FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999
Commission file number: 0-18291
U.S. PAWN, INC.
---------------
(Name of Small Business Issuer in its charter)
Colorado 84-0819941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7215 Lowell Boulevard
Westminster, CO 80030
(Address of principal executive offices)
(Zip Code)
(303) 657-3550
(Issuer's telephone number, including area code)
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value, 3,595,285 shares as of November 11, 1999.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. PAWN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share data)
Assets
September December
30, 1999 31, 1998
-------- --------
Current Assets:
Cash $ 431 $ 831
Service charges receivable 455 371
Pawn loans 3,063 2,750
Accounts receivable, net 16 28
Income taxes receivable 183 162
Deferred income taxes 94 81
Inventory, net 2,126 1,789
Prepaid expenses and other 256 134
------ ------
Total current assets 6,624 6,146
Property and equipment, at cost, net 1,463 1,574
Intangible assets, net 296 328
Other assets 18 20
------ ------
$8,401 $8,068
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 71 $ 54
Customer layaway deposits 41 33
Accrued expenses 311 408
Current portion of
notes payable-related parties 185 136
Current portion of notes payable 47 108
------ ------
Total current liabilities 655 739
Notes payable, less current portion 1,186 665
Deferred income taxes -- 8
------ ------
Total Liabilities 1,841 1,412
------ ------
Commitments and contingencies
Stockholders' equity:
Redeemable preferred stock, 9.5%,$10 par value
1,000,000 authorized: 37,800 shares issued
and outstanding 378 378
Common stock, no par value, 30,000,000 shares
authorized; 3,686,285 and 3,685,410
shares issued and outstanding 5,462 5,462
Retained earnings 720 816
------ ------
Total Stockholders' Equity 6,560 6,656
------ ------
$8,401 $8,068
====== ======
See notes to consolidated financial statements
2
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
REVENUES:
<S> <C> <C> <C> <C>
Sales $1,245 $1,378 $3,689 $4,627
Pawn service charges 1,074 1,102 3,147 3,733
Other income 13 18 56 50
------ ------ ------ ------
Total Revenues 2,332 2,498 6,892 8,410
------ ------ ------ ------
COST OF SALES AND EXPENSES:
Cost of sales 1,015 1,239 2,927 3,872
Operations 846 900 2,579 2,768
Administration 290 268 803 818
Depreciation and
amortization 86 262 257 457
------ ------ ------ ------
Total Cost of Sales
and Expenses 2,237 2,669 6,566 7,915
------ ------ ------ ------
INCOME (LOSS) FROM OPERATIONS 95 (171) 326 495
------ ------ ------ ------
OTHER (EXPENSES)
Interest (37) (59) (98) (238)
Merger termination (339) - (339) -
Loss on disposal
of fixed assets - (10) - (20)
------ ------ ------ ----
Total other (expenses) (376) (69) (437) (258)
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (281) (240) (111) 237
PROVISION (BENEFIT) FOR INCOME TAXES (98) 84 (42) 247
------ ------ ------ ------
NET (LOSS) (183) (324) (69) (10)
DIVIDENDS ON PREFERRED STOCK (9) (9) (27) (27)
------ ------ ------ ------
(LOSS) ATTRIBUTABLE
TO COMMON STOCKHOLDERS $ (192) $ (333) $ (96)$ (37)
====== ====== ====== ======
(LOSS) PER COMMON SHARE $ (.05) $ (.09) $ (.03)$ (.01)
====== ====== ====== ======
(LOSS) PER COMMON SHARE,
ASSUMING DILUTION $ (.05) $ (.09) $ (.03)$ (.01)
====== ====== ====== ======
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 3,686 3,808 3,686 3,785
====== ====== ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING,
ASSUMING DILUTION 3,686 3,808 3,686 3,785
====== ====== ====== ======
See notes to consolidated financial statements
3
<PAGE>
U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Nine Months Ended Sept 30,
1999 1998
------- -------
CASH FLOWS (TO) FROM OPERATING ACTIVITIES:
Net income $ (69) $ (10)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 257 457
Deferred income taxes (22) (9)
Loss on disposal of fixed assets - 20
Changes in:
Service charges receivable (84) 35
Inventory (337) 304
Accounts receivable 12 6
Income taxes receivable (21) 247
Prepaid expenses and other (122) (56)
Accounts payable 18 (11)
Accrued expenses (97) (178)
Customer layaway deposits 8 (7)
------- -------
Net Cash (Used) Provided
by Operating Activities (457) 798
------- -------
CASH FLOWS (TO) FROM INVESTING ACTIVITIES:
Pawn loans made (7,054) (7,643)
Pawn loans repaid 4,562 5,427
Pawn loans forfeited 2,179 2,521
Proceeds from sale of fixed assets - 8
Proceeds from sale of pawn shop assets - 681
Purchase of property and equipment (114) (63)
Decrease in other assets 2 -
------- -------
Net Cash (Used) Provided
by Investing Activities (425) 931
------- -------
CASH FLOWS FROM (TO) FINANCING ACTIVITIES:
Dividends paid (27) (27)
Issuance of notes payable and long-term debt 525 -
Payments on notes payable and long-term debt (65) (1,284)
Issuance of notes payable-related parties 100 10
Payments on notes payable-related parties (51) (552)
Issuance of common stock, net of offering costs - 167
------- -------
Net Cash Provided (Used)
by Financing Activities 482 (1,686)
------- -------
NET (DECREASE) INCREASE IN CASH (400) 43
CASH, beginning of period 831 791
------- -------
CASH, end of period $ 431 $ 834
======= =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 86 $ 226
======= =======
See notes to consolidated financial statements
4
</TABLE>
<PAGE>
U.S. PAWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements (the
"financial statements") include the accounts of U.S. Pawn, Inc. and its
subsidiaries (the "Company"). All material inter-company transactions have been
eliminated upon consolidation. The financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions for Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations, and cash flows of
the Company for the interim periods presented.
The results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results of operations for the full year. These
financial statements and related footnotes should be read in conjunction with
the financial statements and footnotes thereto included in the Company's Form
10-KSB filed with the Securities and Exchange Commission for the year ended
December 31, 1998.
Certain amounts in the prior year's financial statements have been reclassified
for comparative purposes to conform with the current year. These
reclassification had no effect on results of operations or retained earnings as
previously reported.
NOTE 2 - ACQUISITIONS
On May 6, 1999, the Company entered into an agreement and plan of merger to
acquire Cash- N-Pawn International, Ltd., a Minneapolis, Minnesota based pawn
shop operator with a total of ten locations in three states. The agreement and
plan of merger was mutually terminated in October 1999. As part of the
termination agreement, the Company agreed to pay a breakup fee of $135,000. The
breakup fee, coupled with other costs that were otherwise deferrable as part of
the merger, resulted in a charge of approximately $339,000 to the Company's
third quarter earnings.
NOTE 3 - INCOME TAXES
The provision for income taxes has been recorded based upon the Company's
estimate of the expected annualized effective tax rate for each interim period
presented. Deferred income taxes have been recorded in accordance with generally
accepted accounting principles under SFAS 109.
NOTE 4 - EARNING PER COMMON SHARE
During 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Basic earnings per share is computed based upon the
weighted average number of common shares outstanding during the period. Diluted
earnings per share consists of the weighted average number of common shares
outstanding plus the dilutive effects of options and warrants calculated using
the treasury stock method. In loss periods, dilutive common equivalent shares
are excluded as the effect would be anti-dilutive. All prior period earnings per
share data has been restated to reflect the requirements of SFAS 128.
5
<PAGE>
NOTE 5 - CONTINGENCIES
The Company is party to a number lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material effect on the Company's financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
U.S. Pawn, Inc. (the "Company") is one of five publicly traded pawnshop
operators in the United States. The Company operates pawnshops that lend money
on the security of pledged tangible personal property (a transaction commonly
referred to as a "pawn loan"), for which the Company receives a pawn service
charge to compensate it for the pawn loan. The pawn service charge is calculated
as a percentage of the pawn loan amount, and has generally ranged from 96% to
240% annually. The pledged property is held through the term of the pawn loan,
which generally is 30 to 120 days, unless otherwise earlier paid or renewed.
Generally, the customer repays the pawn loan and accrued service charge in full,
redeeming the pledged property, or pays the accrued service charge and renews
the pawn loan. In the event the customer does not redeem the pledged property or
renew the pawn loan, the unredeemed collateral is forfeited to the Company and
becomes inventory available for sale in the pawnshop. The Company currently owns
and operates thirteen (13) pawnshops, of which twelve (12) are located Colorado
and one (1) in Wyoming.
Except for the historical information contained herein, certain matters set
forth in this report are forward-looking statements which can be identified by
the use of forward-looking terms such as "believes", "estimates", "plans",
"expects", "anticipates", "intends" or by discussions of strategy, future
operating results or events. These forward-looking statements are subject to
risks and uncertainties that may cause the Company's actual results, performance
or achievements to differ materially from those discussed in the forward-looking
statements. These risks and uncertainties are detailed from time to time in the
Company's periodic reports filed with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and, in many cases, the Company cannot predict all of the risks and
uncertainties that could cause its actual results, performance or achievements
to differ materially from those indicated by the forward-looking statements.
These forward-looking statements speak only as of the date hereof and the
Company and its management cannot assure that future results covered by any
forward-looking statements will be achieved and disclaims any intent or
obligation to update these forward-looking statements.
Business Strategy
As an integral part of its business strategy, the Company intends to identify
specific geographic areas in which to concentrate multiple pawnshops in order to
achieve economies of scale in supervision, improve market penetration, enhance
name recognition and reinforce market programs. Currently the Company has 85% of
its store locations clustered in the Denver, Colorado Metropolitan Area
("Denver"). The Company's recent management activity has focused on identifying
those of its seventeen (17) 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, the Company
consolidated its operations into thirteen (13) pawn shops during 1998.
Management believes that the Company is now properly positioned in the near term
to be successful in the markets in which it operates. Management intends to
continue its analysis of the markets in which it currently operates and may
decide to expand or contract in its current market areas or enter new markets
which management feels will further its operating strategies.
6
<PAGE>
Management believes that expanding the Company's market share through the
careful acquisition of existing locations in conjunction with opening new pawn
shops will provide the best opportunity to meet its strategic objectives.
Management believes that additional pawn shops in market clusters will provide
economies of scale in supervision, purchasing, administration and marketing.
The Company's primary pawn shop acquisition/store opening criteria include the
perceived competence of the pawn shop's current management, the annual number of
pawn transactions, the outstanding pawn loan balances, the quality and quantity
of pawn shop inventory, pawn shop locations, number of competitive pawn shops in
the market area, lease terms and physical condition of the pawn shop.
The Company expects to finance the acquisition or development of additional pawn
shops through internal cash flow, additional lines of credit and debt and/or
equity securities offerings. The Company cannot assure, however, that these
sources of financing will be available. Furthermore, a number of factors may
limit or even eliminate the Company's ability to increase its number of pawn
shops including, (i) unanticipated operating losses or increases in overhead
expenses, (ii) unavailability of acceptable acquisition candidates or pawn shop
locations, (iii) higher pawn loan demand which will reduce the Company's
available capital for expansion, and (iv) general economic conditions. There can
be no assurance that future expansion can be continued on a profitable basis.
Management's ability to establish, identify, acquire or profitably manage
additional locations or successfully integrate their operations without
substantial costs, delays or other unanticipated problems is a risk factor for
future expansion. There can be no assurance that any new pawn shops established
or any entity that the Company acquires will achieve profitability that
justifies the Company's investment. Establishing new locations and/or
acquisitions involve a number of risks, which may include: adverse short-term
effects on the Company's reported operating results and cash flows; diversion of
management's attention; dependence on retraining, hiring and training key
personnel; and the effects of amortization of intangibles. Such risks could have
adverse effects on the Company's operations and financial performance. As the
Company expands, the Company will be required to supplement its existing
management team in order to effectively manage the acquired entities and
successfully implement its acquisition and operating strategies.
Merger Termination Agreement
On May 6, 1999, the Company entered into an agreement and plan of merger to
acquire Cash- N-Pawn International, Ltd., a Minneapolis, Minnesota based pawn
shop operator with a total of ten locations in three states. The agreement and
plan of merger was mutually terminated in October 1999. As part of the
termination agreement, the Company agreed to pay a breakup fee of $135,000. The
breakup fee, coupled with other costs that were otherwise deferrable as part of
the merger, resulted in a charge of approximately $339,000 to the Company's
third quarter earnings.
RESULTS OF OPERATIONS
Three and Nine Months Ended September 30, 1999 ("1999Q" and "1999",
respectively, or "1999 Periods" ) Compared to Three and Nine Months Ended
September 30, 1998 ("1998Q" and "1998", respectively, or "1998 Periods")
Revenues
Total revenues for the 1999 Periods fell by 7% and 18% to $2,332,000 and
$6,892,000 from $2,498,000 and $8,410,000 for the 1998 Periods. During the 1999
Periods, same store operations (13 stores) generated revenues of $2,332,000 and
$6,892,000 as compared to $2,371,000 and $7,383,000 during the 1998 Periods.
Stores either consolidated, closed or sold during 1998 (4 stores) generated
revenues of $127,000 and $1,027,000 in the 1998 Periods.
7
<PAGE>
The decrease in revenues for the 1999 Periods reflects a 10% and a 20% drop in
merchandise sales, a decrease of 3% and 16% in pawn service charges, and a 28%
decrease for the 1999Q and a 12% increase for 1999 in other income. As a
percentage of total revenues, merchandise sales decreased to 54% from 55% and
pawn service charges increased to 45% from 44% during 1999 as compared to 1998.
This revenue mix is consistent with the Company's expectations.
Merchandise Sales
During the 1999 Periods, same store operations generated merchandise sales of
$1,245,000 and $3,689,000 as compared to $1,282,000 and $4,011,000 during the
1998 Periods. Stores either consolidated, closed or sold during 1998 posted
merchandise sales of $96,000 and $616,000 for the 1998 Periods. For the 1999
Periods, the Company's annualized inventory turnover rate was 2.1 and 2.0 times
with a gross profit margin on sales of 18.5% and 20.7% as compared to 2.4 and
2.4 times and gross profit margin on sales of 10.1% and 16.3% for the 1998
Periods. 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 1998. The Company expects
its annualized inventory turnover rate to approach 2.5 times and to produce
gross margins on sales of 20% or higher for the twelve months ending December
31, 1999 ("Fiscal 1999").
Pawn Service Charges
During the 1999 Periods, same store operations generated pawn service charges of
$1,074,000 and $3,147,000 as compared to $1,072,000 and $3,327,000 for the 1998
Periods. Stores either consolidated, closed or sold during 1998 contributed pawn
service charges of $30,000 and $406,000 for the 1998 Periods. The Company's pawn
loan balance outstanding on December 31, 1998 was $2,750,000. During the nine
months ended September 30, 1999, the Company's pawn loan balance increased by
$313,000 or 11.4% to $3,063,000.
New pawn loans written decreased by $589,000 during 1999 as compared to 1998.
However, as compared to 1998, new pawn loans written in same store operations
during 1999 increased $260,000 or 5.1%. Management believes that the increase in
the pawn loan balance in same store operations is due primarily to the recent
rise in the cost of living in Colorado ( which may have had the effect of
increasing the demand for pawn loans) and several strategies implemented during
the first quarter of 1999 designed to attract more pawn customers. During the
month of October 1999, the Company's pawn loan balance fell to $2,917,000 as a
result of increased forfeitures and increased competition for pawn customers in
the Denver market.
Management is continually analyzing available market data and selecting
strategies designed to increase the number of pawn loans written. Management is
hopeful that demand for pawn loans will increase during the remainder of Fiscal
1999. The Company realized an annualized pawn service charge on average pawn
loans outstanding equal to 143% for 1999 as compared to 154% for 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 32% for
1999 as compared to 30% for 1998. The Company's forfeiture rate is believed to
be in line with industry comparisons, but less than the Company's expectations.
The Company 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. The Company plans to emphasize this loan strategy
for the reasonably foreseeable future and anticipates the forfeiture rate to
approach 35% for Fiscal 1999.
8
<PAGE>
Total Cost of Sales and Expenses
Total cost of sales and expenses for the 1999 Periods decreased 16% and 17% to
$2,237,000 and $6,566,000 as compared to $2,669,000 and $7,915,000 for the 1998
Periods. As a percentage of total revenues, total cost of sales and expenses for
the 1999Q decreased to 96% from 107% and increased to 95% for 1999 from 94% as
compared to 1998.
Operating Expenses
Operating expenses for the 1999 Periods decreased by $54,000 and $189,000 or 6%
and 7% as compared to the 1998 Periods. However, as a percentage of total
revenues, operating expenses were 36% and 37% for the 1999 Periods as compared
to 36% and 33% for the 1998 Periods. The increase in operating expenses as a
percentage of revenues for the 1999 Periods is primarily attributable to the
decrease in revenues for the 1999 Periods. As many operating expenses are fixed,
i.e., they do not fluctuate as revenues fluctuate, the expense to revenue ratio
will in some cases increase.
Administration
Administrative overhead remained relatively unchanged during 1999 as compared to
1998. As a percentage of total revenues, administrative overhead increased to
12% for 1999 from 10% as compared to 1998.
Depreciation and Amortization Expense
Depreciation and amortization expense decreased during 1999 by $200,000 as
compared to 1998. The decrease relates primarily to the write-off of long-lived
intangible assets during 1998.
Other Expense
Interest expense for 1999 decreased by $140,000. The Company reduced its
outstanding debt during 1998 by $2,194,000. On May 6, 1999, the Company entered
into an agreement and plan of merger to acquire Cash-N-Pawn International, Ltd.
The agreement and plan of merger was mutually terminated in October 1999. As
part of the termination agreement, the Company agreed to pay a breakup fee of
$135,000. The breakup fee, coupled with other costs that were otherwise
deferrable as part of the merger, resulted in a charge of approximately $339,000
to the 1999Q.
Operating Results
Income (loss) before income taxes for the 1999 Periods increased by 17% and 147%
to $(281,000) and $(111,000)from $(240,000) and $237,000 as compared to the 1998
Periods. After accounting for the effects of income taxes and preferred
dividends, earnings (loss) attributable to common stockholders for the 1999
Periods decreased 42% and increased 159% to $(192,000) and $(96,000) from
$(333,000) and $(37,000) as compared to the 1998 Periods.
Loss Per Share
Loss per share for the 1999 Periods equaled $(0.05) and $(0.03) as compared to
$(0.09) and $(0.01) for the 1998 Periods. The number of common shares
outstanding on September 30, 1999 decreased by 141,000 as compared to September
30, 1998 as a result of the issuance of 6,000 common shares from the exercise of
employee options and the repurchase of 147,000 common shares by the Company.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital Working capital increased to $5,969,000 at September 30, 1999
from $5,407,000 at December 31, 1998. Total assets increased during 1999 by
$333,000 mainly due to decreases in cash offset by increases in pawn loans,
service charges receivable, and inventory.
9
<PAGE>
Total liabilities increased by $429,000 at September 30, 1999 to $1,841,000 from
$1,412,000 at December 31, 1998 mainly due to the Company's ability to repay
$100,000 of debt, offset by $525,000 of new bank borrowings. Total stockholders'
equity decreased during 1999 by $96,000 as a result of earnings, net of income
taxes and preferred dividends.
The Company's operations have been financed from funds generated from
operations, bank borrowing, private borrowing, and public offerings. During the
1999 Periods, the Company raised sufficient capital to satisfy its capital
requirements.
During 1998, the Company maintained a bank line of credit totaling $1,000,000.
The agreement was fully paid on its maturity date of April 4, 1998. On August
26, 1999, the Company entered into an agreement for a revolving bank line of
credit totaling $2,500,000. The agreement matures on August 26, 2001. As of the
date of this report, the outstanding principal balance owing under this credit
facility was $525,000.
The private borrowings which comprises $677,000 of the total liabilities are due
in 2000 through 2002. Management intends to repay the majority of these
obligations as they mature from internally generated funds or other borrowings.
The Company plans to expand its operating base with acquisitions of existing
pawn shops and the development of new locations by actively seeking such
acquisitions and locations. The Company expects to fund this expansion and meet
its on-going working capital needs with internally generated funds, debt 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 the Company.
The Company has experienced that new start-up stores generally result in
operating losses during the first three to twelve months of operations.
Leasehold improvements and equipment costs for new stores have ranged from
approximately $75,000 to $100,000 per store. Acquisition of existing pawn shops
generally result in immediate increases in operating income. However,
acquisitions also generally result in an increase in intangibles due to purchase
prices which may be in excess of the value of assets acquired. Such intangibles
are then amortized to expense over their estimated useful lives.
Profitability vs. Liquidity
The profitability and liquidity of the Company is affected by the amount of the
Company's outstanding pawn loans, which in turn is affected in part by the
Company's pawn loan decisions. The Company is generally able to influence the
frequency of pawn loan redemptions and forfeitures of pawn loan collateral by
increasing or decreasing the amount loaned in relation to the estimated resale
value of the pledged property. A more conservative loan policy, i.e., smaller
loans in relation to the pledged property's estimated resale value, generally
results in fewer and smaller transactions being entered into, a decrease in the
Company's aggregate pawn loan balance and a decrease in pawn service charge
income. However, smaller pawn loans also tend to increase pawn loan redemptions
and improve the Company's liquidity. A conservative pawn loan policy also tends
to decrease the cost of merchandise inventory, thereby improving the margins
possible through resale of forfeited pawn loan collateral. Conversely, a more
aggressive pawn loan policy which provides for larger pawn loans in relation to
the estimated resale value of the pledged property generally results in
increased pawn service charge income, but also tends to increase pawn loan
forfeitures, thereby increasing the quantity of inventory on hand and, unless
the Company is able to increase inventory turns, reducing the Company's
liquidity.
10
<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
The Company does not believe that inflation has had a material effect on the
Company's results of operations.
Seasonality
The Company's pawn loan demand and sales follow slight seasonal trends. Sales
are generally highest during the fourth calendar quarter of the year, while pawn
loan demand is general lower during the first and second calendar quarters than
during the third and fourth calendar quarters.
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 the Company's operations.
In early 1998, the Company began formulating a comprehensive plan to assess the
Company's Y2K issues. The plan calls for the identification of those systems,
both internal and external, which are critical to the Company'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 the Company'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. The Company
believes that it has identified the internal systems that are susceptible to
failures or potential processing errors as a result of the Y2K Issue. The
Company is concentrating its Y2K efforts on these systems. The Company believes
its has completed its Y2K identification assessment for critical internal
systems, however, testing for Y2K compliance will be an on-going process.
The Company has identified its pawn shop operating system as its only critical
internal business system. The Company'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 has been installed in each of the Company's locations. Testing of the pawn
shop management software is continuing. The Company believes that its computer
hardware and related peripherals are currently Y2K compliant based upon
representations made by the providers of such equipment. The Company also
believes that its accounting and payroll software systems are Y2K compliant and
testing to ensure such compliance is continuing.
11
<PAGE>
The Company 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 the Company's operations to: (i)
ascertain the extent to which the Company 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, the Company has no
control over and has no 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 the Company's operations.
The Company currently estimates that the total identifiable cost of its Y2K
compliance effort will not exceed $150,000. As of September 30, 1999, the
Company has expended approximately $75,000 of this estimate to obtain upgraded
software licenses and pay for installation of this software. The remaining costs
include possible replacement of computer hardware and/or software, other
equipment, installation charges and testing procedures. The Company does not
track personnel costs associated with its Y2K compliance effort. The Company
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, the Company 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 the Company have or will be identified and corrected. Because the
assessment of Y2K issues is ongoing, the Company has yet to determine the most
reasonably likely worst case scenario relating to Y2K issues, and has yet to
complete its comprehensive contingency plan with respect to its Y2K issues.
However, as part of the its current contingency planning, the Company's lending
operations can and will be conducted, if necessary, on a manual,
non-computerized basis. The Company anticipates completing its Y2K comprehensive
contingency plan by November 30, 1999.
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings
None.
ITEM 2. Changes in securities
None.
ITEM 3. Defaults upon senior securities
None.
ITEM 4. Submission of matters to a vote of security holders None.
ITEM 5. Other information
None.
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibit #27.1 Financial Data Schedule.
(b) Reports on Form 8-K: During the three months covered by this report, the
Company filed no reports on form 8-K.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: November 15, 1999 U.S. PAWN, INC.
-------------------
(Registrant)
/s/ Charles C. VanGundy
--------------------------------
Charles C. Van Gundy
President
Chief Executive Officer
Chief Financial Officer
(Principal Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 431
<SECURITIES> 0
<RECEIVABLES> 3,534
<ALLOWANCES> 0
<INVENTORY> 2,126
<CURRENT-ASSETS> 6,624
<PP&E> 3,345
<DEPRECIATION> (1,586)
<TOTAL-ASSETS> 8,401
<CURRENT-LIABILITIES> 655
<BONDS> 1,186
0
378
<COMMON> 5,462
<OTHER-SE> 720
<TOTAL-LIABILITY-AND-EQUITY> 8,401
<SALES> 3,689
<TOTAL-REVENUES> 6,892
<CGS> 2,927
<TOTAL-COSTS> 6,566
<OTHER-EXPENSES> 339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98
<INCOME-PRETAX> (111)
<INCOME-TAX> (42)
<INCOME-CONTINUING> (69)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (69)
<EPS-BASIC> (.03)
<EPS-DILUTED> (.03)
</TABLE>
