FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2000
Commission file number: 0-18291
U.S. PAWN, INC.
--------------------------------------------
(Name of Small Business Issuer in its charter)
Colorado 84-0819941
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7215 Lowell Boulevard
Westminster, CO 80030
(Address of principal executive offices)
(Zip Code)
(303) 657-3550
(Issuer's telephone number, including area code)
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value, 3,327,785 shares as of May 12, 2000.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. PAWN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in thousands, except share data)
Assets
March December
31, 2000 31, 1999
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<S> <C> <C>
Current Assets:
Cash $ 461 $ 514
Service charges receivable 457 476
Pawn loans 2,632 2,828
Accounts receivable, net 17 27
Income taxes receivable 180 224
Deferred income taxes 65 58
Inventory, net 2,237 2,147
Prepaid expenses and other 279 256
------ ------
Total current assets 6,328 6,530
Property and equipment, at cost, net 1,384 1,406
Intangible assets, net 274 285
Deferred income taxes 21 --
Other assets 19 19
------ ------
$8,026 $8,240
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 24 $ 170
Customer layaway deposits 42 33
Accrued expenses 277 365
Current portion of
notes payable-related parties 186 186
Current portion of notes payable 78 85
------ ------
Total current liabilities 607 839
Line of credit 942 942
Notes payable, less current portion 658 660
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Total Liabilities 2,207 2,441
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Commitments and contingencies
Stockholders' equity:
Redeemable preferred stock, 9.5%,$10 par value
1,000,000 authorized: 37,800 shares
issued and outstanding 378 378
Common stock, no par value, 30,000,000 shares
authorized; 3,327,785 and 3,327,785
shares issued and outstanding 4,871 4,871
Retained earnings 570 550
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Total Stockholders' Equity 5,819 5,799
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$8,026 $8,240
====== ======
See notes to consolidated financial statements
2
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U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share data)
Three Months Ended
March 31,
-------------------
2000 1999
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REVENUES:
Sales $ 1,311 $ 1,307
Pawn service charges 1,011 1,020
Other income 14 21
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Total Revenues 2,336 2,348
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COST OF SALES AND EXPENSES:
Cost of sales 1,014 1,026
Operations 868 852
Administration 254 245
Depreciation and amortization 85 85
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Total Cost of Sales and Expenses 2,221 2,208
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INCOME FROM OPERATIONS 115 140
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OTHER (EXPENSES)
Interest (60) (28)
Interest, related parties (8) (4)
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Total other (expenses) (68) (32)
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INCOME BEFORE INCOME TAXES 47 108
PROVISION FOR INCOME TAXES 16 31
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NET INCOME 31 77
DIVIDENDS ON PREFERRED STOCK (11) (9)
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EARNINGS AVAILABLE FOR COMMON STOCKHOLDERS $ 20 $ 68
======= =======
EARNINGS PER COMMON SHARE $ 0.01 $ 0.02
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EARNINGS PER COMMON SHARE, ASSUMING DILUTION $ 0.01 $ 0.02
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 3,328 3,685
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WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING, ASSUMING DILUTION 3,328 3,717
======= =======
See notes to consolidated financial statements
3
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U.S. PAWN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in thousands)
Three Months Ended March 31,
----------------------------
2000 1999
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<S> <C> <C>
CASH FLOWS (TO) FROM OPERATING ACTIVITIES:
Net income $ 31 $ 77
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 85 85
Deferred income taxes (28) 1
Changes in:
Service charges receivable 19 35
Inventory (90) 78
Accounts receivable 10 14
Income taxes receivable 44 29
Prepaid expenses and other (23) (92)
Accounts payable (146) 16
Accrued expenses (88) (70)
Customer layaway deposits 9 1
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Net Cash (Used) Provided by Operating Activities (177) 174
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CASH FLOWS FROM INVESTING ACTIVITIES:
Pawn loans made (2,011) (2,128)
Pawn loans repaid 1,468 1,600
Pawn loans forfeited 739 687
Purchase of property and equipment (52) (39)
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Net cash Provided by Investing Activities 144 120
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CASH FLOWS (TO) FINANCING ACTIVITIES:
Dividends paid (11) (9)
Payments on notes payable and long-term debt (9) (24)
Issuance of notes payable-related parties -- --
Payments on notes payable-related parties -- (51)
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Net Cash (Used) by Financing Activities (20) (84)
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NET (DECREASE)INCREASE IN CASH (53) 210
CASH, beginning of period 514 831
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CASH, end of period $ 461 $ 1,041
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 61 $ 30
======= =======
See notes to consolidated financial statements
4
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U.S. PAWN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements (the
"financial statements") include the accounts of U.S. Pawn, Inc. and its
subsidiaries (the "Company"). All material inter-company transactions have been
eliminated upon consolidation. The financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions for Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the financial statements contain all material
adjustments, consisting only of normal recurring adjustments necessary to
present fairly the financial condition, results of operations, and cash flows of
the Company for the interim periods presented.
The results for the three months ended March 31, 2000 are not necessarily
indicative of the results of operations for the full year. These financial
statements and related footnotes should be read in conjunction with the
financial statements and footnotes thereto included in the Company's Form 10-KSB
filed with the Securities and Exchange Commission for the year ended December
31, 1999.
Certain amounts in the prior year's financial statements have been reclassified
for comparative purposes to conform with the current year. These
reclassification had no effect on results of operations or retained earnings as
previously reported.
NOTE 2 - INCOME TAXES
The provision for income taxes has been recorded based upon the Company's
estimate of the expected annualized effective tax rate for each interim period
presented. Deferred income taxes have been recorded in accordance with generally
accepted accounting principles under SFAS 109.
NOTE 3 - EARNING PER COMMON SHARE
Basic earnings per share is computed based upon the weighted average number of
common shares outstanding during the period. Diluted earnings per share consists
of the weighted average number of common shares outstanding plus the dilutive
effects of options and warrants calculated using the treasury stock method. In
loss periods, dilutive common equivalent shares are excluded as the effect would
be anti-dilutive.
NOTE 4 - CONTINGENCIES
The Company is party to a number lawsuits arising in the normal course of
business. In the opinion of management, the resolution of these matters will not
have a material effect on the Company's financial position.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
U.S. Pawn, Inc. (the "Company") is one of five publicly traded pawnshop
operators in the United States. The Company operates pawnshops that lend money
on the security of pledged tangible personal property (a transaction commonly
referred to as a "pawn loan"), for which the Company receives a pawn service
charge to compensate it for the pawn loan. The pawn service charge is calculated
as a percentage of the pawn loan amount, in a manner similar to which interest
is charged on a loan, and has generally ranged from 120% to 240% annually. The
pledged property is held through the term of the pawn loan, which generally is
30 to 120 days, unless otherwise earlier paid or renewed. Generally, the
customer repays the pawn loan and accrued service charge in full, redeeming the
pledged property, or pays the accrued service charge and renews the pawn loan.
In the event the customer does not redeem the pledged property or renew the pawn
loan, the unredeemed collateral is forfeited to the Company and becomes
inventory available for sale in the pawnshop. The Company currently owns and
operates thirteen (13) pawnshops, of which twelve (12) are located Colorado and
one (1) in Wyoming.
Except for the historical information contained herein, certain matters set
forth in this report are forward-looking statements which can be identified by
the use of forward-looking terms such as "believes", "estimates", "plans",
"expects", "anticipates", "intends" or by discussions of strategy, future
operating results or events. These forward-looking statements are subject to
risks and uncertainties that may cause the Company's actual results, performance
or achievements to differ materially from those discussed in the forward-looking
statements. These risks and uncertainties are detailed from time to time in the
Company's periodic reports filed with the Securities and Exchange Commission.
These risks and uncertainties are beyond the ability of the Company to control,
and, in many cases, the Company cannot predict all of the risks and
uncertainties that could cause its actual results, performance or achievements
to differ materially from those indicated by the forward-looking statements.
These forward-looking statements speak only as of the date hereof and the
Company and its management cannot assure that future results covered by any
forward-looking statements will be achieved and disclaim any intent or
obligation to update these forward-looking statements.
Business Strategy
The concentration of multiple pawn shops may achieve economies of scale in
supervision, improve market penetration, enhance name recognition and reinforce
market programs. Currently the Company has 85% of its store locations clustered
in the Denver, Colorado Metropolitan Area ("Denver"). The Company intends to
analyze the markets in which it 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. 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.
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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 future expansion can be continued on a profitable basis.
Management's ability to establish, identify, acquire or profitably manage
additional locations or successfully integrate their operations without
substantial costs, delays or other unanticipated problems is a risk factor for
future expansion. There can be no assurance that any new pawn shops established
or any entity that the Company acquires will achieve profitability that
justifies the Company's investment. Establishing new locations and/or
acquisitions involve a number of risks, which may include: adverse short-term
effects on the Company's reported operating results and cash flows; diversion of
management's attention; dependence on retraining, hiring and training key
personnel; and the effects of amortization of intangibles. Such risks could have
adverse effects on the Company's operations and financial performance. If the
Company expands, it will be required to supplement its existing management team
in order to effectively manage the acquired entities and successfully implement
its acquisition and operating strategies.
Merger 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 ("2000") Compared to Three Months Ended
March 31, 1999 ("1999")
Revenues
Total revenues for 2000 decreased less than 1% to $2,336,000 from $2,348,000 for
1999. The decrease in revenues for 2000 is primarily due to a drop in pawn
service charges to $1,011,000 from $1,020,000, during 2000 as compared to 1999.
As a percentage of total revenues, both merchandise sales and pawn service
charges were unchanged at 56% and 43%, respectively, during 2000 as compared to
1999. This revenue mix is consistent with the Company's expectations. During
2000, the Company encountered intense competition from other pawn shops for pawn
loan customers and in the sales of merchandise from other pawn shops, thrift
shops and general retail businesses.
Merchandise Sales
During 2000, store operations generated merchandise sales of $1,311,000 as
compared to $1,307,000 during 1999. For 2000, the Company's annualized inventory
turnover rate was 1.9 times with a gross profit margin on sales of 22.7% as
compared to 2.3 times and 21.5% for 1999.
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The Company expects its annualized inventory turnover rate to approximate 2.5
times and to produce gross margins on sales of 20% or higher for 2000.
Pawn Service Charges
During 2000, store operations generated pawn service charges of $1,011,000 as
compared to $1,020,000 for 1999. The Company's pawn loan balance outstanding
decreased $196,000 or 7% to $2,632,000 from $2,828,000 at December 31, 1999.
Based on historical comparisons (e.g., during the 1999 quarter, the Company's
pawn loan balance outstanding decreased 6%), such a decrease is not uncommon
during the Company's first quarter, as customers are believed to use income tax
returns to redeem pawn loans.
New pawn loans written decreased by $117,000 during 2000 as compared to 1999.
Management believes that the decrease in new pawn loans written is due primarily
to the strong overall economy in Colorado ( which may have had the effect of
dampening the demand for pawn loans) and increased competition for pawn loan
customers.
Management is analyzing available market data and selecting strategies designed
to increase the number of pawn loans written. Management is hopeful that demand
for pawn loans will increase during the remainder of fiscal 2000. The Company
realized an annualized pawn service charge on average pawn loans outstanding
during the period equal to 148% for 2000 as compared to 153% for the 1999.
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 33.5%
for 2000 as compared to 30.0% for 1999. 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 emphasize an 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 approximate 35% for Fiscal 2000.
Total Cost of Sales and Expenses
Total cost of sales and expenses for 2000 increased only nominally to $2,221,000
as compared to $2,208,000 for 1999. As a percentage of total revenues, total
cost of sales and expenses for 2000 were 95% as compared to 94% for 1999.
Operating Expenses
Operating expenses increased by $16,000 or 2% during 2000 as compared to 1999.
However, as a percentage of total revenues, operating expenses increased to 37%
for 2000 as compared to 36% for 1999. The increase in operating expenses as a
percentage of revenues for 2000 is primarily attributable to escalations in
store rents and increased store personnel costs for 2000.
Administration
Administrative overhead increased during 2000 by $9,000 or 3.6% to $254,000 from
$245,000 as compared to 1999. As a percentage of total revenues, administrative
overhead increased to 10.9% for 2000 from 10.4% as compared to 1999. The
increase in administrative overhead is due primarily to market adjustments in
middle management salaries and related employee benefits during 2000 as compared
to 1999.
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Depreciation and Amortization Expense
Depreciation and amortization expense was unchanged during 2000 as compared to
the 1999.
Other Expense
Interest expense for 2000 increased by $36,000. During 2000, the Company's
outstanding balance on its revolving bank line of credit was $942,000. No such
bank debt was outstanding during 1999.
Operating Results
Income from operations before income taxes for 2000 decreased by 56% to $47,000
from $108,000 as compared to 1999. After accounting for the effects of income
taxes and preferred dividends, earnings attributable to common stockholders for
2000 decreased 70% to $20,000 from $68,000 as compared to 1999.
Earnings Per Share
Earnings per share for 2000 equaled $0.01 as compared to $0.02 for 1999. The
number of common shares outstanding decreased by 357,625 from March 31, 1999 to
March 31, 2000 as a result of the issuance of 875 shares from the exercise of
employee stock options and the repurchase of 358,500 common shares by the
Company.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital
Working capital increased to $5,721,000 at March 31, 2000 from $5,691,000 at
December 31, 1999. Total assets decreased during 2000 by $214,000 mainly due to
decreases in pawn loans, property, equipment and intangible assets. Total
liabilities decreased by $234,000 at March 31, 2000 to $2,207,000 from
$2,441,000 at December 31, 1999 mainly due to decreases in accounts payable and
other accrued expenses. Total stockholders' equity increased during 2000 by
$20,000 as a result of earnings, net of income taxes and preferred dividends.
The Company's operations have been financed from funds generated from
operations, bank borrowing, private borrowing, and public offerings. During
2000, the Company raised sufficient capital to satisfy its capital requirements.
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 comprise $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 expects to fund this
expansion and meet its on-going working capital needs with internally generated
funds, debt and/or equity offerings if needed and lines of credit. There can be
no assurance however, that such debt or equity offerings and lines of credit
will be available to the Company.
The Company has experienced that new start-up stores generally result in
operating losses during the first three to twelve months of operations.
Leasehold improvements and equipment costs for new stores have ranged from
approximately $75,000 to $100,000 per store. Acquisition of existing pawn shops
generally result in immediate increases in operating income. However,
9
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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 general lower during the first and second calendar quarters than
during the third and fourth calendar quarters.
PART II. OTHER INFORMATION
ITEM 1. Legal proceedings
None.
ITEM 2. Changes in securities
None.
ITEM 3. Defaults upon senior securities
None.
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ITEM 4. Submission of matters to a vote of security holders
None.
ITEM 5. Other information
None.
ITEM 6. Exhibits and reports on Form 8-K
(a) Exhibit #27.1 Financial Data Schedule.
(b) Reports on Form 8-K: During the three months covered by this report, the
Company filed no reports on form 8-K.
11
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: May 12, 2000 U.S. PAWN, INC.
----------------------------------
(Registrant)
/s/ Charles C. Van Gundy
----------------------------------
Charles C. Van Gundy
President
Chief Executive Officer
Chief Financial Officer
(Principal Accounting Officer)
12
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