SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-18291
U.S. PAWN, INC.
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(Name of Small Business Issuer in its charter)
Colorado 84-0819941
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(State or other jurisdiction of incorporation (I.R.S.Employer
or organization) Identification Number)
7215 Lowell Boulevard
Westminster, Colorado 80030
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (303) 657-3550
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
No Par Value Common Stock
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 period 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
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As of March 16, 2000, 3,327,785 shares of the Issuer's no par value common stock
were outstanding and the aggregate market value of the shares held by
non-affiliates was approximately $3,573,239 based upon a closing sales price of
$1.25 per share of Common Stock on the Nasdaq SmallCap Market.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
The Issuer's revenue for its most recent fiscal year was $9,488,000.
The following documents are incorporated by reference into Part III, Items 9
through 12 hereof: None.
<PAGE>
PART I
ITEM 1. BUSINESS
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Introduction
U.S. Pawn, Inc. (the "Company") was organized as a Colorado corporation on March
18, 1980. As of December 31, 1999, the Company was one of five publicly traded
pawn shop operators in the United States, and owned and operated twelve (12)
pawn shops in Colorado and one (1) in Wyoming. The Company's principal offices
are located at 7215 Lowell Boulevard, Westminster, Colorado 80030, and its
telephone number is (303) 657-3550. As used herein, the term "Company" includes
U.S. Pawn, Inc. and its subsidiaries.
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 disclaim any intent or
obligation to update these forward-looking statements.
General
The Company is engaged in acquiring, establishing and operating pawn shops that
lend money on the security of pledged tangible personal property, a transaction
commonly referred to as a "pawn loan". Pawn shops provide a convenient source of
consumer loans and a ready market for the resale of previously-owned merchandise
acquired by the Company when customers do not repay pawn loans. 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 based on
the size and term of the pawn loan, in a manner similar to which interest is
charged on a 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 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 pawn shop. For the years ended December 31, 1999
("1999") and 1998 ("1998"), the Company realized an annualized average pawn
service charge equal to 151% and 148% of pawn contracts outstanding.
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
The concentration of multiple pawn shops achieves economies of scale in
supervision, improves market penetration, enhances name recognition and
reinforces 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 Fiscal 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 Fiscal 1998.
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Management believes that the Company is now properly positioned in the near term
to be successful in the markets in which it currently operates. Management
intends to continue its analysis of the markets in which the Company currently
operates and may decide to expand or contract its current market areas or enter
new markets in furtherance of its operating strategies.
Management believes that expanding the Company's market share through the
careful acquisition of existing locations in conjunction with opening new pawn
shops could provide the best opportunity to meet its strategic objectives. As
indicated above, management believes that additional pawn shops in market
clusters may 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 any 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 the Company will expand or that such expansion can be
completed on a profitable basis.
Management's ability to identify, acquire and 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 entity that the Company acquires will achieve
profitability that justifies the Company's investment. 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. If the Company expands, it will
be required to supplement its existing management team in order to effectively
manage any acquired entities and successfully implement its acquisition and
operating strategies.
Recent Store Activity
During 1996, the Company entered the Cheyenne, Wyoming market using its store
cluster market concept by acquiring or opening a total of four stores. The
Cheyenne, Wyoming market ultimately proved to be insufficient to support such a
cluster of stores. At December 31, 1997, two stores had been consolidated; and
in early February 1998, all three remaining stores were consolidated into one
location. Management believes that as a result of the operational cost savings
attainable through consolidating its pawn business into a single location in
this market, its one remaining pawn shop in Cheyenne will be profitable in the
future.
During late 1996, the Company acquired two pawn shops in the Las Vegas, Nevada
market, one through merger and one through purchase. On November 14, 1997, the
merger was rescinded by mutual agreement of the parties. In November 1997,
management evaluated the relative merits of expansion in the Las Vegas market
and determined that while the Las Vegas market presented potential for
establishing a profitable cluster of stores, other barriers to expansion in Las
Vegas were greater than its potential to the Company at this time. In July 1998,
the Company sold the Las Vegas store.
In June 1997, the Company acquired one store in the Omaha, Nebraska market. The
Company completed its evaluation of the Omaha, Nebraska market in the third
quarter of 1998 and determined that its potential to the Company for expansion
at this time was minimal. On December 31, 1998, the Company closed the Omaha,
Nebraska store.
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Merger Agreement and Termination
On November 10, 1998, the Company entered into a non-binding letter of intent to
acquire Cash-N-Pawn International, Ltd., ("CNP") a Minneapolis, Minnesota based
pawn shop operator with a total of ten locations in three states. On May 6,
1999, the Company and CNP entered into an agreement and plan of merger, which
was subsequently terminated by mutual consent on October 4, 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 $366,000 to the Company's
earnings for 1999.
Operating Controls
The Company's store locations are monitored on a daily basis from corporate
headquarters through an online, real time computer network system. The Company
also has an internal audit staff that monitors the Company's perpetual inventory
system, lending practices, and regulatory compliance. Management believes that
the current operating and financial controls and its computer systems are
adequate for its current operating base. However, the Company's management
information and point of sale systems will require extensive improvement to
effectively support any store growth. Management intends to complete an analysis
of its systems requirements, both software and hardware, and if appropriate,
begin development and installation of improvements within the next eighteen
months.
Pawn Operations
The Company is engaged in the business of advancing money to customers on the
security of pledged goods. The pledged goods are tangible personal property and
generally consist of jewelry, cameras and video electronics, tools, televisions
and stereos, musical instruments and other miscellaneous items. The pledged
personal property is offered by the customer to provide security to the Company
for the repayment of the pawn loan. Pawn loans cannot be made with personal
liability to the customer, and therefore, the Company 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. The
Company receives a pawn service charge to compensate it for extending the pawn
loan. Pawn service charges contributed approximately 44% and 43% to the
Company's total operating revenues for 1999 and 1998, 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 (pledgor)
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 the Company is willing to finance is typically based on a
percentage of the pledged personal property's estimated resale value. The
sources for the Company'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 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 the Company and becomes
inventory available for sale in the pawn shop. The Company 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 the Company'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, the Company has experienced gross profits from sales of inventory.
The Company generated gross profit margins on the sale of inventory of
approximately 20% and 15% for 1999 and 1998, respectively.
4
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At December 31, 1999, the Company had 25,971 pawn loans outstanding with an
aggregate balance of $2,828,000, or an average of $108.89 per pawn loan
outstanding. At December 31, 1998, the Company had 24,645 pawn loans outstanding
with an aggregate balance of $2,750,000, or an average of $111.58 per pawn loan
outstanding. The Company monitors and maintains record keeping in connection
with its pawn loans through a specialized computer hardware and software system.
During 1999 and 1998, approximately 34% and 32%, respectively, of pawn loans
were not redeemed, with the forfeited pledged property added to the Company's
sales inventory. For 1999 and 1998, the Company's annualized yield on its
average pawn loan balance outstanding was 151% and 148%, 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. The Company provides an incentive compensation plan for its store level
employees based on managerial and financial performance.
Resale Operations
The Company 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 the Company'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 55% and 56% of the
Company's total operating revenues for 1999 and 1998, respectively.
The Company does not provide its customers with warranties on used merchandise
purchased from the Company.
The Company 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. The Company 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 the Company.
Revenues derived from lay-away plans historically amount to less than 1% of
total revenues.
The Company 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, 1999, total merchandise held for resale was
$2,147,000 after reduction for a valuation allowance of $158,000.
Competition
The Company 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 store level employees and quality customer service. In
addition, as the pawnshop industry consolidates, the Company believes that the
ability to compete effectively will be based on strong general management,
regional market focus, automated management information systems, and access to
capital. Some of the Company's competitors have greater financial resources than
the Company.
In connection with its lending of money, the Company 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 the Company.
The pawn shop industry is highly fragmented and includes over 13,000 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 (who are generally regional operators) own more than 50 pawn
shops. Including the Company, there are five publicly held pawn shop chains of
which the Company has the fewest pawn shops and the smallest amount of assets,
revenues, net worth and personnel. In the Company'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 the Company's
knowledge, there are no other pawn shop operators in Colorado who operate more
pawn shops than the Company.
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In connection with its resale of tangible personal property, the Company
competes with numerous retail and wholesale stores, including jewelry stores,
discount retail stores, consumer electronics stores and other pawn shops. The
Company encounters significant competition in all aspects of the operation of
its business. Many competitors (public and private) have greater financial
resources than the Company.
Regulation
The Company'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 the Company'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 the Company operates may also regulate pawn
service charges within their jurisdictions. The City and County of Denver is the
only Colorado municipality in which the Company 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 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 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 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 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 the Company operates may also regulate
pawn service charges within their jurisdictions. The City of Cheyenne, where the
Company's Wyoming pawn shop is located, deviates from the Wyoming statute
pertaining to pawn service charges.
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The maximum allowable pawn service charges for Cheyenne pawn loans are set forth
below:
Maximum Annual Rate On That Part of Unpaid Principal Balance
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Which is Between
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240% $0 to $200
120% $200 to $400
60% $400 to $1,000
18% $1,000 to $3,000
Firearms. All the Company'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 and to
conduct a background investigation of any person purchasing or redeeming a
handgun prior to completion of the transaction. The Company does not sell or
deal in ammunition for firearms. As a matter of policy since the early 1990's,
the Company has not sold 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. In October of 1998, the Company elected to discontinue pawning
handguns. As of the date of this report, the Company has no material handgun
business in its Denver Area locations and intends to have no handguns under its
control in such locations in the near future.
In order to avoid the acquisition of stolen merchandise, all the Company'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 the Company, there is a risk that acquired merchandise
may be subject to claims of rightful owners. Historically, the Company has not
experienced a material number of rightful owner claims.
The Company has experienced no material losses by theft or casualty. The Company
maintains liability and casualty insurance and insurance against employee theft
at each of its pawn shop locations. The Company does not maintain insurance
against robbery and burglary, as the risk of loss does not justify the premium
cost of coverage.
Employees
The Company currently employs 75 employees, including its executive officers.
ITEM 2. - PROPERTIES
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The Company'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.
The Company owns the real estate and buildings for two of its Denver, Colorado
pawn shops and currently leases its other pawn shops at monthly rentals between
$2,700 and $7,000 on lease terms between three and seven years. The Company
expects to continue leasing its pawn shops in order to utilize its working
capital for pawn loans.
ITEM 3. - LEGAL PROCEEDINGS
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The Company is not a party to any pending or threatened material legal
proceedings.
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ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None.
PART II
ITEM 5. - MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock has been traded on the Nasdaq SmallCap Market
("NASDAQ") under the symbol "USPN" since May 10, 1989. On March 16, 2000, the
closing sales price for the Company's Common Stock was $1.25 per share.
The following table sets forth for the quarters indicated, the range of high and
low sales prices of the Company's Common Stock as reported by NASDAQ.
Common Stock
By Quarter Ended: High Low
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Fiscal 1999
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December 31, 1999.............................. 1.94 1.13
September 30, 1999............................. 2.50 1.00
June 30, 1999.................................. 3.25 2.25
March 31, 1999................................. 3.88 1.41
Fiscal 1998
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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
The above quotations were reported by NASDAQ and reflect inter-dealer prices,
without retail mark-up, markdown or commission and may not necessarily represent
actual transactions.
As of December 31,1999, the Company had approximately 1,500 stockholders of
record. The Company has not declared any dividends on its Common Stock to date.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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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 disclaim any intent or
obligation to update these forward-looking statements.
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RESULTS OF OPERATIONS
Year Ended December 31, 1999 ("1999") Compared to Year Ended December 31, 1998
("1998")
Revenues
Total revenues for 1999 fell by 14% to $9,488,000 from $11,068,000 for the 1998.
During 1999, same store operations (13 stores) generated revenues of $9,488,000
as compared to $9,935,000 during 1998. Stores either consolidated, closed or
sold during 1998 (4 stores) generated revenues $1,133,000 1998. The decrease in
revenues for 1999 reflects a 16% drop in merchandise sales, a decrease of 12% in
pawn service charges, and a 20% decrease in other income. As a percentage of
total revenues, merchandise sales decreased to 55% from 56% and pawn service
charges increased to 44% from 43% during 1999 as compared to 1998. This revenue
mix is consistent with the Company's expectations. Management believes that the
robust economy, low unemployment and increased competition for pawn customers in
its Colorado market are the primary factors contributing to the decrease in same
store revenues.
Merchandise Sales
During 1999, same store operations generated merchandise sales of $5,234,000 as
compared to $5,511,000 during 1998. Stores either consolidated, closed or sold
during 1998 posted merchandise sales of $706,000 for 1998. For 1999, the
Company's annualized inventory turnover rate was 2.1 times with a gross profit
margin on sales of 19.7% as compared to 2.6 times and gross profit margin on
sales of 14.5% for 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 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, 2000 ("Fiscal 2000").
Pawn Service Charges
During 1999, same store operations generated pawn service charges of $4,201,000
as compared to $4,370,000 for 1998. Stores either consolidated, closed or sold
during 1998 contributed pawn service charges of $415,000 during 1998. The
Company's pawn loan balance outstanding on December 31, 1998 was $2,750,000.
During 1999, the Company's pawn loan balance increased by $78,000 or 3% to
$2,828,000.
New pawn loans written decreased by $500,000 during 1999 as compared to 1998.
However, as compared to 1998, new pawn loans written in same store operations
during 1999 increased $338,000 or 3.8%. Management believes that the increase in
the amount of new pawn loan written 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.
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 Fiscal 2000. The Company
realized an annualized pawn service charge on average pawn loans outstanding
equal to 151% for 1999 as compared to 148% 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 34% for
1999 as compared to 32% 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 continue 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 2000.
9
<PAGE>
Total Cost of Sales and Expenses
Total cost of sales and expenses for 1999 decreased 13% to $9,294,000 as
compared to $10,696,000 for 1998. As a percentage of total revenues, total cost
of sales and expenses for 1999 increased to 98% from 97% as compared to 1998.
Operating Expenses
Operating expenses for 1999 decreased by $94,000 or 3% as compared to 1998.
However, as a percentage of total revenues, operating expenses were 38% for 1999
as compared to 33% for 1998. The increase in operating expenses as a percentage
of revenues for 1999 is primarily attributable to the decrease in revenues
during 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 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 $191,000 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 $134,000. 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 $366,000
to 1999.
Operating Results
Income (loss) before income taxes for 1999 decreased to $(324,000) from $61,000
as compared to 1998. After accounting for the effects of income taxes and
preferred dividends, (loss) attributable to common stockholders for 1999
increased 55% to $(266,000) from $(171,000) as compared to 1998.
Loss Per Share
Loss per share for 1999 equaled $(0.07) as compared to $(0.05) for 1998. The
number of common shares outstanding on December 31, 1999 decreased by 357,625 as
compared to December 31, 1998 as a result of the issuance of 875 common shares
from the exercise of employee options and the repurchase of 358,500 common
shares by the Company during the fourth quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital increased to $5,691,000 at December 31, 1999 from $5,407,000 at
December 31, 1998. Total assets increased during 1999 by $172,000 mainly due to
decreases in cash offset by increases in pawn loans, service charges receivable,
and inventory. Total liabilities increased by $1,029,000 at December 31, 1999 to
$2,441,000 from $1,412,000 at December 31, 1998 mainly due to $942,000 of new
bank borrowings. Total stockholders' equity decreased during 1999 by $857,000 as
a result of losses, net of income taxes and preferred dividends of ($266,000)
and $592,000 expended to repurchase 358,500 common shares during the fourth
quarter of 1999.
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.
10
<PAGE>
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 $942,000.
The private borrowings which comprises $678,000 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 may expand its operating base with acquisitions of existing pawn
shops and the development of new locations. The Company would 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.
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 generally lower during the first and second calendar quarters
than during the third and fourth calendar quarters.
ITEM 7. - FINANCIAL STATEMENTS
- ------------------------------
11
<PAGE>
U.S. PAWN, INC.
AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1999 and 1998
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Table of Contents
-----------------
Page
----
Independent Auditors' Report...............................................F-2
Consolidated 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
<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, 1999 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, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Ehrhardt Keefe Steiner & Hottman PC
-----------------------------------
Ehrhardt Keefe Steiner & Hottman PC
March 8, 2000
Denver, Colorado
F-2
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31,
--------------------------
1999 1998
---------- ----------
Assets
Current assets
Cash $ 514,000 $ 831,000
Service charges receivable 476,000 371,000
Pawn loans 2,828,000 2,750,000
Accounts receivable, net 27,000 28,000
Income tax refund receivable 224,000 162,000
Deferred income taxes 58,000 81,000
Inventory, net 2,147,000 1,789,000
Prepaid expenses and other 256,000 134,000
---------- ----------
Total current assets 6,530,000 6,146,000
Property and equipment, net 1,406,000 1,574,000
Intangible assets, net 285,000 328,000
Other assets 19,000 20,000
---------- ----------
$8,240,000 $8,068,000
========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 170,000 $ 54,000
Customer layaway deposits 33,000 33,000
Accrued expenses 365,000 408,000
Notes payable - related parties 186,000 136,000
Current portion of notes payable 85,000 108,000
---------- ----------
Total current liabilities 839,000 739,000
Line of credit 942,000 --
Notes payable, less current portion 660,000 665,000
Deferred income taxes -- 8,000
---------- ----------
Total liabilities 2,441,000 1,412,000
---------- ----------
Commitments and contingencies
Stockholders' equity
Redeemable preferred stock, 9.5%,
$10 par value, 1,000,000 shares
authorized; 37,800 shares issued
and outstanding (liquidation on
preference $378,000) 378,000 378,000
Common stock, no par value,
30,000,000 shares authorized;
3,327,785 and 3,685,410 shares
issued and outstanding 4,871,000 5,462,000
Retained earnings 550,000 816,000
---------- ----------
Total stockholders' equity 5,799,000 6,656,000
---------- ----------
$8,240,000 $8,068,000
========== ==========
See notes to consolidated financial statements.
F-3
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended
December 31,
----------------------------
1999 1998
------------ ------------
Revenues
Sales $ 5,234,000 $ 6,217,000
Pawn service charges 4,201,000 4,785,000
Other income 53,000 66,000
------------ ------------
Total revenues 9,488,000 11,068,000
------------ ------------
Cost of sales and expenses
Cost of sales 4,203,000 5,313,000
Operations 3,609,000 3,703,000
Administration 1,139,000 1,146,000
Depreciation and amortization 343,000 534,000
------------ ------------
Total cost of sales and expenses 9,294,000 10,696,000
------------ ------------
Income from operations 194,000 372,000
Other income (expenses)
Interest expense (135,000) (183,000)
Interest expense, related parties (17,000) (103,000)
Loss on settlement of contract (366,000) --
Loss on disposal of assets -- (25,000)
------------ ------------
Total other income (expenses) (518,000) (311,000)
Income (loss) before income taxes
and minority interest (324,000) 61,000
Income tax expense (benefit) (94,000) 196,000
------------ ------------
Net income (loss) (230,000) (135,000)
Dividends on preferred stock (36,000) (36,000)
------------ ------------
Net income (loss) available for
common stockholders $ (266,000) $ (171,000)
============ ============
Earnings (loss) per common share
- basic and diluted $ (.07) $ (.05)
============ ============
Weighted average shares outstanding 3,640,647 3,782,844
============ ============
See notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Years Ended December 31, 1999 and 1998
Preferred Stock Common Stock
------------------- -------------------- Retained
Shares Amount Shares Amount Earnings Total
------ ------ ------ ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
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
Repurchase of common stock including
transaction costs -- -- (358,500) (592,000) -- (592,000)
Dividends on preferred stock -- -- -- -- (36,000) (36,000)
Exercise of common stock options -- -- 875 1,000 -- 1,000
Net loss -- -- -- -- (230,000) (230,000)
----------- ----------- ----------- ----------- ----------- -----------
37,800 $ 378,000 3,327,785 $ 4,871,000 $ 550,000 $ 5,799,000
=========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
F-6
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended
December 31,
------------------------------------
1999 1998
----------- -----------
Cash flows from operating activities
Net income (loss) $ (230,000) $ (135,000)
----------- -----------
Adjustments to reconcile net income
(loss) to net cash provided (used) by
operating activities:
Loss on disposal of fixed assets -- 25,000
Allowance for inventory obsolescence 32,000 (24,000)
Depreciation and amortization 343,000 534,000
Deferred income taxes 15,000 (7,000)
Changes in:
Service charges receivable (105,000) 76,000
Inventory (390,000) 578,000
Accounts receivable 1,000 (10,000)
Income taxes receivable (62,000) 194,000
Prepaid expenses and other (122,000) (10,000)
Accounts payable 116,000 6,000
Accrued expenses (43,000) (86,000)
Customer layaway deposits -- (37,000)
----------- -----------
(215,000) 1,239,000
----------- -----------
Net cash provided (used) by operating activities (445,000) 1,104,000
----------- -----------
Cash flows from investing activities
Pawn loans made (9,158,000) (9,644,000)
Pawn loans repaid 5,953,000 6,929,000
Pawn loans forfeited 3,127,000 3,371,000
Proceeds from sale of equipment -- (9,000)
Purchase of property and equipment (132,000) (68,000)
Proceeds from sale of pawnshop -- 632,000
Other assets 1,000 --
Purchase of minority interest in subsidiary -- (15,000)
----------- -----------
Net cash provided (used) by investing activities (209,000) 1,196,000
----------- -----------
Cash flows from financing activities
Net activity on line-of-credit 942,000 (637,000)
Dividends paid (36,000) (36,000)
Issuance of notes payable and long-term debt 62,000 42,000
Payments on notes payable and long-term debt (90,000) (669,000)
Issuance of notes payable-related parties 156,000 10,000
Payments on notes payable-related parties (106,000) (940,000)
Net proceeds from exercise of options and warrants,
net of offering costs
1,000 166,000
Repurchase of common stock including transaction costs (592,000) (196,000)
----------- -----------
Net cash provided (used) by financing activities 337,000 (2,260,000)
----------- -----------
Net increase in cash (317,000) 40,000
Cash, beginning of year 831,000 791,000
----------- -----------
Cash, end of year $ 514,000 $ 831,000
=========== ===========
See notes to consolidated financial statements.
F-6
</TABLE>
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 December 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.
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.
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.
Acquisition Activity
- --------------------
During 1999, the Company terminated an agreement to acquire another entity. The
total costs associated with the attempted acquisition were $366,000 and these
costs have been expensed during 1999.
Subsidiary Operations
- ---------------------
During 1999, the Company formed a wholly-owned subsidiary to develop an internet
commerce site to offer for resale personal property from forfeitured loans, as
well as merchandise purchased.
The subsidiary is still in the development stage as no significant revenues have
been generated from its primary operations.
F-7
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
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.
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, Equipment and Vehicles
- --------------------------------
Property, equipment and vehicles are recorded at cost. Depreciation and
amortization expense is generally provided on a straight-line basis using
estimated useful lives of 5 years for vehicles, 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 $301,000 and $291,000 for the
years ended December 31, 1999 and 1998, respectively.
F-8
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
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 1999 was $44,000 and for 1998 was $243,000 of which $186,000 relates
to the write-off of goodwill related to certain pawnshop locations abandoned and
consolidated into other operations during 1998.
Software Development Costs
- --------------------------
Direct costs incurred in the development of software are capitalized once the
preliminary project stage is complete, management has committed to funding the
project and completion and use of the software for its intended purpose are
probable. The Company ceases capitalization of development costs once the
software has been substantially completed and is ready for its intended use.
Software development costs are amortized over their estimated useful lives of 3
years. Costs associated with upgrades and enhancements that result in additional
functionality are capitalized.
Advertising Costs
- -----------------
The Company expenses all advertising costs as incurred.
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.
F-9
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies (continued)
- --------------------------------------------------------------------------------
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.
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
$158,000 and $190,000 at December 31, 1999 and 1998, respectively, in the
accompanying financial statements. Actual net realizable value may differ from
these results.
Reclassifications
- -----------------
Certain balances in the December 31, 1998 financial statements have been
reclassified to conform to the December 31, 1999 presentation.
F-10
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 2 - Property and Equipment
- -------------------------------
Property and equipment consist of the following:
December 31,
---------------------------
1999 1998
----------- -----------
Land $ 236,000 $ 236,000
Buildings 546,000 546,000
Equipment and vehicles 1,168,000 1,095,000
Leasehold improvements 895,000 835,000
----------- -----------
2,845,000 2,712,000
Less accumulated depreciation
and amortization (1,439,000) (1,138,000)
----------- -----------
$ 1,406,000 $ 1,574,000
=========== ===========
Note 3 - Intangible Assets
- --------------------------
Intangible assets consist of the following:
December 31,
---------------------------
1999 1998
----------- -----------
Goodwill $ 603,000 $ 603,000
Acquisition costs 45,000 45,000
Non-compete agreements 67,000 67,000
----------- -----------
715,000 715,000
Less accumulated amortization (430,000) (387,000)
----------- -----------
$ 285,000 $ 328,000
=========== ===========
Note 4 - Accrued Expenses
- -------------------------
Accrued expenses consist of the following:
December 31,
---------------------------
1999 1998
----------- -----------
Accrued salaries and payroll taxes $ 135,000 $ 132,000
Accrued property and sales taxes 103,000 92,000
Accrued interest-related parties 1,000 2,000
Accrued lease abandonment costs 40,000 114,000
Other 86,000 68,000
----------- -----------
$ 365,000 $ 408,000
=========== ===========
F-11
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 5 - Notes Payable - Related Parties
- ----------------------------------------
The Company has notes payable to related parties, who are stockholders or family
members of stockholders, totaling $186,000 and $136,000 as of December 31, 1999
and 1998, respectively. These notes have interest rates of 10% to 15% per annum,
and are unsecured. Interest is due monthly. As a condition of several notes
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 as interest expense for each of the years ended December 31,
1999 and 1998, respectively. These warrants were fully amortized at December 31,
1999.
Note 6 - Line-of-Credit and Notes Payable
- -----------------------------------------
Line-of-credit consists of the following:
December 31,
--------------------------
1999 1998
--------- ----------
$2,500,000 line-of-credit to a bank,
interest at prime plus 3% (11.5% at
December 31, 1999). Interest payable
monthly, principal at maturity August
2001. Collateralized by substantially
all assets of the Company. $ 942,000 $ -
========= ==========
Notes payable consist of the following:
December 31,
------------
1999 1998
---- ----
Note payable to a finance company,
paid in full during 1999.
$ - $ 62,000
Note payable to an individual; interest
at 15% per annum due monthly; principal
due at maturity - April 2002; unsecured. 450,000 450,000
Note payable to an individual; interest
rate of 12% per annum; principal and
interest of $2,547 due monthly; matures
August 2002; collateralized by real estate. 215,000 219,000
Notes payable to various individuals; interest
rate of 10% per annum; due monthly; matures
October 2000; unsecured. 42,000 42,000
F-12
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notes 6 - Line-of-Credit and Notes Payable (continued)
- ------------------------------------------------------
December 31,
--------------------------
1999 1998
--------- ----------
Note payable to a finance company due
July 2000; interest rate of 9.0% per
annum; principal and interest of $5,754
due monthly; matures July 2000; unsecured. 38,000 -
--------- ----------
745,000 773,000
Less current portion (85,000) (108,000)
--------- ----------
$ 660,000 $ 665,000
========= ==========
Maturities of notes payable are as follows:
Year Ending December 31,
2000 $ 85,000
2001 6,000
2002 456,000
2003 7,000
2004 8,000
Thereafter 183,000
---------
$ 745,000
=========
Note 7 - 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.
F-13
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - Commitments and Contingencies (continued)
- --------------------------------------------------
Operating Leases (continued)
- ----------------------------
Future minimum lease payments under noncancelable leases are as follows:
Related Non-Related
Year Ending December 31, Party Parties Total
- ------------------------ ----------- ----------- -----------
2000 $ 36,000 $ 447,000 $ 483,000
2001 37,000 422,000 459,000
2002 39,000 331,000 370,000
2003 19,000 227,000 246,000
2004 - 201,000 201,000
Thereafter - 102,000 102,000
----------- ----------- -----------
$ 131,000 $ 1,730,000 $ 1,861,000
=========== =========== ===========
Total future minimum lease payments above do not include a reduction of $107,000
for noncancelable sublease payments.
Rent expense was $599,000 and $568,000, for the years ended December 31, 1999
and 1998, respectively. Included in rent expense were amounts paid to a
stockholder of $36,000 for 1999 and for 1998 and sublease income of $53,000 and
$42,000, respectively.
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.
F-14
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 7 - Commitments and Contingencies (continued)
- --------------------------------------------------
Employment Agreements
- ---------------------
The Company has entered into employment agreements with two officers of the
Company. The agreements include annual salary requirements which total $240,000
per annum and have incentive compensation provisions. The agreements expire in
December 2000 and December 2001.
Note 8 - Income Taxes
- ---------------------
The components of deferred tax assets and (liabilities) are as follows:
December 31,
-------------------------
1999 1998
---------- ----------
Total deferred tax assets $ 58,000 $ 81,000
Total deferred tax (liabilities) - (8,000)
---------- ----------
Net deferred tax assets (liabilities) $ 58,000 $ 73,000
========== ==========
The tax effects of temporary differences that give rise to deferredx assets and
(liabilities) are as follows:
December 31,
-----------------------------
Temporary differences: 1999 1998
------------ ------------
Abandonment of leases $ 62,000 $ 43,000
Change in tax accounting method
for service charges receivable
(6,000) (8,000)
Property and equipment (30,000) (1,000)
Inventory 1,000 25,000
Other 31,000 14,000
------------ ------------
$ 58,000 $ 73,000
============ ============
F-15
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 8 - Income Taxes (continued)
- ---------------------------------
Income tax expense (benefit) consists of the following:
Years Ended
December 31,
----------------------------
1999 1998
----------- -----------
Current $ (109,000) $ 203,000
Deferred 15,000 (7,000)
----------- -----------
$ (94,000) $ 196,000
========== ===========
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:
Years Ended
December 31,
---------------------------
1999 1998
----------- -----------
Tax expense (benefit) at federal statutory rates $ (110,000) $ 21,000
Goodwill amortization - 20,000
Non deductible items 9,000 6,000
State tax, net of federal benefit 11,000 17,000
Sale of pawnshop - 119,000
Other (4,000) 13,000
----------- -----------
$ (94,000) $ 196,000
=========== ===========
Note 9 - 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.
F-16
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - 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 were exercised
when they expired in 1999.
A summary of the status of the Company's warrants follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998
-------------------------- ------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercose
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 9,000 4.00 134,000 $ 3.07
Granted - - - -
Exercised - - (50,500) 3.00
Canceled 9,000 4.00 (74,500) 3.00
----------- ------- --------- ----------
Outstanding and exercisable at end of year
- - 9,000 $ 4.00
=========== ======== ========= ==========
</TABLE>
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, 1999.
F-17
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Common Stock, Options and Warrants (continued)
- --------------------------------------------------------
Stock-Based Compensation Plans (continued)
- ------------------------------------------
A summary of the status of the Company's stock option plans follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1999 1998
------------------------- -----------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Outstanding at beginning of year 296,542 2.89 324,500 2.71
Granted 167,500 1.64 40,000 3.50
Exercised (875) 1.13 (8,875) 1.76
Canceled (40,000) 3.43 (59,083) 1.70
---------- --------- ---------- ---------
Outstanding and exercisable at end of year
423,167 2.35 296,542 $ 2.89
========== ========= ========== =========
Options available for future grant 91,209 218,709
========== ==========
Weighted average fair value of options granted
during the year $ .35 $ .88
========== ==========
</TABLE>
The following information summarizes stock options outstanding and exercisable
at December 31, 1999:
Weighted
Weighted Average
Average Remaining
Number of Exercise Contractual
Range of exercise prices Options Price Life
- ------------------------ ------- ----- ----
$1.13 to $1.70 147,875 $ 1.41 8.57
$1.70 to $3.24 217,667 2.61 6.67
$3.25 to $5.13 57,625 3.77 7.25
-------------- ---------- ---------- ----------
$1.13 to $5.13 423,167 $ 2.35 7.41
============== ========== ========== ==========
F-18
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Common Stock, Options and Warrants (continued)
- --------------------------------------------------------
Stock-Based Compensation Plans (continued)
- ------------------------------------------
The weighted average fair value of options granted are as follows:
Weighted
Average
Number of Fair
Options Value
------- -----
Granted during the year ended December 31, 1998
Less than fair value - -
Equal to fair value 40,000 .88
Greater than fair value - -
--------
40,000
Granted during the year ended December 31, 1999
Less than fair value - -
Equal to fair value 130,000 .35
Greater than fair value 37,500 .34
--------
167,500
=======
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):
December 31,
----------------------------
1999 1998
------------ -----------
Net income (loss) - as reported $ (230,000) $ (172,000)
Net income (loss) - pro forma $ (288,000) $ (207,000)
Earnings (loss) per share - basic
and assuming dilution as reported
$ (.07) $ (.05)
Earnings (loss) per share - pro forma $ (.08) $ (.05)
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: expected
dividend yield is 0%, expected stock price volatility is 45.0%, risk free
interest rate is 6.0% and expected life of options is 1.5 years.
F-19
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 10 - Common Stock, Options and Warrants (continued)
- --------------------------------------------------------
Earnings (Loss) Per Share
- -------------------------
The following table sets forth the computation of earnings (loss) per common
share:
Years Ended
December 31,
----------------------------
Numerator: 1999 1998
----------- ------------
Net income (loss) available
for common stockholders
$ (230,000) $ (171,000)
=========== ===========
Denominator:
Denominator for basic earnings
per share - weighted average shares
3,640,647 3,782,844
Effect of dilutive securities:
Stock options and warrants - -
----------- ------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed conversions 3,640,647 3,782,844
=========== ============
Earnings (loss) per common share
- basic and assuming dilution
$ (.07) $ (.05)
=========== ===========
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 1999 and 1998, the Company
repurchased 358,500 and 141,500, respectively, shares from the open market. In
addition, the Company may repurchase up to 37,800 shares of preferred stock at
par value of $10.
Note 11 - 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
$76,000 and $4,000, for the years ended December 31, 1999 and 1998,
respectively.
F-20
<PAGE>
U.S. PAWN, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Note 12 - Supplemental Information to Statement of Cash Flows for Noncash
Investing and Financing Activities
- --------------------------------------------------------------------------------
For the Years Ended
December 31,
---------------------------
1999 1998
----------- -----------
Cash paid during the year for interest $ 142,000 $ 283,000
=========== ===========
Cash paid during the year for income taxes $ - $ -
=========== ==========
F-21
<PAGE>
ITEM 8. - DISAGREEMENTS IN ACCOUNTING AND FINANCIAL DISCLOSURE
- --------------------------------------------------------------
On March 26, 1998 the Company's principal independent accountant resigned due to
certain independence issues. On March 30, 1998 the Company engaged a new
independent accountant. On March 31, 1998 a Form 8-K, which is incorporated
herein by reference, was filed reflecting this change.
PART III
ITEM 9. - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The following table sets forth certain information as to each director's or
officer's age, positions with the Company, and the year when each first became
an officer or director of the Company.
<TABLE>
<CAPTION>
Officer or
Officer or
Name Age Office Director Since
- ---- --- ------ ---------------
<S> <C> <C>
Charles C. Van Gundy 47 President, Chief Executive 1994
Officer, Chief Financial Officer,
and Director
Ronald A. Mitola 45 Vice President - Operations,
Secretary 1997
Gary A. Agron 55 Director 1989
Jack Skidell 57 Director 1997
Ross L. Murphy 48 Director 1998
</TABLE>
Charles C. Van Gundy has been employed by the Company since January 1992.
His positions within the Company have included Vice President of Accounting,
Vice President and Chief Financial Officer, and Secretary. Mr. Van Gundy
currently serves as the Company's President, Chief Executive Officer, and Chief
Financial Officer and is responsible for the overall operations of the Company.
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 of 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. He devotes
substantially all of his time to the Company's affairs.
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.
12
<PAGE>
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 the Company'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 the
Company'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 also
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 such time as is necessary
to the Company's affairs.
Ross L. Murphy has been the Chief Executive Officer and Chairman of the
Board of Directors of BancPro Inc., an OTC Bulletin Board specialty lender
company located in Tempe, Arizona since 1994. Mr. Murphy earned his Bachelor of
Business Administration Degree from the University of Texas in 1973. He owned
and managed a chain of retail furniture stores for 16 years. Mr. Murphy later
acquired Haymco Marketing, which he successfully ran for three years and sold.
Mr. Murphy is also 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 the Company's affairs.
Compliance With Section 16(a) of the Securities Exchange Act of 1934
The Company's executive officers and directors are required to file under the
Securities Exchange Act of 1934 reports of ownership and changes of ownership in
securities of the Company with the Securities and Exchange Commission. Based
solely upon copies of such reports and information provided to the Company by
individual executive officers and directors, the Company believes that during
the year ended December 31, 1999 all executive officers and directors complied
with such reporting requirements.
ITEM 10. - EXECUTIVE COMPENSATION
The following tables set forth compensation with respect to the chief executive
officer of the Company for the fiscal years indicated in each table:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Fiscal Other Long-Term Compensation
Name and Position Year Salary Compensation Stock Options(#)
- ----------------- ---- ------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
Charles C. Van Gundy (1) 1999 $150,000 -0- 100,000
President, Chief Executive 1998 150,000 -0- -0-
Officer, Chief Financial 1997 125,000 -0- 87,500
Officer and Secretary
(1) Mr. Van Gundy was elected President and Chief Executive Officer on October
29, 1997. Prior to October 29, 1997, Mr. Van Gundy served as the Company's
Chief Financial Officer and Secretary.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable
% of Value at Assumed Annual
Total Exercise Rates of Stock Price
Granted Price Appreciation for Option
Options in Fiscalper Share Expiration Term
Name Granted Year ($/Sh) Date 5% ($) 10%($)
- ---- ------- ---- ------ ---- ------- ------
Charles C. 100,000 77% $1.38 1-3-09 $86,787 $219,936
Van Gundy
13
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
Value of Unexercised
Number of Unexercised Options In-the-Money Options at
Shares Acquired At Fiscal Year End Fiscal Year End(2)
Name on Exercise(#) Value Realized($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- -------------- -------------------- ------------------------- ----------- -------------
Charles C.
Van Gundy -0- $ -0- 216,750 -0- $10,500 $ -0-
</TABLE>
(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.
(2) Represents the difference, if any, between the market value of the
Company's common stock on December 31, 1999 and the exercise price of the
options.
Employment Agreements
The Company and Mr. Van Gundy have entered into an employment agreement, which
expires on December 31, 2000. Provisions of the agreement include: (i) an annual
base salary of $150,000; (ii) 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; (iii) an option to
purchase 75,000 common shares of the Company at an exercise price of $3.24 per
share, which in the event of a change in control of the Company or constructive
termination, Mr. Van Gundy could cause the Company to repurchase at a price
equal to the difference between the exercise price and the closing price of the
Company's common stock on the effective date of termination or to extend the
exercisability of the option under other circumstances; (iv) grants of options
to purchase 100,000 and 75,000 common shares of the Company vesting in fiscal
years 1999 and 2000, respectively, which in the event of a change in control of
the Company or constructive termination, Mr. Van Gundy could cause the Company
to repurchase at a price equal to the difference between the exercise price and
the closing price of the Company's common stock on the effective date of
termination or to extend the exercisability of the option under other
circumstances; (v) 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
the Company as defined in the agreement; (vi) continuation of salary payments
equal to one year's salary in the event of a change in control of the Company;
and (vii) continuation of salary payments during periods of disability as
defined in the agreement.
The Company and Mr. Mitola have entered into an employment agreement, which
expires on December 31, 2001. Provisions of the agreement include: (i) an annual
base salary of $90,000; (ii) 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; (iii) an option to
purchase 40,000 common shares of the Company at an exercise price of $3.50 per
share, which in the event of a change in control of the Company or constructive
termination, Mr. Mitola could cause the Company to repurchase at a price equal
to the difference between the exercise price and the closing price of the
Company's common stock on the effective date of termination or to extend the
exercisability of the option under other circumstances; (iv) grants of options
to purchase 30,000 common shares of the Company vesting in fiscal years 1999,
2000 and 2001, which in the event of a change in control of the Company or
constructive termination, Mr. Mitola could cause the Company to repurchase at a
price equal to the difference between the exercise price and the closing price
of the Company's common stock on the effective date of termination or to extend
the exercisability of the option under other circumstances; (v) 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 the Company as defined in
the agreement or in the event of a change in control of the Company; and (vi)
continuation of salary payments during periods of disability as defined in the
agreement.
14
<PAGE>
ITEM 11. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- -------------------------------------------------------------------------
The following table sets forth the holdings of common stock, by each person who,
as of the date hereof, holds of record or is known by the Company to hold
beneficially or of record, more that 5% of the Company's common stock, by each
director or officer, and by all directors and officers as a group.
Shareholdings
Name and Address Number Percent
- ---------------- ------ -------
Charles C. Van Gundy(1) 246,750 6.6%
7215 Lowell Blvd.
Westminster, CO 80030
Gary A. Agron(2) 36,500 1.0%
5445 DTC Parkway, Suite 520
Englewood, CO 80111
Jack Skidell(3) 99,469 2.6%
500 N. Broadway #159
Jericho, NY 11753
Ross Murphy(4) 17,500 0.5%
3923 S. McClintock Drive #410
Tempe, AZ 85282
Ronald A. Mitola(5) 90,000 2.4%
7215 Lowell Blvd.
Westminster, CO 80030
Rodney W. Smith 356,225 9.5%
P.O. Box 7022
Tyler, TX 75711
All officers and directors
as a group(five in number)(1)(2)(3)(4)(5) 490,219 13.1%
(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 3, 2009.
(2) 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 $2.62 per share until July 1,
2009.
(3) Includes currently exercisable stock options to purchase 12,500 shares at
$3.24 per share until October 29, 2007 and 10,000 shares at $2.62 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 $2.62 per share
until July 1, 2009.
15
<PAGE>
(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 30,000 shares at $1.38 per share until January 3,
2009.
ITEM 12. - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------
The Company was indebted at December 31, 1999 in the aggregate amount of
approximately $186,000 for loans advanced to the Company by shareholders and/or
employees. These loans are unsecured, bear interest between 10% and 15% per
annum, were used for working capital and are due on dates ranging from March
2000 to February 2001. The terms of the loans are believed to be as fair as
terms which could have been obtained in arm's length transactions with
unaffiliated third parties.
Mr. Agron, a director of the Company, performs legal services on the Company's
behalf. Mr. Agron received legal fees from the Company totaling $76,000 and
$4,000 for fiscal 1999 and 1998, respectively.
ITEM 13. - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements:
---------------------------
The following consolidated financial statements are included in Part II, Item 7
for the years ended December 31, 1999 and 1998: Balance Sheets, Statements of
Operations, Statements of Changes in Stockholder's Equity, Statements of Cash
Flows and Notes to Financial Statements.
2. Financial Statements Schedules:
-------------------------------------
None.
3. Exhibits:
---------------
Exhibit #27.1 Financial Data Schedule.
(b) Reports on Form 8-K: During the twelve months covered by this report, the
Company filed no reports on Form 8-K.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
March 29, 2000 on its behalf by the undersigned, thereto duly authorized.
U.S. PAWN, INC.
By /s/ Charles C. Van Gundy
----------------------------
Charles C. Van Gundy
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 2000.
Signature Capacity
Chief Executive Officer,
Chief Financial Officer,
/s/ Charles C. Van Gundy (Principal Accounting Officer)
- ------------------------ and Director
Charles C. Van Gundy
/s/ Gary A. Agron Director
- ------------------------
Gary A. Agron
/s/ Jack Skidell Director
- ------------------------
Jack Skidell
/s/ Ross L. Murphy Director
- ------------------------
Ross L. Murphy
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 514
<SECURITIES> 0
<RECEIVABLES> 3,304
<ALLOWANCES> 0
<INVENTORY> 2,147
<CURRENT-ASSETS> 6,530
<PP&E> 3,560
<DEPRECIATION> (1,869)
<TOTAL-ASSETS> 8,240
<CURRENT-LIABILITIES> 839
<BONDS> 1,602
0
378
<COMMON> 4,871
<OTHER-SE> 550
<TOTAL-LIABILITY-AND-EQUITY> 8,240
<SALES> 5,234
<TOTAL-REVENUES> 9,488
<CGS> 4,203
<TOTAL-COSTS> 5,091
<OTHER-EXPENSES> 366
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 152
<INCOME-PRETAX> (324)
<INCOME-TAX> (94)
<INCOME-CONTINUING> (230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (230)
<EPS-BASIC> (.07)
<EPS-DILUTED> (.07)
</TABLE>
