELOPE
______________________________
Signature, if held jointly
PLEASE CHECK THIS BOX IF YOU INTEND TO BE PRESENT AT THE ANNUAL MEETING OF
SHAREHOLDERS _____
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Report...............................................F-2
Financial Statements
Consolidated Balance Sheets.........................................F-3
Consolidated Statements of Operations...............................F-4
Consolidated Statement of Changes in Stockholders' Equity...........F-5
Consolidated Statements of Cash Flows...............................F-6
Notes to Consolidated Financial Statements.................................F-7
Cash-N-Pawn, International, Ltd.
Independent Auditors' Report...............................................F-23
Financial Statements
Consolidated Balance Sheets.........................................F-24
Consolidated Statements of Operations...............................F-25
Consolidated Statement of Changes in Stockholders' Equity...........F-26
Consolidated Statements of Cash Flows...............................F-27
Notes to Consolidated Financial Statements.................................F-28
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
U.S. Pawn, Inc. and Subsidiaries
Westminster, Colorado
We have audited the accompanying consolidated balance sheets of U.S. Pawn, Inc.
and Subsidiaries as of December 31, 1997 and 1998, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Pawn, Inc. and
Subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
Ehrhardt Keefe Steiner & Hottman PC
February 26, 1999
Denver, Colorado
F - 2
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, March 31,
1997 1998 1999
---- ---- ----
Assets (Unaudited)
------
Current assets
<S> <C> <C> <C>
Cash $ 791,000 $ 831,000 $ 1,041,000
Service charges receivable 534,000 371,000 336,000
Pawn loans 3,711,000 2,750,000 2,591,000
Accounts receivable, net 18,000 28,000 14,000
Income tax refund receivable 356,000 162,000 133,000
Deferred income taxes 94,000 81,000 73,000
Inventory, net 2,343,000 1,789,000 1,711,000
Prepaid expenses and other 124,000 134,000 226,000
----------- ----------- -----------
Total current assets 7,971,000 6,146,000 6,125,000
Property and equipment, net 1,808,000 1,574,000 1,537,000
Intangible assets, net 801,000 328,000 318,000
Other assets 20,000 20,000 20,000
----------- ----------- -----------
$10,600,000 $ 8,068,000 $ 8,000,000
=========== =========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Line of credit $ 637,000 $ -- $ --
Accounts payable 48,000 54,000 70,000
Customer layaway deposits 70,000 33,000 34,000
Accrued expenses 494,000 408,000 337,000
Current portion of notes payable - related parties 905,000 136,000 85,000
Current portion of notes payable 669,000 108,000 85,000
----------- ----------- -----------
Total current liabilities 2,823,000 739,000 611,000
Notes payable - related parties, less current portion 161,000 -- --
Notes payable, less current portion 731,000 665,000 664,000
Deferred income taxes 28,000 8,000 1,000
----------- ----------- -----------
Total liabilities 3,743,000 1,412,000 1,276,000
----------- ----------- -----------
Commitments and contingencies
Stockholders' equity
Redeemable preferred stock, 9.5%, $10 par value,
1,000,000 shares authorized; 37,800 shares
issued and outstanding 378,000 378,000 378,000
Common stock, no par value, 30,000,000 shares
authorized; 3,685,410 and 3,772,779 shares
issued and outstanding 5,492,000 5,462,000 5,462,000
Retained earnings 987,000 816,000 884,000
----------- ----------- -----------
Total stockholders' equity 6,857,000 6,656,000 6,724,000
----------- ----------- -----------
$10,600,000 $ 8,068,000 $ 8,000,000
=========== =========== ===========
See notes to consolidated financial statements.
F - 3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year Ended Three Months Ended
December 31, March 31,
---------------------------- ----------------------------
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited)
Revenues
<S> <C> <C> <C> <C>
Sales $ 7,058,000 $ 6,217,000 $ 1,687,000 $ 1,307,000
Pawn service charges 5,640,000 4,785,000 1,342,000 1,020,000
Other income 46,000 66,000 14,000 21,000
------------ ------------ ------------ ------------
Total revenues 12,744,000 11,068,000 3,043,000 2,348,000
------------ ------------ ------------ ------------
Cost of sales and expenses
Cost of sales 5,655,000 5,313,000 1,374,000 1,026,000
Operations 4,125,000 3,703,000 971,000 852,000
Administration 1,751,000 1,146,000 281,000 245,000
Depreciation and amortization 568,000 534,000 96,000 85,000
------------ ------------ ------------ ------------
Total cost of sales and expenses 12,099,000 10,696,000 2,722,000 2,208,000
------------ ------------ ------------ ------------
Income from operations 645,000 372,000 321,000 140,000
Other income (expenses)
Interest (208,000) (183,000) (34,000) (28,000)
Interest, related parties (143,000) (103,000) (70,000) (4,000)
Loss on settlement of contract (220,000) -- -- --
Loss on disposal of assets (39,000) (25,000) -- --
------------ ------------ ------------ ------------
Total other income (expenses) (610,000) (311,000) (104,000) (32,000)
Income before income taxes and minority interest 35,000 61,000 217,000 108,000
Income tax expense 49,000 196,000 69,000 31,000
------------ ------------ ------------ ------------
Income (loss) before minority interest (14,000) (135,000) 148,000 77,000
Minority interest 9,000 -- -- --
------------ ------------ ------------ ------------
Net income (loss) (5,000) (135,000) 148,000 77,000
Dividends on preferred stock (36,000) (36,000) (9,000) (9,000)
------------ ------------ ------------ ------------
Net income (loss) available for common stockholders $ (41,000) $ (171,000) $ 139,000 $ 68,000
============ ============ ============ ============
Earnings (loss) per common share - basic $ (.01) $ (.05) $ .04 $ .02
============ ============ ============ ============
Earnings (loss) per common share - diluted $ (.01) $ (.05) $ .04 $ .02
============ ============ ============ ============
Weighted average shares outstanding - basic 3,730,715 3,782,844 3,772,779 3,685,410
============ ============ ============ ============
Weighted average shares outstanding - diluted 3,730,715 3,782,844 3,878,686 3,717,029
============ ============ ============ ============
See notes to consolidated financial statements.
F - 4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Years Ended December 31, 1998 and 1997 and the
Three Months Ended March 31, 1999 (Unaudited)
Preferred Stock Common Stock Retained
Shares Amount Shares Amount Earnings Total
------ ------ ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 37,800 $ 378,000 3,496,489 $ 4,859,000 $ 1,028,000 $ 6,265,000
Exercise of common stock options -- -- 200,624 424,000 -- 424,000
Stock issued for acquisition -- -- 75,666 275,000 -- 275,000
Tax effect of options exercised -- -- -- 225,000 -- 225,000
Repurchase of options -- -- -- (267,000) -- (267,000)
Option offering costs -- -- -- (24,000) -- (24,000)
Dividends on preferred stock -- -- -- -- (36,000) (36,000)
Net loss -- -- -- -- (5,000) (5,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 37,800 $ 378,000 3,772,779 $ 5,492,000 $ 987,000 $ 6,857,000
Exercise of common stock options -- -- 8,875 16,000 -- 16,000
Exercise of common stock warrants -- -- 50,500 151,000 -- 151,000
Repurchase of common stock -- -- (146,744) (196,000) -- (196,000)
Stock issuance costs -- -- -- (1,000) -- (1,000)
Dividends on preferred stock -- -- -- -- (36,000) (36,000)
Net loss -- -- -- -- (135,000) (135,000)
----------- ----------- ----------- ----------- ----------- -----------
Balance at December 31, 1998 37,800 $ 378,000 3,685,410 $ 5,462,000 $ 816,000 $ 6,656,000
Dividends on preferred stock (unaudited) -- -- -- -- (9,000) (9,000)
Net income (unaudited) -- -- -- -- 77,000 77,000
----------- ----------- ----------- ----------- ----------- -----------
Balance at March 31, 1999 (unaudited) 37,800 $ 378,000 3,685,410 $ 5,462,000 $ 884,000 $ 6,724,000
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F - 5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year Ended Three Months Ended
December 31, March 31,
---------------------------- ----------------------------
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited)
Cash flows from operating activities
<S> <C> <C> <C> <C>
Net income (loss) $ (5,000) $ (135,000) $ 148,000 $ 77,000
------------ ------------ ------------ ------------
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Loss on disposal of fixed assets 39,000 25,000 -- --
Allowance for inventory obsolescence 214,000 (24,000) 7,000 (3,000)
Accrued interest receivable written off (4,000) -- -- --
Settlement costs 220,000 -- -- --
Depreciation and amortization 568,000 534,000 96,000 85,000
Deferred income taxes (179,000) (7,000) (14,000) 1,000
Minority interest (9,000) -- -- --
Income tax effect of stock options exercised 225,000 -- -- --
Changes in:
Service charges receivable 37,000 76,000 43,000 35,000
Inventory (292,000) 578,000 93,000 81,000
Accounts receivable (37,000) (10,000) -- 14,000
Income taxes receivable (356,000) 194,000 73,000 29,000
Prepaid expenses and other 99,000 (10,000) (62,000) (92,000)
Accounts payable 19,000 6,000 44,000 16,000
Accrued expenses 273,000 (86,000) (92,000) (70,000)
Customer layaway deposits 16,000 (37,000) 7,000 1,000
------------ ------------ ------------ ------------
833,000 1,239,000 195,000 97,000
------------ ------------ ------------ ------------
Net cash provided by operating activities 828,000 1,104,000 343,000 174,000
------------ ------------ ------------ ------------
Cash flows from investing activities
Pawn loans made (11,791,000) (9,644,000) (2,606,000) (2,128,000)
Pawn loans repaid 7,736,000 6,929,000 2,063,000 1,600,000
Pawn loans forfeited 3,893,000 3,371,000 886,000 687,000
Proceeds from sale of equipment 6,000 (9,000) -- --
Purchase of property and equipment (470,000) (68,000) (15,000) (39,000)
Proceeds from sale of pawnshop -- 632,000 -- --
Cash paid for pawn shop acquisitions, net of cash acquired (150,000) -- -- --
Acquisition costs (30,000) -- -- --
Other assets 7,000 -- -- --
Purchase of minority interest in subsidiary (20,000) (15,000) -- --
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities (819,000) 1,196,000 328,000 120,000
------------ ------------ ------------ ------------
Cash flows from financing activities
Net activity on line-of-credit 424,000 (637,000) -- --
Dividends paid (36,000) (36,000) (9,000) (9,000)
Issuance of notes payable and long-term debt 553,000 42,000 -- --
Payments on notes payable and long-term debt (186,000) (669,000) (744,000) (24,000)
Issuance of notes payable-related parties 189,000 10,000 10,000 --
Payments on notes payable-related parties (972,000) (940,000) (58,000) (51,000)
Net proceeds from exercise of options and
warrants, net of offering costs 400,000 166,000 -- --
Repurchase of options and common stock (267,000) (196,000) -- --
------------ ------------ ------------ ------------
Net cash provided (used) by financing activities 105,000 (2,260,000) (801,000) (84,000)
------------ ------------ ------------ ------------
Net increase in cash 114,000 40,000 (130,000) 210,000
Cash, beginning of period 677,000 791,000 791,000 831,000
------------ ------------ ------------ ------------
Cash, end of period $ 791,000 $ 831,000 $ 661,000 $ 1,041,000
============ ============ ============ ============
See notes to consolidated financial statements.
F - 6
</TABLE>
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies
- - --------------------------------------------------------------------
U.S. Pawn, Inc., (the Company) was incorporated in the State of Colorado in
March 1980. The Company is engaged in acquiring, establishing and operating
pawnshops which lend money on the security of pledged tangible personal property
to residents of Colorado, Wyoming, Nevada and Nebraska. In addition, the Company
offers for resale personal property from forfeited loans, as well as merchandise
purchased directly from customers and vendors. As of March 31, 1999, the Company
operated 12 pawnshops in Colorado and 1 pawnshop in Wyoming.
Principles of Consolidation
- - ---------------------------
The Company and its subsidiaries in which it exercises control through majority
ownership are consolidated, and all intercompany accounts and transactions are
eliminated. The acquisitions of subsidiaries have been accounted for using the
purchase method of accounting for business combinations and accordingly, the
results of operations of the acquirees are included in the Company's financial
statements only from the applicable dates of acquisition.
Interim Financial Statements (Unaudited)
- - ----------------------------------------
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position of the Company at March 31, 1999 and
the results of its operations and changes in cash flows for the three months
then ended. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for a full year.
Minority Interest
- - -----------------
The consolidated financial statements of the Company include the assets,
liabilities and equity of Advantage Pawn, Inc. (Advantage) which was owned 100%
by the Company at March 31, 1999 and December 31, 1998, respectively, and which
was owned 94% by the Company at December 31, 1997.
Pawn Loans and Income Recognition
- - ---------------------------------
Pawn loans (loans) are generally made for a period of one to four months with an
automatic extension period (loan term) on the pledge of tangible personal
property. The pawn service charge is calculated as a percentage of the loan
amount based on the size and duration of the loan. Pawn service charges on loans
are recognized on a constant yield basis over the loan term.
F - 7
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- - --------------------------------------------------------------------------------
Pawn Loans and Income Recognition (continued)
- - ---------------------------------------------
If the loan is not repaid, the principal amount loaned plus accrued pawn service
charges become the carrying value (cost) of the forfeited collateral (inventory)
which is recoverable through sales to customers. Accordingly, the Company does
not record loan losses or charge-offs on defaulted loans.
Concentrations of Credit Risk
- - -----------------------------
There are no concentrations of credit risk, except for geographical
concentrations, with respect to pawn loans receivable. Items that are pawned
serve as collateral for the loan to the customer. Generally, 40% - 50% of the
resale value of the item is loaned against the collateral. Therefore, if the
loan forfeits, the Company can recover the loss on the loan by selling the
collateral.
The Company maintains all cash in bank deposit accounts, which at times may
exceed federally insured limits. The Company has not experienced a loss in such
accounts.
Fair Values of Financial Instruments
- - ------------------------------------
Pawn loans are outstanding for a relatively short period, generally 120 days or
less. The rate of pawn service charges bears no relationship to interest rate
market movements. Pawn loans may not be resold to anyone but a licensed
pawnbroker. For these reasons, management believes that the fair value of pawn
loans approximates their carrying value.
The Company's bank credit facilities bear interest at rates which adjust
frequently based on market rate changes. Accordingly, management believes that
the fair value of that debt approximates its carrying value. The fair value of
investor notes payable was estimated based on market values for debt issues with
similar characteristics, or interest rates currently available for debt with
similar terms. Management believes the fair values of those debts approximate
their carrying value.
Customer Layaways
- - -----------------
Interim payments from customers on layaway sales are classified as customer
layaway deposits and subsequently recorded as income during the period in which
the final payment is received or when the deposit is forfeited.
Cash Equivalents
- - ----------------
For purposes of reporting cash flows, the Company considers all funds with
original maturities of three months or less to be cash equivalents.
F - 8
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- - --------------------------------------------------------------------------------
Inventory
- - ---------
Inventory consists of merchandise acquired from forfeited loans, merchandise
purchased directly from the public and new merchandise purchased from vendors.
Inventory is stated at the lower of cost (specific identification) or market.
Property and Equipment
- - ----------------------
Property and equipment are recorded at cost. Depreciation and amortization
expense is generally provided on a straight-line basis using estimated useful
lives of 5-10 years for equipment, 7-15 years for leasehold improvements and
15-39 years for buildings. Depreciation and amortization expense of property and
equipment was $291,000 for each of the years ended December 31, 1997 and 1998
and $71,000 and $75,000 for the three months ended March 31, 1998 and 1999,
respectively.
Intangible Assets
- - -----------------
Intangible assets consist primarily of costs in excess of net assets of
pawnshops acquired and noncompete agreements with the previous owners of
pawnshops acquired. The costs in excess of net assets acquired and the
noncompete agreements are amortized on a straight-line basis over 10 years and
over the term of the agreements of 5 to 10 years, respectively. Recoverability
is reviewed annually or sooner if events or circumstances indicate that the
carrying amount may exceed fair value. Recoverability is then determined by
comparing the undiscounted net cash flows of the assets to which goodwill
applies to the net book value including goodwill of those assets. The analysis
involves significant management judgment to evaluate the capacity of an acquired
business to perform within projections. Amortization expense of intangible
assets for the year ended December 31, 1998 was $243,000, of which $186,000
relates to the write-off of goodwill related to a pawnshop location closed
during 1998, and for the year ended December 31, 1997 was $277,000 of which
$167,000 relates to the write-off of goodwill related to certain pawnshop
locations abandoned and consolidated into other operations during 1997.
Amortization expense for the three months ended March 31, 1998 and 1999 was
$24,000 and $10,000, respectively.
Advertising Costs
- - -----------------
The Company expenses all advertising costs as incurred.
F - 9
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- - --------------------------------------------------------------------------------
Income Taxes
- - ------------
Deferred income taxes are recorded to reflect the tax consequences in future
years of temporary differences between the tax basis of the assets and
liabilities and their financial statement amounts at the end of each reporting
period. Valuation allowances will be established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the current period and the change during the period in
deferred tax assets and liabilities. The deferred tax assets and liabilities
have been netted to reflect the tax impact of temporary differences.
Earnings (Loss) Per Common Share
- - --------------------------------
Basic earnings (loss) per common 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.
Stock Options
- - -------------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25), and related interpretations in accounting
for all stock option plans. Under APB 25, no compensation cost has been
recognized for stock options granted to employees when the option price equals
or exceeds the market price of the underlying common stock on the date of grant.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), requires the Company to provide pro forma information
regarding net income as if compensation cost for the Company's stock option
plans had been determined in accordance with the fair value based method
prescribed in SFAS 123. To provide the required pro forma information, the
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model.
Use of Estimates in the Preparation of Financial Statements
- - -----------------------------------------------------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates and assumptions.
F - 10
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- - --------------------------------------------------------------------------------
Use of Estimates in the Preparation of Financial Statements (continued)
- - -----------------------------------------------------------------------
Management of the Company has determined that a reserve for obsolescence of
inventory is necessary in order to reflect a value for inventory that is not in
excess of net realizable value. Management has calculated an estimate of the net
realizable value of inventory and has recognized an allowance of approximately
$213,000 and $190,000 at December 31, 1997 and 1998, respectively, and $220,000
and $187,000 at March 31, 1998 and 1999, respectively, in the accompanying
financial statements. Actual net realizable value may differ from these results.
During 1997, the Company approved a plan to consolidate operations in Wyoming
and in 1998 close operations in Nebraska. The Company has recognized expenses
totaling $162,000 based upon the estimated costs to terminate leases on these
locations. The balance of the liability at December 31, 1998 was $114,000 and
$96,000 at March 31, 1999. Actual results could differ from these amounts.
Recently Issued Accounting Pronouncements
- - -----------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 addresses the accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedging activities. SFAS
133 is effective for all fiscal quarters of all fiscal years beginning after
June 15, 1999. This statement currently has no impact on the financial
statements of the Company as the Company has no derivative instruments nor
participates in hedging activities.
Reclassifications
- - -----------------
Certain balances in the December 31, 1997 financial statements have been
reclassified to conform to the December 31, 1998 presentation.
Note 2 - Property and Equipment
- - -------------------------------
Property and equipment consisted of the following:
December 31, March 31,
1997 1998 1999
---- ---- ----
Land $ 236,000 $ 236,000 $ 236,000
Buildings 546,000 546,000 546,000
Equipment and vehicles 1,089,000 1,095,000 1,109,000
Leasehold improvements 796,000 835,000 860,000
----------- ----------- -----------
2,667,000 2,712,000 2,751,000
Less accumulated depreciation
and amortization (859,000) (1,138,000) (1,214,000)
----------- ----------- -----------
$ 1,808,000 $ 1,574,000 $ 1,537,000
=========== =========== ===========
F - 11
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 3 - Intangible Assets
- - --------------------------
Intangible assets consisted of the following:
December 31, March 31,
1997 1998 1999
---- ---- ----
Goodwill $ 834,000 $ 603,000 $ 406,000
Acquisition costs 115,000 45,000 45,000
Non-compete agreements 32,000 67,000 67,000
--------- --------- ---------
981,000 715,000 518,000
Less accumulated amortization (180,000) (387,000) (200,000)
--------- --------- ---------
$ 801,000 $ 328,000 $ 318,000
========= ========= =========
Note 4 - Accrued Expenses
- - -------------------------
Accrued expenses consisted of the following:
December 31, March 31,
1997 1998 1999
---- ---- ----
Accrued salaries and payroll taxes $160,000 $132,000 $155,000
Accrued property and sales taxes 95,000 92,000 36,000
Accrued interest-related parties 11,000 2,000 1,000
Accrued lease abandonment costs 137,000 114,000 96,000
Other 91,000 68,000 49,000
-------- -------- --------
$494,000 $408,000 $337,000
======== ======== ========
Note 5 - Line-of-Credit
- - -----------------------
The Company had an agreement with a bank for a line of credit of $1,000,000
which matured in April 1998; collateralized by substantially all assets of the
Company. The Company did not renew this agreement upon maturity. The outstanding
balance at December 31, 1997 was $637,000.
F - 12
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 6 - Notes Payable - Related Parties
- - ----------------------------------------
The Company has notes payable to related parties, who are stockholders, family
members of stockholders or employees, totaling $1,066,000 and $136,000 as of
December 31, 1997 and 1998, respectively, and $85,000 as of March 31, 1999.
These notes have interest rates of 10% to 15% per annum, and are unsecured.
Interest is due monthly. As a condition of several note payable agreements, the
Company issued warrants to purchase 9,000 shares of the Company's common stock,
exercisable at $4.00 per share through 1999. A deferred charge of $10,000 has
been recorded for the value of the warrants and is being amortized over the term
of the loan, which is three years. Amortization of $3,000 was expensed for each
of the years ended December 31, 1997 and 1998, respectively and $750 as of March
31, 1998 and 1999.
There were no future maturities of notes payable, related parties at December
31, 1998 as all remaining related party debt is due during 1999.
Notes 7 - Notes Payable
- - -----------------------
Notes payable consists of the following:
December 31, March 31,
1997 1998 1999
---- ---- ----
Note payable to a finance company due
November 1999; interest rate of 10% per
annum; principal and interest of $8,100
due monthly; collateralized by computer
equipment. The note allows for up to
$250,000 in principal. $ 147,000 $ 62,000 $ 39,000
Note payable to an individual due April
2002; interest rate of 15% per annum due
monthly; unsecured. 450,000 450,000 450,000
Note payable to an individual; due
August 2002; interest rate of 12% per
annum; principal and interest of $2,547
due monthly; collateralized by real
estate. 224,000 219,000 218,000
Notes payable to various individuals;
due October 31, 1999, interest rate of
10% per annum, due monthly; unsecured. 579,000 42,000 42,000
------- ------ ------
1,400,000 773,000 749,000
Less current portion (669,000) (108,000) (85,000)
-------- -------- -------
$ 731,000 $ 665,000 $ 664,000
========= ========= =========
F - 13
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Notes 7 - Notes Payable (continued)
- - -----------------------------------
Maturities of notes payable are as follows:
Year Ending December 31,
- - ------------------------
1999 $ 108,000
2000 5,000
2001 6,000
2002 654,000
2003 --
---------
$ 773,000
=========
Note 8 - Commitments and Contingencies
- - --------------------------------------
Operating Leases
- - ----------------
The Company leases a pawnshop facility from a stockholder and leases its other
pawnshop facilities from unrelated parties under operating leases expiring in
various years through 2006. Utilities, insurance and taxes are paid by the
Company for all of the pawnshop facilities. The majority of the operating leases
provide for an option to renew for one additional period of five years at the
fair market value at the time of renewal.
Future minimum lease payments under noncancelable leases are as follows:
Related Non-Related
Year Ending December 31, Party Parties Total
- - ------------------------ ----- ------- -----
1999 $ 36,000 $ 431,000 $ 467,000
2000 36,000 353,000 389,000
2001 37,000 307,000 344,000
2002 39,000 191,000 230,000
2003 19,000 93,000 112,000
Thereafter -- 187,000 187,000
--------- ----------- -----------
$ 167,000 $ 1,562,000 $ 1,729,000
========= =========== ===========
Total future minimum lease payments above do not include a reduction of $140,000
for noncancelable sublease payments.
F - 14
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 8 - Commitments and Contingencies (continued)
- - --------------------------------------------------
Operating Leases (continued)
- - ----------------------------
Rent expense was $644,000 and $568,000, for the years ended December 31, 1997
and 1998, respectively and $148,000 and $126,000 for the three months ended
March 31, 1998 and 1999, respectively. Included in rent expense were amounts
paid to a stockholder/officer of $70,000 and $36,000 for the year ended December
31, 1997 and 1998, respectively, and $9,000 for the three months ended March 31,
1998 and 1999.
Litigation
- - ----------
The Company is a party to a number of lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material adverse effect on the Company's financial position.
Insurance
- - ---------
For the most part, the Company does not maintain theft insurance for personal
property losses as management believes that the risk of loss does not justify
the premium cost of coverage. Insurance is provided to insure against casualty
loss, employee dishonesty and general business liability claims. Costs resulting
from uninsured property losses will be charged against income upon occurrence.
No material amounts for uninsured property losses were charged to operations for
any of the periods presented.
Employment Agreements
- - ---------------------
The Company has entered into employment agreements with two officers of the
Company. The agreements include annual salary requirements which total $225,000
and have incentive compensation provisions. The agreements expire in December
2000.
Note 9 - Income Taxes
- - ---------------------
The components of deferred tax assets and (liabilities) are as follows:
December 31, March 31,
1997 1998 1999
---- ---- ----
Total deferred tax assets $ 94,000 $ 81,000 $ 73,000
Total deferred tax (liabilities) (28,000) (8,000) (1,000)
-------- -------- --------
Net deferred tax assets (liabilities) $ 66,000 $ 73,000 $ 72,000
======== ======== ========
F - 15
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 9 - Income Taxes (continued)
- - ---------------------------------
The tax effects of temporary differences that give rise to deferred tax assets
and (liabilities) are as follows:
December 31, March 31,
Temporary differences: 1997 1998 1999
---- ---- ----
Abandonment of leases $ 51,000 $ 43,000 $ 36,000
Change in tax accounting method
for service charges receivable (111,000) (8,000) (8,000)
Property and equipment 85,000 (1,000) 8,000
Inventory 29,000 25,000 23,000
Other 12,000 14,000 13,000
--------- --------- ---------
$ 66,000 $ 73,000 $ 72,000
========= ========= =========
Income tax expense (benefit) consists of the following:
Year Ended Three Months Ended
December 31, March 31,
------------------------- -------------------------
1997 1998 1998 1999
---- ---- ---- ----
Current $ 228,000 $ 203,000 $ 83,000 $ 32,000
Deferred (179,000) (7,000) (14,000) (1,000)
--------- --------- --------- ---------
$ 49,000 $ 196,000 $ 69,000 $ 31,000
========= ========= ========= =========
The current tax benefit for 1997 associated with the exercise of stock options
reduced taxes currently payable by approximately $225,000. Such benefit is
reflected as additional paid in capital.
The following is a reconciliation of the amount of income tax expense that would
result from applying the statutory federal income tax rates to pre-tax income
and the reported amount of income tax expense:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
------------------- --------------------
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax expense at federal statutory rates $ 15,000 $ 21,000 $ 74,000 $ 37,000
Goodwill amortization 14,000 20,000 4,000 1,000
Non deductible items 3,000 6,000 1,000 1,000
State tax, net of federal benefit 1,000 17,000 7,000 4,000
Sale of pawnshop -- 119,000 -- --
Other 16,000 13,000 (17,000) (12,000)
-------- -------- -------- --------
$ 49,000 $196,000 $ 69,000 $ 31,000
======== ======== ======== ========
F - 16
</TABLE>
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 10 - Redeemable Preferred Stock
- - ------------------------------------
The Company has authorized 1,000,000 shares of $10 par value, redeemable
preferred stock. The preferred stock is redeemable only at the Company's option
at par value. The preferred stock is nonvoting, cumulative, pays a monthly
dividend at an annual rate of 9.5% and has the same rights in the event of
liquidation as the common stockholders.
Note 11 - Common Stock, Options and Warrants
- - --------------------------------------------
Warrants
- - --------
In connection with a July 1993 private placement offering, the Company issued to
an underwriter warrants to purchase up to 125,000 shares of common stock until
July 31, 1998 at an exercise price of $3.00 per share. In July 1998, 50,500
warrants were exercised and the remaining warrants expired.
In connection with $300,000 of notes payable issued during 1996, the Company
issued warrants to purchase up to 9,000 shares of the Company's common stock for
an exercise price of $4.00 per share through 1999. No warrants have been
exercised as of December 31, 1998.
A summary of the status of the Company's warrants follows:
Exercise
Price Per
Warrants Share
-------- -----
Outstanding and exercisable, December 31, 1997 134,000 3.07
Warrants granted -- --
Warrants exercised (50,500) 3.00
Warrants cancelled (74,500) 3.00
-------- -----
Outstanding and exercisable, December 31, 1998 9,000 4.00
Warrants granted -- --
Warrants exercised -- --
Warrants cancelled -- --
-------- -----
Outstanding and exercisable, March 31, 1999 (unaudited) 9,000 $ 4.00
======== ======
F - 17
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 11 - Common Stock, Options and Warrants (continued)
- - --------------------------------------------------------
Stock-Based Compensation Plans
- - ------------------------------
The Company's stock option plans provide for the granting of stock options to
employees, key employees, consultants and directors. Under the plans, the
Company has reserved 1,452,500 shares of common stock for issuance at prices not
less than the fair market value at the date of grant. For options granted to an
employee owning shares of common stock possessing more than 10% of the total
combined voting power of all classes of the Company's common stock, the option
price shall not be less than 110% of the fair market value of the common stock,
on the date of grant. The maximum term of the options is ten years and all plans
are fully vested at December 31, 1998.
A summary of the status of the Company's stock option plans follows:
Exercise
Price Per
Options Share
------- -----
Outstanding and exercisable, December 31, 1997 324,500 2.71
Options granted 40,000 3.50
Options exercised (8,875) 1.76
Options cancelled (59,083) 1.70
-------- -----
Outstanding and exercisable, December 31, 1998 296,542 2.89
Options granted 130,000 1.55
Options exercised -- --
Options cancelled -- --
-------- -----
Outstanding and exercisable, March 31, 1999 (unaudited) 426,542 $2.48
======== =====
Options available for future grant 88,709
========
Weighted average fair value of options granted during
the year ended December 31, 1998 $ .88
========
Weighted average fair value of options granted during
the three months ended March 31, 1999 (unaudited) $ .39
========
F - 18
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 11 - Common Stock, Options and Warrants (continued)
- - --------------------------------------------------------
Stock-Based Compensation Plans (continued)
- - ------------------------------------------
The following information summarizes stock options outstanding and exercisable
at March 31, 1999:
Number of
Options
Outstanding Weighted
and Average Weighted
Exercisable Remaining Average
at March 31, Contractual Exercise
Range of exercise prices 1999 Life Price
- - ------------------------ ---- ---- -----
$1.13 to $1.70 156,750 8.82 $ 1.56
$1.87 to $3.24 187,167 6.79 2.60
$3.50 to $5.13 82,625 5.71 3.95
- - -------------- -------- ----- --------
$1.13 to $5.13 426,542 7.33 $ 2.48
============== ========= ===== ========
Had compensation cost for these plans been determined based on their fair value
at the date of grant pursuant to SFAS 123, net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts indicated as follows
(in thousands except for per share data):
<TABLE>
<CAPTION>
December 31, March 31,
1998 1997 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss) - as reported $ (172,000) $ (41,000) $ 68,000
Net income (loss) - pro forma $ (207,000) $ (150,000) $ 17,000
Earnings (loss) per share - basic $ (.05) $ (.01) $ .02
Earnings (loss) per share - diluted $ (.05) $ (.01) $ .02
Earnings (loss) per share - pro forma - basic $ (.05) $ (.04) $ .01
Earnings (loss) per share - pro forma - diluted $ (.05) $ (.04) $ .01
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
December 31, March 31,
1998 1999
---- ----
Expected dividend yield - % - %
Expected stock price volatility 52.05% 45.00%
Risk free interest rate 5.60% 6.00%
Expected life of options 1.5 years 1.5 years
F - 19
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 11 - Common Stock, Options and Warrants (continued)
- - --------------------------------------------------------
Earnings (Loss) Per Share
- - -------------------------
The following table sets forth the computation of earnings (loss) per common
share:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
--------------------------- -----------------------
1997 1998 1998 1999
Numerator: ---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) available for common stockholders $ (41,000) $ (171,000) $ 139,000 $ 68,000
=========== ============ ========== ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares 3,730,715 3,782,844 3,772,779 3,685,410
Effect of dilutive securities:
Stock options and warrants -- -- 105,907 31,619
----------- ------------ ---------- ----------
Denominator for diluted earnings per share -
adjusted weighted average shares and
assumed conversions 3,730,715 3,782,844 3,878,686 3,717,029
=========== ============ ========== ==========
Earnings (loss) per common share - basic $ (.01) $ (.05) $ .04 $ .02
=========== ============ ========== ==========
Earnings (loss) per common shares - diluted $ (.01) $ (.05) $ .04 $ .02
=========== ============ ========== ==========
</TABLE>
Earnings (Loss) Per Share
- - -------------------------
The numerators for earnings (loss) per common share consists of net income
(loss) adjusted only for dividends paid to preferred stockholders.
The Company approved a plan to repurchase up to 500,000 shares of the Company's
common stock through December 31, 1999. During 1998, the Company repurchased
141,500 shares from the open market. In addition, the Company may repurchase up
to 37,800 shares of preferred stock at par value of $10. The Company did not
repurchase any shares for the three months ended March 31, 1999.
Note 12 - Related Party Transactions
- - ------------------------------------
In addition to transactions with related parties discussed throughout the notes
to financial statements, the following related party transactions have occurred:
Certain stockholders/directors of the Company are attorneys who have provided
certain legal services to the Company. Legal fees incurred totaled approximately
$47,000 and $4,000, for the years ended December 31, 1997 and 1998, respectively
and $500 and $1,000 for the three months ended March 31, 1998 and 1999,
respectively. In addition, one such attorney received a finder's fee for
locating an investor who placed a $450,000 note with the Company on April 26,
1997.
F - 20
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 12 - Related Party Transactions (continued)
- - ------------------------------------------------
In October 1997, a stockholder/officer resigned from his position with the
Company. The terms of the resignation agreement between the Company and the
stockholder/officer provided that (i) the Company purchase certain real estate
from the stockholder/officer valued at $332,000 in consideration of the Company
assuming a $224,000 mortgage and the cancellation of amounts due to the Company
from the stockholder of $108,000 and; (ii) redeem for cash options to purchase
223,250 common shares of the Company exercisable by the stockholder/officer for
approximately $267,000.
Note 13 - Acquisition/Divestiture Activity
- - ------------------------------------------
Effective February 1, 1996, the Company acquired 80% of the outstanding stock of
Advantage for an aggregate purchase price of $188,000. During 1997, the Company
acquired an additional 14% of Advantage for an aggregate purchase price of
$37,489. The minority stockholders received $19,615 in cash and a promissory
note of $17,874 of which $0 and $13,405 was outstanding as of December 31, 1998
and 1997, respectively. During 1998, the Company acquired the remaining 6% of
Advantage for $15,000 in cash.
In December 1996, the Company acquired all of the outstanding stock in Bobby's
Pawnshop, Inc. (Bobby's) which operated one pawnshop in Las Vegas, Nevada for an
aggregate purchase price of $700,000. In July 1998, the Company sold most of
these assets for approximately $630,000 in cash. The assets sold included pawn
loans, pawn license, trade fixtures and trade name of Bobby's Pawn Shop, Inc.
The Company's operations in Nevada closed upon the sale of these assets.
In December 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 Bills (Bill's). However, in November 1997, the merger was rescinded
by mutual agreements 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 all of the outstanding common stock of
Pawn Warehouse Outlet, Inc. (Pawn) a pawnshop located in Omaha, Nebraska 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 was recorded as goodwill. The operating results of Pawn
have been included in the Company's consolidated financial statements since the
date of acquisition. Management ceased operations of this location in December
1998 and the remaining assets are being liquidated.
F - 21
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information with Respect to March 31, 1998 and 1999 is Unaudited)
Note 14 - Supplemental Information to Statement of Cash Flows for Noncash
Investing and Financing Activities
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
----------------------- --------------------
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash paid during the period for interest $ 335,000 $ 283,000 $ 100,000 $30,000
========== ========== ========== =======
Cash paid during the period for income taxes $ 338,000 $ -- $ 89,000 $38,000
========== ========== ========== =======
Note issued in acquisition of minority interest $ 18,000 $ -- $ -- $ --
========== ========== ========== =======
</TABLE>
F - 22
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Cash-N-Pawn International, Ltd.
Minneapolis, Minnesota
We have audited the accompanying consolidated balance sheets of Cash-N-Pawn
International, Ltd. and its wholly-owned subsidiaries as of December 31, 1997
and 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cash-N-Pawn International, Ltd. and its wholly-owned subsidiaries as of December
31, 1997 and 1998, and the consolidated results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for pawn service charges and adopted Statement of Position
98-5, Reporting on the Cost of Start-up Activities, in 1998.
February 19, 1999
Minneapolis, Minnesota
F - 23
<PAGE>
<TABLE>
<CAPTION>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, March 31,
1997 1998 1999
---- ---- ----
(Unaudited)
Assets
------
Current assets
<S> <C> <C> <C>
Cash $ 294,845 $ 412,897 $ 234,512
Receivables
Pawn loans 1,231,262 1,269,919 1,213,322
Pawn service charges 441,551 293,534 277,382
Other 11,743 8,070 28,231
Inventories 2,314,553 1,975,339 1,884,837
Prepaid expenses 81,984 80,357 90,970
Deferred income taxes 140,356 86,000 93,800
---------- ---------- ----------
Total current assets 4,516,294 4,126,116 3,823,054
---------- ---------- ----------
Property and equipment, net of depreciation 1,054,548 909,065 872,958
---------- ---------- ----------
Other assets
Deposits 20,304 19,459 19,459
Deferred income taxes 240,230 565,000 565,000
Intangibles, net of accumulated amortization of
$301,582 (1997) and $173,760 (1998) 320,012 185,491 168,560
---------- ---------- ----------
580,546 769,950 753,019
---------- ---------- ----------
$6,151,388 $5,805,131 $5,449,031
========== ========== ==========
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities
Current portion of long-term debt $ 12,588 $ 49,649 $ 589,862
Notes payable
Banks 1,005,000 1,324,486 1,004,486
Related parties 482,000 202,000 202,000
Accounts payable 61,404 72,014 99,791
Accrued expenses 666,685 764,860 713,907
Customer layaway deposits 79,677 83,930 94,427
---------- ---------- ----------
Total current liabilities 2,307,354 2,496,939 2,704,473
---------- ---------- ----------
Long-term liabilities
Long-term debt, net of current portion 2,631,649 2,546,268 2,002,608
Deferred rent 28,433 21,910 20,275
---------- ---------- ----------
2,660,082 2,568,178 2,022,883
---------- ---------- ----------
Stockholders' equity 1,183,952 740,014 721,675
---------- ---------- ----------
$6,151,388 $5,805,131 $5,449,031
========== ========== ==========
See notes to consolidated financial statements.
F - 24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended Three Months Ended
December 31, March 31,
-------------------------- --------------------------
1997 1998 1998 1999
---- ---- ---- ----
(Unaudited)
Revenues
<S> <C> <C> <C> <C>
Retail sales $ 5,503,333 $ 5,746,048 $ 1,505,022 $ 1,551,627
Cost of sales 4,334,460 4,745,405 1,197,926 1,077,497
----------- ----------- ----------- -----------
Gross profit 1,168,873 1,000,643 307,096 474,130
Pawn service charges 2,587,828 2,939,386 698,755 504,100
Miscellaneous 11,002 75,187 11,632 21,546
----------- ----------- ----------- -----------
Revenues, net of cost of sales 3,767,703 4,015,216 1,017,483 999,776
Store operating expenses 2,772,141 2,791,318 654,395 692,050
Loss on store closing 119,535 -- -- --
----------- ----------- ----------- -----------
Store operating income 876,027 1,223,898 363,088 307,726
General and administrative expenses 605,768 751,901 152,524 150,513
Litigation settlement costs 295,000 -- -- --
----------- ----------- ----------- -----------
Operating income (loss) (24,741) 471,997 210,564 157,213
----------- ----------- ----------- -----------
Other income (expense)
Interest (447,219) (520,379) (114,920) (126,533)
Amortization of debenture costs (62,539) (62,539) (15,900) (15,900)
Other (5,493) 881 -- (40,919)
----------- ----------- ----------- -----------
(515,251) (582,037) (130,820) (183,352)
----------- ----------- ----------- -----------
Income (loss) before income taxes and
cumulative effect of accounting changes (539,992) (110,040) 79,744 (26,139)
Income tax benefit (expense) 185,926 30,791 (27,910) 7,800
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting changes (354,066) (79,249) 51,834 (18,339)
Cumulative effect of accounting changes,
net of $236,414 tax benefit -- (364,689) (364,689) --
----------- ----------- ----------- -----------
Net loss $ (354,066) $ (443,938) $ (312,855) $ (18,339)
=========== =========== =========== ===========
Proforma net loss assuming retroactive
application of accounting changes (unaudited) $ (376,246) $ -- $ -- $ --
=========== =========== =========== ===========
Basic and diluted earnings per share
Income (loss) before accounting change (.14) (.03) .02 (.01)
Accounting change -- (.14) (.14) --
Net income (loss) (.14) (.17) (.12) (.01)
Weighted average shares outstanding - basic and diluted 2,566,198 2,566,198 2,566,198 2,566,198
=========== =========== =========== ===========
See notes to consolidated financial statements.
F - 25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Consolidated Statement of Stockholders' Equity
Years Ended December 31, 1997 and 1998 and the Three Months
Ended March 31, 1999 (Unaudited)
Common Stock, $.01 Par,
10,000,000
Shares Authorized
------------------------- Additional Total
Shares Paid-in Accumulated Subscription Stockholders'
Issued Amount Capital Deficit Receivable Equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 2,566,198 $ 25,662 $ 2,193,416 $ (631,060) $ (50,000) $ 1,538,018
Net loss -- -- -- (354,066) -- (354,066)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997
2,566,198 25,662 2,193,416 (985,126) (50,000) 1,183,952
Net loss -- -- -- (443,938) -- (443,938)
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998
2,566,198 25,662 2,193,416 (1,429,064) (50,000) 740,014
Net loss (unaudited) -- -- -- (18,339) -- (18,339)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 1999 (unaudited)
2,566,198 $ 25,662 $ 2,193,416 $(1,447,403) $ (50,000) $ 721,675
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F - 26
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended Three Months Ended
December 31, March 31,
-------------------------- --------------------------
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities (Unaudited)
Reconciliation of net loss to net cash provided
by (used in) operating activities
Net loss $ (354,066) $ (443,938) $ (312,845) $ (18,339)
----------- ----------- ----------- -----------
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities
Deferred
Income taxes (206,140) (34,000) 27,900 (7,800)
Rent (2,567) (6,523) 1,618 1,635
Depreciation 168,564 198,822 41,775 42,960
Amortization 150,582 71,158 16,740 15,900
Inventory allowance 141,000 (44,539) (43,432) 4,998
Loss on disposal of assets due to abandonment 69,344 -- -- --
Cumulative effect of accounting changes, net
of tax benefit -- 364,689 364,689 --
(Increase) decrease in assets
Receivables
Pawn service charges (138,472) (10,346) 22,131 16,152
Other (6,913) 3,673 2,408 (1,734)
Inventories (313,806) 16,376 124,088 85,504
Prepaid expenses (14,827) 1,627 (58,252) (10,613)
Other assets 4,091 (11,155) (83,600) 4,745
Increase (decrease) in liabilities
Accounts payable (24,115) 10,610 114,966 2,424
Accrued expenses 386,585 98,175 (48,594) (50,953)
Customer layaway deposits 11,546 4,253 14,932 10,439
----------- ----------- ----------- -----------
224,872 662,820 160,524 113,657
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities (129,194) 218,882 184,624 95,318
----------- ----------- ----------- -----------
Cash flows from investing activities
Purchase of property and equipment (263,778) (53,339) (11,372) (6,853)
Payment for start-up costs (19,991) --
(Increase) decrease in pawn loans receivable (408,623) (38,657) 82,181 56,597
----------- ----------- ----------- -----------
Net cash used in investing activities (692,392) (91,996) 70,809 49,744
----------- ----------- ----------- -----------
Cash flows from financing activities
Proceeds from notes payable
Related parties 100,000 --
Banks 817,137 1,319,486
Payments on
Notes payable, bank -- (1,000,000) (1,438) (322,030)
Long-term debt (89,701) (48,320) (1,417)
Notes payable, related parties (81,000) (280,000) (130,000)
Origination fee -- -- (5,155) --
----------- ----------- ----------- -----------
Net cash (used in) provided by financing
activities 746,436 (8,834) (136,593) (323,447)
----------- ----------- ----------- -----------
Net increase (decrease) in cash (75,150) 118,052 118,840 (178,385)
Cash, beginning 369,995 294,845 294,845 412,897
----------- ----------- ----------- -----------
Cash, ending $ 294,845 $ 412,897 $ 413,685 $ 234,512
=========== =========== =========== ===========
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 364,374 $ 410,014 $ 101,624 $ 98,140
=========== =========== =========== ===========
See notes to consolidated financial statements.
F - 27
</TABLE>
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 1 - Summary of Significant Accounting Policies and Nature of Business
- - --------------------------------------------------------------------------
Nature of Business:
- - -------------------
Cash-N-Pawn International, Ltd. and its subsidiaries (the Company) own and
operate ten pawn shops in the Minneapolis, Indianapolis, and St. Louis areas.
The Company's revenues are derived from pawn service charges (comprised of
interest, storage, service and other charges) relating to the lending activity
of the pawn shops, and from the sale of merchandise acquired from forfeited
loans and items purchased directly from the public and wholesale vendors.
Principles of Consolidation
- - ---------------------------
The consolidated financial statements include the accounts of Cash-N-Pawn
International, Ltd. and its wholly-owned subsidiaries Cash-N-Pawn Minnesota,
Ltd., Cash-N-Pawn Missouri, Ltd., Cash-N-Pawn Indiana, Ltd. and C-N-P Northwest,
Ltd. All significant intercompany balances and transactions have been eliminated
in consolidation.
Interim Financial Statements (Unaudited)
- - ----------------------------------------
In the opinion of management, the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position of the Company at March 31, 1999 and
the results of its operations and changes in cash flows for the three months
then ended. The results of operations for the three months ended March 31, 1999
are not necessarily indicative of the results to be expected for a full year.
Pawn loans and Revenue Recognition
- - ----------------------------------
Pawn loans are made against pledged collateral of tangible personal property for
a period of 30 days, with an automatic extension of either 60 or 90 days for the
various stores.
Effective January 1, 1998, the Company changed its method of income recognition
on pawn loans. Under the new method, the Company accrues pawn service charges at
required statutory rates set by the state to a maximum of 25% of the loan value.
For loans not repaid, the forfeited collateral ("inventory") is valued at loan
cost plus the 25% pawn service charge accrual. Prior to 1998, pawn service
charges were recorded on the interest accrual method for the first 90 days a
loan was outstanding. For loans not repaid, the carrying value of the forfeited
collateral ("inventory") was valued at loan cost plus 90 days of pawn service
accrual. See Note 2 for further discussion of the accounting change.
F - 28
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 1 - Summary of Significant Accounting Policies and Nature of Business
(continued)
- - --------------------------------------------------------------------------------
Fair Values of Financial Instruments
- - ------------------------------------
Pawn loans are outstanding for a relatively short period, generally 120 days or
less. The rate of pawn service charges bears no relationship to interest rate
market movements. Pawn loans may not be resold to anyone but a licensed
pawnbroker. For these reasons, management believes that the fair value of pawn
loans approximates their carrying value.
The Company's credit facilities bear interest at rates which adjust based on
market rate changes. Accordingly, management believes that the fair value of
that debt approximates its carrying value. The fair value of investor notes
payable was estimated based on market values for debt issues with similar
characteristics, or interest rates currently available for debt with similar
terms. Management believes the fair values of those debts approximate their
carrying value.
Customer Layaway Deposits
- - -------------------------
Customer layaway deposits are recorded as deferred revenue until the entire
amount of the sales price has been collected.
Inventories
- - -----------
Inventories represent merchandise purchased directly from the public,
merchandise acquired from forfeited loans and new merchandise purchased from
vendors. Inventories purchased directly from vendors and customers are recorded
at cost. Inventories from forfeited loans are recorded at the amount of the loan
principal plus accrued pawn service charges on the unredeemed goods. The cost of
inventories is determined on the specific identification method. Inventories are
stated at the lower of cost or market; accordingly, inventory valuation
allowances are established when inventory carrying values are in excess of
estimated selling prices, net of direct costs of disposal. Management has
evaluated inventory and established a valuation allowance of $141,000 and
$96,000 as of December 31, 1997 and 1998, respectively and $100,998 as of March
31, 1999.
Property and Equipment and Depreciation Methods
- - -----------------------------------------------
Property and equipment are stated at cost, and are depreciated using the
straight-line method over the estimated useful lives of the related assets as
follows:
Building 20 years
Computer equipment and furniture 5-10 years
Store displays and signage 10 years
F - 29
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 1 - Summary of Significant Accounting Policies and Nature of Business
(continued)
- - --------------------------------------------------------------------------------
Property and Equipment and Depreciation Methods (continued)
- - -----------------------------------------------------------
Leasehold improvements are amortized over the estimated useful life of the
improvement or the length of the lease whichever is shorter.
Intangibles
- - -----------
Intangibles consist of debt placement costs associated with the acquisition of
long-term debt and goodwill resulting from the acquisition of a pawn shop at a
cost greater than the estimated fair market value of its assets at the date of
acquisition. Goodwill is amortized over 10 years and debt placement costs are
amortized over the term of the related loans.
Advertising Costs
- - -----------------
Advertising costs are expensed as incurred. Advertising costs for the years
ended December 31, 1997 and 1998 were $138,487 and $145,386, respectively and
$27,439 and $27,424 for the three months ended March 31, 1998 and 1999,
respectively.
Earnings (Loss) Per Common Share
- - --------------------------------
Basic earnings (loss) per common 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.
Stock-Based Compensation
- - ------------------------
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25
(APB No. 25), Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense was recorded on the date of grant
only if the current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted Accounting for Stock-Based
Compensation (SFAS 123), which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 allows entities to continue to apply the provisions of
APB No. 25 and provide pro forma net income disclosures for employee stock
option grants as if the fair-value based method defined in SFAS 123 had been
applied. The Company has elected to continue to apply the provisions of APB No.
25 and provide the pro forma disclosure provisions of SFAS 123.
F - 30
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 1 - Summary of Significant Accounting Policies and Nature of Business
(continued)
- - --------------------------------------------------------------------------------
Concentrations of Credit Risk
- - -----------------------------
The Company maintains its cash in financial institutions located in Minnesota,
Missouri and Indiana. At times these balances may exceed federally insured
limits.
Restriction on Cash
- - -------------------
The cash balance at December 31, 1998 includes approximately $24,000 which is
restricted for payment to customers receiving payment as a result of the class
action lawsuit.
Use of estimates
- - ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect certain reported amounts and disclosures. Actual results could differ
from those estimates.
Recently Issued Accounting Pronouncements
- - -----------------------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). SFAS No. 133 addresses the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. SFAS No. 133 is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. This statement currently has no
impact on the financial statements of the Company as the Company has no
derivative instruments nor participates in hedging activities.
Reclassifications
- - -----------------
Certain reclassifications to the 1997 financial statements have been made to
conform with the 1998 presentation.
Note 2 - Changes in Accounting Principles
- - -----------------------------------------
Pawn Service Charge Accrual
- - ---------------------------
Effective January 1, 1998, the Company changed its method of income recognition
of pawn loans. The Company accrues pawn service changes at required statutory
rates set by the various states up to a maximum of 25% of the loan value. For
loans not repaid, the forfeited collateral ("inventory") is valued at loan cost
plus the 25% pawn service charge accrual.
F - 31
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 2 - Changes in Accounting Principles (continued)
- - -----------------------------------------------------
Pawn Service Charge Accrual (continued)
- - ---------------------------------------
The Company believes the accounting change provides a more timely matching of
revenues and expenses with which to measure results of operations. The
cumulative effect of the accounting change on prior years is as follows:
Cost of sales $ 224,458
Pawn service charges $ 95,018
These items net of a tax benefit of $206,266 are included as a reduction of 1998
income.
The effect for 1998 of adopting the change in income recognition on pawn loans
was to decrease loss before cumulative effect of change in accounting principle
and net loss by $14,972. The 1997 unaudited pro forma amounts shown in the
statements of operations reflect the effect of retroactive application of pawn
service charges, cost of sales and related income taxes. The unaudited
consolidated financial statement periods ending March 31, 1998 and 1999 have
been adjusted to reflect the change in the Company's method of income
recognition of pawn loans.
Costs of Start-up Activities
- - ----------------------------
In 1998, the Company adopted SOP 98-5 "Reporting on the Cost of Start-up
Activities." This SOP requires costs of start-up activities and organization
costs to be expensed as incurred. The change in accounting principle resulted in
a pre-tax, non-cash charge of $75,361 ($45,213 after tax) in 1998. There was no
effect on 1998 loss before cumulative effect of change in accounting principle.
Note 3 - Property and Equipment
- - -------------------------------
Property and equipment consists of the following:
December 31, March 31,
1997 1998 1999
---- ---- ----
Land and building $ 75,000 $ 81,800 $ 81,800
Computer equipment and furniture 513,984 510,250 517,103
Store displays and signage 316,403 317,948 317,948
Leasehold improvements 522,554 526,957 526,957
Idle equipment -- 32,131 32,131
----------- ----------- -----------
1,427,941 1,469,086 1,475,939
Less accumulated depreciation (373,393) (560,021) (602,981)
----------- ----------- -----------
$ 1,054,548 $ 909,065 $ 872,958
=========== =========== ===========
F - 32
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 4 - Notes Payable, Banks
- - -----------------------------
Notes payable, banks, consist of the following:
December 31, March 31,
1997 1998 1999
---- ---- ----
BNC Financial Corporation, $2,250,000
revolving line of credit (revolver)
subject to a borrowing base, interest
only due monthly at prime plus 3%
(10.75% at December 31, 1998) through
April 15, 2001. Secured by substantially
all assets of the Company, guaranteed by
an officer of the Company and subject to
certain financial covenants. (a) $ -- $1,319,486 $ 999,486
Bank Windsor; term note subject to
borrowing base requirements of 75% of
accounts receivable and 25% of
inventory; interest due monthly at the
First Bank NA reference rate not to be
less than 8.5%; principal due April 30,
1998; secured by all inventory, accounts
and intangibles of the Company and an
assignment of an officer's life
insurance policy. 1,000,000 -- --
First Bank; $25,000 promissory note;
interest due monthly at 1% over prime
(8.75% and 9.5% as of December 31, 1998
and 1997, respectively) principal due
August 1, 1999, secured by letter of
credit. 5,000 5,000 5,000
---------- ---------- ----------
$1,005,000 $1,324,486 $1,004,486
========== ========== ==========
(a) The revolver is subject to a prepayment penalty of 3% of the total credit
facility during the first year and 2% and 1% for the second and third
years, respectively. The revolver also requires additional origination fees
of $7,500 to be paid in each the second and third year of the agreement. An
additional $750,000 is available under the revolver and is subject to a
$7,500 origination fee. Based on the borrowing base the unused portion of
the revolver at December 31, 1998 and March 31, 1999 was approximately
$600,000 and $1,000,000, respectively.
Note 5 - Notes Payable, Related Parties
- - ---------------------------------------
Notes payable, related parties consists of demand notes with shareholders and
their affiliates or family members. Interest rates are either 12% or 15% and
interest is due quarterly. Interest expense incurred on notes with related
parties was approximately $53,475 and $28,500 for the years ended December 31,
1997 and 1998, respectively, and $7,935 and $6,435 for the three months ended
March 31, 1998 and 1999, respectively.
F - 33
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 6 - Long-Term Debt
- - -----------------------
Long-term debt consists of the following:
December 31, March 31,
1997 1998 1999
---- ---- ----
Convertible debentures (a) $ 2,580,875 $ 2,543,660 $ 2,543,660
Allegiant Bank; promissory note due in
monthly installments of $977 including
interest at 9.25% with a balloon payment
of $39,948 on July 27, 1999, secured by
real estate. 51,292 43,756 41,726
Other 12,070 8,501 7,084
----------- ----------- -----------
2,644,237 2,595,917 2,592,470
Less current portion (12,588) (49,649) (589,862)
----------- ----------- -----------
$ 2,631,649 $ 2,546,268 $ 2,002,608
=========== =========== ===========
(a) Convertible debentures are due to both shareholders and nonshareholders.
The convertible debentures held by nonshareholders total $2,000,000 and
bear an interest rate of 11%, payable quarterly. The convertible debentures
held by shareholders total $580,875 and $543,660 at December 31, 1997 and
1998 and March 31, 1999, respectively, and bear interest at 15%, payable
January 2000. All of the debentures are subordinate to notes payable, bank,
and are unsecured. Interest expense related to shareholders with long-term
debt was $87,000 and $84,000 in 1997 and 1998, respectively and $21,750 and
$31,951 for the three months ended March 31, 1998 and 1999, respectively.
The debentures held by the shareholders may be converted into the Company's
voting common stock upon written notice prior to maturity of the debentures or
the Company's initial public offering (IPO). The conversion rate will be either
(1) 75% of the per share sales price of the common stock sold in the IPO or, (2)
if no IPO has occurred prior to January 1, 2000, a per share price equal to the
price per share for which common stock was sold in the last private placement of
common stock occurring immediately prior to the date of the conversion. The
number of shares of common stock to be received upon conversion of the
debentures will be equal to the principal amount of the debenture which is
surrendered for conversion, plus accrued and unpaid interest divided by the per
share conversion rate. In addition, the holders of the debentures will have the
right, only at the time of conversion, to purchase additional shares of common
stock. The maximum number of shares which may be purchased will be equal to the
number of shares received upon exercise of the conversion right. In May 1999,
the debentures held by shareholders were paid down by $200,000 including
principles plus accrued interest, thereon.
F - 34
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 6 - Long-Term Debt (continued)
- - -----------------------------------
The convertible debentures totaling $2,000,000 that were issued during 1996 to
nonshareholders may be converted into the Company's voting common stock upon
written notice prior to maturity of the debentures on July 1, 2001, or the
Company's initial public offering (IPO). The conversion rate will be either (1)
75% of the per share sales price of the common stock sold in the IPO or, (2) if
there has been no IPO prior to an acquisition, 75% of the consideration per
share of common stock received in an acquisition or, (3) if no IPO or
acquisition has occurred prior to July 1, 2001, $4.00 per share. The number of
shares of common stock to be received upon conversion of each debenture shall be
equal to the principal amount of the debenture surrendered, divided by the per
share conversion price.
Future maturities of long-term debt are as follows:
Year Ending December 31, Amount
------------------------ ------
1999 $ 49,649
2000 546,268
2001 2,000,000
----------
$ 2,595,917
===========
Note 7 - Commitments and Contingencies
- - --------------------------------------
Sale of Business
- - ----------------
On November 10, 1998, the Company entered into an Intent to Sell Agreement with
U.S. Pawn, Inc. The sale, if consummated, would be for all of the outstanding
stock of the Company. The purchase price consists of 750,000 shares of U.S.
Pawn, Inc. common stock, a $2,725,000 promissory note, and $550,000 cash. The
sale is expected to close in mid-1999.
Leases
- - ------
The Company leases space for its main office and retail stores. The leases
expire at various dates through February 2002. Most of the leases require the
Company to pay its prorata share of real estate taxes and utilities in addition
to base rent, and contain renewal options for multiple year periods. One of the
leases contains a purchase option.
F - 35
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 7 - Commitments and Contingencies (continued)
- - --------------------------------------------------
Leases (continued)
- - ------------------
Future minimum lease payments under operating leases are as follows:
Year Ending December 31,
------------------------
1999 $ 249,608
2000 76,964
2001 40,464
2002 6,744
---------
$ 373,780
=========
Rent expense under all operating leases for the years ended December 31, 1997
and 1998 was $422,579 and $424,379, respectively and $104,144 and $108,623 for
the three months ended March 31, 1998 and 1999, respectively.
Employment Agreements
- - ---------------------
The Company has an employment agreement with its Chief Executive Officer (CEO)
calling for a base salary and bonus, plus benefits, through December 31, 1999.
The Company has agreed to grant the CEO stock options to buy 85,000 shares of
common stock at $3 per share, including options granted under the Employee
Long-Term Incentive Plan, over the years 1995 through 1999 based on Company
performance. The Company has further agreed that the CEO will be granted
additional options equal to the amount necessary to maintain his ownership at a
minimum of 10% and up to 12 1/2% of the total stock outstanding during the term
of the contract, subject to the Company's performance exceeding certain revenue
and profit objectives. This would not include shares issued in a public stock
offering or shares resulting from the conversion of debt obligations.
The Company has also entered an Employment Agreement with its Chief Financial
Officer (CFO) through December 31, 1999. Per the agreement, the Company granted
the CFO incentive stock options under the Employee Long-Term Incentive Plan. The
CFO is eligible for additional annual stock option grants under this plan based
upon performance.
F - 36
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 7 - Commitments and Contingencies (continued)
- - --------------------------------------------------
Litigation
- - ----------
In November of 1996, a class action suit was brought against the Company
alleging it had violated Minnesota Statutes relating to usurious rates of
interest, rebates of unearned interest, disposition of customers' collateral,
and unlawful and deceptive trade practices. The Company has denied these
allegations, however, to avoid the expense and disruption of protracted
litigation, the Company in January 1998 reached a settlement regarding the
allegations. Terms of the settlement include a cash payment of $85,000 plus a
minimum of $75,000 of scrip that can be redeemed at the Company's stores. If
less than $75,000 of scrip is redeemed, the Company must pay the remaining
portion in cash. Management believes that no more than the minimum amount of
scrip will be redeemed. Accordingly, the Company recorded a charge of $295,000
in 1997 to cover the total estimated costs and expenses associated with the
settlement. As of December 31, 1998 and March 31, 1999 approximately $24,000 and
$0, respectively, of cash obligations and $75,000 and $74,000, respectively, of
scrip were still outstanding.
Note 8 - Stock Options and Warrants
- - -----------------------------------
On December 4, 1995, the Company's Board of Directors adopted the Employee
Long-Term Incentive Plan (the "Plan"). The Plan provides for the issuance of
incentive stock options and non-qualified stock options to key employees and
directors of the Company. The total number of shares of common stock authorized
and reserved for issuance under the Plan is 250,000 shares. The exercise price
for each stock option granted under the Plan may not be less than the fair
market value of the common stock on the date of the grant, unless, in the case
of incentive stock options, the optionee owns greater than 10% of the total
combined voting power of all classes of capital stock of the Company, in which
case the exercise price may not be less than 110% of the fair market value of
the Common Stock on the date of the grant. Unless otherwise determined by the
Board, options granted under the Plan have a maximum duration of ten years and
vest in one or more installments, upon such terms and conditions as the Board
shall determine.
No additional options or warrants were issued during the three months ended
March 31, 1999.
F - 37
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 8 - Stock Options and Warrants (continued)
- - -----------------------------------------------
Information with respect to Long Term Incentive Plan options outstanding as of
December 31, 1998, is summarized as follows:
1997 1998
---------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 130,300 $ 3.00 141,700 $ 3.00
Granted 45,000 3.00 99,050 2.00
Exercised -- -- -- --
Forfeited (33,600) 3.00 (2,933) 3.00
--------- ------- --------- -------
Outstanding at end of year 141,700 $ 3.00 237,817 $ 2.58
========= ======= ========= =======
Options exercisable at year end 79,434 174,700
Weighted average remaining life 8.8 years 6.4 years
The Company also issues warrants to purchase shares of Common Stock to members
of the Board of Directors who are not employees or officers of the Company and
to outside consultants and advisors in connection with various acquisitions,
debt offerings and consulting engagements.
Information with respect to warrants outstanding for the purchase of shares of
the Company's common stock as of December 31, 1998 is as follows:
1997 1998
--------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Outstanding at beginning of year 94,090 $ 3.60 94,090 $ 3.60
Granted -- -- -- --
Exercised -- -- -- --
Forfeited -- -- -- --
------ ---------- ------ ---------
Outstanding at end of year 94,090 $ 3.60 94,090 $ 3.60
====== ========= ====== =========
Options exercisable at year end 94,090 94,090
Weighted average remaining life 3.9 years 2.9 years
F - 38
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 8 - Stock Options and Warrants (continued)
- - -----------------------------------------------
Warrants outstanding as of December 31, 1998 include 55,000 warrants that are
excercisable at $4.00 or 75% of the IPO price of the stock. They have been
included in the above table at $4.00
SFAS 123 Disclosures
- - --------------------
The Company has adopted the disclosure provision only of SFAS 123, for employees
and directors, and will continue to account for its stock option and warrants
issued in lieu of cash compensation in accordance with the provisions of APB No.
25, Accounting for Stock Issued to Employees.
Estimated per share weighted average fair value of all stock options granted
during fiscal 1998 and 1997 was $1.34 and $.33, respectively, as of the date of
grant. For warrants granted as compensation, the estimated per share weighted
average fair value at date of grant was $.84. The fair value of the Company's
stock-based awards were estimated using the Black-Scholes model with the
following weighted average assumptions:
Options Warrants
---------------- ---------------
1997 1998 1997 1998
---- ---- ---- ----
Expected life in years 10 3 4 N/A
Risk-free interest rate 6.0% 6.0% 6.0% N/A
The Company has not declared dividends on any of its capital stock and does not
expect to do so in the foreseeable future.
Pursuant to the requirements of SFAS. 123, the following are the pro forma net
loss amounts for 1997 and 1998, as if the compensation cost for the stock
options and warrants issued had been determined based on the fair value at the
grant date for grants in 1997 and 1998:
December 31,
-------------------------
1997 1998
---- ----
Net (loss) income:
As reported $(354,066) $(433,938)
Fair value of stock-based compensation (28,000) (19,000)
--------- ---------
Pro forma net loss $(382,066) $(452,938)
========= =========
Pro forma net loss amounts reflect only options and warrants granted in 1997 and
1998. Therefore, the full impact of calculating compensation cost for stock
options and warrants under SFAS 123 is not reflected in the pro forma net loss
amounts presented because compensation cost is reflected over the term of the
option and compensation cost for options granted prior to January 1, 1996 is not
considered.
F - 39
<PAGE>
CASH-N-PAWN INTERNATIONAL, LTD.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Information as of March 31, 1998 and 1999 is Unaudited)
Note 9 - Income Taxes
- - ---------------------
The Company had deferred tax assets of $380,586 and $661,000 at December 31,
1997 and 1998, respectively, primarily due to the Company's net operating losses
(NOL's), change in accounting methods for pawn service charges, and intangible
assets recorded only for tax purposes.
At December 31, 1998, the Company has net operating loss carryforwards of
approximately $585,000 which are available to offset future federal and state
taxable income. These loss carryforwards begin to expire in fiscal year 2011.
Should the Company undergo an ownership change (see Note 7) as defined in
Section 382 of the Internal Revenue Code, the Company's tax net operating loss
carryforwards generated prior to the ownership change will be subject to an
annual limitation which could reduce or defer the utilization of these losses.
The provision for federal and state income taxes consists of the following:
December 31, March 31,
---------------------- ----------------------
1997 1998 1998 1999
---- ---- ---- ----
Current tax (expense) benefit $ (20,214) $ (3,209) $ (13,180) $ 7,800
Deferred income tax benefit 206,140 34,000 -- --
--------- --------- --------- ---------
$ 185,926 $ 30,791 $ (13,100) $ 7,800
========= ========= ========= =========
Income taxes applicable to income before taxes differ from those obtained using
statutory income tax rates due to certain expenses that are only partially
deductible for tax purposes.
Note 10 - Retirement Plan
- - -------------------------
A profit sharing plan with a 401(k) feature exists for substantially all
employees 21 or older who work at least 1,000 hours and are employed for at
least one year. The Company matches 25% of the employees elective deferrals up
to a maximum of 1% of compensation; and the profit sharing contributions are
discretionary. The Company's matching portion was $9,235 and $8,616 at December
31, 1997 and 1998, respectively and $1,853 at March 31, 1999. No profit sharing
contributions were made during the years ended December 31, 1997 and 1998 nor
the three months ended March 31, 1999.
F - 40
AGREEMENT AND PLAN OF MERGER
Among
U.S. PAWN, INC.,
U.S. PAWN CNP HOLDINGS, INC.
And
CASH-N-PAWN INTERNATIONAL, LTD.
Dated as of May 6, 1999
I-1
<PAGE>
TABLE OF CONTENTS
Article I
Definitions...........................................................1
Section 1.1 Defined Terms............................................1
Article II
The Merger............................................................5
Section 2.1 General............................................5
Section 2.2 Filing.............................................6
Section 2.3 Effectiveness of the Merger........................6
Section 2.4 Articles of Incorporation and Bylaws...............6
Section 2.5 Directors and Officers.............................6
Section 2.6 Conversion.........................................6
Section 2.7 Treatment of the Company's Convertible Debt........6
Section 2.8 Dissenting Shares..................................7
Section 2.9 Conversion of Shares...............................8
Section 2.10 Effects of Merger..................................9
Section 2.11 Closing............................................9
Article III
Representations and Warranties of the Company........................10
Section 3.1 Organization and Qualification....................10
Section 3.2 Corporate Authorization...........................10
Section 3.3 Capitalization....................................10
Section 3.4 Consents and Approvals............................11
Section 3.5 No Violations.....................................11
Section 3.6 Financial Statements..............................11
Section 3.7 Interim Changes...................................11
Section 3.8 Real Property.....................................13
Section 3.9 Personal Property.................................14
Section 3.10 Contracts.........................................14
Section 3.11 Litigation........................................16
Section 3.12 Compliance with Laws..............................16
Section 3.13 Labor Matters.....................................16
Section 3.14 Environmental and Safety Matters..................17
Section 3.15 Tax Matters.......................................18
Section 3.16 Employee Benefit Plans............................19
Section 3.17 Insurance.........................................20
Section 3.18 Affiliate Interests...............................20
Section 3.19 Fees, Commissions and Expenses....................21
Section 3.20 Bank Accounts.....................................21
Section 3.21 Intellectual Property.............................21
Section 3.22 Employment Agreements.............................21
Section 3.23 Indemnification of Employees, Etc.................21
Section 3.24 Disclosure........................................21
Section 3.25 Board Recommendation..............................22
Section 3.26 Year 2000 Compliant...............................22
I-2
<PAGE>
Article IV
Representations and Warranties of the Parent and the Purchaser.......22
Section 4.1 Organization and Qualification....................22
Section 4.2 Corporate Authorization...........................22
Section 4.3 Consents and Approvals; No Violation..............23
Section 4.4 Litigation........................................23
Section 4.5 Compliance with Laws..............................23
Section 4.6 Brokers...........................................23
Section 4.7 Ownership of Company Stock........................23
Section 4.8 Formation of Purchaser............................24
Section 4.9 Issuance of Securities............................24
Section 4.10 NASDAQ SmallCap Market Listing....................25
Section 4.11 SEC Documents.....................................25
Section 4.12 Disclosure........................................25
Section 4.13 Capitalization....................................25
Article V
Covenants............................................................25
Section 5.1 Conduct of Business of the Company and the
Subsidiaries....................................25
Section 5.2 Approval of the Shareholders of the Company.......26
Section 5.3 Approval of the Shareholders of the Parent........26
Section 5.4 Filings; Third Party Consents.....................27
Section 5.5 Proxy Statement...................................27
Section 5.6 Access to Information.............................28
Section 5.7 Confidentiality...................................29
Section 5.8 Public Announcements..............................29
Section 5.9 Exclusivity.......................................29
Section 5.10 Options...........................................30
Section 5.11 Warrants..........................................30
Section 5.12 Proxy and Lock-up.................................31
Section 5.13 Directors.........................................31
Section 5.14 Counsel Opinion...................................31
Section 5.15 Notification of Certain Matters...................32
Section 5.16 Certain Litigation................................32
Section 5.17 Rule 144..........................................32
Section 5.18 Continuation of Indemnification...................32
Article VI
Conditions to Closing................................................33
Section 6.1 Conditions to Each Party's Obligation.............33
Section 6.2 Conditions to Obligation of the Parent and
the Purchaser...................................33
Section 6.3 Conditions to Obligation of the Company...........35
Article VII
Termination..........................................................35
Section 7.1 Termination.......................................35
Article VIII
Indemnification......................................................36
Section 8.1 Indemnification...................................36
Article IX
General Provisions...................................................39
Section 9.1 Rules of Construction.............................39
Section 9.2 Notices...........................................40
Section 9.3 Governing Law.....................................41
Section 9.4 Entire Agreement..................................41
Section 9.5 Amendment; Waiver.................................41
Section 9.6 Binding Effect....................................41
Section 9.7 Counterparts......................................41
Section 9.8 Expenses..........................................41
I-3
<PAGE>
SCHEDULES
Schedule 2.5 Directors and Officers of Surviving Corporation
Schedule 2.7(b) Holders of 15% Subordinated Convertible Debentures and
Related Conversion Rights
Schedule 3.1 Subsidiaries
Schedule 3.3 Capitalization
Schedule 3.3A Cash-N-Pawn International, Ltd. Capital Stock and Equity
Rights
Schedule 3.4 Company Consents and Approvals
Schedule 3.5 No Violations
Schedule 3.6 Financial Statements
Schedule 3.7 Interim Changes
Schedule 3.8(a) Real Property
Schedule 3.8(b) Required Consents Under Leases
Schedule 3.8(c) Encumbrances on Fixtures
Schedule 3.9 Personal Property
Schedule 3.10(a) Other Contracts
Schedule 3.10(b) Loan Agreements and Related Documentation
Schedule 3.10(c) Consents Required Under Other Contracts and Loan Agreements
Schedule 3.11 Litigation
Schedule 3.13 Labor Matters
Schedule 3.14 Environmental and Safety Matters
Schedule 3.15(a) Filing of Tax Returns
Schedule 3.15(b) Past Audits, Agreements, Waivers or Arrangements
Schedule 3.15(c) Pending Audits and Other Proceedings
Schedule 3.15(e) Tax Return Jurisdictions
Schedule 3.16(a) Employee Plans and Employee Benefit Arrangements
Schedule 3.16(b) Employee Plan Liabilities
Schedule 3.16(f) Determination Letter Matters
Schedule 3.17 Insurance
Schedule 3.18 Affiliate Interests
Schedule 3.20 Bank Accounts
Schedule 3.21 Intellectual Property
Schedule 3.22 Employment Agreements
Schedule 3.23 Employee Indemnification
Schedule 4.3 Parent and Purchaser Consents and Approvals; No Violation
Schedule 5.1 Conduct of Business
I-4
<PAGE>
EXHIBITS
Exhibit A Intentionally Omitted
Exhibit B Certificate of Designation
Exhibit C Form of Promissory Note
Exhibit D Proxy and Lock-up Agreement
Exhibit E Counsel Opinion
Exhibit F Employment Agreement between the
Purchaser and Jack D. Hartsoe
Exhibit G Employment Agreement between the
Purchaser and Alan L. Cross
APPENDICES
Appendix A Merger Consideration
Appendix A-1 Adjustment Example
Appendix A-2 Final Balance Sheet Adjustments
I-5
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of May 6, 1999, among
U.S. PAWN, INC., a Colorado corporation (the "Parent"), U.S. PAWN CNP HOLDINGS,
INC., a Colorado corporation and a wholly-owned subsidiary of the Parent (the
"Purchaser"), and CASH-N- PAWN INTERNATIONAL, LTD., a Minnesota corporation (the
"Company").
The Company and the Parent have each approved the acquisition of the
Company by the Parent pursuant to a merger of the Company with and into the
Purchaser with the Purchaser surviving such merger, upon the terms and subject
to the conditions set forth herein.
The Company and the Parent intend that the merger will be treated as a tax
free reorganization which meets the requirements of Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended.
The Board of Directors of each of the Parent and the Purchaser believes it
is in the best interest of each of the Parent and the Purchaser and their
respective shareholders, and the Board of Directors of the Company believes it
is in the best interest of the Company and its shareholders, to consummate such
merger upon the terms and subject to the conditions set forth herein.
The Board of Directors of the Parent, the Purchaser and the Company have
approved and adopted this Agreement and approved the proposed merger upon the
terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties and covenants contained herein, the parties agree as
follows:
Article I
Definitions
Section 1.1 Defined Terms. As used in this Agreement, the following terms
shall have the following meanings:
(a) "Affiliate" of any specified person means any officer or director
of such person and any other person directly or indirectly controlling or
controlled by or under direct or indirect common control with such specified
person and, in the case of an individual, includes members of such individual's
immediate family. For purposes of this definition, "control" when used with
respect to any specified person means the power to direct the management and
policies of such person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise, and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
(b) "Agreement" means this Agreement and includes all of the schedules
and exhibits annexed hereto.
1
<PAGE>
(c) "CBCA" means the Colorado Business Corporation Act, Colorado
Revised Statutes ss. 7-101-101, et seq.
(d) "Closing" is defined in Section 2.11.
(e) "Closing Date" is defined in Section 2.11.
(f) "Code" means the Internal Revenue Code of 1986, as amended.
(g) "Company Common Stock" means the Company's common stock, par value
$.01 per share.
(h) "Contract" means any contract, lease, license, purchase order,
sales order or other agreement or binding commitment, whether or not in written
form.
(i) "Controlling Shareholders" is defined in Section 5.12.
(j) "Converted Company Shares" is defined in Appendix A.
(k) "Dissenting Shares" is defined in Section 2.8.
(l) "Effective Time" is defined in Section 2.3.
(m) "Employee Plans" means all employee benefit plans (as defined in
Section 3(3) of ERISA) to which the Company is a party or is bound, with respect
to which payments or contributions are required to be made by the Company, or in
respect of which the Company may otherwise have any liability.
(n) "Encumbrances" means all liens, charges, security interests and
similar rights of third parties with respect to property.
(o) "Environmental and Safety Requirements" means all federal, state
and municipal statutes, regulations, common law and similar provisions having
force or effect of law, including all required orders, permits, licenses and
approvals, with respect to environmental, public health and safety, occupational
health and safety, product liability and transportation matters, including
without limitation those relating to the presence, use, production, generation,
handling, transportation, treatment, storage, disposal, distribution, labeling,
testing, processing, discharge, release, control or cleanup of any contaminant,
waste, hazardous materials or substances, chemical substances or mixtures,
pesticides, toxic compounds or materials, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation.
(p) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
2
<PAGE>
(r) "Exchange Agent" is defined in Section 2.9.
(s) "Exchange Agreements" is defined in Section 5.11.
(t) "Exchange Fund" is defined in Section 2.9.
(u) "GAAP" means generally accepted accounting principles in effect in
the United States.
(v) "Governmental Permit" means any franchise, consent, license,
marketing right, permit, authorization, approval or other operating authority
issued by any governmental or regulatory body.
(w) "Historical Financials" means the consolidated audited balance
sheets and statements of income and cash flows of the Company and the Operating
Subsidiaries as of and for the fiscal years ended December 31, 1998 and 1997
(including the footnotes thereto) and the consolidated balance sheets and
statements of income and cash flows of the Company and the Subsidiaries for the
interim period ended March 31, 1999.
(x) "Latest Balance Sheet" means the consolidated audited balance
sheet of the Company as of December 31, 1998.
(y) "Loss" or "Losses" means any and all out-of-pocket damages, costs,
liabilities, losses (including consequential losses), judgments, penalties,
fines, expenses or other costs, including reasonable attorney's fees, incurred
by any party.
(z) "MBCA" means the Minnesota Business Corporation Act, Minnesota
Statutes Chapter 302A.
(aa) "Material Adverse Effect" means a material adverse effect on
either (i) the assets, operations, financial condition or prospects of the
Company, or (ii) the Company's ability to consummate the transactions
contemplated hereby; provided, however, for purposes of this Agreement and
setting forth information on the disclosure schedules hereto, "Material Adverse
Effect" shall be deemed to include any event or circumstance which could
reasonably be expected to result in a liability to the Company in excess of
$5,000.
(bb) "Merger" is defined in Section 2.1.
(cc) "Merger Consideration" means the consideration as detailed on
Appendix A attached hereto.
(dd) "Operating Subsidiaries" means those subsidiaries of the Company
set forth as such on Schedule 3.1.
3
<PAGE>
(ee) "Parent Common Stock" means the Parent's common stock, no par
value.
(ff) "Parent Preferred Stock" means the Parent's preferred stock with
the terms and conditions as described on the Certificate of Designation attached
hereto as Exhibit B.
(gg) "Permitted Liens" means (i) liens for Taxes, fees, levies, duties
or other governmental charges of any kind which are not yet delinquent or are
being contested in good faith by appropriate proceedings which suspend the
collection thereof and for which appropriate reserves have been established in
accordance with GAAP; (ii) liens for mechanics, material, laborers, employees,
suppliers or similar liens arising by operation of law for sums which are not
yet delinquent or which are being contested in good faith by appropriate
proceedings or with respect to which arrangements for payment and/or release
have been made and for which appropriate reserves have been established in
accordance with GAAP; and (iii) with respect to real property, easements,
servitudes, leases, reservations or rights vested in public authorities or
public or private utility companies for rights-of-way, streets, roads, bridges,
pipes, pipelines, railroads, electric transmission and distribution lines,
telegraph and telephone lines, sewage and drainage rights and other similar
purposes, provided that such Encumbrances do not in the aggregate materially
affect the marketability of title to the property subject thereto for the
purposes for which it is currently held and do not in the aggregate materially
interfere with the conduct of the business of the Company.
(hh) "Person" means any individual, partnership, corporation, limited
liability company, association, joint stock company, trust, joint venture,
unincorporated organization or governmental entity (or any department, agency or
political subdivision thereof).
(ii) "Promissory Note" means the note or notes of the Purchaser
guaranteed by the Parent which are payable as part of the Merger Consideration
in the aggregate principal amount to be determined in accordance with Appendix
A, all in substantially the form of Exhibit C attached hereto.
(jj) "Purchaser Common Stock" means the Purchaser's common stock, no
par value.
(kk) "Securities Act" means the Securities Act of 1933, as amended.
(ll) "Subsidiary" means with respect to any Person (i) any corporation
at least a majority of whose outstanding voting stock is owned, directly or
indirectly, by such Person or by one or more of its Subsidiaries, or by such
Person and one or more of its Subsidiaries, (ii) any general partnership, joint
venture or similar entity, at least a majority of whose outstanding partnership
or similar interests shall at the time be owned by such Person, or by one or
more of its Subsidiaries, or by such Person and one or more of its Subsidiaries
and (iii) any limited partnership of which such Person or any of its
Subsidiaries is a general partner. For purposes of this definition, "voting
stock" means shares, interests, participations or other equivalents in the
equity interest (however designated) in such Person having ordinary voting power
for the election of a majority of the directors (or the equivalent) of such
Person other than shares, interests, participations or other equivalents having
such power only by reason of the occurrence of a contingency.
4
<PAGE>
(mm) "Surviving Corporation" is defined in Section 2.1(a).
(nn) "Tax" means any federal, state, local or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp, occupation,
premium, windfall profits, environmental (pursuant to Section 59A of the Code or
otherwise), custom duties, capital stock, franchise, employee's income
withholding, foreign withholding, social security (or its equivalent),
unemployment, disability, real property, personal property, sales, use,
transfer, value added, registration, alternative or add-on minimum, estimated or
other tax, including any interest, penalties or additions to tax in respect of
the foregoing, whether disputed or not, and any obligation to indemnify, assume
or succeed to the liability of any other person in respect of the foregoing, and
the term "Tax Liability" shall mean any liability (whether known or unknown,
whether absolute or contingent, whether liquidated or unliquidated, and whether
due or to become due) with respect to Taxes.
(oo) "Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
Article II
The Merger
Section 2.1 General.
(a) Upon the terms and subject to the conditions contained herein and
in accordance with the CBCA and the MBCA, at the Effective Time, the Company
shall be merged with and into the Purchaser (the "Merger") and thereupon the
separate corporate existence of the Company shall cease, and the Purchaser, as
the surviving corporation (the "Surviving Corporation"), shall continue to exist
under and be governed by the CBCA.
(b) As of the date hereof, (i) the Company has 2,566,198 shares of
Company Common Stock outstanding, all of which are entitled to vote with respect
to the Merger, and no other shares of capital stock outstanding, (ii) the
Purchaser has 100 shares of Purchaser Common Stock outstanding, all of which are
entitled to vote with respect to the Merger, and no other shares of capital
stock outstanding, and (iii) the Parent has 3,685,410 shares of Parent Common
Stock outstanding, all of which are entitled to vote with respect to the Merger,
37,800 shares of Redeemable Preferred Stock outstanding, none of which are
entitled to vote with respect to the Merger, and no other shares of capital
stock outstanding. With respect to the Parent and Purchaser and in accordance
with the CBCA, a majority vote of the outstanding shares of Purchaser Common
Stock and Parent Common Stock is required to approve the Merger. With respect to
the Company, in accordance with Shareholder Voting Agreement of the shareholders
of the Company dated September 1, 1995, the vote of sixty percent (60%) of the
outstanding shares of Company Common Stock (rather than the majority required by
the MBCA) is required to approve the Merger.
5
<PAGE>
Section 2.2 Filing. On the Closing Date, the Company and the Purchaser will
cause an appropriate mutually acceptable certificate of merger (the "Certificate
of Merger") to be executed and filed with the Secretaries of State of Colorado
and Minnesota pursuant to the applicable provisions of the CBCA and the MBCA,
and prior thereto the Parent will cause the Certificate of Designation in the
form of Exhibit B hereto to be executed and filed with the Secretary of State of
Colorado pursuant to the applicable provisions of the CBCA.
Section 2.3 Effectiveness of the Merger. The Merger shall become effective
(the "Effective Time") immediately upon the filing and acceptance of the
Certificate of Merger with the Secretaries of State of Colorado and Minnesota.
Section 2.4 Articles of Incorporation and Bylaws. Upon the Effective Time,
the Articles of Incorporation of the Purchaser in effect immediately prior to
the Effective Time shall become the Articles of Incorporation of the Surviving
Corporation. The bylaws of the Purchaser as in effect immediately prior to the
Effective Time shall become the bylaws of the Surviving Corporation as of the
Effective Time.
Section 2.5 Directors and Officers. As of the Effective Time, the directors
and officers of the Surviving Corporation shall be as designated in Schedule
2.5. Such directors shall serve in accordance with the bylaws of the Surviving
Corporation until the next annual meeting of the Surviving Corporation or until
their successors are duly elected or appointed and qualified.
Section 2.6 Conversion. At the Effective Time, by virtue of the Merger and
without any action on the part of the holders thereof:
(a) Each outstanding share (or fraction thereof) of Company Common
Stock, other than Dissenting Shares, shall be converted into and shall
thereafter represent only the right to receive, upon surrender in accordance
with Section 2.9, the Merger Consideration;
(b) All shares of capital stock which are held by the Company as
treasury shares shall be canceled and retired and cease to exist, without any
conversion thereof; and
(c) The shares of Parent Common Stock and Parent Preferred Stock, if
any, issued by the Parent as the Merger Consideration shall be dated as of the
Effective Time and shall be "restricted securities" as defined in Rule 144 under
the Securities Act and shall bear a legend to such effect.
Section 2.7 Treatment of the Company's Convertible Debt.
(a) The Company's 11% Convertible Debt. As of the date hereof, the
Company has $2,000,000 of Series A 11% Senior Subordinated Convertible
Debentures due July 1, 2001 outstanding (the "Company 11% Debt"). The Company
11% Debt is convertible into Company Common Stock under certain circumstances
prior to maturity. In the event of a merger, the Company 11% Debt is convertible
into Company Common Stock at an exercise price equal to 75% of the total merger
consideration received per share of Company Common Stock. The right of
conversion expires if not exercised during the 30 day period prior to the
closing of the Merger. To the extent that the holders of the Company 11% Debt
elect to convert such debt prior to the Effective Time, the portion of the
Merger Consideration constituting the Promissory Notes will be increased (i)
6
<PAGE>
$1.17 for every $1.00 of principal amount of the Company 11% Debt that is
converted up to a maximum of $588,235 of converted Company 11% Debt and (ii)
$1.00 for every $1.00 of principal amount of Company 11% Debt that is converted
above such amount. In this way, the Parent will assume $.17 of the $.33
conversion premium of the Company 11% Debt up to a maximum aggregate increase in
the value of the Promissory Notes of $100,000. To the extent that the holders of
the Company 11% Debt elect not to convert prior to the Effective Time, each such
debtholder may either (i) retain such debt after the Effective Time as a debt
liability of the Purchaser in accordance with its terms and without any
conversion right (which liability the Purchaser, as the Surviving Corporation of
the Merger, hereby acknowledges it will assume as a result of the Merger) or
(ii) to the extent that each such debtholder is an "accredited investor" (as
defined in Regulation D under the Securities Act) and otherwise complies with
the terms of the Parent's private placement for Parent 11% Debt (as defined
below), such debtholder may exchange the Company 11% Debt such debtholder holds
for 11% Convertible Debt of the Parent (the "Parent 11% Debt"). The Parent 11%
Debt shall be on terms substantially similar to that of the Company 11% Debt
except that the Parent 11% Debt shall be (i) callable at any time by the Parent
at par value plus accrued and unpaid interest and (ii) convertible at any time
prior to maturity or upon redemption into Parent Common Stock at an exercise
price of $6.00 per share.
(b) The Company's 15% Convertible Debt. All of the Company's 15%
Subordinate Convertible Debentures due January 1, 2000 (the "Company 15% Debt")
shall be prepaid by the Company (prior to its conversion) on or prior to the
Effective Time. It is expected that such prepayment will be effected utilizing
funds from the Company's current line of credit with BNC Financial Corporation,
which line of credit shall be assumed, and is expected to be continued by, the
Purchaser following the Effective Time. If necessary to prepay the Company 15%
Debt, the Company and Parent shall use reasonable efforts to obtain a higher
line of credit from BNC Financial Corporation on terms reasonably satisfactory
to Parent, utilizing the post-Merger consolidated financial position and
creditworthiness of the Parent. In addition, prior to the Closing, the Company
shall obtain the waiver of all of the conversion rights associated with the
conversion agreements executed in connection with the Company 15% Debt. All such
holders are listed on Schedule 2.7(b).
Section 2.8 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Company Common Stock that are issued and outstanding
immediately prior to the Effective Time and that are held by stockholders who
have not voted such shares in favor of the Merger or consented thereto in
writing and who have filed a written demand for payment for such shares in the
manner provided in Sections 302A.471 and 302A.473 of the MBCA (the "Dissenting
Shares") shall not be converted into or represent a right to receive the Merger
Consideration pursuant to Section 2.6 herein, but the holder thereof shall be
entitled only to such rights as are granted by Sections 302A.471 and 302A.473 of
the MBCA. Each holder of Dissenting Shares shall receive payment therefor from
the Surviving Corporation in accordance with the MBCA; provided, however, (a) if
any such holder of Dissenting Shares shall have failed to establish his
entitlement to receive payment for such shares as provided in Sections 302A.471
and 302A.473 of the MBCA, or (b) if any such holder of Dissenting Shares shall
have effectively withdrawn his demand for payment for such shares of Common
Stock, such holder or holders (as the case may be) shall forfeit the right to
receive payment for such shares of Company Common Stock and each such share of
Company Common Stock shall thereupon be deemed to have been converted, as of the
Effective Time, into the right to receive the Merger Consideration pursuant to
Section 2.6 hereof.
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Section 2.9 Conversion of Shares. The Purchaser and the Parent shall
authorize one or more persons to act as Exchange Agent for the Merger, which
person(s) shall be reasonably acceptable to the Company (the "Exchange Agent").
Immediately prior to the Effective Time, the Parent shall, or the Parent shall
cause the Purchaser to, deposit in trust with the Exchange Agent the Parent
Common Stock and the cash portion of the Merger Consideration. Once post-closing
adjustments have been made in accordance with the provisions of Appendix A
hereof, the Parent shall, or the Parent shall cause the Purchaser to, deposit in
trust with the Exchange Agent the Promissory Notes and the Parent Preferred
Stock (the Merger Consideration deposited with the Exchange Agent is hereinafter
referred to as the "Exchange Fund"). The Exchange Agent shall, pursuant to
irrevocable instructions, make the payments provided for in Section 2.9 of this
Agreement out of the Exchange Fund. The Exchange Agent shall invest the cash in
the Exchange Fund, as applicable, as the Parent directs, in direct obligations
of the United States of America, obligations for which the full faith and credit
of the United States of America is pledged to provide for the payment of all
principal and interest, commercial paper obligations receiving the highest
rating from either Moody's Investors Services, Inc. or Standard and Poor's
Corporation, or certificates of deposit, bank repurchase agreements or banker's
acceptances of commercial banks with capital exceeding $10 billion. Any net
profit resulting from, or interest or income produced by, such investments shall
be payable to the Purchaser. The Purchaser shall replace any monies lost through
any investment made pursuant to this Section 2.9 after the Effective Time. This
Exchange Fund shall not be used for any other purpose except as provided in this
Agreement.
As soon as practicable after the Effective Time, the Parent shall cause the
Exchange Agent to mail or deliver to each record holder of certificates which
immediately prior to the Effective Time represented shares of Company Common
Stock (the "Certificates") a letter of transmittal and instructions for use in
effecting the surrender of the Certificates in exchange for the Merger
Consideration, which letter of transmittal shall specify that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
proper delivery of the Certificates to the Exchange Agent. Upon surrender to the
Exchange Agent of a Certificate, together with such letter of transmittal duly
executed and completed in accordance with the instructions thereto, the holder
of such Certificate shall be entitled to receive in exchange therefor the Merger
Consideration multiplied by the number of shares represented by the Certificate,
and such Certificate shall forthwith be canceled. The Exchange Agent may
distribute the Parent Common Stock and cash portions of the Merger Consideration
in accordance with the preceding sentence prior to receipt of the Promissory
Notes and Parent Preferred Stock portion, if any. If there is delivered to the
Exchange Agent by any person who is unable to produce a Certificate for
surrender (i) evidence to the Purchaser that any such Certificate has been lost,
wrongfully taken or destroyed, (ii) any such security or indemnity as reasonably
may be requested by the Purchaser to hold it harmless, and (iii) evidence to the
reasonable satisfaction of the Purchaser that such a person is the owner of the
shares theretofore represented by each Certificate claimed by him to be lost,
wrongfully taken or destroyed and that he is the person who would be entitled to
present each such Certificate and to receive the Merger Consideration pursuant
to this Agreement, then the Purchaser, in absence of actual notice to it that
any shares theretofore represented by any such Certificate have been acquired by
a bona fide purchaser, shall cause the Exchange Agent to deliver to such person
the Merger Consideration that such person would have been entitled to receive
upon surrender of each such lost, wrongfully taken or destroyed Certificate.
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If delivery of the Merger Consideration is to be made to any person other
than the person in whose name the Certificate surrendered is registered, it
shall be a condition of such delivery that the Certificate so surrendered shall
be properly endorsed or otherwise in proper form for transfer and that the
person requesting such delivery shall pay any transfer or other taxes required
by reason of such delivery or establish to the satisfaction of the Exchange
Agent that such tax has been paid or is not applicable. As of the Effective
Time, until surrendered in accordance with the provisions of this Section 2.9,
each Certificate (other than Certificates representing Dissenting Shares) shall
represent for all purposes only the right to receive the Merger Consideration
multiplied by the number of shares represented by such Certificate. Certificates
representing Dissenting Shares shall represent for all purposes only the right
to receive payment from the Purchaser, as the Surviving Corporation, of the
"fair value" of such Dissenting Shares determined in accordance with Sections
302A.471 and 302A.473 of the MBCA. Any portion of the Exchange Fund which
remains unclaimed by the former shareholders of the Company for 180 days after
the Effective Time (including any interest thereon) shall be paid to the
Purchaser upon demand. Any shareholders of the Company shall thereafter look
only to the Purchaser with respect to the Merger Consideration payable upon due
surrender of their Certificates.
Notwithstanding the foregoing, neither the Parent, the Purchaser nor the
Exchange Agent shall be liable to a holder of shares of Company Common Stock for
any Merger Consideration delivered to a public official pursuant to applicable
abandoned property, escheat and similar laws. After the Effective Time, there
shall be no transfers on the stock transfer books of the Purchaser of the shares
of Company Common Stock that were outstanding immediately prior to the Effective
Time.
Section 2.10 Effects of Merger. The Merger shall have the effects set forth
in the CBCA and the MBCA. Without limiting the foregoing, on and after the
Effective Time, the Purchaser shall possess all the assets and interests of
every description, wherever located, and all rights, privileges, immunities,
powers, franchises and authority, of a public as well as of a private nature,
and all debts and liabilities of each of the Company and the Purchaser, all of
which shall be vested in the Purchaser without further act or deed.
Section 2.11 Closing. The closing of the Merger (the "Closing") shall be
held at a place mutually agreeable and as soon as practicable, but in no event
more than 40 days after both the Company and the Parent have held the
shareholder meetings described in Sections 5.2 and 5.3 (the "Closing Date"), or
at such other place and time as the Parent and the Company may mutually agree.
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Article III
Representations and Warranties of the Company
The Company represents and warrants to the Parent and the Purchaser as
follows:
Section 3.1 Organization and Qualification. The Company (i) is a
corporation validly existing and in good standing under the laws of the State of
Minnesota, (ii) has the requisite corporate power to carry on its business as
now being conducted, and (iii) is duly qualified as a foreign corporation in
good standing in each jurisdiction where the conduct of its business makes such
qualification necessary, except where the failure to be so qualified or in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect. The Company owns, directly or indirectly, all of the capital stock of
each of the corporations set forth on Schedule 3.1. Each Operating Subsidiary is
duly and validly organized and in good standing under the laws of the
jurisdiction of its formation, and each Operating Subsidiary is duly qualified
as a foreign corporation in good standing in each jurisdiction where the conduct
of its business requires such qualification, except where the failure to be so
qualified would not, individually or in the aggregate, have a Material Adverse
Effect. The Company does not own, and does not have any obligation to acquire,
any material equity interest in any business enterprise other than the
Subsidiaries. Except as set forth on Schedule 3.1, neither the Company nor any
Subsidiary has an investment in or owns any type of equity interest in any other
Person.
Section 3.2 Corporate Authorization. The execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby are within the Company's corporate powers and
have been duly authorized by all necessary corporate action on the part of the
Company, except for the approval by the Company's shareholders, which approval
is a condition to the Merger. This Agreement constitutes a valid and binding
obligation of the Company enforceable against the Company in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, fraudulent conveyance
and transfer, and moratorium or other similar laws of general application
affecting the enforcement of creditors' rights generally.
Section 3.3 Capitalization. The Company's outstanding capital stock as of
the date of this Agreement consists of 2,566,198 shares of Company Common Stock.
The outstanding Company Common Stock is duly authorized and validly issued, is
fully paid and non-assessable, and as of the date of this Agreement is owned of
record as set forth on Schedule 3.3. The issued and outstanding capital stock of
each Subsidiary is set forth on Schedule 3.3, and is owned by the Company.
Except as set forth on Schedule 3.3, as of the date hereof, the Company has no
outstanding capital stock. Except as set forth on Schedule 3.3, as of the date
hereof, (i) there were no outstanding subscriptions, options, calls, contracts,
commitments, understandings, restrictions, arrangements, rights or warrants,
including any right of conversion or exchange under any outstanding security,
instrument or other agreement and also including any rights plan or other
anti-takeover agreement, obligating the Company or any Subsidiary to issue,
deliver or sell, or cause to be issued, delivered or sold or otherwise to become
outstanding, additional shares of the capital stock of the Company or any
Subsidiary or obligating the Company or any Subsidiary to grant, extend or enter
into any such agreement or commitment, and (ii) there are no voting trusts,
proxies or other agreements or understandings to which the Company or any
Subsidiary is a party or is bound with respect to the voting of any shares of
capital stock of the Company or any Subsidiary and, to the knowledge of the
Company, there are no such trusts, proxies, agreements or understandings by,
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between or among any of the Company's stockholders with respect to Company
Common Stock. Except as set forth on Schedule 3.3, there are no outstanding or
authorized stock appreciation rights, phantom stock, profit participation or
similar rights with respect to the Company or any Subsidiary. To the best
knowledge of the Company, no more than 35 of the holders of the Company's Common
Stock are not "accredited investors" as defined in Regulation D under the
Securities Act.
Section 3.4 Consents and Approvals. Except as set forth on Schedule 3.4, no
filings with, notices to, or approvals of, any governmental or regulatory body
are required to be obtained or made by the Company or any Subsidiary in
connection with the consummation of the transactions contemplated hereby.
Section 3.5 No Violations. The execution and delivery of this Agreement and
the performance by the Company of its obligations hereunder (i) do not and will
not conflict with or violate any provision of the certificate or articles of
incorporation or bylaws (or similar organizational documents) of the Company and
(ii) except as set forth on Schedule 3.5 or as would not result in a Material
Adverse Effect, do not and will not (a) conflict with or result in a breach of
the terms, conditions or provisions of, (b) constitute a default under, (c)
result in the creation of any Encumbrance upon the capital stock or assets of
the Company or any Subsidiary pursuant to, (d) give any third party the right to
modify, terminate or accelerate any obligation under, (e) result in a violation
of, or (f) require any authorization, consent, approval, exemption or other
action by or notice to any court or administrative or governmental body or other
third party pursuant to, any law, statute, rule or regulation or any Contract,
order, judgment or decree to which the Company or any Subsidiary is subject or
by which any of its assets are bound.
Section 3.6 Financial Statements. Except as set forth on Schedule 3.6, the
Historical Financials have been prepared in accordance with GAAP, consistently
applied and fairly present in all material respects the financial position of
the Company and the Operating Subsidiaries on a consolidated basis as of the
dates specified and the results of operations of the Company and the Operating
Subsidiaries on a consolidated basis for the periods covered thereby, and
neither the Company nor any Operating Subsidiary has any liabilities or
obligations of any nature (absolute, accrued, contingent or otherwise) (i) that
are not reflected or fully reserved against on the Latest Balance Sheet or
incurred in the ordinary course of the business consistent with past practice
subsequent to the date of the Latest Balance Sheet, (ii) that are not set forth
on the disclosure schedules hereto or, if not so specifically set forth, have
not directly arisen or will not directly arise in connection with or do not or
will not otherwise directly relate to, the matters specifically set forth on
such disclosure schedules or matters otherwise specifically disclosed by the
Company therein or herein, or (iii) if described by neither of the foregoing
clauses (i) or (ii), any of which would cause a Material Adverse Effect.
Section 3.7 Interim Changes. Except as set forth on Schedule 3.7, since the
date of the Latest Balance Sheet the Company and each Operating Subsidiary have
conducted their businesses, in all material respects, in the ordinary course and
in a manner consistent with past practice (except in connection with the
negotiation and execution and delivery of this Agreement), and there have not
been:
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(a) any changes in the financial condition, assets, liabilities,
personnel or operations of the Company or any Operating Subsidiary or in the
Company's or any Operating Subsidiary's relationships with suppliers,
distributors, lessors or others with whom they have business dealings, other
than changes which individually or in the aggregate do not have a Material
Adverse Effect;
(b) any damage, destruction or loss, whether or not covered by
insurance, materially and adversely affecting the Company or any Operating
Subsidiary;
(c) any increase in the compensation, bonus or benefits paid or to
become payable to any officers of the Company or any Operating Subsidiary or,
other than in the ordinary course and in a manner consistent with past practice,
any increase in the compensation or benefits payable to non-officer employees of
the Company or any Operating Subsidiary;
(d) any transfer, lease, license or other disposition of assets of the
Company or any Operating Subsidiary other than sales of inventory in the
ordinary course of business;
(e) any incurrence of indebtedness for borrowed money other than
pursuant to the Company's revolving line of credit or any Encumbrances placed on
any of the assets of the Company or any Operating Subsidiary;
(f) any new contract (or amendment to any existing contract)
obligating the Company or any Operating Subsidiary to purchase goods or services
for a period of 90 days or more, any amendment or termination of any material
lease, contract, license or other agreement or any waiver of material claims or
rights of the Company or any Operating Subsidiary against third parties;
(g) any material change in the collection, payment or credit
experience or practices or in the accounting practices, procedures or methods of
the Company or any Operating Subsidiary;
(h) any material agreement, arrangement or transaction between the
Company or any Operating Subsidiary and any Affiliate of the Company or any
Operating Subsidiary;
(i) any declaration, setting aside or payment of any dividend or
distribution in respect of any capital stock of the Company for any redemption,
purchases or other acquisitions of any of the Company's securities (except for
the redemption of the Company 15% Debt and the waiver of any rights of
conversion associated therewith, any conversion of the Company 11% Debt and any
redemption of the warrants issued to Miller & Schroeder and listed on Schedule
3.3A);
(j) other than as required by law, any increase in, amendment to, or
establishment of any bonus, insurance, severance, deferred compensation,
pension, retirement, profit sharing, stock option, stock purchase or other
employee benefit plan;
(k) paid any bonus to the employees of the Company or any Operating
Subsidiary;
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(l) any other transaction not in the ordinary course of business and
consistent with past practices of the Company or any Operating Subsidiary that,
individually or in the aggregate, could reasonably be expected to have a
Material Adverse Effect; or
(m) any commitment with respect to any of the foregoing.
Section 3.8 Real Property.
(a) Except as set forth on Schedule 3.8(a), neither the Company nor
any Subsidiary currently owns any real property in fee simple. Schedule 3.8(a)
sets forth a true, correct and complete list of (i) all real properties or
premises that have been owned in whole or in part by the Company or a
Subsidiary, and (ii) all real properties or premises that are leased or have
been leased in whole or in part by the Company or a Subsidiary. The properties
listed on Schedule 3.8(a) constitute all the real properties utilized by the
Company and the Subsidiaries. As to each leased property, Schedule 3.8(a) sets
forth (i) lease term, (ii) monthly rental (both base and additional rent), (iii)
renewal option, if any and (iv) any right of the landlord for each such parcel
to terminate the lease for each such parcel in the absence of a default of the
tenant thereunder. Except as set forth on Schedule 3.8(a), the Company or a
Subsidiary has good and marketable leasehold title to each leased property
described on Schedule 3.8(a). True, correct and complete copies of all
mortgages, deeds of trust, leases, guarantees of lease and other documents
concerning such real property have been delivered to the Parent or its
representatives. No amount payable by the Company or any Subsidiary under any
such lease is past due and neither the Company nor any Subsidiary has received
any notification of a default, offset or counterclaim under any such lease. No
event or condition has happened or presently exists which constitutes a default
or, after notice or lapse of time or both, would constitute a default under any
such lease.
(b) Each lease of premises utilized by the Company or a Subsidiary is
legal, valid and binding in all material respects, as between the Company or a
Subsidiary and the other party or parties thereto, and the Company or a
Subsidiary is a tenant or possessor in good standing thereunder, free of any
material default or breach and quietly enjoy the premises provided for therein.
Except as set forth on Schedule 3.8(a), neither the Company nor any Subsidiary
has assigned, mortgaged, pledged or otherwise encumbered its interest under any
such lease. Except as set forth on Schedule 3.8(b), no consent is required of
any party to any such lease by virtue of the Merger, and the Merger will not
result in the termination of any such lease.
(c) Except as set forth on Schedule 3.8(c), (i) the Company and the
Subsidiaries have all required legal or governmental approvals for each of the
properties and premises owned, leased, used or occupied by them, other than any
such approvals the absence of which, individually or in the aggregate, would not
have a Material Adverse Effect; (ii) the Company or a Subsidiary has good and
marketable title and owns outright, free and clear (except for rights of
landlords with respect to fixtures and leasehold improvements, if any, with
respect to leased premises) of all Encumbrances (other than Permitted Liens),
each improvement or fixture purported to be owned by it that is located in or on
any of the properties and premises owned, leased or occupied by it; (iii) no
improvement or fixture on any such premises is in violation of any law,
including without limitation any zoning, building, safety, health or other law
which, individually or in the aggregate, would have a Material Adverse Effect;
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(iv) each of such premises and properties is zoned for the purposes for which
such premises or properties are currently being used and has adequate parking
and unrestricted public access; and (v) no material portion of such premises or
properties has been condemned or otherwise taken by any public authority, and no
such condemnation or taking is threatened or contemplated by any public
authority.
Section 3.9 Personal Property. Except as set forth on Schedule 3.9 and
except for rights of landlords with respect to such personal property as may be
deemed to constitute fixtures and leasehold improvements, if any, with respect
to leases premises, the Company and the Subsidiaries have good and marketable
title to their respective assets (other than real property, which is covered in
Section 3.8) free and clear of all Encumbrances. The Company's and each
Subsidiary's machinery, equipment and other tangible assets have been maintained
in all material respects in good working condition (normal wear and tear
excepted) and are sufficient for the conduct of its business. The Company's and
each Subsidiary's accounts receivable represent bona fide obligations arising in
the ordinary course of the business and are fully collectible by the Company or
the Subsidiaries, net of reserves for doubtful accounts reflected on the Latest
Balance Sheet or reserves arising in the ordinary course of business consistent
with past practice since the date of the Latest Balance Sheet. The Company's and
each Subsidiary's inventory is not obsolete or damaged, and has been prepared in
compliance in all material respects with all applicable legal requirements. The
assets reflected on the Latest Balance Sheet constitute all of the assets,
properties and other rights of the Company and the Subsidiaries except for those
assets acquired or disposed of in the ordinary course of business consistent
with past practice subsequent to the date of the Latest Balance Sheet.
Section 3.10 Contracts.
(a) Schedule 3.10(a) sets forth a true, correct and complete list of
all Contracts (other than real property leases and Loan Agreements referred to
in Section 3.10(b) hereof) to which the Company and the Subsidiaries are a party
or to which their respective assets are subject (i) which involve consideration
with a value of $5,000 or more; (ii) which will require the Purchaser to
purchase or provide goods or services for a period of more than 90 days after
the Closing Date; (iii) which evidence or provide for any indebtedness for
borrowed money for which the Purchaser will be liable following the Closing or
any Encumbrance on any of its assets; (iv) which guarantee the performance,
liabilities or obligations of any other entity; (v) which restrict in any
material respect the ability of the Company or the Subsidiaries to conduct any
business activities; (vi) which involve any Affiliate; (vii) which are not in
the ordinary course of business; (viii) which are subject to termination or
modification by any third party as a result of the transactions contemplated by
this Agreement; or (ix) which are otherwise material to the Company or the
Subsidiaries (collectively (i) through (ix) above, "Other Contracts"). Except as
set forth on Schedule 3.10(a), neither the Company nor any Subsidiary is in
material breach of any Other Contract set forth on Schedule 3.10(a), nor to the
best of the Company's knowledge is any third party in material breach of any
such Other Contract. True, correct and complete copies of all Other Contracts
set forth on Schedule 3.10(a) have previously been delivered to the Parent or
its representatives.
(b) Set forth in Schedule 3.10(b) is (x) a list of all loan or credit
agreements, notes, bonds, mortgages, indentures and other agreements and
instruments pursuant to which any indebtedness of the Company or a Subsidiary is
outstanding or may be incurred (collectively, "Loan Agreements") and (y) the
respective principal amounts outstanding thereunder as of the dates specified in
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Schedule 3.10(b). Except as set forth on Schedule 3.10(b), since December 31,
1998, neither the Company nor any Subsidiary has made any drawings under or with
respect to the loan or credit agreements, notes, bonds, mortgages, indentures
and other agreements referred to in clause (x) above. Except as set forth on
Schedule 3.10(b), all such indebtedness is prepayable at any time without
penalty, subject to the notice provisions of the agreements governing such
indebtedness. For purposes of this Section 3.10 "indebtedness" shall mean,
without duplication, (A) all obligations for borrowed money, or with respect to
deposits or advances of any kind, (B) all obligations evidenced by bonds,
debentures, notes or similar instruments, (C) all obligations upon which
interest charges are customarily paid, (D) all obligations under conditional
sale or other title retention agreements relating to purchased property, (E) all
obligations issued or assumed as the deferred purchase price of property or
services (excluding obligations to creditors for inventory, services and
supplies incurred in the ordinary course of business), (F) all capitalized lease
obligations, (G) all obligations of others secured by any lien on property or
assets owned or acquired, whether or not the obligations secured thereby have
been assumed, (H) all obligations under interest rate or currency swap
transactions (valued at the termination value thereof), (I) all letters of
credit issued for the account of the Company or a Subsidiary), (J) all
obligations to purchase securities (or other property) which arise out of or in
connection with the sale of the same or substantially similar securities or
property, and (K) all guarantees and arrangements having the economic effect of
a guarantee of any indebtedness of any other person or entity.
(c) As of the date hereof, each of the Other Contracts and Loan
Agreements is in full force and effect and is a valid and binding obligation of
the Company or a Subsidiary and, to the knowledge of the Company, the other
parties thereto. Neither the Company nor any Subsidiary is in either payment
default or material non-payment default under any Other Contract or Loan
Agreement, nor does any condition exist that with notice or lapse of time or
both would constitute a material default thereunder. To the knowledge of the
Company, no other party to any Other Contract or Loan Agreement is in material
default thereunder. Neither the Company nor any Subsidiary has any reason to
believe that any of the Other Contracts or Loan Agreements that are renewable
will not be renewed on reasonable terms, nor does the Company know of any
expressed desire or intent, on the part of any other party to any of the Other
Contracts or Loan Agreements, to materially reduce or terminate the amount of
its business with the Company or a Subsidiary in the future. Except as set forth
in Schedule 3.10(c), no consent is required of any party to any of the Other
Contracts or any of the Loan Agreements by virtue of the Merger, and the Merger
will not result in the termination of any Other Contract or Loan Agreement.
Section 3.11 Litigation. Except as set forth on Schedule 3.11, there are no
pending or, to the best of the Company's knowledge, threatened claims, actions,
suits or proceedings against the Company or any Subsidiary which, if adversely
determined, individually or in the aggregate, would have a Material Adverse
Effect. Except as set forth on Schedule 3.11, neither the Company nor any
Subsidiary is presently subject to any injunction, order or other decree of any
court of competent jurisdiction.
Section 3.12 Compliance with Laws.
(a) The Company and each of the Subsidiaries have conducted their
businesses in compliance with all applicable laws and regulations of
governmental authorities, except for such violations that have been cured or
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that, individually or in the aggregate, would not have a Material Adverse
Effect. The Company and each Subsidiary possesses, and is in compliance in all
material respects with, all Governmental Permits necessary to the conduct of its
business, except where the failure to so possess or comply with any such
Governmental Permit would not have a Material Adverse Effect, and such
Governmental Permits they possess will be in full force and effect immediately
prior to the Merger.
(b) Neither the Company nor any Subsidiary has, and, to the best of
the Company's knowledge, no director, officer, agent of employee thereof: (i)
made or agreed to make any contributions, payments or gifts of its funds or
property to any governmental official, employee or agent where either the
payment or the purpose of such contribution, payment or gift was or is illegal
under the laws of the United States, any state thereof or any other jurisdiction
(foreign or domestic); (ii) established or maintained any unrecorded fund or
asset for any purpose, or made any false or artificial entries on any of its
books or records for any reason; (iii) made or agreed to make any contribution,
or reimbursed any political gift or contribution made by any other person or
entity, to candidates for public office whether Federal, state, local or
foreign, where such contributions were or would be violative of applicable law;
or (iv) otherwise violated the Federal Corrupt Practices Act of 1977, as
amended.
Section 3.13 Labor Matters. Except as set forth on Schedule 3.13, neither
the Company nor any Subsidiary is a party to any collective bargaining agreement
or any employment, consulting or similar agreement or any agreement, plan or
arrangement providing for severance payments to any employee upon termination of
employment or which provide benefits upon a change in control. Except as set
forth on Schedule 3.13, there is no labor strike, work stoppage, unfair labor
practice charge, grievance or other labor dispute pending or, to the best of the
Company's knowledge, threatened against or with respect to the Company or any
Subsidiary. There is no existing union representation question respecting any
employees of the Company or any Subsidiary, nor to the Company's knowledge are
there any organizational efforts with respect to any employees of the Company or
any Subsidiary. The Company has complied in all material respects with
immigration and naturalization laws in connection with the employment of its
work force.
Section 3.14 Environmental and Safety Matters.
(a) Except as set forth on Schedule 3.14 or as would not have a
Material Adverse Effect:
(i) The Company and each Subsidiary are and have been in
compliance at all times with all applicable Environmental and Safety
Requirements, and neither the Company nor any Subsidiary has received notice,
report or information regarding any liabilities (whether accrued, absolute,
contingent, unliquidated or otherwise), or any corrective, investigatory or
remedial obligations, arising under Environmental and Safety Requirements with
respect to the past or present operations or properties of the Company or any
Subsidiary relating to a period of the Company's or a Subsidiary's occupancy
thereof.
(ii) The Company and each Subsidiary has obtained, and is and has
been in compliance at all times with all terms and conditions of, all permits,
licenses and other authorizations required pursuant to Environmental and Safety
Requirements for the occupation of its properties and the conduct of its
operations.
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(iii) To the best of the Company's knowledge, none of the
following exists at any property owned or occupied by the Company or a
Subsidiary: asbestos-containing material in any form or condition;
polychlorinated biphenyl-containing materials or equipment; or underground
storage tanks.
(iv) To the best of the Company's knowledge, the transactions
contemplated by this Agreement do not impose any obligations under Environmental
and Safety Requirements for site investigation or cleanup or notification to or
consent of any government agencies or third parties.
(v) No facts, events or conditions relating to the past or
present properties or operations of the business or properties contiguous
thereto will (x) prevent, hinder or limit continued compliance by the Company
and the Subsidiaries with Environmental and Safety Requirements, (y) to the best
of the Company's knowledge, give rise to any corrective, investigatory or
remedial obligations on the part of the Company or any Subsidiary pursuant to
Environmental and Safety Requirements, or (z) to the best of the Company's
knowledge, give rise to any liabilities on the part of the Company or any
Subsidiary (whether accrued, absolute, contingent, unliquidated or otherwise)
pursuant to Environmental and Safety Requirements, including without limitation
those liabilities relating to onsite or offsite hazardous substance releases,
personal injury, property damage or natural resources damage.
(vi) Neither the Company nor any Subsidiary has assumed any
liabilities or obligations of any third party under Environmental and Safety
Requirements.
(b) The Company and each Subsidiary have delivered to the Parent or
its representatives true, correct and complete copies of all environmental
reports, analyses, tests or monitoring in the possession of the Company and each
of Subsidiary pertaining to any property owned or operated by the Company or the
Subsidiaries at any time and a true, correct and complete list identifying all
third party facilities at which contaminants generated by the Company or any
Subsidiary have been transported, treated, stored, handled or disposed within
the past five years.
Section 3.15 Tax Matters.
(a) Except as set forth on Schedule 3.15(a), the Company and each
Subsidiary have timely filed all federal and state income Tax Returns (and all
other material Tax Returns) required to be filed through the date hereof, and
all such Tax Returns are true and complete in all material respects. The Company
and each Subsidiary have timely paid all Taxes that are due, or claimed or
asserted by any taxing authority to be due, from or with respect to the Company
and each Subsidiary for all periods prior to the date hereof, whether or not
shown on any Tax Return, including withholding and similar Taxes with respect to
its employees, except in the case of all Tax Returns other than federal and
state income Tax Returns, where the failure to do so would not have a Material
Adverse Effect. Except as set forth on Schedule 3.15(a), with respect to any
period for which Tax Returns have not yet been filed, or for which Taxes are not
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yet due or owing, neither the Company nor any Subsidiary has any liability for
Taxes other than that set forth on the Latest Balance Sheet or incurred
subsequent to the date of the Latest Balance Sheet in the ordinary course of
business consistent with past practice. The Company and each Subsidiary have
made all required current estimated Tax payments sufficient to avoid any
underpayment penalties.
(b) Except as set forth on Schedule 3.15(b), no Tax Return of the
Company or any Subsidiary has been audited or examined by the Internal Revenue
Service or any other taxing authority during the last fiscal year. Except as set
forth on Schedule 3.15(b), there are no outstanding agreements, waivers or
arrangements extending the time within which the Company or any Subsidiary may
file any Tax Return or the statutory period of limitation applicable to any
claim for, or the period for the collection or assessment of, any Taxes due from
or with respect to the Company or any Subsidiary for any taxable period. The
Company and each Subsidiary have previously delivered to the Parent or its
representatives true, correct and complete copies of all federal, state, local
or foreign income or franchise Tax Returns filed by the Company and the
Subsidiaries for the fiscal years ended December 31, 1997 and 1998. No closing
agreement pursuant to Section 7121 of the Code (or any predecessor provision) or
any similar provision of any state, local, or foreign law has been entered into
by or with respect to the Company or any Subsidiary for any Tax period.
(c) Except as set forth on Schedule 3.15(c), no audit or other
proceeding by any court or other governmental or regulatory authority is pending
or, to the best of the Company's knowledge, threatened with respect to any Taxes
due from or with respect to the Company or any Subsidiary or any Tax Return
filed by or with respect to the Company or any Subsidiary, and there is no
pending dispute or claim concerning any Tax Liability of the Company or any
Subsidiary.
(d) Neither the Company nor any Subsidiary has made or is obligated to
make any payment, nor is the Company or any Subsidiary bound by any contract or
other agreement, plan or arrangement covering any Person that, individually or
collectively, could give rise to any payment, that would not be deductible under
Section 280G or 162(m) of the Code.
(e) Schedule 3.15(e) sets forth a list of all jurisdictions (whether
foreign or domestic) in which the Company and each Operating Subsidiary
presently files Tax Returns. To the Company's knowledge, no claim has ever been
made by an authority in a jurisdiction where the Company or a Subsidiary does
not file Tax Returns that it is or may be subject to taxation by that
jurisdiction.
(f) Neither the Company nor any Subsidiary is a "foreign person"
within the meaning of Section 1445(g)(3) of the Code.
Section 3.16 Employee Benefit Plans.
(a) Schedule 3.16(a) contains a true, correct and complete list of all
Employee Plans and all stock option, bonus or other incentive plans, vacation
policies, and other material employee benefit arrangements of the Company and
each Subsidiary, true, correct and complete copies of which have been delivered
to the Parent or its representatives.
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(b) Except as set forth on Schedule 3.16(b) and except for
contributions not yet due and payable, neither the Company nor any Subsidiary
has any liability or potential liability (including, but not limited to, actual
or potential withdrawal liability) with respect to (x) any multiemployer plan
within the meaning of Section 4001(a)(3) of ERISA, or (y) any Employee Plan of
the type described in Section 4063 and 4064 of ERISA or in Section 413(c) of the
Code (and regulations promulgated thereunder).
(c) No Employee Plan provides any health, life or other welfare
benefits to retired or former employees of the Company or any Subsidiary, other
than as required by Section 4980B of the Code. No Employee Plan is a defined
benefit plan (as defined in Section 3(35) of ERISA), and neither the Company nor
any Subsidiary has any actual or potential liability with respect to any defined
benefit plan. With respect to each of the Employee Plans, all required
contributions attributable to plan years ending on or prior to the Closing Date
and all required employer and salary reduction employee contributions for all
months ending on or prior to the Closing Date have been made or will be timely
made prior to the Closing Date.
(d) Each Employee Plan and all related trusts, insurance contracts and
funds (as applicable) have been maintained, funded and administered in
compliance in all material respects with all applicable laws and regulations,
including but not limited to ERISA and the Code. Neither the Company, any
Subsidiary or any Affiliate of the Company or any Subsidiary nor, to the best of
the Company's knowledge, any trustee or administrator of any Employee Plan or
any other Person, has engaged in any transaction with respect to any Employee
Plan which could reasonably be expected to subject the Company, any Subsidiary
or any trustee or administrator of such Employee Plan to any material liability,
tax or penalty (civil or otherwise) imposed by ERISA or the Code. No actions,
suits, investigations or claims with respect to the Employee Plans or with
respect to any fiduciary or other Person dealing with any Employee Plan are
pending or to the best of the Company's knowledge threatened, and the Company
has no knowledge of any facts which could reasonably be expected to give rise to
any such actions, suits, investigations or claims. The Company and each
Subsidiary have complied in all material respects with the requirements of
Section 4980B of the Code.
(e) No Employee Plan has been terminated within the last three
calendar years. No Employee Plan has incurred any accumulated funding
deficiency, whether or not waived, and none of the assets of the Company or any
Subsidiary are subject to any lien arising under 302(f) of ERISA or 412(n) of
the Code.
(f) Except as set forth on Schedule 3.16(f), each Employee Plan that
is intended to be qualified under Section 401(a) of the Code, and each trust
forming a part thereof, has received a favorable determination letter from the
Internal Revenue Service as to the qualification under the Code of such Employee
Plan and the tax exempt status of such related trust, and nothing has occurred
since the date of such determination letter that could reasonably be expected to
adversely affect the qualification of such Employee Plan or the tax exempt
status of such related trust.
(g) With respect to each Employee Plan, the Company has provided the
Parent or its representatives with true, correct and complete copies, to the
extent applicable, of (i) all documents (including summary plan descriptions and
other material employee communications) pursuant to which such Employee Plan is
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maintained, funded and administered, (ii) the most recent annual report (Form
5500 series) filed with the Internal Revenue Service (with attachments) if such
Form is required by the Code, ERISA or any other applicable laws or regulations
(iii) the most recent financial statements, if such financial statements are
required by the Code, ERISA or any other applicable laws or regulations and (iv)
all governmental rulings, determinations and opinions (and pending requests for
governmental rulings, determinations and opinions) and correspondence with
respect thereto.
Section 3.17 Insurance. Schedule 3.17 contains a true, correct and complete
listing of all policies of insurance carried by the Company and each Subsidiary,
including the type and amount of coverage, deductible levels, expiration dates
and any outstanding unpaid claims under such policies. All premiums due with
respect to such policies have been paid and such policies are in full force and
effect and will remain in full force and effect through the Closing Date.
Neither the Company nor any Subsidiary has received any notices from any of its
insurance carriers indicating cancellation or non-renewal of any insurance or
suggested changes in the Company's or any Subsidiary's operations as a condition
of such insurance. The Company believes that such insurance is adequate for the
conduct of its business and the business of each Subsidiary and such insurance
is customary for similar companies of similar size.
Section 3.18 Affiliate Interests. Except as set forth on Schedule 3.18,
neither the Company nor any Subsidiary is a party to any transaction with (a)
any employee, officer or director of the Company or any Subsidiary, (b) any
relative of any such employee, officer or director, or (c) any entity,
corporation or partnership that, directly or indirectly, is an Affiliate of any
such employee, officer, director or relative, including without limitation any
contract, agreement or other arrangement (i) providing for the furnishing of
services by such Person, (ii) providing for the rental of real or personal
property from or to such Person, (iii) providing for the guaranty of any
obligation of such Person, (iv) requiring any payment to such Person which will
continue beyond the Closing Date, or (v) establishing any right or interest of
such Person in any of the assets or rights of the Company or any Subsidiary.
Section 3.19 Fees, Commissions and Expenses. Neither the Company nor any
Subsidiary has paid or is obligated to pay any brokerage commissions, finders'
fees or similar compensation (including any payments to employees of the
Company) in connection with the transactions contemplated by this Agreement.
Section 3.20 Bank Accounts. Schedule 3.20 sets forth a true, correct and
complete list of each of the bank accounts maintained by the Company and each
Subsidiary and the persons listed as authorized signatories thereon.
Section 3.21 Intellectual Property. Schedule 3.21 is a list of all
trademarks, trade names, patents, fictitious business names, service marks and
pending applications therefor that are owned by the Company and each Subsidiary
and a list of all trademarks, trade names, patents, fictitious business names,
service marks and pending applications therefor that are used by the Company and
each Subsidiary or which the Company or any Subsidiary has the right to use.
Except as disclosed in Schedule 3.21, to the best of the Company's knowledge, in
the last five years, no written claim alleging any infringement or violation of
any statutory or common law or any other rights of any third parties (including,
without limitation, copyright, trademark and the rights of privacy and
publicity) has been received by the Company or any Subsidiary.
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Section 3.22 Employment Agreements. Schedule 3.22 contains a complete list
of each management, employment, consulting or other agreement, contract or
commitment, in each case, in writing, between each of the Company and each
Subsidiary and any employee, officer or director thereof (a) providing for the
employment of any person or providing for retention of management, executive or
consulting services and providing for an obligation to pay or accrue
compensation of $50,000 or more per annum, or (b) providing for the payment or
accrual of any compensation or severance upon (i) a change in control of the
Company or any Subsidiary or (ii) any termination of such management,
employment, consulting or other relationship.
Section 3.23 Indemnification of Employees, Etc. Except in connection with
matters set forth in Schedule 3.23 hereto, and except for matters covered by
insurance (subject to deductibles) as of the date hereof, there is no
proceeding, claim, suit, action or governmental investigation pending or, to the
best knowledge of the Company, threatened, with respect to which any current or
former director, officer, employee or agent of the Company or any Subsidiary is
entitled, or has asserted he is entitled, to claim indemnification from the
Company or any Subsidiary pursuant to the Articles of Incorporation or bylaws of
the Company or any Subsidiary, as provided in any indemnification agreement to
which the Company or any Subsidiary is a party, or pursuant to applicable law.
Section 3.24 Disclosure. No information supplied by the Company or any
Subsidiary in this Agreement or the Schedules or Exhibits hereto, or in the
financial statements, certificates or other writings furnished by the Company or
any Subsidiary to the Parent or any of its representatives prior to the date
hereof, contains any untrue statement of material fact or omits or shall omit to
state any material fact necessary in order to make the statements herein or
therein, in the light of circumstances under which they were made, not
misleading.
Section 3.25 Board Recommendation. On or prior to the date hereof, the
Board of Directors of the Company, at a meeting duly called and held, has by the
vote of those directors present (a) determined that this Agreement and the
transactions contemplated hereby, are fair and in the best interests of the
Company's stockholders and has approved the same and (b) resolved to recommend
that the holders of the Company Common Stock approve the Merger.
Section 3.26 Year 2000 Compliant. The Company has licensed from Vertical
Computer Systems, Inc. (The "Vendor") computer software for use in documenting
and monitoring pawn transactions and such software is the only software material
to the Company's operations. The Company believes such software is Year 2000
Compliant. Such belief is based upon assurances of the Vendor. Neither the
Company nor any of the Subsidiaries has independently evaluated the reliability
of such assurances although neither has any reason to doubt the veracity of such
assurances. In addition, without undertaking independent investigation, neither
the Company nor any Subsidiary is aware of any failure on the part of any of
their material vendors, suppliers or other business relations to be Year 2000
Compliant. Neither the Company nor any Subsidiary believes any further
evaluation of its systems (other than as described above) is required in order
for the Company's and the Subsidiary's systems to be Year 2000 Compliant except
where such failure to be Year 2000 Compliant would not cause a Material Adverse
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Effect. "Year 2000 Compliant" means designed to be used prior to, during and
after the calendar year 2000 A.D., and will accurately receive, provide and
process date/time data (including, but not limited to, calculating, comparing,
and sequencing) from, into and between the 20th and 21st centuries, including
the years 1999 and 2000, and leap-year calculations, and will not malfunction,
cease to function or provide invalid or incorrect results as a result of
date/time data, to the extent that other information technology, used in
combination with such item, properly exchanges date/time data with it.
Article IV
Representations and Warranties of the Parent and the Purchaser
The Parent and the Purchaser, jointly and separately, represent and warrant
to the Company as follows:
Section 4.1 Organization and Qualification. Each of the Parent and the
Purchaser (i) is a corporation validly existing and in good standing under the
laws of the State of Colorado, (ii) has the requisite corporate power to carry
on its business as now being conducted, and (iii) is duly qualified as a foreign
corporation in good standing in each jurisdiction where the conduct of its
business makes such qualification necessary, except where the failure to be so
qualified or in good standing would not, individually or in the aggregate, have
a material adverse effect on the assets, operations, financial conditions or
prospects of the Parent or the Purchaser or on the ability of the Parent or the
Purchaser to consummate the transactions contemplated hereby.
Section 4.2 Corporate Authorization. Except for the approval of the
Parent's stockholders, which approval is a condition to the Merger, the
execution, delivery and performance by each of the Parent and the Purchaser of
this Agreement and the transactions contemplated hereby are within the corporate
powers of each of the Parent and the Purchaser and have been duly authorized by
all necessary corporate action on the part of each of the Parent and the
Purchaser. This Agreement constitutes a valid and binding obligation of each of
the Parent and the Purchaser, enforceable against each of the Parent and the
Purchaser in accordance with its terms, subject to bankruptcy, insolvency,
reorganization, fraudulent conveyance and transfers, and moratorium or other
similar laws of general application affecting the enforcement of creditors'
rights generally.
Section 4.3 Consents and Approvals; No Violation. Except as set forth on
Schedule 4.3, the execution, delivery and performance by each of the Parent and
the Purchaser of this Agreement and the consummation of the transactions
contemplated hereby require no action by or in respect of, filing with, approval
of, or notice to any governmental or regulatory body, agency or official.
Neither the execution, delivery and performance by the Parent and the Purchaser
of this Agreement, nor the consummation by the Parent and the Purchaser of the
transactions contemplated hereby, will (a) violate, conflict with, or result in
a breach of, any provision of the charter or bylaws of the Parent or the
Purchaser, (b) result in a default (or give rise to any right of termination,
cancellation or acceleration) under, any of the terms, conditions or provisions
of any Contract to which the Parent or the Purchaser is a party, or by which its
properties or assets may be bound, except for such violations, breaches or
defaults which would not prevent or delay consummation of the transactions
contemplated hereby or (c) require any authorization, consent, approval,
exemption or other action by or notice to any court or administrative or
governmental body or other third party pursuant to any law, statute, rule,
regulation or any Contract, order, judgment or decree to which the Parent or the
Purchaser is subject or by which any of their assets are bound, except for such
authorizations, consents, approvals, exemptions or other actions which would not
prevent or delay consummation of the transactions contemplated hereby.
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Section 4.4 Litigation. There are no claims, actions, suits, approvals,
investigations, informal objections, complaints or proceedings pending or, to
the best of the Parent's and the Purchaser's knowledge, threatened against the
Parent or the Purchaser before any court, arbitrator, or administrative,
governmental or regulatory authority or body, nor is the Parent or the Purchaser
subject to any order, judgment, writ, injunction or decree, which in either case
could prevent, delay or materially burden the transactions contemplated hereby.
Section 4.5 Compliance with Laws. The Parent has conducted its business in
compliance with all applicable laws and regulations of governmental authorities,
except for such violations that have been cured or that, individually or in the
aggregate, would not have a material adverse effect on the Parent's business or
financial condition. The Parent possesses, and is in compliance in all material
respects with, all Governmental Permits necessary to the conduct of its
business.
Section 4.6 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the
transactions contemplated hereby based upon arrangements made by or on behalf of
the Parent or the Purchaser.
Section 4.7 Ownership of Company Stock. Other than pursuant to this
Agreement, neither the Parent nor the Purchaser nor any of their respective
Affiliates (i) beneficially owns, directly or indirectly, or (ii) are parties to
any agreement, arrangement or understanding for the purpose of acquiring,
holding, voting or disposing of, Company Common Stock.
Section 4.8 Formation of Purchaser. The Purchaser was formed solely for the
purpose of engaging in the transactions contemplated by this Agreement. As of
the date hereof and the Effective Time, except for obligations or liabilities
incurred in connection with its incorporation or organization and except for
this Agreement and any other agreements or arrangements contemplated by this
Agreement or in furtherance of the transactions contemplated hereby, the
Purchaser has not and will not have incurred, directly or indirectly, through
any subsidiary or Affiliate, any obligations or liabilities or engaged in any
business activities of any type or kind whatsoever or entered into any
agreements or arrangements with any person.
Section 4.9 Issuance of Securities.
(a) Stock. Sufficient shares of Parent Common Stock have been, and
following the filing of the Certificate of Designation attached hereto as
Exhibit B, sufficient shares of Parent Preferred Stock will have been reserved
for issuance in the Merger. The shares of Parent Common Stock and the shares of
Parent Preferred Stock to be issued in the Merger will, when issued and
delivered to the shareholders of the Company as a result of the Merger and
pursuant to the terms of this Agreement, be duly and validly authorized and
issued, fully paid, nonassessable and free of preemptive rights or other
restrictions other than those imposed pursuant to securities laws and those
expressly provided for in this Agreement, and, assuming that no more than 35 of
the holders of the Company Common Stock are not "accredited investors" as
defined in Regulation D under the Securities Act, the issuance thereof is not
required to be registered under the Securities Act or any state securities or
blue sky laws (although routine filings may be required under such state
securities or blue sky laws.)
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(b) Promissory Notes. The Promissory Notes to be issued in the Merger
will, when issued and delivered to the shareholders of the Company as a result
of the Merger and pursuant to the terms of this Agreement, be duly and validly
authorized and issued, enforceable against the Purchaser (and, with respect to
the guaranty thereof, the Parent) in accordance with their terms, and free of
restrictions other than those imposed pursuant to securities laws, and, assuming
that no more than 35 of the holders of the Company Common Stock are not
"accredited investors" as defined in Regulation D under the Securities Act, the
issuance thereof is not required to be registered under the Securities Act or
any state securities or blue sky laws (although routine filings may be required
under such state securities or blue sky laws).
(c) Parent 11% Debt. Any Parent 11% Debt instruments issued in
accordance with Section 2.7(a) will, when issued and delivered to the holders of
Company 11% Debt pursuant to the terms of this Agreement, be duly and validly
authorized and issued, enforceable against the Parent in accordance with their
terms, and free of restrictions other than those imposed pursuant to securities
laws, and, assuming that all holders of Company 11% Debt to whom such Parent 11%
Debt is to be issued are "accredited investors" as defined in Regulation D under
the Securities Act, the issuance thereof is not required to be registered under
the Securities Act or any state securities or blue sky laws (although routine
filings may be required under such state securities or blue sky laws).
(d) Shares Issuable Upon Conversion. Sufficient shares of Parent
Common Stock have been reserved for issuance upon the conversion of the Parent
Preferred Stock and the Parent 11% Debt. The shares of Parent Common Stock
issuable upon the conversion of the Parent Preferred Stock and the Parent 11%
Debt will, when issued in accordance with the terms of the Parent Preferred
Stock or the Parent 11% Debt, as the case may be, be duly and validly issued,
fully paid, nonassessable and free of preemptive rights or other restrictions
other than those imposed pursuant to securities laws.
Section 4.10 NASDAQ SmallCap Market Listing. Parent Common Stock is duly
listed on the NASDAQ SmallCap Market and no inquiry or proceeding has been
initiated or, to the knowledge of Parent, threatened for the purpose of causing
such listing to be terminated or restricted.
Section 4.11 SEC Documents. Parent has furnished the Company with a true
and complete copy of each report, schedule, registration statement and
definitive proxy statement, if any (collectively, "SEC Documents"), filed by
Parent with the Securities and Exchange Commission (the "SEC") since January 1,
1997, which are all the documents that Parent has been required to file with the
SEC under applicable law since that date.
Section 4.12 Disclosure. No information supplied by the Parent or the
Purchaser in this Agreement or the Schedules or Exhibits hereto, or certificates
or other writings furnished by the Parent or the Purchaser to the Company or any
of its representatives prior to the date hereof, contains any untrue statement
of material fact or omits or shall omit to state any material fact necessary in
order to make the statements herein or therein, in the light of circumstances
under which they were made, not misleading.
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Section 4.13 Capitalization. The Parent's outstanding capital stock as of
the date of this Agreement consists of 3,685,410 shares of Parent Common Stock
and 37,800 shares of Redeemable Preferred Stock, all of which is duly authorized
and validly issued and is fully paid and nonassessable. The Purchaser's
outstanding capital stock as of the date of this Agreement consists of 100
shares of common stock, all of which is duly authorized and validly issued, is
fully paid and nonassessable, and is owned of record by Parent.
Article V
Covenants
Section 5.1 Conduct of Business of the Company and the Subsidiaries. Except
as contemplated by this Agreement or otherwise consented to in writing by the
Parent, during the period from the date of this Agreement to the Closing Date:
(a) the Company shall, and shall cause each of its Subsidiaries to, conduct its
business in the ordinary course and use its best efforts to preserve intact its
current business organizations, keep available the services of current officers
and employees and preserve its relationships with customers, suppliers,
licensors, licensees, advertisers, distributors and others having business
dealings with it and to preserve goodwill; and (b) the Company will not, and
shall not permit any of the Subsidiaries to, intentionally take any actions that
could reasonably be expected to have a Material Adverse Effect. Without limiting
the generality of the foregoing, and except as otherwise expressly provided in
this Agreement or as set forth on Schedule 5.1, prior to the Closing Date, the
Company will not, and will nor permit any of the Subsidiaries to, without the
prior written consent of the Parent: (i) declare or pay any dividend or other
distribution upon, or repurchase or otherwise reacquire for value, any capital
stock of the Company; (ii) issue any capital stock of the Company or any
securities convertible into or exchangeable for capital stock of the Company;
(iii) reacquire any shares of any class of capital stock of the Company; (iv)
incur any indebtedness for borrowed money other than borrowings for working
capital purposes in the ordinary course of business; (v) acquire any substantial
assets other than in connection with planned capital expenditures approved by
the Company's board of directors prior to the date hereof and described on
Schedule 5.1; (vi) sell, pledge, dispose of or encumber its assets, except for
sales of inventory and sales of obsolete assets and assets concurrently replaced
with similar assets and the incurrence of Permitted Liens, in each case in the
ordinary course of its business consistent with past practice; (vii) except as
otherwise required by law or by any existing plan, arrangement or agreement,
enter into, adopt or amend in any material respect, any Employee Plan for the
benefit of its employees or increase the compensation or bonus payable to
executive officers of the Company; or (viii) authorize any of, or commit or
agree to take any of, the foregoing or take any other intentional action that
would cause the Company's representations and warranties to be untrue in any
material respect.
Section 5.2 Approval of the Shareholders of the Company. As soon as
practicable (but in any event no later than December 31, 1999), the Company,
acting through its Board of Directors, shall in accordance with applicable law,
take all steps necessary duly to call, give notice of, convene and hold a
special meeting of its shareholders, including the preparation and distribution
of a notice of meeting, proxy and proxy statement, for the purpose of adopting
and approving this Agreement and the transactions contemplated hereby. The
notice of such meeting shall contain the information required to be included
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therein pursuant to the MBCA. The Board of Directors of the Company has
determined that this Agreement and the transactions contemplated hereby are
advisable and in the best interests of the shareholders of the Company, and it
shall, (i) recommend that the holders of Company Common Stock vote in favor of,
and approve, this Agreement and the transactions contemplated hereby and the
Merger, and (ii) use its reasonable best efforts to obtain such shareholder
approval.
Section 5.3 Approval of the Shareholders of the Parent. As soon as
practicable (but in any event no later than December 31, 1999), the Parent,
acting through its Board of Directors, shall in accordance with applicable law,
take all steps necessary duly to call, give notice of, convene and hold a
special meeting of its shareholders, including the preparation and distribution
of a notice of meeting, proxy and proxy statement, for the purpose of adopting
and approving this Agreement and the transactions contemplated hereby. The
notice of such meeting shall contain the information required to be included
therein pursuant to the CBCA and federal securities laws. The Board of Directors
of the Parent has determined that this Agreement and the transactions
contemplated hereby are advisable and in the best interests of the shareholders
of the Parent, and it shall, (i) recommend that the holders of Parent common
stock vote in favor of, and approve, this Agreement and the transactions
contemplated hereby and the Merger, and (ii) use its reasonable best efforts to
obtain such shareholder approval.
Section 5.4 Filings; Third Party Consents. Each of the Company, the Parent
and the Purchaser shall exercise reasonable efforts to take or cause to be taken
all actions, and to do or cause to be done all things necessary, proper or
advisable under applicable laws to consummate and make effective, as soon as
reasonably practicable, the transactions contemplated hereby. Without limiting
the generality of the foregoing, each of the Company, the Parent and the
Purchaser shall exercise reasonable efforts to (a) obtain all necessary permits,
authorizations, consents, licenses (pawn and otherwise), waivers, and approvals
from third parties, parties to Contracts or governmental authorities including
the delivery of any required notice thereto, (b) oppose, lift or rescind any
injunction or restraining order or other order adversely affecting the ability
of the parties to consummate the transactions contemplated hereby, and (c)
otherwise fulfill all conditions to this Agreement within its reasonable
control.
Section 5.5 Proxy Statement. As soon as is practicable after the date
hereof, the Parent and the Company shall use reasonable efforts to draft a joint
proxy statement and private placement memorandum that is appropriate for the
Merger and the other transactions described herein (the "Joint Proxy
Statement"). The Parent shall file with the Securities and Exchange Commission
(the "Commission") as soon as is reasonably practicable after the date hereof an
appropriate version of the Joint Proxy Statement ("Parent's Proxy Statement")
and use its best efforts to respond to any comments thereto and cause Parent's
Proxy Statement to be mailed to holders of Parent Common Stock as promptly as
practicable thereafter. In addition, as soon as practicable after the date
hereof, the Company shall draft an appropriate version of the Joint Proxy
Statement ("Company's Proxy Statement") and cause Company's Proxy Statement to
be mailed to the holders of the Company's debt and equity security holders
concurrently with or as soon as practicable following the mailing of the
Parent's Proxy Statement. The information provided and to be provided by each of
the Company and the Parent specifically for inclusion in or incorporation by
reference in the Joint Proxy Statement shall be true and correct in all material
respects without omission of any material fact which is required to make such
information not misleading as of the date thereof and in light of the
circumstances under which given or made.
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The Company covenants that none of the information supplied, or to be
supplied, by the Company or its Subsidiaries specifically for inclusion or
incorporation by reference in the Joint Proxy Statement or Parent's Proxy
Statement, including, without limitation, information concerning the Company,
its Subsidiaries or any of their respective affiliates, directors, officers,
employees, agents, stockholders or representatives will, at the time of mailing
of Parent's Proxy Statement or any amendment or supplement thereto to the
Parent's stockholders, contain any untrue statement of material fact, or omit to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. If, at
any time prior to the date of the Parent's stockholders' meeting, any event with
respect to the Company or any of its Subsidiaries, or with respect to other
information supplied by the Company or its Subsidiaries for inclusion in the
Joint Proxy Statement or Parent's Proxy Statement, shall occur which is required
to be described in an amendment of, or a supplement to, the Joint Proxy
Statement or Parent's Proxy Statement, such information shall be promptly
delivered to the Parent, and the Parent and the Company shall prepare an
amendment or supplement to the Joint Proxy Statement. The Parent shall then
promptly prepare and file with the Commission an amendment or supplement to
Parent's Proxy Statement and, as required by law, disseminate to the Parent's
stockholders such amendment or supplement. All documents that either the Company
or any of its Subsidiaries is responsible for filing with any governmental
authority will comply in all material respects with the provisions of applicable
law as to the information required to be contained therein, except that no
covenant is made by the Company or any of its Subsidiaries with respect to
statements made therein based on information supplied by the Parent or any of
its Subsidiaries or any of their respective affiliates, directors, officers,
employees, agents or representatives in writing for inclusion therein.
The Parent covenants that none of the information supplied, or to be
supplied, by the Parent or its Subsidiaries specifically for inclusion or
incorporation by reference in the Joint Proxy Statement or the Company's Proxy
Statement, including, without limitation, information concerning the securities
being offered as part of the Merger Consideration or the Parent, its
Subsidiaries or any of their respective affiliates, directors, officers,
employees, agents, stockholders or representatives will, at the time of mailing
of Company's Proxy Statement or any amendment or supplement thereto to the
Company's equity and debt security holders, contain any untrue statement of
material fact, or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If, at any time prior to the date of the Company's stockholders'
meeting, any event with respect to the Parent or its Subsidiaries, including the
Purchaser, or with respect to other information supplied by the Parent or its
Subsidiaries for inclusion in the Joint Proxy Statement or Company's Proxy
Statement, shall occur which is required to be described in an amendment of, or
a supplement to the Joint Proxy Statement or Company's Proxy Statement, such
information shall be promptly delivered to the Company for dissemination to the
Company's equity and debt security holders. All documents that either the Parent
or any of its Subsidiaries is responsible for filing with any governmental
authority will comply in all material respects with the provisions of applicable
law as to the information required to be contained therein, except that no
covenant is made by the Parent or any of its Subsidiaries with respect to
statements made therein based on information supplied by the Company or any of
its Subsidiaries or any of their respective affiliates, directors, officers,
employees, agents or representatives in writing for inclusion therein.
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Section 5.6 Access to Information.
(a) The Company shall afford to the Parent and its respective
accountants, counsel, financial advisors and other representatives (the "Parent
Representatives") full access during normal business hours through the Closing
Date to all Company and Subsidiary properties, books, contracts, commitments and
records (including, but not limited to, Tax Returns) and, during such period,
shall furnish promptly to the Parent (i) a copy of each report, schedule and
other document filed or received by any of them which may have a material effect
on its businesses, properties or personnel, and (ii) such other information
concerning its businesses, operations, properties, assets, condition (financial
or other) results of operations and personnel as the Parent shall reasonably
request.
(b) In the event that this Agreement is terminated in accordance with
its terms, the Parent shall, and the Parent shall cause each Parent
Representative to, promptly redeliver to the Company all non-public material in
written or machine readable form provided pursuant to this Section 5.5 and shall
not retain any copies, extracts or other reproductions in whole or in part of
such material. In such event, all documents, memoranda, notes and other writings
in written or machine readable form prepared by the Parent based on the
information in such material shall be destroyed (and the Parent shall use its
reasonable best efforts to cause their advisors and representatives to similarly
destroy their documents, memoranda and notes), and such destruction (and
reasonable best efforts) shall be certified in writing by an authorized officer
supervising such destruction.
(c) The Company shall promptly advise the Parent in writing of any
change or the occurrence of any event after the date of this Agreement having,
or which, insofar as can reasonably be foreseen, in the future may have, a
Material Adverse Effect on the business, operations, properties, assets,
condition (financial or other) or results of operations of the Company or any
Subsidiary.
Section 5.7 Confidentiality. The Parent and the Company will be furnishing
to each other certain information which is either non-public, confidential or
proprietary in nature. The Parent and the Company agree that all such
information furnished or otherwise obtained, directly or indirectly, by such
party and its officers, directors, employees, agents, Affiliates, or otherwise
and all reports, analysis, compilations, data, studies or other documents
prepared by such party, its officers, directors, employees, agents, Affiliates,
or otherwise, containing or based, in whole or in part, on any such furnished
information will be kept strictly confidential and will not, without the prior
written consent of the other party, be disclosed to any other individual,
corporation, partnership, joint venture, trust or association in any manner
whatsoever, in whole or in part and will not be used for any purpose other than
evaluating the transactions described herein; except that (i) if either party
receives an opinion of counsel that it is legally obligated to release such
information, such party may do so after notice to and consultation with the
other party, (ii) either party may disclose such information as may be necessary
in connection with seeking any required statutory approvals and (iii) either
Party may disclose any information that is required by law or judicial or
administrative order to disclose.
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Section 5.8 Public Announcements. The Company and the Parent shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the transactions contemplated
hereby and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law.
Section 5.9 Exclusivity. Unless and until this Agreement shall have been
terminated in accordance herewith, the Company shall not, directly or indirectly
through any officer, director, employee, agent, Affiliate or otherwise, (i)
enter into any agreement, agreement in principle or other commitment (whether or
not legally binding) relating to any acquisition, business combination with,
recapitalization of, or merger or purchase of all or a significant portion of
the assets of, or any material equity interest in, the Company or relating to
any other similar transaction (a "Competing Transaction"), (ii) solicit,
initiate or encourage the submission of any proposal or offer from any person or
entity (including any of its officers, directors, employees and agents) relating
to any Competing Transaction, or (iii) participate in any discussions or
negotiations regarding, furnish to any other person or entity any information
with respect to, or otherwise assist, facilitate or cooperate in any way with
any effort or attempt by any other person or entity to effect a Competing
Transaction. The Company shall promptly notify the Parent if any substantive
proposal regarding a Competing Transaction (or any inquiry or contract with any
Person with respect thereto) is made, and shall advise the Parent of the
contents thereof (and, if in written form, provide the Parent with copies
thereof).
Section 5.10 Options.
Effective at the Effective Time, Parent hereby assumes the Company's
obligations with respect to its stock options, as follows:
Not later than the Effective Time, each option to purchase shares of
Company Common Stock (each a "Company Stock Option") which is outstanding
immediately prior to the Effective Time pursuant to any stock option plan
or stock incentive plan of the Company in effect on the date hereof and
which plan is identified on Schedule 3.3A (the "Company Stock Plans") shall
become and represent an option to purchase an equal number of shares (up to
a maximum of 242,350 shares) of Parent's Common Stock (a "Substitute
Company Option"), at an exercise price per share of Parent Common Stock
equal to the greater of the closing price of Parent's Common Stock on the
day of Closing or $2.375 per share. After the Effective Time, each
Substitute Company Option shall be exercisable upon the same terms and
conditions as were applicable to the related Company Stock Option
immediately prior to the Effective Time, and each Substitute Company Option
shall be vested to the extent provided in the related Company Stock Plan or
the option agreement with respect to the related Company Stock Option, as
the case may be. Prior to the Effective Time, the Company shall amend its
Company Stock Plans to provide for the foregoing. Parent represents and
warrants that it has, or at the Effective Time will have, taken all action
required to issue and reserve a sufficient number of shares of Parent
Common Stock subject to such Company Plans to provide for the exercise of
the Substitute Company Option (including without limitation such Substitute
Company Options as constitute incentive stock options). If not already
registered, Parent agrees to register with the Commission on Form S-8, and
with any state securities commission as required, on or before thirty (30)
days after the Effective Time, all Parent Common Stock subject to
Substitute Company Options.
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Section 5.11 Warrants. Not later than the Effective Time, each warrant to
purchase shares of Company Common Stock (each a "Company Stock Warrant") which
is outstanding immediately prior to the Effective Time and which is identified
on the Schedule 3.3A (excluding the 50,000 warrants issued to Miller &
Schroeder, which shall not be subject to such exchange) shall, pursuant to an
exchange agreement in form and substance reasonably satisfactory to the Parent
and the holders of such warrants (the "Exchange Agreements"), be exchanged for a
warrant to purchase an equal number of shares (up to a maximum of 49,090 shares)
of Parent's Common Stock (a "Substitute Company Warrant"), at an exercise price
per share of Parent Common Stock equal to the greater of the closing price of
Parent's Common Stock on the day of Closing and $2.375 per share. After the
Effective Time, each Substitute Company Warrant shall be exercisable on the same
terms and conditions as were applicable to the related Company Stock Warrant
immediately prior to the Effective Time. Parent represents and warrants that it
has, or at the Effective Time will have, taken all action required to reserve a
sufficient number of shares of Parent Common Stock to provide for the exercise
of the Substitute Company Warrants.
Section 5.12 Proxy and Lock-up. At or before the Closing Date, any Parent
Common Stock to be issued to a holder of more than seven percent (7%) of Company
Common Stock immediately prior to the Effective Time (a "Controlling
Shareholder") shall be subject to a Proxy and Lock-up Agreement substantially in
the form attached hereto as Exhibit D. Pursuant to the Proxy and Lock-up
Agreement, the Parent's Board of Directors shall be entitled to vote such shares
for all matters to be voted upon by the Parent's stockholders during the two
year period following the Effective Date provided that all such stock shall be
voted by the Parent's Board of Directors in favor of the two Director nominees
appointed in accordance with Section 5.13 below. In addition, pursuant to the
Proxy and Lock-up Agreement, all Parent Common Stock held by a Controlling
Shareholder shall, immediately following the Closing Date, be subject to a
lock-up such that no more than 25% of any such Controlling Shareholder's Parent
Common Stock may be sold by him, under Rule 144 of the Securities Act or
otherwise (in any three month period) for two years following the Effective
Time.
Section 5.13 Directors. The Controlling Shareholders have designated Jack
D. Hartsoe and Stan Baratz (collectively and together with any successor
appointed by the Company Committee who is approved by the Parent's Board upon
the death, disability or resignation of either Designee, the "Controlling
Shareholders' Designees") as their designees to the Board of Directors of the
Parent. Parent shall seek the ratification of the Controlling Shareholders'
Designees as such Directors (in a class of Directors whose terms expire at the
Parent's 2001 annual meeting) in the Parent's Proxy Statement; provided,
however, that in the event that such designees are ratified to the Board of
Directors of the Parent, such Board of Directors shall have at least two
directors who are independent directors under any applicable rules of the NASDAQ
Small Cap Market (the "Independent Directors"); and provided further that, if
the number of Independent Directors shall be reduced below two for any reason
whatsoever, any remaining Independent Directors (or Independent Director, if
there shall be only one remaining) shall be entitled to designate a person to
fill such vacancy who shall be deemed to be an Independent Director for purposes
of this Agreement or, if no Independent Director then remains, the other
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directors shall designate two persons to fill such vacancies who shall be
Independent Directors, and such persons shall be deemed to be Independent
Directors for purposes of this Agreement. In connection with the foregoing, the
Parent shall increase the size of the Parent's Board of Directors to a minimum
of six directors. In addition, so long as the Proxy and Lock-up Agreements are
in effect, the Parent's board of directors shall use good faith efforts to
maintain a maximum of seven directors on the Parent's board of directors. In the
event that (i) the Parent's board of directors shall be increased to more than
seven directors or (ii) a Controlling Shareholders' Designee agrees to stand for
reelection to the Parent's board of directors at its annual meeting in 2001 and
is not re-elected, the Proxy and Lock-up Agreement(s) shall terminate.
Section 5.14 Counsel Opinion. On or before the first anniversary date of
the Effective Time, the Parent shall cause its counsel to deliver an opinion to
the Parent's stock transfer agent in substantially the form of Exhibit E
attached hereto.
Section 5.15 Notification of Certain Matters. The Company and the Parent
shall promptly notify each other of:
(a) any notice or other communication from any person alleging that
the consent of such person is required or contemplated by this Agreement;
(b) any notice or other communication from any governmental entity in
connection with the transactions contemplated by this Agreement;
(c) any action, suits, claims, investigations or proceedings commenced
or, to the actual knowledge of the executive officers of the notifying party,
threatened against, relating to or involving or otherwise affecting such party;
(d) an administrative or other order or notification relating to any
material violation or claimed violation of law;
(e) the occurrence or non-occurrence of any event or occurrence or
non-occurrence of which would cause any representation or warranty contained in
this Agreement to be untrue or inaccurate in any material respect at or prior to
the Closing Date; and
(f) any material failure of any party to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder;
provided, however, that the delivery of any notice pursuant to this Section 5.15
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
Section 5.16 Certain Litigation. The Company agrees that it will not settle
any litigation commenced after the date hereof against the Company or any of its
directors by any stockholder of the Company relating to the Merger or this
Agreement, without the prior written consent of the Parent. In addition, the
Company will not voluntarily cooperate with any third party which may hereafter
seek to restrain or prohibit or otherwise oppose the Merger and will cooperate
with the Parent and the Purchaser to resist any such effort to restrain or
prohibit or otherwise oppose the Merger.
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Section 5.17 Rule 144. The Parent agrees that at all times it will file in
a timely manner all reports required to be filed by it pursuant to the Exchange
Act, and, upon the request of any holder of Parent Common Stock, will furnish
such holder with such information as may be reasonably necessary to enable such
holder to effect routine sales of Parent Common Stock pursuant to Rule 144 or
any successor rule under the Securities Act, subject to restrictions expressly
provided for in this Agreement.
Section 5.18 Continuation of Indemnification. The Parent and the Purchaser
hereby agree that all rights to indemnification now existing in favor of current
and former employees, agents, directors, or officers of the Company, as provided
in the Company's Articles of Incorporation or ByLaws, shall survive the Merger
and shall continue in full force and effect, as an obligation of the Purchaser,
as the Surviving Corporation of the Merger, and shall not be amended or revoked
except to the extent provisions expanding the scope of such rights are added
thereto or substituted therefor. The Parent hereby unconditionally guarantees
the obligations of the Purchaser as the Surviving Corporation of the Merger, to
indemnify as described in this Section 5.18. Purchaser and Parent agree to
continue to pay the premiums on the Company's current director and officer
insurance policy (the "Company D&O Policy") through April 1, 2001 up to a
maximum of $15,000 premium per year or to otherwise provide director and officer
insurance coverage covering the same persons with substantially similar coverage
as that provided by the Company D&O Policy.
Article VI
Conditions to Closing
Section 6.1 Conditions to Each Party's Obligation. The respective
obligations of each party to effect the transactions contemplated hereby are
subject to the satisfaction or waiver prior to the Closing Date of the following
conditions:
(a) No Legal Prohibition. No statute, rule, regulation or order shall
be enacted, promulgated, entered or enforced by any court or governmental
authority which would prohibit consummation by such party of the transactions
contemplated hereby.
(b) No Injunction. Such party shall not be prohibited by any order,
ruling, consent, decree, judgment or injunction of a court or regulatory agency
of competent jurisdiction from consummating the transactions contemplated
hereby.
(c) Material Adverse Effects. There shall have been no changes in the
business, operations, properties, assets, condition (financial or otherwise) or
prospects of the parties' businesses that would constitute a Material Adverse
Effect. Each party shall have continued to conduct its business in the ordinary
course, without any violation of law or any deviation from commonly accepted
business practice in the pawn shop industry that would constitute a Material
Adverse Effect.
(d) Stockholder Approval. The Merger, this Agreement and the
transactions contemplated hereby shall have been approved in a manner required
by applicable law, and by the applicable regulations of any stock exchange or
other regulatory body; provided, however, that the Controlling Shareholders
agree by their signatures below, to vote all Company Common Stock owned by them
in favor of this Agreement and the Merger.
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Section 6.2 Conditions to Obligation of the Parent and the Purchaser. The
obligation of the Parent and the Purchaser to effect the transactions
contemplated hereby shall be subject to the fulfillment and satisfaction, prior
to or at the Closing, of the following additional conditions, unless waived by
the Parent and the Purchaser:
(a) Representations and Covenants. Except as expressly contemplated by
this Agreement, the representations and warranties of the Company contained in
this Agreement shall be true and correct in all material respects on and as of
the Closing Date with the same force and effect as though made on and as of the
Closing Date. The Company shall have performed and complied in all material
respects with all covenants and agreements required by this Agreement to be
performed or complied with by it on or prior to the Closing Date.
(b) Approvals. All governmental and third party approvals, consents,
licenses, permits or waivers required on or prior to the Closing Date which, if
not obtained, would have a Material Adverse Effect or a material adverse effect
on either the assets, operations, financial condition or prospect of the Parent
or the Surviving Corporation (which include, without limitation, those set forth
on Schedules 3, 4 and 3.8(b)) shall have been obtained in form and substance
reasonably satisfactory to the Parent.
(c) Proxy and Lock-Up Agreement. Proxy and Lock-Up Agreement shall
have been executed by the Controlling Shareholders pursuant to the terms and
conditions set forth in Section 5.12 hereof.
(d) Dissenting Shareholders. Holders of not more than 5% of the
outstanding Company Common Stock shall have perfected their appraisal rights
under the MBCA.
(e) Legal Opinion. The Parent shall have received an opinion from
counsel to the Company, effective as of the Closing Date, in form and substance
reasonably satisfactory to the Parent.
(f) Employment Agreement. The Employment Agreements, substantially in
the forms attached hereto as Exhibits F and G, between the Parent and each of
Jack D. Hartsoe, as President and Chief Operating Officer, and Alan L. Cross, as
Chief Financial Officer, respectively, shall have been executed by each of Jack
D. Hartsoe and Alan L. Cross, respectively.
(g) Line of Credit. The lender on the Company's current line of
credit, BNC Financial Corporation, shall have consented to continue such line of
credit on substantially similar terms with the Surviving Corporation
post-Merger.
(h) The Company 15% Debt. Subject to Section 2.7(b), all of the
Company 15% Debt shall be prepaid by the Company (prior to its conversion). In
addition, all of the holders of conversion rights and additional rights (as
described on Schedule 3.3A, Section III) associated with the Company's 15% Debt
shall have waived such rights in a form reasonably satisfactory to the Parent.
(i) Exchange Agreements. Each of the holders of the warrants set forth
on Schedule 3.3A (excluding Miller & Schroeder) shall have executed an Exchange
Agreement.
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(j) The Company shall have received (and sent copies to Parent) a
favorable determination letter from the Internal Revenue Service as to the
qualification under the Code of the Employee Plan that is intended to be
qualified under Section 401(a) of the Code as indicated on Schedule 3.16(f).
Section 6.3 Conditions to Obligation of the Company. The obligation of the
Company to effect the transactions contemplated hereby shall be subject to the
fulfillment and satisfaction, prior to or at the Closing, of the following
additional conditions, unless waived by the Company:
(a) Representations and Covenants. Except as expressly contemplated by
this Agreement, the representations and warranties of the Parent and the
Purchaser contained in this Agreement shall be true and correct in all material
respects on and as of the Closing Date with the same force and effect as though
made on and as of the Closing Date. The Parent and the Purchaser shall have
performed and complied in all material respects with all covenants and
agreements required by this Agreement to be performed or complied with by the
Parent and the Purchaser on or prior to the Closing Date.
(b) Employment Agreements. The Employment Agreements, substantially in
the forms attached hereto as Exhibits F and G, between the Parent and each of
Jack D. Hartsoe, as President and Chief Operating Officer, and Alan L. Cross, as
Chief Financial Officer, respectively, shall have been executed by the Parent.
In addition, the employment agreement of Charles C. Van Gundy, the Parent's
President and Chief Executive Officer, shall be amended to provide for a term of
at least the same duration of the employment agreements of Jack D. Hartsoe and
Alan L. Cross.
(c) Legal Opinion. The Company shall have received an opinion from
counsel to the Parent and Purchaser, effective as of the Closing Date, in form
and substance reasonably satisfactory to the Company.
(d) Release of Guarantors. All guarantees of indebtedness of the
Company heretofore executed by any holder of Company Common Stock or any
Affiliate of any such holder shall be terminated or released or if such a
termination or release is not obtained prior to Closing, the Parent and
Purchaser shall indemnify such holder or Affiliate, as the case may be, for such
guarantee in a form reasonably satisfactory to such holder or Affiliate. The
Purchaser and Parent agree to use reasonable good faith efforts to obtain any
such termination or release.
(e) Parent Board of Directors. The Articles of Incorporation, Bylaws
and other governing documents of the Parent shall (i) provide for the class of
Directors contemplated by Section 5.13 hereof, and (ii) contain such other
provisions, if any, necessary to enable the Parent to perform the covenants set
forth in Section 5.13, such provisions in each case to be in form and substance
reasonably satisfactory to the Company.
Article VII
Termination
Section 7.1 Termination. This Agreement may be terminated at any time prior
to the Closing:
(a) By mutual written consent of the Parent and the Company.
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(b) By the Company:
(i) if the Closing Date shall not have occurred on or before
December 31, 1999, other than as a result of a material breach by the Company of
its representations, warranties, covenants or other obligations hereunder; or
(ii) if, prior to the Closing Date, the Parent or the Purchaser
fails to perform in any material respect any of its obligations under this
Agreement and such failure has not been cured within fifteen (15) days after
receipt of written notice from the Company.
(c) By the Parent or the Purchaser:
(i) if the Closing Date shall not have occurred on or before
December 31, 1999, other than as a result of a material breach by the Parent or
the Purchaser of their representations, warranties, covenants or other
obligations hereunder;
(ii) if, prior to the Closing Date, the Company fails to perform
in any material respect any of its obligations under this Agreement and such
failure has not been cured within fifteen (15) days after written receipt of
notice from the Parent or the Purchaser; or
(iii) if the Parent's required stockholder approval shall not
have been obtained pursuant to the terms hereof.
(d) Effect of Termination. In the event of termination of this
Agreement by the Parent or the Company as provided herein, all obligations of
the parties under this Agreement shall terminate without liability of any party
to any other party, except (i) that the obligations set forth in Sections 5.7,
5.8, 9.3 and 9.8 of this Agreement shall survive any such termination and (ii)
for liability for any willful breach of this Agreement, including without
limitation, fees and expenses of legal counsel, accountants and other experts as
well as fees and expenses incident to the negotiation, preparation and execution
of this Agreement and related documentation and shareholder meetings (it being
understood, however, that the term "willful breach" shall be construed narrowly,
and in any event shall not be deemed to include a breach occasioned by the
failure of a party to perform a covenant or satisfy a condition where such party
has endeavored in good faith to so perform the covenant or satisfy the
condition).
Article VIII
Indemnification
Section 8.1 Indemnification.
(a) Indemnification by the Company.
(i) Subject to the provisions of this Section 8.1(a) and Section
8.1(e) hereof, the Company shall indemnify and hold harmless the
Parent and the Purchaser and their directors, officers, employees,
Affiliates, and agents at all times from and after the Closing Date,
against and in respect of Losses arising from or relating to: (A) any
breach of any of the representations or warranties made by the Company
in this Agreement, and (B) any breach of the covenants and agreements
made by the Company in this Agreement.
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(ii) No claim for indemnification shall be asserted against the
Company with respect to any single Loss in an amount less than $1,000,
it being understood that the aggregate amount of all Losses arising
from the same operative facts and circumstances shall be deemed a
single Loss (a claim asserted against the Company for a single Loss in
excess of $1,000 being herein referred to as an "Indemnifiable
Claim"). No Loss shall be deemed to have been sustained to the extent
of any proceeds received by the Parent, the Purchaser or any other
party indemnified by the Company hereunder from any insurance policy
with respect thereto.
(iii) No amount shall be payable by the Company with respect to
any Indemnifiable Claims unless and until the aggregate amount of such
Indemnifiable Claims otherwise so payable by the Company in the
absence of this clause (iii) exceeds $100,000, in which event 50% of
the first $100,000 of such amount shall be payable by the Company and
any amount in excess of $100,000 shall be payable solely by the
Company, subject to the provisions of Section 8.1(e).
(iv) The Company's aggregate liability for indemnification
hereunder shall not exceed the greater of 10% of the aggregate value
of the Merger Consideration or $500,000 (such greater amount being
referred to herein as the "Company Liability Limit").
(v) An Indemnifiable Claim based upon a purported
misrepresentation or breach of warranty by the Company under Section
3.15 (Tax Matters) must first be asserted within three years from the
Closing Date. An Indemnifiable Claim based upon a purported
misrepresentation or breach of warranty by the Company under Section
3.14 (Environmental and Safety Matters) or Section 3.16 (Employee
Benefit Plans) must first be asserted prior to the expiration of the
statute of limitations applicable thereto, including any extension
thereof, but in any event prior to the maturity of the Promissory
Notes. All other Indemnifiable claims must first be asserted within
one year from the Closing Date. Any Indemnifiable Claim that is not
asserted within the period provided above therefor shall be forever
barred.
(b) Indemnification by the Parent and the Purchaser. The Parent and
the Purchaser shall indemnify and hold harmless the Company and its directors,
officers, employees, Affiliates, and agents at all times from and after the
Closing Date against and in respect of Losses arising from or relating to: (i)
any breach of any of the representations or warranties made by the Parent or the
Purchaser in this Agreement; and (ii) any breach of the covenants and agreements
made by the Parent or the Purchaser in this Agreement.
(c) Procedure for Claims Between Parties. In the event that the
Company, the Parent or the Purchaser as the Surviving Corporation desire to
assert a claim for indemnification against the other hereunder, such party shall
assert such claim in writing, stating the nature and basis of such claim. The
party making such claim shall, on request, provide all information and
documentation reasonably necessary to support and verify any losses which such
person believes gives rise to a claim for indemnification and shall give the
indemnifying party reasonable access to its books, records and personnel for the
purpose of investigating and verifying any such claim.
36
<PAGE>
(d) Procedure for Claims By Third Parties. Any party asserting a right
of indemnification provided for under this Agreement (the "Indemnified Party")
in respect of, arising out of or involving a claim or demand made by any
unrelated person, firm, governmental authority or corporation against the
Indemnified Party (a "Third Party Claim") shall notify the indemnifying party
(the "Indemnifying Party") in writing of the Third Party Claim within ten
business days after such Indemnified Party becomes aware of such Third Party
Claim. As part of such notice, the Indemnified Party shall furnish the
Indemnifying Party with copies of any pleadings, correspondence or other
documents relating thereto that are in the Indemnified Party's possession. The
Indemnified Party's failure to notify the Indemnifying Party of any such matter
within the time frame specified above shall not release the Indemnifying Party,
in whole or in part, from its obligations hereunder except to the extent that
the Indemnified Party's ability to defend against such claim is actually
prejudiced thereby. The Indemnifying Party agrees (and, at such time as the
Indemnifying Party acknowledges its liability hereunder with respect to such
Third Party Claim, the Indemnifying Party shall have the sole and exclusive
right) to defend against, settle or compromise such Third Party Claim through
counsel selected by the Indemnifying Party and at the expense of such
Indemnifying Party. The Indemnified Party shall have the right (but not the
obligation) to participate in the defense of such claim through counsel selected
by it and at its own expense. If the Indemnifying Party has not yet acknowledged
its liability hereunder with respect to such Third Party Claim, then the
Indemnifying Party and the Indemnified Party shall cooperate in defending
against such Third Party Claim, and neither party shall have the right, without
the other's consent, to settle or compromise any such Third Party Claim.
(e) Set-off; Company Committee.
(i) Payment by the Company of Indemnifiable Claims shall be made
solely by setoff against payments due or to become due under the
Promissory Notes (each such setoff for indemnification purposes being
herein referred to as an "Indemnification Setoff"). No holder of a
Promissory Note shall have any personal liability for any Losses. In
the event the aggregate original principal amount of the Promissory
Notes does not exceed the Company Liability Limit, the parties hereto
shall use reasonable efforts to negotiate in good faith to provide
additional collateral to secure the Company's indemnification
obligation hereunder.
(ii) Any such Indemnification Setoff, and any payment under or
permitted prepayment of the Promissory Notes, shall be allocated to
and applied against all Promissory Notes in accordance with their
terms and in proportion to the respective outstanding principal
amounts thereof. No Indemnification Setoff may be made against the
Promissory Notes except in accordance with the provisions of Section
8.1(a) and pursuant to the written approval thereof by the Company
Committee (as hereinafter defined) or a final, nonappealable order of
a court of competent jurisdiction issued in connection with an action
brought in accordance with Section 9.4 hereof.
(iii) For purposes of this Agreement, a committee (the "Company
Committee") initially comprised of Craig Avery, James Ostenson and
Stan Baratz shall represent the interests of the Company and the
holders of Converted Company shares or the Promissory Notes, as the
case may be. In the event any member of the Company Committee shall
die or become unqualified to serve thereon, the remaining qualified
members of the Company Committee may, but shall not be obligated to,
appoint a qualified successor. An individual (including without
limitation each of the initial members of the Company Committee) shall
be qualified to serve as a member of the Company Committee only if
such person is a holder or the representative of a holder of Converted
Company Shares or a Promissory Note, as the case may be.
37
<PAGE>
(iv) The Company Committee shall act by the vote of a majority of
its members (a "Committee Majority"). Any notices or claims by the
Company following the Closing shall be given by the Company Committee,
and shall be executed by a Committee Majority. Any notice to or claim
against the Company following the Closing shall be delivered to the
Company Committee.
(v) The Company Committee may act in reliance upon the advice of
counsel in reference to any matter relating hereto and shall not be
liable for any acts or omissions of any kind unless occasioned by its
own gross negligence or willful misconduct. The legal expenses and
other costs and expenses incurred by the Company Committee in
connection with any claim for indemnification asserted against the
Company ("Committee Indemnification Expenses") shall be initially
borne jointly and severally by the Purchaser and the Parent, provided
that: (i) upon resolution of such claim, the Parent and Purchaser
shall be reimbursed for all Committee Indemnification Expenses paid by
them by way of a set-off against any interest due and payable from
time to time on the Promissory Notes until reimbursed in full (unless
the Parent and/or the Purchaser do not prevail with respect to the
claim, in which case, in accordance with Section 9.8, the Parent and
Purchaser shall not be entitled to such reimbursement); (ii) payment
of Committee Indemnification Expenses shall not be subject to or count
as payment against the indemnification limit in Section 8.1(a)(iv).
Article IX
General Provisions
Section 9.1 Rules of Construction.
(a) Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
(b) Severability. If any provision of this Agreement, or the
application thereof to any person, place or circumstance, shall be held by a
court of competent jurisdiction to be illegal, invalid, unenforceable or void,
then such provision shall be enforced to the extent that it is not illegal,
invalid, unenforceable or void, and the remainder of this Agreement, as well as
such provision as applied to other persons, places or circumstances, shall
remain in full force and effect.
Section 9.2 Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement will
be in writing and shall be deemed to have duly given or delivered (i) when
delivered personally, (ii) sent via a nationally recognized overnight courier to
the recipient for next business day delivery, or (iii) sent via first class
United States mail. Such notices, demands and other communications will be sent
to the address indicated below:
38
<PAGE>
(a) If to the Company:
1000 Shepard Parkway, Suite 405
Minneapolis, MN 55426
Attention: Jack D. Hartsoe
Fax: (612) 525-1073
with copies to:
Mackall, Crounse & Moore, PLC
1400 AT&T Tower
901 Marquette Avenue
Minneapolis, MN 55402
Attention: Robert F. Strauss, Esq.
Fax: (612) 305-1414
(b) If to the Purchaser or the Parent:
7215 Lowell Boulevard
Westminster, CO 80030
Attention: Charles C. Van Gundy
Fax: (303) 650-4832
with copies to:
Brownstein Hyatt & Farber, P.C.
410 Seventeenth Street, 22nd Floor
Denver, CO 80202-4437
Attention: Brent T. Slosky, Esq.
Fax: (303) 623-1956
or to such other address as any party may specify by written notice given to the
other party. The date of giving any such notice shall be (i) the date of hand
delivery, (ii) the second business day following deposit with the United States
mail, or (iii) the business day after delivery to the overnight courier service.
Section 9.3 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF COLORADO WITHOUT
GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (WHETHER OF THE
SATE OF COLORADO OR ANY OTHER JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF
THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF COLORADO.
Section 9.4 Entire Agreement. This Agreement (including attached exhibits
and schedules) constitutes the entire agreement among the parties with respect
to the subject matter of this Agreement and supersedes any prior agreement or
understanding, whether written and oral, among the parties or between any of
them with respect to the subject matter of this Agreement. There are no
representations, warranties, covenants, promises or undertakings, other than
those expressly set forth or referred to herein.
39
<PAGE>
Section 9.5 Amendment; Waiver. This Agreement may be amended, modified or
waived only by a written agreement signed by the Parent, the Purchaser and the
Company. With regard to any power, remedy or right provided in this Agreement or
otherwise available to any party, (i) no waiver or extension of time shall be
effective unless expressly contained in a writing signed by the waiving party,
(ii) no alteration, modification or impairment shall be implied by reason of any
previous waiver, extension of time, delay or omission in exercise or other
indulgence, and (iii) waiver by any party of the time for performance of any act
or condition hereunder does not constitute a waiver of the act or condition
itself.
Section 9.6 Binding Effect. This Agreement shall be binding upon and shall
inure to the benefit of the parties and their respective successors. Neither the
rights nor the obligations of any party to this Agreement may be transferred or
assigned. Any purported assignment of this Agreement or any of the rights and
obligations hereunder shall be null, void and of no effect.
Section 9.7 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original but when taken together
shall constitute one instrument.
Section 9.8 Expenses. Each party to this Agreement shall bear all of its
own expenses in connection with the execution, delivery and performance of this
Agreement and the transactions contemplated hereby, including without limitation
all fees and expenses of its agents, representatives, counsel and accountants.
In addition, the prevailing party in any action to enforce the terms hereof or
in any indemnification claim hereunder shall be entitled to recover reasonable
attorneys' fees and other costs incurred in said action or proceeding in
addition to any other relief to which it may be entitled.
40
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first written above.
U.S. PAWN, INC., a Colorado corporation
By: /s/ Charles C. Van Gundy
---------------------------------------
Charles C. Van Gundy
Chief Executive Officer
U.S. PAWN CNP HOLDINGS, INC., a
Colorado corporation and wholly-owned
subsidiary of U.S. Pawn, Inc.
By: /s/ Charles C. Van Gundy
---------------------------------------
Charles C. Van Gundy, President
CASH-N-PAWN INTERNATIONAL, LTD.,
a Minnesota corporation
By: /s/ Jack D. Hartsoe
---------------------------------------
Jack D. Hartsoe
Chief Executive Officer
The undersigned Controlling Stockholders acknowledge and agree to the provisions
of Section 6.1(d) hereof.
/s/ Craig C. Avery
- - ------------------
Craig C. Avery
/s/ James L. Ostenson
- - ---------------------
James L. Ostenson
/s/ Jack D. Hartsoe
- - -------------------
Jack D. Hartsoe
41
<PAGE>
Schedules
to
Agreement and Plan of Merger
[Intentionally Omitted]
<PAGE>
EXHIBIT A
INTENTIONALLY OMITTED
<PAGE>
EXHIBIT B
CERTIFICATE OF DESIGNATION
of the
PREFERENCES, RIGHTS, LIMITATIONS, QUALIFICATIONS AND RESTRICTIONS
of the
SERIES B CONVERTIBLE PREFERRED STOCK
of
U.S. PAWN, INC.
U.S. PAWN, INC. (the "Corporation"), a corporation organized and existing
under the Colorado Business Corporation Act (the "CBCA"), does hereby certify
that, pursuant to the authority conferred upon the Board of Directors of the
Corporation (the "Board of Directors") by its Articles of Incorporation and
pursuant to the provisions of the CBCA, the Board of Directors at a meeting duly
called and constituted adopted the following resolution providing for the
authorization of the Corporation's Series B Convertible Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of Directors
by the Corporation's Articles of Incorporation, the Board of Directors hereby
establishes a series of Series B Convertible Preferred Stock of the Corporation
and hereby determines the designation, preferences, rights, qualifications,
limitations and privileges of the Series B Convertible Preferred Stock of the
Corporation as follows:
Section 1. Designation of Series B Convertible Preferred Stock.
The series of Series B Convertible Preferred Stock authorized hereby,
consisting of [ _____ shares] with a par value of $10.00 per share, shall be
designated herein as the "Series B Preferred Stock."
Section 2. Dividend Rights.
The holder of each issued and outstanding share of Series B Preferred Stock
shall be entitled to receive, out of funds legally available for such purpose,
dividends in cash at the rate of 7% per annum, and no more, on the par value of
the shares payable quarterly on the first day of each calendar quarter,
commencing ____________, ____, during which a share of Series B Preferred Stock
shall be issued and outstanding. If any dividends payable on any shares of the
Series B Preferred Stock shall not be paid for any reason, the right of the
holder of such shares of Series B Preferred Stock to receive payment of such
dividends shall not lapse or terminate, but all such accrued and unpaid
dividends (the "Unpaid Dividends") shall accumulate and shall be paid without
interest to such holder, when and as authorized by the Board of Directors of the
Corporation. No dividends or other distributions shall be paid on any shares of
the Corporation's capital stock (other than dividends or distributions payable
B-1
<PAGE>
in the same class or series of capital stock) or any payment to purchase, redeem
or otherwise acquire or retire for value any capital stock of the Corporation,
so long as any dividend arrearage exists with respect to the Series B Preferred
Stock.
Dividends paid on the Series B Preferred Stock in an amount less than the
total amount of dividends at the time accrued and payable on such shares shall
be allocated pro rata on a share- by-share basis among all such shares at the
time outstanding. The amount of dividends payable on the Series B Preferred
Stock for any period shorter or longer than a full calendar quarter shall be
computed on the basis of a 365 or 366 day year, as applicable, and the actual
number of days elapsed in the period for which payable.
Section 3. Redemption.
(a) Optional Redemption. On or after the second anniversary of the date of
issuance, the Corporation may by resolution of the Board of Directors, at any
time and from time to time, redeem for cash the outstanding Series B Preferred
Stock, in whole or in part, at a price equal to $10.00 per share plus Unpaid
Dividends thereon by giving notice of such redemption (the "Redemption Notice")
to all holders of Series B Preferred Stock in accordance with the notice
provisions of subsection 3(b) below. Upon receipt of the Redemption Notice, the
par value of the shares of Series B Preferred Stock subject to the Redemption
Notice plus all Unpaid Dividends on such shares shall be immediately convertible
at the option of the holder thereof for a period of twenty days (the "Redemption
Conversion Period") into shares of restricted Common Stock at the "Applicable
Conversion Rate" (as defined in Section 4) per share in accordance with the
exercise provisions set forth in subsection 4(b) below. Failure of any holder of
Series B Preferred Stock to convert such shares during the Redemption Conversion
Period shall be deemed a waiver of such holder's conversion rights under this
subsection 3(a) and the Corporation may proceed to redeem such shares for cash.
If less than all of the outstanding shares of the Series B Preferred Stock are
to be redeemed, such shares to be redeemed shall be redeemed on a pro rata basis
from the holders thereof (appropriately adjusted to avoid the redemption of
fractional shares).
(b) Notice. Notice of every redemption under this Section 3, effective upon
mailing, shall be sent by registered mail not less than thirty days in advance
of the designated Redemption Conversion Period for such redemption to the
holders of record of the shares of the Series B Preferred Stock to be redeemed
at their respective addresses as the same shall appear on the books of the
Corporation. Dividends on the shares of Series B Preferred Stock called for
redemption shall cease to accrue on the date fixed for such redemption
("Redemption Date"), and such shares shall thereafter represent only the right
to receive the applicable redemption price upon surrender of such certificates
at the Corporation's principal offices. Such notice shall state: (i) the number
of shares of the holder's Series B Preferred Stock being called for redemption,
if less than all; (ii) the Redemption Date; (iii) the current per share Unpaid
Dividends, if any; (iv) the right of a holder to convert to Common Stock; (v)
the current Applicable Conversion Rate; (vi) the dates of the applicable
B-2
<PAGE>
Redemption Conversion Period; (vii) the procedures required to exercise the
conversion right; and (viii) that the conversion right will be deemed waived if
not exercised within the Redemption Conversion Period. Shares of the Series B
Preferred Stock redeemed by the Corporation shall be retired and shall be
restored to the status of authorized and unissued shares of preferred stock,
without designation as to series and may thereafter be reissued as shares of any
authorized series of preferred stock.
Section 4. Conversion Rights.
(a) Optional Conversion. The par value of each share of Series B
Preferred Stock plus Unpaid Dividends thereon which is not subject to a
Redemption Notice pursuant to Section 3 above shall be convertible at the option
of the holder thereof , at any time and from time to time, into shares of
restricted Common Stock at the "Applicable Conversion Rate" in accordance with
the exercise provisions set forth below. "Applicable Conversion Rate" shall mean
(i) on or before the fifth anniversary of the date of issuance, $4.00 per share
of Common Stock (appropriately adjusted to reflect stock splits, stock
dividends, reorganization, consolidations and similar changes in the Common
Stock hereafter effected), and (ii) thereafter, $2.00 per share of Common Stock
(similarly subject to adjustment).
(b) Exercise Provisions for Optional Conversion. In order to exercise
the optional conversion privilege, a holder of Series B Preferred Stock shall
surrender the certificate evidencing such Series B Preferred Stock to the
Corporation at its principal office, duly endorsed to the Corporation and
accompanied by written notice to the Corporation that the holder elects to
convert a specified portion or all of such shares and the amount of accrued and
unpaid dividends thereon, if any. Series B Preferred Stock converted at the
option of the holder shall be deemed to have been converted on the Redemption
Date, if converted pursuant to Section 3, or on the day of surrender of the
certificate representing such shares for conversion (any such date, the
"Conversion Date") in accordance with the foregoing provisions, and at such time
the rights of the holder of such Series B Preferred Stock, as such holder, shall
cease and such holder shall be treated for all purposes as the record holder of
that number of shares of Common Stock issuable upon conversion. As promptly as
practicable on or after the Conversion Date, the Corporation shall issue and
mail or deliver to such holder a certificate or certificates for the number of
validly issued and fully paid shares of Common Stock issuable upon conversion,
computed by rounding up to the nearest whole share, and a certificate or
certificates for the balance of Series B Preferred Stock surrendered, if any,
not converted into Common Stock. Each share of Common Stock issued upon
conversion shall bear a customary restrictive legend regarding the
non-registration of such Common Stock ; provided, however, that the Corporation,
through its counsel, shall record an opinion with the transfer agent stating
that such shares are resaleable if sold in accordance with Rule 144 (or any
successor rule) under the Securities Act of 1933, as amended (the "Securities
Act").
(c) Mandatory Conversion. In the event the closing price of the Common
Stock, as reported on the Nasdaq Stock Market or any applicable stock exchange,
is equal to or exceeds $4.50 per share for a period of ninety consecutive days,
B-3
<PAGE>
the Corporation may, by resolution of the Board of Directors, demand conversion
of the outstanding Series B Preferred Stock, in whole or in part, plus Unpaid
Dividends thereon, into Common Stock at a price equal to the then Applicable
Conversion Rate by giving notice of such conversion to all holders of Series B
Preferred Stock in accordance with the notice provisions of subsection 4(d)
below. In the event of a mandatory conversion in accordance with this subsection
4(c), the Corporation shall either register the converted shares of Common Stock
or, through the Corporation's counsel, record an opinion with the transfer agent
stating that such shares are resalable if sold in accordance with Rule 144 (or
any successor rule) under the Securities Act. If less than all of the
outstanding shares of the Series B Redeemable Preferred Stock are to be
converted, such shares to be converted shall be converted on a pro rata basis
from the holders thereof (appropriately adjusted to avoid the conversion of
fractional shares).
(d) Notice. Notice of mandatory conversion under Section 4(c),
effective upon mailing, shall be sent by registered mail not less than thirty
days in advance of the date designated for such conversion ("Mandatory
Conversion Date") to the holders of record of the shares of the Series B
Preferred Stock at their respective addresses as the same shall appear on the
books of the Corporation. Dividends on the shares of Series B Preferred Stock
called for conversion shall cease to accrue on the Mandatory Conversion Date,
and such shares shall thereafter represent only the right to receive the
applicable number of shares of Common Stock. Such notice shall state: (i) the
number of shares of the holder's Series B Preferred Stock being called for
conversion, if less than all; (ii) the Mandatory Conversion Date; (iii) the
Applicable Conversion Rate; (iv) the required procedures for conversion; and (v)
the current per share Unpaid Dividends, if any. Shares of the Series B Preferred
Stock converted by the Corporation shall be retired and shall be restored to the
status of authorized and unissued shares of preferred stock, without designation
as to series and may thereafter be reissued as shares of any authorized series
of preferred stock.
(e) Effect of Conversion. After a conversion contemplated by this
Section 4, accrual of all dividends on the Series B Preferred Stock shall cease
and payment of any previously accrued and unpaid dividends shall be made only on
such date as declared by the Board of Directors.
Section 5. Voting Rights.
Except as may be required by law, holders of Series B Preferred Stock shall
not be entitled to vote with holders of Common Stock for the election of
directors and other matters submitted to a vote of holders of Common Stock.
Section 6. Liquidation Rights.
In the event of the liquidation, dissolution or winding up of the
Corporation, holders of the Series B Preferred Stock shall be entitled to
receive, after due payment or provision for payment of the debts and other
liabilities of the Corporation and before any distribution to holders of Common
B-4
<PAGE>
Stock, or other series of capital stock, now or hereafter outstanding, an amount
in cash per share equal to $10.00 plus Unpaid Dividends thereon. Neither the
consolidation nor merger of the Corporation into or with another corporation or
corporations, nor the sale, lease, transfer or conveyance of all or
substantially all of the assets of the Corporation to another corporation or any
other entity shall be deemed a liquidation, dissolution or winding up of the
affairs of the Corporation within the meaning of this Section. In the event that
full dividends are not paid or made available to the holders of all outstanding
shares of Series B Preferred Stock and funds available for payment of dividends
and any other amounts due shall be insufficient to permit payment in full to
holders of all such stock of the full amounts to which they are then entitled,
then the entire amount available for payment of dividends shall be distributed
pro rata among all such holders of Series B Preferred Stock in proportion to the
full amount to which they would otherwise be respectively entitled.
Section 7. Preemptive Rights.
Other than the conversion right provided for herein, holders of Series B
Preferred Stock shall not be entitled, as a matter of right, to subscribe for,
purchase or receive any part of any stock of the Corporation of any class
whatsoever, or of securities convertible into or exchangeable for any stock of
any class whatsoever, whether now or hereafter authorized and whether issued for
cash or other consideration or by way of dividend.
Section 8. Amendment.
This Certificate of Designation shall not be amended or supplemented
without the consent of a majority of the shares of Series B Preferred Stock
outstanding.
Section 9. Delivery of Information.
So long as the shares of Series B Preferred Stock are outstanding, the
Corporation shall send or deliver to each holder, at the same time, all
information which is sent or delivered to the holders of the Corporation's
Common Stock; provided, however, that any holder who is also a holder of Common
Stock is not required to receive duplicate information.
Section 10. Miscellaneous.
The Series B Preferred Stock, when issued, will be legally issued, fully
paid and nonassessable.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be executed by Charles C. Van Gundy, its President, this ___ day
of ________, 1999.
Charles C. Van Gundy
B-5
<PAGE>
EXHIBIT C
FORM OF PROMISSORY NOTE
-----------------------
THIS NOTE WAS ORIGINALLY ISSUED ON ______________ , 199__
AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY STATE SECURITIES LAWS. THIS NOTE
MAY BE TRANSFERRED ONLY IN ACCORDANCE WITH SUCH LAWS.
______________, 199__ $____________
U.S. Pawn CNP Holdings, Inc., a Colorado corporation (the "Payor", which
term shall include any successor entity), hereby promises to pay to
_____________, (the "Payee", which term shall include any subsequent holder of
this Note), the principal amount of ______________________ Dollars
($____________), together with interest thereon in accordance with the
provisions of this Note. This Note is one of the Promissory Notes referred to in
the Agreement and Plan of Merger dated April ___, 1999 among Payor's parent
corporation, U.S. Pawn, Inc., a Colorado corporation, and guarantor of this Note
("Guarantor," which term shall include any successor entity), Payor and
Cash-N-Pawn International, Ltd., a Minnesota corporation ("CNP"), and the other
persons signatory thereto (the "Agreement"). Upon consummation of the
transactions contemplated by the Agreement, CNP will be merged with and into
Payor.
This Note is given by the Payor in partial consideration of the merger
contemplated by the Agreement.
Section 1. Payment of Principal. To the extent not theretofore paid
pursuant to Section 3 hereof, the entire unpaid principal amount of this Note,
together with all accrued and unpaid interest thereon, shall be payable in full
in cash on [_________], 2004 (the "Maturity Date").
Section 2. Payment of Interest.
(a) Interest Rate. Interest shall accrue on the unpaid principal
amount of this Note from the date hereof at the rate of [_________________]
percent ([___]%) per annum (computed on the basis of actual days elapsed in a
year of 365 or 366 days, as applicable).
(b) Payment of Interest. The Payor shall pay accrued interest
quarterly in arrears on March 31, June 30, September 30 and December 31 of each
calendar year, commencing [____________, 1999]. Any accrued interest which for
any reason has not theretofore been paid shall be paid in full in cash on the
Maturity Date.
C-1
<PAGE>
Section 3. Optional Prepayment of Note. The Payor may, at any time and from
time to time without premium or penalty, prepay all or any portion of the unpaid
principal amount of this Note together with accrued and unpaid interest thereon;
provided, however, that any prepayment on any of the Promissory Notes referred
to in the Agreement shall be made pro rata among all holders of all such
Promissory Notes, based upon amounts then due or owing.
Section 4. Waiver of Presentment, Protest, Demand and Dishonor. The Payor
hereby waives presentment for payment, protest, demand, notice of protest,
demand, dishonor and notice of nonpayment with respect to this Note.
Section 5. Payments. All payments on this Note shall be made in lawful
money of the United States of America by check drawn to the order of Payee at
the address shown on the books of the Payor or at such other address as Payee
may specify in writing to Payor from time to time.
Section 6. Events of Default. Each of the following events or conditions
shall constitute a default (a "Default") under this Note:
(a) the failure to make any payment of principal, interest or other
amount due under this Note within 5 business days of when such payment is due;
or
(b) the bankruptcy, insolvency or liquidation of the Payor or the
Guarantor; or
(c) the failure of the Payor or the Guarantor to perform or observe
any material term of this Note or any guaranty thereof, as the case may be, and
such failure continues for a period of sixty (60) days after written notice
thereof to Payor.
In the event that a Default shall exist and be continuing, the Payee may, by
written notice to the Payor, declare this Note and all accrued interest hereon
to be forthwith due and payable (except that no such notice shall be required in
the case of a Default described in clause (b) above), whereupon the Payee may
exercise all remedies available to it under the provisions of this Note and
applicable law.
Section 7. Unsecured; Priority. This Note is not secured by any collateral.
The Payor, for itself, its successors and assigns, covenants and agrees, and the
Payee by acceptance hereof, likewise covenants and agrees, that the payments on
this Note are hereby expressly (i) subordinated in right of payment to the prior
payment of the Payor's outstanding indebtedness for borrowed money now existing;
(ii) subordinated in right of payment to the prior payment of the Payor's
outstanding indebtedness for money borrowed from a bank or financial institution
whether now existing or hereafter created; (iii) subordinate in right of payment
to the prior payment of the Payor's outstanding indebtedness for money borrowed
from U. S. Pawn, Inc., whether now existing or hereafter created (indebtedness
under (i), (ii) and (iii) being referred to collectively as "Senior
Indebtedness"); and (iv) senior in right of payment to any indebtedness of the
C-2
<PAGE>
Payor for borrowed money hereafter created other than that described in (ii) and
(iii) above. The subordination referred to in clauses (i), (ii) and (iii) is for
the benefit of the holders of Senior Indebtedness. All persons who, in reliance
upon such provisions, become holders of, or continue to hold, Senior
Indebtedness, shall be entitled to rely hereon, and such provisions are made for
the benefit of the holders of Senior Indebtedness, and they or any of them may
proceed to enforce such provisions directly against the Payor. Payee, by
acceptance of this Note, agrees to take such action and execute such documents
as may be reasonably necessary or appropriate to effectuate the subordination as
provided in this Section 7; provided, however, that failure to take any such
action shall not act as a bar to payment under the terms of this Note.
Section 8. Application of Payments; Right of Offset. Payments will be first
applied to interest and other charges due at the time such payments are received
and then to principal. The Payor shall have the right to offset against any
payments due under this Note pro-rata amongst all holders of the Notes issued
pursuant to the Agreement any amounts owed to the Payor pursuant to claims for
indemnification and costs and expenses associated therewith pursuant to Article
VIII of the Agreement.
SECTION 9. GOVERNING LAW. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF COLORADO.
Section 10. Cancellation. After all unpaid principal and interest owed on
this Note has been paid in full, this Note shall be surrendered to the Payor for
cancellation and shall not be reissued.
Section 11. Miscellaneous. The rights and remedies of the Payee under this
Note and applicable law shall be cumulative and concurrent, and the exercise of
any one or more of them shall not preclude the simultaneous or later exercise by
the Payee of any or all such other rights or remedies. In the event any
provision of this Note is held to be invalid, illegal or unenforceable for any
reason, then such provision only shall be deemed null and void and shall not
affect any other provisions of this Note, which shall remain effective. No
modification or waiver of any provision of this Note shall be effective unless
it is in writing and signed by the Payee, and any such waiver shall be effective
only in specific instance and for the specific purpose for which it is given.
The failure of the Payee to exercise its option to accelerate this Note as
provided above, or to exercise any other option, right or remedy, in any one or
more instances, or this acceptance by the Payee of partial payments or partial
performance, shall not constitute a waiver of any Default, or the right to
exercise any option, right or remedy at any time. The nouns, pronouns, and verbs
used in this Note shall be construed as being of such number and gender as the
context may require. In the event that legal action is brought for the
enforcement of this Note, or because of an alleged dispute, breach, default or
misrepresentation in connection with any of the provisions of this Note, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in said action or proceeding, in
addition to any other relief to which it may be entitled.
Section 12. Delivery of Information. So long as this Note is outstanding,
the Payor or the Guarantor shall send or deliver to Payee, at the same time, all
information which is sent or delivered to the holders of the Guarantor's Common
Stock; provided, however, that if the Payee is also a holder of such Common
Stock, the Payee is not required to receive duplicate information.
C-3
<PAGE>
Section 13. Loss, Theft, Destruction or Mutilation of Note. Upon receipt by
the Payor of evidence reasonably satisfactory to the Payor of the loss, theft,
destruction or mutilation of this Note, and of indemnity or security reasonably
satisfactory to the Payor, and upon reimbursement to the Payor of all reasonable
expenses incidental thereto, and upon surrender and cancellation of this Note,
if mutilated, the Payor will make and deliver a new Note of like tenor, in lieu
of this Note (accompanied by a notation of the guaranty duly endorsed by the
Guarantor). Any Note made and delivered in accordance with this provision shall
be dated as of the date to which interest has been paid on this Note, or if no
interest has therefore been paid on this Note, then dated the date hereof.
Section 14. Restrictions on Transfer. Transfer of this Note is restricted.
The Payor shall be entitled to treat the person or entity listed as the
registered owner on its Note register as the owner of the Note for all purposes.
Section 15. Successors. All agreements of the Payor and the Guarantor in
this Note and the guaranty shall bind their respective successors and assigns.
IN WITNESS WHEREOF, the Payor has executed and delivered this Note on the
date first written above.
U.S. PAWN CNP HOLDINGS, INC.
By:
Name:
Title:
GUARANTY
--------
For value received, U.S. Pawn, Inc., a Colorado corporation
("Guarantor," which term shall include any successor entity) unconditionally
guarantees, to the holder of the Note, irrespective of the validity and
enforceability of the Note or the obligations of the Payor thereunder, (i) the
due and punctual payment of the principal of and interest on the Note upon which
this Guaranty is endorsed, whether at maturity or on an interest payment date,
by acceleration, upon a call for redemption, or otherwise, and (ii) the due and
punctual payment of all other obligations of the Payor to the Payee in
accordance with the terms of the Note. The Payor is wholly-owned by the
Guarantor, and the Guarantor will receive substantial benefits under the
Agreement, including from the issuance of the Notes.
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<PAGE>
The Guarantor hereby waives (a) notice of acceptance hereof, of any action
taken or omitted in reliance hereon and of any defaults of the Payor in the
payment of any sums guaranteed hereunder, or in the performance of any such
covenants and agreements, and (b) any presentment, demand, protest or notice of
any kind. The Guarantor hereby agrees that the Note may be modified, amended or
supplemented in any manner (including the renewal or extension of the Note),
without the consent of the Guarantor, and agrees that no such amendment,
modification, supplement, renewal or extension shall discharge, affect, reduce
or impair the liability of the Guarantor under this Guaranty. The Guarantor
agrees that the liability of the Guarantor hereunder shall not be discharged,
affected, reduced or impaired by reason of the release of, failure to realize
upon or resort to, any security given for the Note, or by reason of the failure
to pursue or enforce any other right or remedy under the Note, or by reason of
the failure of the holder of the Note to pursue, enforce or resort to any rights
against the Guarantor hereunder, and the Guarantor waives all right to require
the holder of the Note to pursue, enforce or resort to any and all such rights
or remedies. The Guarantor agrees that the holder of the Note may proceed
against the Guarantor under this Guaranty without first attempting to recover
from the Payor under the Note, or exhausting any other security for the Note.
Payments pursuant to this Guaranty are hereby expressly subordinated to the
prior payment in full of the Guarantor's outstanding indebtedness for borrowed
money, whether now existing or hereafter created (the "Senior Indebtedness"),
and that such subordination is for the benefit of the holders of Senior
Indebtedness. All persons who, in reliance upon such provisions, become holders
of, or continue to hold, Senior Indebtedness, shall be entitled to rely hereon,
and such provisions are made for the benefit of the holders of Senior
Indebtedness, and they or any of them may proceed to enforce such provisions
directly against the Guarantor. Payee, by acceptance of this Note and Guaranty,
agrees to take such action and execute such documents as may be reasonably
necessary or appropriate to effectuate such subordination as provided in this
Guaranty; provided, however, that failure to take any such action shall not act
as a bar to payment under the terms of this Guaranty.
In the event that legal action is brought for the enforcement of this
Guaranty, or because of an alleged dispute, breach, default or misrepresentation
in connection with any of the provisions of this Guaranty, the successful or
prevailing party shall be entitled to recover reasonable attorneys' fees and
other costs incurred in said action or proceeding, in addition to any other
relief to which it may be entitled.
This Guaranty shall continue in full force and effect under its original
terms and shall not be affected by the dissolution, termination, winding up or
other discontinuation of the Payor, the sale of the Payor or other disposition
of all or substantially all of the assets of the Payor, the sale by the
Guarantor, directly or indirectly, of all or any portion of the capital stock of
the Payor, the marshaling of such assets and liabilities of the Payor, or the
receivership, bankruptcy, insolvency, reorganization, arrangement, composition
with creditors or readjustment of, or other similar proceedings affecting, the
Payor or any of its assets.
No waiver, amendment, release or modification of this Guaranty shall be
effective unless in writing duly executed by the holder of the Note on the date
of such waiver, amendment, release or modification.
C-5
<PAGE>
The Guarantor agrees that any and all rights of subrogation and all similar
rights which it may have against the Payor or any security for the Note shall be
subordinate to any and all rights which the holder of the Note may have against
the Payor or any such security pursuant to this Guaranty, the Note, or
otherwise, and the Guarantor agrees that it will not enforce any such right of
subrogation or similar rights until the Note and all its obligations hereunder
have been paid in full. Until the Note and obligations have been paid in full,
the Guarantor shall pay all amounts received by it pursuant to its rights of
subrogation or similar rights, immediately upon receipt thereof, to the holder
of the Note in satisfaction of its obligations hereunder whether matured or
unmatured.
The Guarantor agrees that upon written notice of the institution by the
holder of the Note of any action or proceeding, legal or otherwise, for the
adjudication of any controversy with the Payor, the Guarantor will be
conclusively bound by the adjudication in any such action or proceeding and by a
judgment, award or decree entered in therein, Subject to the rights of the
Guarantor pursuant to Article VIII of the Agreement, the Guarantor waives the
right to assert in any action or proceedings brought by the holder of the Note
upon this Guaranty or the Note any offsets or counterclaims which the Guarantor
or the Payor may have with respect thereto.
The Guarantor agrees to endorse on any Note issued in exchange or
replacement for this note a guaranty in this form.
This Guaranty shall be binding upon the successors and assigns of the
Guarantor and shall inure to the benefit of the holder of the Note and such
holder's successors and assigns.
The provisions of this Guaranty are severable. In the event any portion,
provision, section or clause hereof is held invalid or unenforceable by any
court of competent jurisdiction, such holding shall not invalidate or render
unenforceable any of the remaining portions, provisions, sections or clauses
hereof. This Guaranty shall be governed by the laws of the State of Colorado.
The obligation of the Guarantor pursuant to this Guaranty shall terminate
upon payment in full of the Note and all obligations thereunder. Notwithstanding
the foregoing, this Guaranty shall continue to be effective or shall be
reinstated, as the case may be, if at any time any payment of the obligations
under the Note is rescinded or must otherwise be returned by the holder of the
Note upon the insolvency, bankruptcy or reorganization of the Payor, all as
though such payment had not been made.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Guaranty as of the
date first above written.
U.S. PAWN, INC.
By:
Name:
Title:
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<PAGE>
EXHIBIT D
PROXY AND LOCK-UP AGREEMENT
---------------------------
U.S. Pawn, Inc.
7215 Lowell Boulevard
Westminster, CO 80030
ATTN: Charles C. Van Gundy
Re: Common Stock and other securities of U.S. Pawn, Inc. (the "Company")
acquired in merger of Cash-N-Pawn International, Ltd. with and into
U.S. Pawn CNP Holdings, Inc.
Ladies and Gentlemen:
The undersigned is the owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock (collectively, such Common Stock
and such other securities owned by the undersigned, the "Securities") which were
acquired in connection with the merger of Cash-N-Pawn International, Ltd. with
and into U.S. Pawn CNP Holdings, Inc., a wholly owned subsidiary of the Company
(the "Merger"). A condition to, and partial consideration of, the Merger, was
that the undersigned would agree to not sell, pledge or otherwise encumber the
Securities and grant the Company a proxy to vote such Securities for a limited
period. The undersigned recognizes that the Merger will be of benefit to the
undersigned. The undersigned acknowledges that the Company and U.S. Pawn CNP
Holdings, Inc. are relying on the representations and agreements of the
undersigned contained in this letter agreement in carrying out the Merger.
LOCK-UP
-------
In consideration of the foregoing, subject to the next paragraph, the
undersigned hereby agrees that he will not, without the prior written consent of
the Company (which consent may be withheld in its sole discretion), directly or
indirectly, offer, sell, pledge or otherwise encumber, or grant any option to
purchase or otherwise dispose of, any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) by the undersigned, or publicly
announce the undersigned's intention to do any of the foregoing (any of the
foregoing transactions being hereinafter referred to as a "sale"), for a period
D-1
<PAGE>
commencing on ________, 1999 (the "Closing Date") and continuing until the
earlier of (i) the date 2 years after the Closing Date, (ii) the date upon which
the Company has more than seven directors on its board or (iii) if a Controlling
Shareholders' Designee (as defined in the agreement governing the Merger) agrees
to stand for election to the Company's board of directors at the Company's 2001
annual meeting and is not elected, the date of the Company's 2001 annual meeting
(the "Period"). The undersigned also agrees and consents to the entry of stop
transfer instructions with the Company's transfer agent and registrar against
the transfer of shares of Common Stock or securities convertible into or
exchangeable or exercisable for Common Stock held by the undersigned except in
compliance with the foregoing restrictions.
Notwithstanding anything herein to the contrary, the undersigned may A)
transfer shares of Common Stock: (i) by operation by law; or (ii) by will or
laws governing descent and distribution, and B) sell in any 3 month period a
number of shares of Common Stock which does not exceed 25% of the number of
shares owned of record or beneficially by the undersigned.
Notwithstanding anything herein to the contrary, no transfer permitted by
clause A) above shall be consummated or effective unless and until each proposed
transferee executes and delivers to the Company a copy of this letter agreement.
PROXY
-----
In connection with the Merger, the undersigned hereby makes, constitutes
and appoints the board of directors of the Company, or its designee, as the
undersigned's true and lawful attorney in fact and proxy for the undersigned and
in the undersigned's name, place and stead, to vote all Common Stock owned by
the undersigned, and such additional shares of capital stock of the Company to
which the undersigned holds a proxy granted by a third party. The undersigned
hereby further grants and gives to such attorney in fact full power and
authority to do and perform every act necessary, requisite or proper to be done
to effectuate such voting of the Common Stock and other shares of capital stock
as the undersigned might do were the undersigned personally present, with full
power of substitution and revocation.
This proxy is irrevocable during the Period and is coupled with an
interest. This proxy shall automatically expire at 12:00 p.m., Denver, Colorado
time, on the last day of the Period.
The undersigned agrees that damages would be an inadequate remedy for
breach of this letter agreement and that the parties hereto may be enforced by
the remedies of specific performance and injunctive relief.
D-2
<PAGE>
This agreement is irrevocable and will be binding on the undersigned and
the respective successors, heirs, personal representatives, and permissible
assigns of the undersigned.
Dated: _____________, 1999
[Name]
STATE OF MINNESOTA )
) ss:
COUNTY OF _______________ )
Subscribed and sworn to before me this ___ day of ______________, 1999 by .
Witness my hand and official seal.
My commission expires: ___________________
____________________________________
Notary Public
D-3
<PAGE>
EXHIBIT E
COUNSEL OPINION
---------------
___________, 2000
Corporate Stock Transfer
[Address]
Ladies and Gentlemen:
We are issuing this opinion in connection with the sale (the "Subject
Sale") pursuant to Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), by the shareholders listed on Schedule A attached hereto
(each a "Stockholder") of the number of shares set forth opposite each
Stockholder's name on Schedule A (each such shares, the "Shares") of the Common
Stock, no par value (the "Common Stock"), of U.S. Pawn, Inc., a Colorado
corporation (the "Company"), issued to the Stockholder in connection with the
Merger among the Company, [Newco] and Cash-N-Pawn International, Ltd. on
________, 1999. The certificates representing the Shares currently bear a legend
referring to the transfer restrictions under the Securities Act.
For the purpose of this opinion (1) below, we have assumed with your
permission that (a) the Company has filed all reports required to be filed under
Section 13 of the Securities Exchange Act of 1934, as amended, during the 12
month period immediately preceding the date of the Subject Sale, (b) the
Stockholder has been the beneficial owner of the Shares since ______________,
1999, (c) each Stockholder's Shares represent less than the greater of (i) 1.0%
of the currently outstanding Common Stock, or (ii) the average weekly reported
volume of trading in the Common Stock on all national securities exchanges
and/or reported through the automated quotation system of a registered
securities association during the four calendar weeks preceding the filing of
the notice required by Rule 144(h) under the Securities Act, (d) no other sales
of shares of Common Stock are required to be aggregated with the Subject Sale
pursuant to Rule 144(e)(3), (e) the Shares are sold in "brokers' transactions"
(within the meaning of Section 4(4) of the Securities Act) and the Stockholder
has not solicited or arranged for the solicitation of, and will not solicit or
arrange for solicitation of, orders to buy the Common Stock in anticipation of
or in connection with the Subject Sale, and (f) the Stockholder has not made,
and will not make, any payment in connection with the Subject Sale to any person
other than the broker who executes the Subject Sale.
If the factual circumstances and assumptions set forth in this letter
prove to be incorrect or if such factual circumstances later change, our opinion
as set forth in this letter could differ. We have not made, and will not make,
any effort to independently verify any of such circumstances or assumptions.
E-1
<PAGE>
(1) Subject to the above assumptions and subject to the limitations
expressed herein, it is our opinion that each certificate representing the
Shares which are sold in connection with the Subject Sale may be issued to the
purchaser thereof without any restrictive legend relating to the Securities Act.
(2) Assuming (a) at least two years have elapsed since the later of the
date the Stockholder acquired the Shares from the Company or from an affiliate
of the Company (calculated in accordance with subparagraph (d) of Rule 144) and
(b) the Stockholder is not, at the time of the Subject Sale, and has not been
during the three month period preceding the Subject Sale, an affiliate of the
Company; then the Shares which are sold in connection with the Subject Sale may
be issued to the purchaser thereof without any restrictive legend relating to
the Securities Act and any residue certificate covering shares not sold also may
be issued to the Stockholder without a restrictive legend relating to the
Securities Act thereon.
This letter has been furnished to you to assist the transfer agent for
the Company's Common Stock and the Stockholder in transferring the Shares and
may not be relied on by or copied to any other person or by you for any other
purpose without our prior written consent.
Our opinions herein is limited to matters arising under the Securities
Act, and we express no opinion as to the application or effect of any other
United States federal laws or the laws of any other jurisdiction.
Very truly yours,
E-2
<PAGE>
EXHIBIT F
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, made and entered into effective the ____ day of ________,
1999, ("Agreement"), by and between U.S. Pawn, Inc., a corporation organized and
existing under the laws of the State of Colorado ("Company") and Jack D.
Hartsoe, an individual residing in the State of Minnesota (hereinafter referred
to as "Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employee desires to serve the Company as President and Chief
Operating Officer on the terms as hereinafter set forth.
NOW, THEREFORE, for and in consideration of the above premises, the mutual
covenants and promises hereinafter contained, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:
1. ENGAGEMENT. Throughout the term of this Agreement, Company shall employ
Employee as President and Chief Operating Officer of the Company with the title
of Chief Operating Officer, and Employee hereby accepts employment by the
Company in such capacity and on the terms and conditions hereinafter set forth.
2. DUTIES OF EMPLOYEE. Employee's duties during the term of this Agreement
shall include, but not be limited to the following:
a. To carry out such duties and perform such functions as are
included within the job description for President and Chief
Operating Officer as set forth on Exhibit A attached hereto and
incorporated herein by reference and to follow such directions as
may reasonably be given to Employee from time to time by the
Chief Executive Officer or the Board of Directors of the Company.
Such duties shall include the management and oversight of the
operations of subsidiaries for which the Company is to provide
management services. For purposes of this Agreement, the term
"Company" shall include such subsidiaries.
b. To safeguard the reputation, name and goodwill of the Company;
and
c. Subject to the vacation rights set forth in paragraph 5(c)
hereof, to devote his full energy, skill, attention and time to
the management, supervision and operation of the Company for as
many working hours as may be reasonably necessary.
F-1
<PAGE>
3. DUTIES OF THE COMPANY. The duties of the Company during the term hereof
shall be as follows:
a. To timely pay Employee the compensation hereafter set forth for
the services to be performed by Employee;
b. To periodically reimburse all business expenses incurred by the
Employee in the performance of such services and approved by the
Chief Executive Officer or the Board of Directors of the Company;
and
c To provide reasonable office facilities, equipment and support
staff for the performance of Employee's duties set forth herein.
4. RELATIONSHIP OF THE PARTIES. Employee shall be considered at all times
and when acting in the ordinary course of his employment and performing the
duties herein set forth to be an employee of the Company. Employee shall have
the authority to take such actions and to enter into such contracts, agreements
or commitments for or on behalf of the Company as may be approved by the
Company's Chief Executive Officer or the Board of Directors.
5. COMPENSATION. Employee shall be entitled to receive as full compensation
during the term hereof:
a. Base Annual Salary: A base annual salary ("Base") of One Hundred
Twenty-Four Thousand Five Hundred Dollars ($124,500.00) per annum
beginning on _____________, 1999. Said Base Salary shall be
reviewed annually on January 1, beginning January 1, 2001, and
such Base Salary may be increased at the sole discretion of the
Board of Directors of the Company, taking into consideration the
number of stores in operation, the capital financing of the
Company, the financial performance of the Company and the
performance of the Employee. In the event this Agreement
terminates on a date other than an anniversary date hereof, the
Base Salary shall be prorated. Said Base Salary shall be paid to
Employee bi-weekly each Friday or on such other regular system as
the Company may establish from time to time. There shall be
withheld from the said Base Salary such amounts necessary for
taxes or other amounts authorized by law or authorized in writing
by Employee.
b. Car Allowance. Employee shall receive a monthly car allowance
during the term of this Agreement in the amount of $1,000.00 per
month. Said car allowance shall be payable on the first pay check
of each month. In the event this Agreement terminates on a date
other than the last day of the month, the car allowance shall be
prorated.
F-2
<PAGE>
c. Personal Benefits. Employee, in addition to the foregoing, shall
be entitled to receive all employee benefits made available to
management pursuant to the Company's employee policies in effect
from time to time during the term of this Agreement, which
benefits shall include, but not be limited to, family health and
medical hospital insurance coverage which is the same or
substantially similar to the coverage provided to other similar
executive employees and annual paid vacation of three weeks per
year.
d. Stock Purchase Option. Employee may be entitled to earn options
to purchase stock of the Company (the "Options") under the
following terms and conditions:
(i) The Compensation Committee of the Board of Directors
shall grant to the Employee Options to purchase 67,000
shares of the common stock ("Shares") of the Company
pursuant to the terms and conditions of the Company's
incentive stock option plans. Subject to Section 6.b.ii
below, such Options shall vest on December 31, 2001.
(ii) In addition to the Options set forth in Section
5.c.(i), above, the Employee may be granted additional
Shares of the Company under the Plan as so determined
by the Compensation Committee, in its sole discretion,
annually on December 31, beginning December 31, 1999,
taking into consideration the number of stores in
operation, the capital financing of the Company, the
financial performance of the Company and the
performance of the Employee.
(iii)The Options granted hereunder shall be exercisable at
the fair market value of such Shares on the date of
grant, or such other price as may be necessary to
qualify such Options for tax treatment under Internal
Revenue Code Section 421. The number of Options and
Shares granted to the Employee hereunder for purchase
shall be adjusted for stock splits and
recapitalizations of the Company.
e. Cash Bonus. [Employee shall be eligible to earn an annual
cash bonus based on, among other things, the number of
stores in operation, the capital financing of the Company,
and financial performance of the Company, and the individual
performance of Employee. The exact criteria to be used in
determining the amount of and benchmarks for such cash bonus
shall be determined in good faith by the parties hereto
during the 30 days following the execution of the Merger
Agreement.]
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<PAGE>
f. Relocation Allowance. In the event the Company requires
Employee to relocate, the Company shall give Employee a
reasonable allowance for the costs associated with such
relocation, the exact amount to be determined in good faith
by the parties hereto.
6. TERM TERMINATION.
a. Term. The term of this Agreement shall commence and continue from
________________, 1999, until December 31, 2001, unless otherwise
terminated as herein provided.
b. Termination.
i. For Cause. This Agreement may be terminated by either
party for cause at any time during the term hereof.
Cause for the purpose of this Agreement shall be the
failure of the Company to substantially meet its
obligations under Section 3 hereof or Employee to
substantially meet his obligations as set forth on
Exhibit A, upon 30 days written notice thereof and
failure to cure said default. In the event of such a
termination by the Company for cause, the Company shall
have no further obligations hereunder.
ii. By Company Without Cause. This Agreement may be
terminated by Company without cause at any time during
the term hereof.
In the event of such a termination by Company without
cause or a termination by Employee for cause pursuant
to clause (i) above, the Company shall continue to pay
Employee at Employee's option, the Base, any pro rata
portion of the Cash Bonus for the year of termination,
the car allowance and all medical, major medical and
hospital insurance benefits to become due during the
remaining term of this Agreement; provided, however,
that the obligations of Company hereunder shall be
reduced and deemed forgiven to the extent of an amount
equal to any compensation earned by Employee and the
value of any comparable benefits to which Employee may
become entitled during said remaining term. In
addition, at the Company's election, the Company shall
pay the Employee a lump sum payment equal to the
difference between the exercise price(s) of all stock
options vested and unvested in the Employee on the
effective date of the Employee's termination (the
"options") and the closing price of the underlying
securities on the effective date of the Employee's
termination for the options, or the Company shall vest
all options and extend the exercisibility of the
F-4
<PAGE>
options for a period of two years from the effective
date of the Employee's termination, provided, however,
that if, on the effective date of the Employee's
termination, the closing price of the underlying
securities is less than the exercise price of the
options, the Company shall vest all options and extend
the exercisibility of the options for a period of two
years from the effective date of the Employee's
termination.
iii. By Employee Without Cause. This Agreement may be
terminated by the Employee without cause (resignation).
In the event of such a termination, the Company shall
have no further obligations hereunder.
iv. Continuation of Terms. Except as provided herein, the
termination of this Agreement with or without cause
shall not affect the continuing obligations of the
parties hereto, as their respective interests may
appear, to Options earned prior to termination or under
any subsequent employment agreement, or to the
enforcement of the confidentiality, noncompetition and
similar provisions of this Agreement.
7. CONFIDENTIALITY AND NONCOMPETITION AGREEMENT, Employee contemporaneously
with the execution of this Agreement is executing a Confidentiality and
Noncompetition Agreement in the form attached hereto and made a part hereof as
Exhibit B.
8. ANNUAL RENEWAL. In the event that this Agreement is not renewed or
replaced on or before December 31, 2001, and either the Employee or the Company
has not been notified of the desire of the other party to terminate this
Agreement or negotiate for a revised employment arrangement by June 30, 2001,
then this Agreement shall be automatically extended for a period of one (1) year
under the same terms and conditions. Such extensions shall continue from year to
year (with a corresponding requirement for notification on June 30th of each
such extension year) except as provided herein.
9. MISCELLANEOUS.
a. This Agreement shall be deemed the entire agreement of the
parties and any amendment, modification, abrogation or addition
hereto shall be null and void unless embodied in writing and
signed by the parties hereto.
F-5
<PAGE>
b. The terms, provisions and sections of this Agreement shall be
deemed severable and, in the event of unenforceability,
illegality or invalidity of any of said terms, provisions or
sections, the same shall be severed and stricken herefrom and the
remainder of said Agreement interpreted and construed in a manner
so as to render the balance of said Agreement enforceable and
consistent with the intent of the parties hereto.
c. This Agreement may not be assigned by either party without the
prior written consent of the other party.
d. The Agreement shall be deemed to be a Colorado agreement and
shall be enforced, interpreted and construed pursuant to Colorado
law.
e. Any controversy or claim arising out of or relating to this
Agreement, or any breach hereof, shall be settled in arbitration
in the city and state where Employee is based in accordance with
the arbitration rules of the American Arbitration Association,
and judgment upon the award rendered by the arbitrator(s) may be
entered by any Court having jurisdiction thereof. If any party
refuses or neglects to appear at or participate in such
arbitration proceedings, the arbitrator(s) are empowered to
decide the controversy in accordance with whatever evidence is
presented by the party or parties who do participate. The
arbitrator(s) are authorized to award any party or parties such
sum as they consider proper for the time, expense and trouble of
arbitration, including arbitrator fees and attorney's fees. The
decision of the arbitrator(s) shall be final and shall not be
subject to appeal to any court of law or in equity.
IN WITNESS THEREOF, the undersigned have executed this Agreement effective
the date and year first above written.
COMPANY
U.S. PAWN, INC.
By:
Its:
EMPLOYEE
Jack D. Hartsoe
F-6
<PAGE>
The undersigned acknowledge and agree that this Agreement shall supersede the
Employment Agreement by and between Cash-N-Pawn International, Ltd. and Employee
dated _____________, _____ (the "Prior Agreement") and upon execution by the
parties above, the Prior Agreement shall be canceled and of no further force and
effect.
Jack D. Hartsoe
CASH-N-PAWN INTERNATIONAL, LTD.
By:
Title:
F-7
<PAGE>
EXHIBIT A
---------
Job Description
Oversee the day-to-day operations of Company stores at the direction and under
the supervision of the Company's Chief Executive Officer. Such duties may
include:
1. Oversee hiring and training of store employees.
2. Oversee the training of Area Managers.
3. Assist the Company's Chief Executive Officer in overseeing advertising and
marketing programs.
4. Assist the Company's Chief Executive Officer in the selection of hardware
and software for store management inventory control and accounting.
5. Oversee supervision of store personnel and training.
6. Oversee store construction.
7. Assist the Company's Chief Executive Officer in overseeing public
relations.
9. Other responsibilities as may be required by the Company's Chief Executive
Officer or the Board of Directors.
<PAGE>
EXHIBIT B
---------
CONFIDENTIALITY AND NONCOMPETITION AGREEMENT
--------------------------------------------
Effective Date: _____________, 1999
Parties: U.S. Pawn, Inc. ("Company")
Jack D. Hartsoe ("Employee")
RECITALS:
---------
1. Cash-N-Pawn International, Ltd., the company which employed Employee prior
to the date hereof, was merged with and into U.S. Pawn CNP Holdings, Inc.,
a Colorado corporation and wholly owned subsidiary of the Company (the
"Merger").
2. Employee and Company have entered into an Employment Agreement dated the
even date hereof employing him with the Company.
3. Employee, directly and indirectly, will control the day to day operations
of the Company.
4. Employee, in his position with the Company has and will continue to create,
obtain and have access to confidential information, documents, trade
secrets, and private information belonging to the Company.
5. Employee acknowledges that he has no proprietary right or valid business
purpose for the use or retention of said documents except insofar as it
relates to his status with the Company.
NOW, THEREFORE, as a condition to the employment of the Employee and to the
Merger, and for additional good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, it is hereby agreed by and between
Employee and Company as follows:
1. Confidentiality and Noncompetition. Employee acknowledges that the
services he performs and the expertise and knowledge he has or will
gain in his dealings with Company and its clients and prospective
clients are of a special and unusual nature with a unique value, the
loss of which cannot be adequately compensated by damages in an action
at law. In view of the unique value of the services and information of
Employee, and of the hardship to Company which may occur due to the
competition of Employee with Company, or the dissemination of
information to competitors of Company, Employee agrees as follows:
1
<PAGE>
a. Confidentiality. Employee hereby covenants and agrees that he
shall not directly or indirectly release or utilize, and will
return to Company, all copies of any confidential information,
trade secrets, client lists, prospective client lists and other
information relating to the development, marketing or performing
of any and all products or services of Company which may have
been or may be disclosed to Employee, or to which he may have
obtained access (regardless of whether such information may have
been created by Employee). Confidential information shall not
include information which:
i. at the time of disclosure was or thereafter is generally
known by and available to the public (other than as a result
of a disclosure directly or indirectly by the Employee or
his representatives);
ii. was available to Employee on a nonconfidential basis from a
source other than the Company or its employees or agents;
provided that such source is not and was not bound by a
confidentiality agreement with the Company; and
iii. has been independently acquired or developed by Employee
without violating his obligations under this Agreement.
b. Noncompetition. Employee hereby covenants and agrees that he will
not directly or indirectly, either as principal, agent, manager,
employee, owner, partner, stockholder, member, officer or
director of a corporation, limited liability company, partnership
or otherwise engage in the soliciting, marketing or furnishing of
the pawn shop consumer lending business or check cashing business
(or competitive products or services of Company) within a radius
of fifty (50) miles of any existing or proposed store of the
Company for the period of his providing services to the Company
and for a period of three (3) years thereafter. This paragraph
1.b. shall not apply if Employee is terminated by the Company
pursuant to Section 6.b.ii or the Employee terminates pursuant to
Section 6.b.i of Employee's Employment Agreement.
c. Nondisparagement. Employee agrees that he shall not disparage
Company, its affiliates or their predecessors, stockholders,
members, governors, officers, directors, employees or agents, nor
the products or services of such entities or individuals.
d. Solicitation of Employees. Employee hereby covenants and agrees
that he will not at any time during the period of his providing
services to the Company and for a period of two (2) years
thereafter solicit or seek to influence any agent or employee of
2
<PAGE>
the Company or any affiliate of the Company to become directly or
indirectly the agent, employee, co-employee or contractor for
Employee, any competitor of the Company, or any other party.
Company shall have the right to enforce the provisions of this
Agreement by specific remedies, including, but not limited to,
temporary restraining orders and temporary and permanent
injunctions, but such remedies shall be cumulative and shall not
preclude the parties from seeking damages resulting from a breach
of this Agreement. These remedies shall be in addition to and not
in limitation of any other rights or remedies to which Company,
its successors, affiliates or related entities has or may be
entitled at law, in equity or under this Agreement.
2. Reasonableness of Restrictions.
a. Reasonableness, Employee has carefully read and considered the
provisions of this Agreement and, having done so, agrees that the
restrictions set forth herein, including but not limited to the
time period of the restrictions and the entities and activities
to which such restrictions apply are fair and reasonable, and are
reasonably required for the protection of the interests of
Company, its shareholders, officers, directors and employees.
b. Modification by Court. In the event that, notwithstanding the
foregoing, any of the provisions of this Agreement shall be held
to be invalid or unenforceable, the remaining provisions hereof
shall nevertheless continue to be valid and enforceable as
through the invalid or unenforceable parts had not been included
herein. In the event that any provision relating to the time
period, areas of restriction and/or the entities or activities of
restriction shall be declared by a court of competent
jurisdiction to exceed the maximum time period, areas of
restriction and/or entities or activities such court deems
reasonable and enforceable, the time period, areas of restriction
and/or entities or activities of restriction deemed reasonable
and enforceable by said court shall become and thereafter be the
maximum time period, areas of restriction and/or entities and
activities.
3. Return of Documents. All documents, files and materials relating to
the operations of the Company, its clients or prospective clients
shall be returned to Company on or immediately following the
termination of services of Employee with Company.
4. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or any breach hereof, shall be settled by arbitration
in the city and state in which Employee is based in accordance with
the Arbitration Rules of the American Arbitration Association, and
3
<PAGE>
judgment upon the award rendered by the arbitrator(s) may be entered
in any court having jurisdiction thereof. If any party refuses or
neglects to appear at or participate in such arbitration proceedings,
the arbitrator(s) are empowered to decide the controversy in
accordance with whatever evidence is presented by the party or parties
who do participate. The arbitrators are authorized to award any party
or parties such sums as they consider proper for the time, expense,
and trouble of arbitration, including arbitrator fees and attorneys'
fees. The decisions of the arbitrator(s) shall be final and shall not
be subject to appeal to any court, in law or in equity.
Notwithstanding the above, the Company shall be authorized to use the
courts of the states in which this Agreement is to be effective in
order to obtain temporary restraining orders, temporary or permanent
injunctions, and other relief at law or in equity relating to the
enforcement of this Agreement.
5. Miscellaneous.
a. The provisions and prohibitions of this Agreement may be enforced
by court proceedings at law or in equity.
b. The mutual obligations hereof shall survive the termination of
services of Employee.
c. This Agreement shall inure to the benefit of and be binding upon
the parties hereto, their legal representatives, successors and
permitted assigns.
d. This Agreement shall be governed by and construed in accordance
with the laws of the State of Colorado.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective the date and year first above written.
COMPANY
U.S. PAWN, INC.
By:
Its:
EMPLOYEE
Jack D. Hartsoe
4
<PAGE>
The undersigned acknowledge and agree that this Confidentiality and
Noncompetition Agreement shall supercede the Confidentiality and Noncompetition
Agreement by and between Cash-N-Pawn International, Ltd. And Employee dated
_________________ (the "Prior C and N Agreement") and upon execution by the
parties above, the Prior C and N Agreement shall be cancelled and of no further
force and effect.
Jack D. Hartsoe
CASH-N-PAWN INTERNATIONAL, LTD.
By:
Title:
5
<PAGE>
EXHIBIT G
EMPLOYMENT AGREEMENT
--------------------
THIS AGREEMENT, made and entered into effective the ____ day of
____________, 1999, ("Agreement") by and between U.S. Pawn, Inc., a corporation
organized and existing under the laws of the State of Colorado ("Company") and
Alan L. Cross, an individual residing in the State of Minnesota (hereinafter
referred to as "Employee").
W I T N E S S E T H:
--------------------
WHEREAS, Employee desires to serve the Company as a Chief Financial Officer
and the Company desires to employ the Employee as Chief Financial Officer on the
terms as hereinafter set forth.
NOW, THEREFORE, for and in consideration of the above premises, the mutual
covenants and promises hereinafter contained, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties to this Agreement hereby agree as follows:
1. ENGAGEMENT. Throughout the term of this Agreement, Company shall employ
Employee as a Chief Financial Officer of the Company with the title of Chief
Financial Officer, and Employee hereby accepts employment by the Company in such
capacity and on the terms and conditions hereinafter set forth.
2. DUTIES OF EMPLOYEE. Employee's duties during the term of this Agreement
shall include, but not be limited to the following:
a. To carry out such duties and perform such functions as are
included within the job description for Chief Financial Officer
as set forth on Exhibit A attached hereto and incorporated herein
by this reference and to follow such directions as may reasonably
be given to Employee from time to time by the Board of Directors
of the Company or the Chief Executive Officer of the Company
("CEO"), who shall be responsible for evaluating the Employee's
job performance and determining the extent to which the Employee
is fulfilling his duties set forth herein. Such duties shall
include the management and oversight of the financial operations
of the Company, subsidiaries of the Company and all of the
affiliated companies for which the Company is to provide
management services. For purposes of this Agreement, the term
"Company" shall include such subsidiaries; and
G-1
<PAGE>
b. Subject to the vacation rights set forth in paragraph 5(b)
hereof, to devote his full energy, skill, attention and time to
the financial management, supervision and operation of the
Company for as many working hours as may be reasonably necessary.
3. DUTIES OF THE COMPANY. The duties of the Company during the term hereof
shall be as follows:
a. To timely pay Employee the compensation hereafter set forth for
the services to be performed by Employee;
b. To periodically reimburse all business expenses incurred by the
Employee in the performance of such services and approved by the
CEO of the Company; and
c. To provide reasonable office facilities, equipment and support
staff for the performance of Employee's duties set forth herein
or delegated by the CEO.
4. RELATIONSHIP OF THE PARTIES. Employee shall be considered at all times
and when acting in the ordinary course of his employment and performing the
duties herein set forth to be an employee of the Company. Employee shall have
the authority to take such actions and to enter into such contracts, agreements
or commitments for or on behalf of the Company as may be approved by the
Company's Board of Directors.
5. COMPENSATION. Employee shall be entitled to receive as full compensation
during the term hereof.
a. Base Annual Salary: A base annual salary ("Base") of One Hundred
Thousand Dollars ($100,000.00) per annum beginning on the
effective date hereof. Said Base Salary shall be reviewed
annually on January 1, beginning January 1, 2001, and such Base
Salary may be increased at the sole discretion of the Board of
Directors of the Company, taking into consideration the number of
stores in operation, the capital financing of the Company, the
financial performance of the Company and the performance of the
Employee. In the event this Agreement terminates on a date other
than an anniversary date hereof, the Base Salary shall be
prorated. Said Base Salary shall be paid to Employee bi-weekly
each Friday or on such other regular system as the Company may
establish from time to time. There shall be withheld from the
said Base Salary such amounts necessary for taxes or other
amounts authorized by law or authorized in writing by Employee.
G-2
<PAGE>
b. Car Allowance. Employee shall receive a monthly car allowance
during the term of this Agreement in the amount of $500.00 per
month. Said car allowance shall be payable on the first pay check
of each month. In the event this Agreement terminates on a date
other than the last day of the month, the car allowance shall be
prorated.
c. Personal Benefits. Employee, in addition to the foregoing, shall
be entitled to receive all employee benefits made available to
management pursuant to the Company's employee policies in effect
from time to time during the term of this Agreement, which
benefits shall include, but not be limited to, family health and
medical hospital insurance coverage which is the same or
substantially similar to the coverage provided to other similar
executive employees, and annual paid vacation of three weeks per
year.
d. Stock Purchase Option. Employee may be entitled to earn options
to purchase stock of the Company (the "Options") under the
following terms and conditions:
(i) The Compensation Committee of the Board of Directors shall
grant to the Employee Options to purchase 67,000 shares of
the common stock ("Shares") of the Company pursuant to the
terms and conditions of the Company's incentive stock option
plans. Subject to Section 6.b.ii below, such options shall
vest on December 31, 2001.
(ii) In addition to the Options set forth in Section 5.c.(i),
above, the Employee may be granted additional Shares of the
Company under the Plan as so determined by the Compensation
Committee, in its sole discretion, annually on December 31,
beginning December 31, 1999 taking into consideration the
number of stores in operation, the capital financing of the
Company, the financial performance of the Company and the
performance of the Employee.
(iii)The Options granted hereunder shall be exercisable at the
fair market value of such Shares on the date of grant, or
such other price as may be necessary to qualify such Options
for tax treatment under Internal Revenue Code Section 421.
The number of Options and Shares granted to the Employee
hereunder for purchase shall be adjusted for stock splits
and recapitalizations of the Company.
e. Cash Bonus. [Employee shall be eligible to earn an annual cash
bonus based on, among other things, the number of stores in
operation, the capital financing of the Company, and financial
performance of the Company, and the individual performance of
Employee. The exact criteria to be used in determining the amount
of and benchmarks for such cash bonus shall be determined in good
faith by the parties hereto during the 30 days following the
execution of the Merger Agreement.]
G-3
<PAGE>
f. Relocation Allowance. In the event the Company requires Employee
to relocate, the Company shall give Employee a reasonable
allowance for the costs associated with such relocation, the
exact amount to be determined in good faith by the parties
hereto.
6. TERM TERMINATION.
a. Term. The term ("Term") of this Agreement shall commence and
continue from the effective date hereof until December 31, 2001,
unless otherwise terminated as herein provided.
b. Termination.
i. For Cause. This Agreement may be terminated by either party
for cause at any time during the term hereof. Cause for the
purpose of this Agreement shall be the failure of the
Company to substantially meet its obligations under Section
3 hereof or Employee to substantially meet his obligations
as set forth on Exhibit A, upon 30 days written notice
thereof and failure to cure said default. In the event of
such a termination by the Company for cause, the Company
shall have no further obligations hereunder.
ii. By Company Without Cause. This Agreement may be terminated
by Company without cause at any time during the term hereof.
In the event of such a termination by Company without cause
or a termination by Employee for cause pursuant to clause
(i) above, the Company shall continue to pay Employee at
Employee's option, the Base, any pro rata portion of the
Cash Bonus for the year of termination, the car allowance
and all medical, major medical and hospital insurance
benefits to become due during the remaining term of this
Agreement; provided, however, that the obligations of
Company hereunder shall be reduced and deemed forgiven to
the extent of an amount equal to any compensation earned by
Employee and the value of any comparable benefits to which
Employee may become entitled during said remaining term. In
addition, at the Company's election, the Company shall pay
the Employee a lump sum payment equal to the difference
between the exercise price(s) of all stock options vested
and unvested in the Employee on the effective date of the
G-4
<PAGE>
Employee's termination (the "options") and the closing price
of the underlying securities on the effective date of the
Employee's termination for the options, or the Company shall
vest all options and extend the exercisibility of the
options for a period of two years from the effective date of
the Employee's termination, provided, however, that if, on
the effective date of the Employee's termination, the
closing price of the underlying securities is less than the
exercise price of the options, the Company shall vest all
options and extend the exercisibility of the options for a
period of two years from the effective date of the
Employee's termination.
iii. By Employee Without Cause. This Agreement may be terminated
by the Employee without cause (resignation). In the event of
such a termination, the Company shall have no further
obligations hereunder.
iv. Continuation of Terms. Except as provided herein, the
termination of this Agreement with or without cause shall
not affect the continuing obligations of the parties hereto,
as their respective interests may appear, to Options earned
prior to termination or under any subsequent employment
agreement, or to the enforcement of the confidentiality,
noncompetition and similar provisions of this Agreement.
7. CONFIDENTIALITY AND NONCOMPETITION AGREEMENT. Employee contemporaneously
with the execution of this Agreement is executing a Confidentiality and
Noncompetition Agreement in the form attached hereto and made a part hereof as
Exhibit B.
8. ANNUAL RENEWAL. In the event that this Agreement is not renewed or
replaced on or before December 31, 2001, and either the Employee or the Company
has not been notified of the desire of the other party to terminate this
Agreement or negotiate for a revised employment arrangement by June 30, 2001,
then this Agreement shall be automatically extended for a period of one (1) year
under the same terms and conditions. Such extensions shall continue from year to
year (with a corresponding requirement for notification on June 30th of each
such extension year) except as provided herein.
G-5
<PAGE>
9. MISCELLANEOUS.
a. This Agreement shall be deemed the entire agreement of the
parties and any amendment, modification, abrogation or addition
hereto shall be null and void unless embodied in writing and
signed by the parties hereto.
b. The terms, provisions and sections of this Agreement shall be
deemed severable and, in the event of unenforceability,
illegality or invalidity of any of said terms, provisions or
sections, the same shall be severed and stricken herefrom and the
remainder of said Agreement interpreted and construed in a manner
so as to render the balance of said Agreement enforceable and
consistent with the intent of the parties hereto.
c. This Agreement may not be assigned by either party without the
prior written consent of the other party.
d. The Agreement shall be deemed to be a Colorado agreement and
shall be enforced, interpreted and construed pursuant to Colorado
law.
e. Any controversy or claim arising out of or relating to this
Agreement, or any breach hereof, shall be settled in arbitration
in the city and state where Employee is based in accordance with
the arbitration rules of the American Arbitration Association,
and judgment upon the award rendered by the arbitrator(s) may be
entered by any Court having jurisdiction thereof. If any party
refuses or neglects to appear at or participate in such
arbitration proceedings, the arbitrator(s) are empowered to
decide the controversy in accordance with whatever evidence is
presented by the party or parties who do participate. The
arbitrator(s) are authorized to award any party or parties such
sum as they consider proper for the time, expense and trouble of
arbitration, including arbitrator fees and attorney's fees. The
decision of the arbitrator(s) shall be final and shall not be
subject to appeal to any court of law or in equity.
G-6
<PAGE>
IN WITNESS THEREOF, the undersigned have executed this Agreement effective
the date and year first above written.
COMPANY:
U.S. PAWN, INC.
By:
Its:
EMPLOYEE:
Alan L. Cross
The undersigned acknowledge and agree that this Agreement shall supersede the
Employment Agreement by and between Cash-N-Pawn International, Ltd. and Employee
dated _____________, _____ (the "Prior Agreement") and upon execution by the
parties above, the Prior Agreement shall be canceled and of no further force and
effect.
Alan L. Cross
CASH-N-PAWN INTERNATIONAL, LTD.
By:
Title:
G-7
<PAGE>
EXHIBIT A
---------
JOB DESCRIPTION
Oversee the day-to-day financial affairs of the Company at the direction and
under supervision of the Company's Chief Executive Officer. Such duties may
include:
1. Oversee external and internal financial reporting functions including SEC
compliance and coordination with external auditing firm.
2. Oversee the cash management function including banking relationships.
3. Oversee preparation of annual budgets and variance reporting.
4. Oversee the internal administration of the Company's legal affairs and
provide primary contact with outside legal counsel.
5. Assist the Chief Executive Officer and Chief Operating Officer in the
selection of hardware and software for inventory control and general ledger
accounting.
6. Oversee lease contract negotiation and compliance.
7. Oversee the licensing and permit function.
8. Oversee tax reporting compliance function.
9. Oversee insurance and other risk management functions.
10. Oversee employee benefit administration.
11. Assist the Chief Executive Officer in overseeing stockholder and public
relations.
12. Other responsibilities as may reasonably be required by the Chief Executive
Officer or the Board of Directors.
<PAGE>
EXHIBIT B
---------
CONFIDENTIALITY AND NONCOMPETITION AGREEMENT
--------------------------------------------
Effective Date: __________, 1999
Parties: U.S. Pawn, Inc. ("Company")
Alan L. Cross ("Employee")
R E C I T A L S:
----------------
1. Cash-N-Pawn International, Ltd., the company which employed Employee prior
to the date hereof, was merged with and into U.S. Pawn CNP Holdings, Inc.,
a Colorado corporation and wholly owned subsidiary of the Company (the
"Merger").
2. Employee and Company have entered into an Employment Agreement dated the
even date hereof employing him with the Company.
3. Employee, directly and indirectly, will control the day to day finances of
the Company.
4. Employee, in his position with the Company has and will create, obtain and
have access to confidential information, documents, trade secrets, and
private information belonging to the Company.
5. Employee acknowledges that he has no proprietary right or valid business
purpose for the use or retention of said documents except insofar as it
relates to his status with the Company.
NOW, THEREFORE, as a condition to the employment of the Employee and to the
Merger, and for additional good and valuable consideration the receipt and
sufficiency of which are hereby acknowledged, it is hereby agreed by and between
Employee and Company as follows:
1. Confidentiality and Noncompetition. Employee acknowledges that the
services he will perform and the expertise and knowledge he has or
will gain in his dealings with Company and its clients and prospective
clients are of a special and unusual nature with a unique value, the
loss of which cannot be adequately compensated by damages in an action
at law. In view of the unique value of the services and information of
Employee, and of the hardship to Company which may occur due to the
competition of Employee with Company, or the dissemination of
information to competitors of Company, Employee agrees as follows:
1
<PAGE>
a. Confidentiality, Employee hereby covenants and agrees that he
shall not directly or indirectly release or utilize, and will
return to Company, all copies of any confidential information,
trade secrets, client lists, prospective client lists and other
information relating to the development, marketing or performing
of any and all products or services of Company which may have
been or may be disclosed to Employee, or to which he may have
obtained access (regardless of whether such information may have
been created by Employee). Confidential information shall not
include information which:
(i) at the time of disclosure was or thereafter is generally
known by and available to the public (other than as a result
of a disclosure directly or indirectly by the Employee or
his representatives);
(ii) was available to Employee on a nonconfidential basis from a
source other than the Company or its employees or agents;
provided that such source is not and was not bound by a
confidentiality agreement with the Company; and
(iii)has been independently acquired or developed by Employee
without violating his obligations under this Agreement.
b. Noncompetition, Employee hereby covenants and agrees that he will
not directly or indirectly, either as principal, agent, manager,
employee, owner, partner, stockholder, member, officer or
director of a corporation, limited liability company, partnership
or otherwise engage in the soliciting, marketing or furnishing of
the pawn shop consumer lending business or check cashing business
(or competitive products or services of Company) within a radius
of fifty (50) miles of any existing or proposed store of the
Company for the period of his providing services to the Company
and for a period of three (3) years thereafter. This paragraph
1.b. shall not apply if Employee is terminated by the Company
pursuant to Section 6.b.ii or the Employee terminates pursuant to
Section 6.b.i of Employee's Employment Agreement.
c. Nondisparagement, Employee agrees that he shall not disparage
Company, its affiliates or their predecessors, stockholders,
members, governors, officers, directors, employees or agents, nor
the products or services of such entities or individuals.
d. Solicitation of Employees, Employee hereby covenants and agrees
that he will not at any time during the period of his providing
services to the Company and for a period of two (2) years
thereafter solicit or seek to influence any agent or employee of
2
<PAGE>
the Company or any affiliate of the Company to become directly or
indirectly the agent, employee, co-employee or contractor for
Employee, any competitor of the Company, or any other party.
Company shall have the right to enforce the provisions of this
Agreement by specific remedies, including, but not limited to,
temporary restraining orders and temporary and permanent injunctions,
but such remedies shall be cumulative and shall not preclude the
parties from seeking damages resulting from a breach of this
Agreement. These remedies shall be in addition to and not in
limitation of any other rights or remedies to which Company, its
successors, affiliates or related entities has or may be entitled at
law, in equity or under this Agreement.
2. Reasonableness of Restrictions.
a. Reasonableness, Employee has carefully read and considered the
provisions of this Agreement and, having done so, agrees that the
restrictions set forth herein, including but not limited to the
time period of the restrictions and the entities and activities
to which such restrictions apply are fair and reasonable, and are
reasonably required for the protection of the interests of
Company, its shareholders, officers, directors and employees.
b. Modification by Court, In the event that, notwithstanding the
foregoing, any of the provisions of this Agreement shall be held
to be invalid or unenforceable, the remaining provisions hereof
shall nevertheless continue to be valid and enforceable as
through the invalid or unenforceable parts had not been included
therein. In the event that any provision relating to the time
period, areas of restriction and/or the entities or activities of
restriction shall be declared by a court of competent
jurisdiction to exceed the maximum time period, areas of
restriction and/or entities or activities such court deems
reasonable and enforceable, the time period, areas of restriction
and/or entities or activities of restriction deemed reasonable
and enforceable by said court shall become and thereafter be the
maximum time period, areas of restriction and/or entities and
activities.
3. Return of Documents. All documents, files and materials relating to
the operations of the Company, its clients or prospective clients
shall be returned to Company on or immediately following the
termination of services of Employee with Company.
4. Arbitration. Any controversy or claim arising out of or relating to
this Agreement, or any breach hereof, shall be settled by arbitration
in the city and state in which Employee is based in accordance with
the Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered by the arbitrator(s) may be entered
3
<PAGE>
in any court having jurisdiction thereof. If any party refuses or
neglects to appear at or participate in such arbitration proceedings,
the arbitrator(s) are empowered to decide the controversy in
accordance with whatever evidence is presented by the party or parties
who do participate. The arbitrators are authorized to award any party
or parties such sums as they consider proper for the time, expense,
and trouble of arbitration, including arbitrator fees and attorneys'
fees. The decisions of the arbitrator(s) shall be final and shall not
be subject to appeal to any court, in law or in equity.
Notwithstanding the above, the Company shall be authorized to use the
courts of the states in which this Agreement is to be effective in
order to obtain temporary restraining orders, temporary or permanent
injunctions, and other relief at law or in equity relating to the
enforcement of this Agreement.
5. Miscellaneous.
a. The provisions and prohibitions of this Agreement may be enforced
by court proceedings at law or in equity.
b. The mutual obligations hereof shall survive the termination of
services of Employee.
c. This Agreement shall inure to the benefit of and be binding upon
the parties hereto, their legal representatives, successors and
permitted assigns.
d. This Agreement shall be governed by and construed in accordance
with the laws of the State of Colorado.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed effective the date and year first above written.
COMPANY:
U.S. PAWN, INC.
By:
Its:
EMPLOYEE:
Alan L. Cross
The undersigned acknowledge and agree that this Confidentiality and
Noncompetition Agreement shall supercede the Confidentiality and Noncompetition
Agreement by and between Cash-N-Pawn International, Ltd. And Employee dated
_________________ (the "Prior C and N Agreement") and upon execution by the
parties above, the Prior C and N Agreement shall be cancelled and of no further
force and effect.
Alan L. Cross.
CASH-N-PAWN INTERNATIONAL, LTD.
By:
Title:
5
<PAGE>
APPENDIX A
MERGER CONSIDERATION
--------------------
Subject to adjustment as provided below, each outstanding share (or
fraction thereof) of Company Common Stock (such shares of Company Common Stock
other than Dissenting Shares, herein referred to as "Converted Company Shares")
shall be converted into and shall thereafter represent the right to receive,
upon surrender in accordance with Section 2.9 of the Agreement, each of the
following as Merger Consideration:
(a) Parent Common Stock: A number of restricted shares of Parent Common
Stock equal to 750,000 (subject to appropriate adjustment for any stock
dividend, subdivision, reclassification, recapitalization, split, combination or
exchange with respect to the Parent Common Stock occurring before the Effective
Time) divided by the total number of shares of Company Common Stock issued and
outstanding on the Closing Date (the "Outstanding Stock Number");
(b) Cash: A cash payment equal to $550,000 divided by the Outstanding Stock
Number;
(c) Promissory Note: 9.63% Promissory Notes in an aggregate principal
amount equal to $2,450,000 divided by the Outstanding Stock Number; and
(d) Preferred Stock: A number of shares of Parent Preferred Stock with a 7%
preferred dividend equal to 12,500 divided by the Outstanding Stock Number.
The foregoing principal amount of Promissory Notes and number of shares of
Parent Preferred Stock in (c) and (d) above, and the interest rate for the
Promissory Notes specified in (c) above, are for illustrative purposes based
upon a Determination Price (as hereinafter defined) of $2.50. The combined yield
provided by the interest rate on the Promissory Notes and the dividend on the
Parent Preferred Stock shall equal 9.5%, and, subject to adjustment as provided
below, the aggregate of the face amount of the Promissory Notes and par value of
Parent Preferred Stock shall equal $2,575,000 (the "Aggregate Additional
Consideration").
With respect to each holder of Company Common Stock, if the aggregate
number of shares of either Parent Common Stock or Parent Preferred Stock
collectively issuable to such holder for conversion of all of such holder's
Company Common Stock includes a fractional share, such fractional share shall be
rounded up to the nearest whole number.
Adjustments:
- - ------------
A. In no event shall the total dollar value (excluding any amount added to the
Merger Consideration as a result of the conversion of the Company 11% Debt
pursuant to Section B.(1) of this Appendix A) of the Merger Consideration exceed
$5,000,000 or be less than $4,700,000. Accordingly, to the extent the dollar
value of the Parent Common Stock component of the Merger Consideration:
1
<PAGE>
(i) exceeds $1,875,000 (i.e., the Determination Price exceeds $2.50), the
following adjustments shall be made to the following Merger Consideration
components in such order until the value of the Merger Consideration as
determined above equals $5,000,000:
(a) First, the Aggregate Additional Consideration shall be reduced
until equal to zero $1 for each $1 that the total dollar value of the
Parent Common Stock component of the Merger Consideration exceeds
$1,875,000.
(b) Second, for any additional amounts, the cash component of the
Merger Consideration shall be reduced $1 for each $1 until equal to zero.
(c) Thereafter, the Parent Common Stock component shall be reduced so
that the aggregate value of the Parent Common Stock equals $5,000,000.
(ii) is less than $1,575,000 (i.e., the Determination Price is less than
$2.10) then the Aggregate Additional Consideration shall be increased
dollar-for-dollar for the amount the aggregate value of the Parent Common Stock
component of the Merger Consideration is less than $1,575,000.
B. Following any adjustments under Section A above, the Merger Consideration
shall be adjusted as follows in such order:
(i) Up to the full extent of any reduction pursuant to paragraph A(i)(b) or
(c) above, first the Parent Common Stock and then the cash component of the
Merger Consideration; and thereafter the Aggregate Additional Consideration
shall be increased (i) $1.17 for every $1.00 of principal amount of the Company
11% Debt that is converted up to a maximum of $588,235 of converted Company 11%
Debt and (ii) $1.00 for every $1.00 of principal amount of Company 11% Debt that
is converted prior to the Effective Time above such amount. In this way, the
Parent will assume $.17 of the $.33 conversion premium of the Company 11% Debt
up to a maximum aggregate increase in the value of the Promissory Notes of
$100,000. The total principal amount of the outstanding Company 11% Debt is
$2,000,000 and as of April 1, 1999 $0 accrued but unpaid interest thereon.
(ii) As soon as practicable (but in no event later than 45 days) following
the Closing Date, the Company, through the Company Committee, shall prepare and
Ehrhardt Keefe Steiner & Hottman, P.C. (the "Auditor") shall review (i) a
balance sheet of the Company and the Subsidiaries on a consolidated basis as of
the Closing Date (the "Closing Date Balance Sheet") and (ii) a supplemental
"Final Balance Sheet" which shall be the Closing Date Balance Sheet with
adjustments for the excluded amounts described on Appendix A-2. The Closing Date
Balance Sheet shall be prepared in accordance with GAAP applied on a basis
consistent with the accounting principles used in preparation of the Latest
Balance Sheet, and the Final Balance Sheet shall also be prepared on such basis,
subject to the adjustments made in accordance with Appendix A-2. The Purchaser
or Parent shall have a period of 30 business days following delivery of the
Closing Date Balance Sheet and the Final Balance Sheet to object in writing to
the Closing Date Balance Sheet or the Final Balance Sheet. If no objection is
made within such period, the Closing Date Balance Sheet and the Final Balance
Sheet shall be final and binding on the parties. If an objection is made, the
parties shall attempt in good faith to resolve such dispute and if no resolution
2
<PAGE>
is reached within ten (10) business days, the parties shall engage a mutually
acceptable "Big Five" accounting firm that is not otherwise related to the
Parent, the Purchaser or the Company to resolve such dispute. The determination
of such accounting firm shall be final and binding upon the parties, and the
fees and expenses of such firm and of the parties in connection with such
dispute shall be borne on one hand by Purchaser and the Parent, jointly and
severally, and on the other hand by the holders of Converted Common Shares (by
reduction on a dollar-for-dollar basis from the Aggregate Additional
Consideration), in proportion to the variance of their positions on the
calculation of net assets on the Final Balance Sheet from the determination made
by such firm. The Aggregate Additional Consideration shall be reduced on a
dollar-for-dollar basis for any reduction in net assets of the Company and the
Subsidiaries on a consolidated basis as shown on the Final Balance Sheet from
the net assets reflected on the Latest Balance Sheet.
(iii) Following the adjustments described in the foregoing clauses (i) and
(ii) above, the Aggregate Additional Consideration shall be allocated between
the Promissory Notes and the Parent Preferred Stock in the following manner: the
number of shares of Parent Preferred Stock will be adjusted upwards or downwards
(and the portion of the Aggregate Additional Consideration allocated to the
Promissory Notes will be adjusted exactly dollar-for-share opposite (e.g., $1
increase in aggregate principal amount of Promissory Notes for a 1 share
decrease in Parent Preferred Stock) so that the sum of the value of Parent
Preferred Stock (using a value of $10 per share) plus the value of Parent Common
Stock (using the average of the closing prices of Parent Common Stock on the
NASDAQ SmallCap Market for the five trading days immediately preceding the day
two days prior to the Closing Date) (such average price per share of Parent
Common Stock being herein referred to as the "Determination Price") equals 40%
(or, if following the foregoing calculation the number of shares of Parent
Preferred Stock is reduced to zero, at least 40%) of the total Merger
Consideration (Parent Common Stock (using the same valuation as above) plus cash
plus Promissory Notes plus Parent Preferred Stock).
After all of the foregoing adjustments, the interest rate on the Promissory
Notes shall be adjusted (to the nearest hundredth of a percent) such that the
blended yield of the Promissory Notes and the Parent Preferred Stock equals
9.5%.
Examples of calculations of the Merger Consideration and the allocation of
the Aggregate Additional Consideration based on various values for the
Determination Price of Parent Common Stock are attached hereto as Appendix A-1.
As the Determination Price cannot be determined at this time, such calculations
are provided for exemplary purposes only.
3
<PAGE>
<TABLE>
<CAPTION>
APPENDIX A-1
ADJUSTMENT EXAMPLE
------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Parent common shares 750,000 750,000 750,000 750,000 750,000 750,000 750,000
Price per Parent common share
at closing $ 1.75 $ 2.10 $ 2.25 $ 2.50 $ 2.67 $ 2.75 $ 3.00
---------- ---------- ---------- ---------- ---------- ---------- ----------
Value of Parent common shares $1,312,500 $1,575,000 $1,687,500 $1,875,000 $2,000,000 $2,062,500 $2,250,000
Debt 2,270,000 2,270,000 2,337,500 2,450,000 2,450,000 2,387,500 2,200,000
Cash 550,000 550,000 550,000 550,000 550,000 550,000 550,000
Value of Parent preferred shares 567,500 305,000 237,500 125,000 0 0 0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total Merger Consideration $4,700,000 $4,700,000 $4,812,500 $5,000,000 $5,000,000 $5,000,000 $5,000,000
========== ========== ========== ========== ========== ========== ==========
Ratio of equity to total
Merger Consideration 40.00% 40.00% 40.00% 40.00% 40.00% 41.25% 45.00%
Annual dividend on Parent
preferred stock - 7% $ 39,725 $ 21,350 $ 16,625 $ 8,750 $ 0 $ 0 $ 0
Annual interest requirement
on Debt 229,838 223,275 228,000 235,875 232,750 226,813 209,000
Total return on preferred
stock and Debt - 9.5% $ 269,563 $ 244,625 $ 244,625 $ 244,625 $ 232,750 $ 226,813 209,000
Annual interest rate on Debt 10.13% 9.84% 9.75% 9.63% 9.50% 9.50% 9.50%
The calculations presented herein are for illustrative purposes only and do not take into consideration any adjustments that may be
required pursuant to paragraphs B(i) and B(ii) of Appendix A of the Agreement.
A-1
</TABLE>
<PAGE>
APPENDIX A-2
FINAL BALANCE SHEET ADJUSTMENTS
-------------------------------
Section B(ii) of Appendix A (Merger Consideration) provides that the Company,
through the Company Committee, shall prepare, and the Auditor shall review,
the Closing Date Balance Sheet and a supplemental Final Balance Sheet. This
Appendix A-2 describes the adjustments to be made to the Closing Date
Balance Sheet in the preparation of the Final Balance Sheet therefrom,
which adjustments are as follows:
In light of the adjustment to the Aggregate Additional Consideration to
be made pursuant to Section B(i) of Appendix A, the Final Balance
Sheet shall show as a liability of the Company the aggregate amount of
Company 11% Debt converted to Company Common Stock from and after the
date of the Agreement and prior to the Effective Time, so that the
Final Balance Sheet shall reflect the amount of Company 11% Debt
outstanding on the date of the Agreement as if no such Company 11%
Debt shall have been converted.
The Final Balance Sheet shall not show, either as a reduction of assets or
an increase in liabilities so as to cause a reduction in net assets as
stated in such Final Balance Sheet, any costs or liabilities as may
directly arise in connection with, or otherwise directly relate to,
the matters specifically set forth in the disclosure schedules to the
Agreement or matters otherwise specifically disclosed by the Company
in such disclosure schedules or in the Agreement, in each case
regardless of whether or not such costs or liabilities have been paid,
accrued or provided for by the Company as of the Effective Time.
The Final Balance Sheet shall not show, either as a reduction of assets or
an increase in liabilities so as to cause a reduction in net assets as
stated in such Final Balance Sheet, any costs or liabilities paid or
incurred from and after January 1, 1999, up to an aggregate amount not
to exceed $216,700, of the following types, in each case regardless of
whether or not such costs or liabilities have been paid, accrued or
provided for by the Company as of the Effective Time:
Legalfees and expenses relating to the negotiation of the Agreement
and the consummation of the Merger, including without limitation
legal fees and expenses incurred in connection with the
preparation of proxy statements and obtaining required corporate
and third party approvals for and in connection with the Merger,
the retirement of the 15% Company Debt and the waiver or
cancellation of associated rights, the obtaining of financing for
the retirement of such indebtedness and the waiver or
cancellation of such rights, the conversion or exchange of the
11% Company Debt, the retirement of the agent's warrants and
other rights held by Miller & Schroeder Financial, Inc., and the
surrender or exchange of other options, warrants, and other
equity rights and any amendment of plan documents therefor.
A-2-1
<PAGE>
Accounting fees and expenses related to reports, reviews or
consultations relating to the negotiation of the Agreement, the
consummation of the Merger, and the preparation of the Closing
Date Balance Sheet and the Final Balance Sheet.
The redemption price paid for or other cost of retirement of the
agent's warrants and other rights held by Miller & Schroeder
Financial, Inc.
With respect to the annual premium paid by the Company for directors
and officers liability insurance coverage through April 2000, the
portion allocable to the period from and after the Effective
Time.
All of Jerry Royal's salary, and related payroll expenses and 50% of
Gerry Polito's salary.
Travel and associated costs relating to meetings, due diligence or
other purposes relating to the Merger.
The fees and expenses of the Auditor in connection with the review of the
Closing Date Balance Sheet and the Final Balance Sheet shall be paid by the
Purchaser as the Surviving Corporation of the Merger and/or the Parent.
A-2-2
Exhibit 2
CASH-N-PAWN INTERNATIONAL, LTD.
1995
LONG-TERM INCENTIVE PLAN
The purpose of the CASH-N-PAWN INTERNATIONAL, LTD. 1995 LONG-TERM INCENTIVE
PLAN (the "Plan") is to promote the growth and profitability of CASH-N-PAWN
INTERNATIONAL, LTD. (the "Company") and its affiliates by providing its key
executives with an incentive to achieve long term corporate objectives, to
attract and retain executives of outstanding competence, and to provide its
executives with an equity interest in the Company.
1. Stock Subject to Plan.
a. Aggregate Limit. A aggregate limit of 210,000 shares (the "Shares")
of the common stock of the Company ("Company Stock") may be subject to
awards granted under the Plan. Such Shares may be authorized but unissued
Company Stock or authorized and issued Company Stock that has been acquired
by the Company. Except to the extent otherwise provided in paragraph 6.b.,
Shares that are forfeited, and Shares that are subject to an award which
expires or are canceled, shall be available for reissuance under the Plan.
b. Individual Limit. Not more than 36,000 Shares may be subject to
awards granted to any employee during any calendar year. If an award
granted to an employee is canceled, the canceled award will continue to be
counted against the maximum number of shares for which awards may be
granted to that employee. If, after grant, the exercise price of a stock
option is reduced, the reduction shall be treated as a cancellation of the
option and the grant of a new option for purposes of this paragraph.
2. Administration.
a. Committee. The Plan shall be administered by a compensation
committee (the "Committee") appointed by the Board of Directors of the
Company (the "Board"), consisting of not less than two members of the
Board. At any time when the Company is registered under Section 12 of the
Securities Exchange Act of 1934 (the "Exchange Act"):
i. each member of the Committee shall be a "disinterested person"
within the meaning of Rule 16b-3(c)(2)(i) under the Exchange Act;
and
ii. to the extent feasible, each member of the Committee shall be an
"outside director" within the meaning of Section 162(m)(4)(C)(i)
of the Internal Revenue Code of 1986 (the "Code") and regulations
thereunder.
II-1
<PAGE>
b. Powers and Duties. The Committee shall have sole discretion and
authority to:
i. adopt rules and regulations governing the administration of the
Plan;
ii. select eligible employees to whom awards will be granted;
iii. determine the type, price, amount, size, and terms of awards;
iv. determine when awards will be granted;
v. determine whether restrictions will be placed on Shares purchased
pursuant to an option or issued pursuant to an award;
and make all other determinations necessary or advisable for the
administration of the Plan. The Committee's determinations need not be
uniform, and may be made by it selectively among persons who are eligible
to receive awards, whether or not such persons are similarly situated. All
interpretations, decisions, or determinations made by the Committee shall
be final and conclusive.
3. Eligibility. Any key employee of the Company or its affiliates who has
been employed with the Company shall be eligible to receive awards under the
Plan; however, no awards shall be made to a director of the Company who is not
an employee of the Company or an Affiliate. An "Affiliate" is any corporation
that is a "parent corporation" or a "subsidiary corporation" with respect to the
Company, as determined under Sections 424(e) and (f) of the Code.
4. Awards. The Committee may make awards in the form of stock options,
stock appreciation rights, restricted stock, performance awards, or any
combination thereof.
5. Stock Options. A stock option shall entitle the optionee, upon exercise,
to purchase Shares at a specified price during a specified period. Stock options
may be "Incentive Stock Options" within the meaning of Section 422 of the Code,
options which do not qualify as Incentive Stock Options ("Nonqualified
Options"), or a combination of Incentive Stock Options and Nonqualified Options.
Stock options shall be subject to the following requirements:
a. Type of Option. Each option shall be identified as an Incentive
Stock Option or a Nonqualified Option. If a combination of Incentive Stock
Options and Nonqualified Options are granted in a single award, the
agreement evidencing the award shall specify the extent to which the
options are Incentive Stock Options and the extent to which they are
Nonqualified Options.
*
b. Term. No option shall be exercisable within six months, or more
than ten years, after the date it is granted.
II-2
<PAGE>
c. Payment. The purchase price of Shares subject to an option shall be
payable in full when the option is exercised. Payment may be made in cash,
in shares of Company Stock having a fair market value which is not less
than the purchase price on the date of exercise, or by a combination of
cash and such shares, as the Committee may determine. Payment may be made
subject to such terms and conditions as the Committee deems appropriate.
d. Options Not Transferable. An option shall not be transferable
except to the extent permitted by the agreement evidencing the option. An
option agreement may only permit an option to be transferred by will or the
laws of descent and distribution, and an option may not be exercised during
the optionee's lifetime by anyone other than the optionee.
e. Incentive Stock Options. An Incentive Stock Option shall be subject
to the following additional requirements:
i. The purchase price of Shares subject to the option shall not be
less than the fair market value of the Shares at the time the
option is granted, as determined in good faith by the Committee.
ii. The fair market value (determined at the time the option is
granted) of all Shares with respect to which Incentive Stock
Options first become exercisable during any calendar year, under
this Plan or any other plan of the Company or an Affiliate, for
any individual employee, shall not exceed $100,000.
iii. If the optionee owns 10% or more of the total combined voting
power of all classes of stock of the Company or an Affiliate at
the time the option is granted, the purchase price of Shares
subject to the option shall not be less than 110% of their fair
market value on the date the option is granted, and the option
may not be exercised more than five years after the date it is
granted. The rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any optionee.
Subject to the foregoing, options may be made exercisable in one or more
installments, upon the happening of certain events, or upon such other
terms and conditions as the Committee shall determine.
6. Stock Appreciation Rights. A stock appreciation right shall entitle the
holder, upon exercise, to receive a payment equal to the amount by which the
fair market value of one Share on the date the right is exercised exceeds the
"base amount" established by the Committee on the date the right is granted.
Stock appreciation rights shall be subject to the following requirements:
II-3
<PAGE>
a. Type of Right. Stock appreciation rights may be granted in tandem
with an option or as "freestanding" rights.
b. Tandem Rights. Stock appreciation rights granted in tandem with an
option shall become nonexercisable upon exercise of the option, and an
option granted in tandem with stock appreciation rights shall become
nonexercisable upon the exercise of the rights. Shares subject to an option
which becomes nonexercisable by virtue of the exercise of a tandem right
shall not be available for subsequent awards under the Plan.
c. Term. No stock appreciation right shall be exercisable within six
months, or more than ten years, after the date it is granted.
d. Payment. The amount payable upon the exercise of a stock
appreciation right may be paid in cash, in shares of Company Stock having a
fair market value which is not more than the amount payable on the date of
exercise, or in a combination of cash and such Shares, as the Committee
shall determine.
e. Rights Not Transferable. A stock appreciation right shall not be
transferable except to the extent permitted by the agreement evidencing the
right. A stock appreciation right agreement may only permit the right to be
transferred by will or the laws of descent and distribution, and a stock
appreciation right may not be exercised during the holder's lifetime by
anyone other than the holder.
f. Rights In Tandem With ISOs. Stock appreciation rights granted in
tandem with an Incentive Stock Option shall be subject to the following
additional requirements:
i. The base amount of the rights shall not be less than the purchase
price of the Shares subject to the option.
ii. The rights may be exercised only when the fair market value of
the Shares subject to the rights exceeds the purchase price of
the Shares subject to the option.
iii. The rights may be exercised only when, and to the extent, the
option may be exercised.
iv. The rights may be transferred only when the option may be
transferred.
v. The amount payable upon exercise of the rights shall not exceed
the difference between the fair market value of the Shares
subject to the right and the purchase price of the Shares subject
to the option.
II-4
<PAGE>
Subject to the foregoing, stock appreciation rights may be made exercisable
in one or more installments, upon the happening of certain events, or upon
such other terms and conditions as the Committee shall determine.
7. Restricted Stock. Restricted stock awards shall entitle the holder to
receive Shares subject to forfeiture if specified conditions are not satisfied
at the end of a restricted period. Restricted stock awards shall be subject to
the following requirements:
a. Restricted Period. The Committee shall establish a restricted
period of not less than six months during which the holder will not be
permitted to sell, transfer, pledge, encumber, or assign the Shares subject
to the award. Within these limits, the Committee may provide for the lapse
of restrictions in installments, upon the occurrence of certain events, or
upon such other terms and conditions as the Committee deems appropriate.
Any attempt by a holder to dispose of restricted Shares in a manner
contrary to the applicable restrictions shall be void, and of no force or
effect.
b. Rights During Restricted Period. Except to the extent otherwise
provided herein or under the terms of a restricted stock agreement, the
holder of restricted Shares shall have all of the rights of a stockholder
in the Company with respect to the restricted Shares, including the right
to vote the Shares and to receive dividends and other distributions.
However, all stock dividends, stock rights, and stock issued upon split ups
or reclassifications of Shares shall be subject to the same restrictions as
the Shares with respect to which they are issued, and may be held in
custody as provided below until the restrictions have lapsed.
c. Forfeitures. Except to the extent otherwise provided in a
restricted stock agreement, restricted Shares shall be forfeited to the
Company, and all rights of the holder with respect to such Shares shall
terminate, if the holder shall cease to be an employee of the Company and
its Affiliates or if any condition established by the Committee for the
release of any restriction shall not have occurred prior to the end of the
restricted period.
d. Custody. The Committee may provide that certificates evidencing
restricted Shares shall be held in custody by a bank or other institution,
or by the Company or an Affiliate, until the restrictions have lapsed. The
Committee may also require the holder of restricted Shares to deliver a
stock power to the Company, endorsed in blank, relating to the restricted
Shares.
e. Certificates. A recipient of restricted Shares shall be issued a
certificate or certificates evidencing such Shares. Such certificates shall
be registered in the name of the recipient, and shall bear a legend which
shall be in substantially the following form:
"The transferability of this certificate and the shares represented
hereby are subject to the terms and conditions (including forfeiture)
of the CASH-N-PAWN INTERNATIONAL, LTD. 1995 LONG-TERM INCENTIVE PLAN
and a Restricted Stock Agreement entered into between the registered
owner and CASH-N-PAWN INTERNATIONAL, LTD. Copies of such Plan and
Agreement are on file in the offices of CASH-N-PAWN INTERNATIONAL,
LTD."
II-5
<PAGE>
8. Performance Awards. Performance awards shall entitle the recipient to
receive future payments of cash or distributions of Shares upon the achievement
of long-term performance goals. Performance awards shall be subject to the
following requirements:
a. Performance Period. The Committee shall establish a performance
period of not fewer than six months, nor more than five years.
b. Amount of Awards. The Committee shall establish a value for each
performance award, which may be expressed in terms of specified dollar
amounts or a specified number of Shares. Such value may be fixed or
variable in accordance with criteria specified by the Committee at the time
of the award.
c. Performance Objectives. The Committee shall establish performance
objectives to be achieved during the performance period, determining the
extent to which an employee will be entitled to distributions with respect
to the award.
d. Performance Measures. Performance objectives may relate to
corporate, subsidiary, unit, or individual performance, or any combination
thereof, and may be established in terms of growth in gross or net
earnings, earnings per share, ratio of earnings to equity or assets, Share
value, or such other measures as the Committee shall determine. Multiple
objectives may be used which have the same or different weighting, and the
objectives may relate to absolute performance or to relative performance
measured against other companies, subsidiaries, units, or individuals.
e. Adjustments. Prior to the end of a performance period, the
Committee may adjust previously established performance objectives to
reflect major unforeseen events such as changes in applicable laws,
regulations, or accounting practices; mergers, acquisitions, or
divestitures; or other unusual or non-recurring events.
f. Distributions with Respect To Awards. Following the end of a
performance period, the Committee shall determine the extent to which the
performance objectives for such period have been achieved and the amounts,
if any, that are payable with respect to performance awards for that
period. Such amounts may be paid in cash or in Shares (based on their fair
market value at the time of the payment), or in any combination of cash and
Shares, as the Committee shall determine. Payments may be made in a lump
sum or in installments, and shall be subject to such vesting, deferral, or
other terms and conditions as the Committee may determine.
g. Nontransferability. A performance award shall not be assignable or
transferable except to the extent permitted by the agreement evidencing the
award. A performance award agreement may only permit an award to be
transferred by will or the laws of descent and distribution, and during the
recipient's lifetime, a performance award may only be paid to the
recipient.
II-6
<PAGE>
9. Agreements. Each award shall be evidenced by an agreement setting forth
the terms and conditions upon which it is granted. Multiple awards may be
evidenced by a single agreement. Subject to the limitations set forth in the
Plan, the Committee may, with the consent of the person to whom an award has
been granted, amend an agreement to modify the terms or conditions of any award.
10. Adjustments. If there is a change in the outstanding Shares of Company
Stock by reason of a stock dividend or split, recapitalization,
reclassification, combination, or exchange of Shares, or by reason of a similar
corporate change, the Committee may adjust the number of Shares subject to an
award, the option price or value of an award, the maximum number of Shares
subject to this Plan, or the maximum number of Shares subject to an award, as
may be appropriate to reflect the nature of the change. Any such adjustments
shall be conclusive and binding for all purposes of this Plan.
11. Merger, Consolidation, etc. Subject to the provisions of the agreement
evidencing an award, if the Company becomes a party to a corporate merger,
consolidation, major acquisition of property for stock, spinoff, reorganization,
or liquidation, the Board may make any arrangement it deems advisable with
respect to outstanding awards, in the number of Shares subject to this Plan, and
in the number of Shares subject to awards to any employee. Such an arrangement
may include, but shall not be limited to, the substitution of new awards for
awards then outstanding, the assumption of any award, and the termination of any
award. Any such arrangements shall be conclusive and binding for all purposes of
this Plan.
12. Indemnification. Each member of the Committee and the Board shall be
indemnified by the Company against any loss, cost, liability, or expense that
may be imposed upon or reasonably incurred by him as a result of any claim,
action, suit, or proceeding in which he may be involved by reason of any action
taken or omitted under this Plan; provided, such person gives the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of indemnification to
which any person may be entitled under the Company's articles of incorporation
or bylaws, as a matter of law, or otherwise.
13. Rights as Stockholder. Except to the extent otherwise specifically
provided herein, the recipient of an award shall have no rights as a stockholder
with respect to Shares sold or issued pursuant to the Plan until certificates
for such Shares have been issued to such person.
14. General Restrictions. Each award granted pursuant to the Plan shall be
subject to the requirement that if, in the opinion of the Committee:
a. the listing, registration, or qualification of any Shares related
thereto upon any securities exchange or under any state or federal law;
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b. the consent or approval of any regulatory body; or
c. an agreement by the recipient with respect to the disposition of
any such Shares is necessary or desirable as a condition of the issuance or
sale of such Shares, such award shall not be consummated unless and until
such listing, registration, qualification, consent, approval, or agreement
is effected or obtained in form satisfactory to the Committee.
15. Employment Rights. Nothing in this Plan, or in any agreement entered
into under the Plan, shall confer upon any employee the right to continue in the
employ of the Company or its Affiliates, or affect the right of the Company or
any Affiliate to terminate an employee's employment at any time, with or without
cause.
16. Withholding. If the Company proposes or is required to issue Shares
pursuant to the Plan, it may require the recipient to remit to it, or withhold
from such award or from the recipient's other compensation, an amount sufficient
to satisfy any tax withholding requirements prior to the delivery of
certificates for the Shares.
17. Amendments. The Board may at any time, and from time to time, amend the
Plan in any respect, except that no amendment:
a. increasing the number of Shares available for issuance or sale
pursuant to the Plan (other than as permitted by paragraphs 10 and 11);
b. changing the classification of employees eligible to participate in
the Plan or the definition of an Affiliate; or
c. materially increasing the benefits accruing to participants under
the Plan;
shall be made without stockholder approval.
18. Contingent Awards. Any award granted under the Plan prior to the date
on which the Plan is approved by the Company's stockholders shall be contingent
upon such approval. If stockholder approval is not received within 12 months
after the date on which this Plan is adopted by the Board, such award shall be
void and of no force or effect.
19. Stockholder Approval. The approval of the Plan or any amendment by the
Company's stockholders must comply with all applicable provisions of the
Company's charter, bylaws, and applicable state law prescribing the method and
degree of stockholder approval required for granting awards of the type provided
under the Plan. Absent any such prescribed method and degree of stockholder
approval, the Plan or such amendment must be approved by a simple majority vote
of stockholders voting, either in person or by proxy, at a duly held
stockholders' meeting
20. Duration. No awards shall be granted under the Plan after the earlier
of: (a) the date the Plan is terminated by the Board; or (b) the tenth
anniversary of the date the Plan was first approved by the Board.
21. Compliance with Section 16(b). In the case of employees who are subject
to Section 16 of the Exchange Act, the Company intends that the Plan and any
award granted under the Plan satisfy the applicable requirements of Rule 16b-3.
If a provision of the Plan or any award would otherwise conflict with such
intent, that provision, to the extent possible, shall be interpreted so as to
avoid the conflict. To the extent of any remaining irreconcilable conflict with
such intent, the provision shall be deemed void as applied to employees who are
subject to Section 16 of the Exchange Act.
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Amendment
to
CASH-N-PAWN INTERNATIONAL, LTD.
1995 LONG-TERM INCENTIVE PLAN
Reference is hereby made to that certain 1995 Long-Term Incentive Plan
("1995 Plan") of Cash-N-Pawn International, Ltd., adopted by the Board of
Directors as of December 4, 1995 and approved by the shareholders of the Company
on February 22, 1996.
Section 1a of the 1995 Plan is amended effective December 31, 1998 to add
40,000 shares to the 1995 Plan, bringing the total number of shares of stock
subject to the 1995 Plan to 250,000, subject to approval by the shareholders of
the Company.
Section 1b of the 1995 Plan is amended effective December 31, 1998 to
increase the annual individual grant limit from 36,000 to 50,000.
In addition, in connection with the merger of Cash-N-Pawn International,
Ltd. with and into U. S. Pawn CNP Holdings, Inc., a Colorado corporation and a
wholly-owned subsidiary of U. S. Pawn, Inc. ("Holdings"), the surviving
corporation of the merger shall be Holdings. In connection with such merger, the
1995 Plan will be further amended as part of the merger, effective as of the
closing date of the merger, as follows:
All references in the 1995 Plan to the Company shall be to Holdings as the
survivor of the merger.
All references in the 1995 Plan to the common stock of the Company or to
Company Stock shall be to shares of common stock, no par value, of U.S. Pawn,
Inc., a Colorado corporation.
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