FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
Commission file number: 0-18291
U.S. PAWN, INC.
---------------
(Name of Small Business Issuer in its charter)
Colorado 84-0819941
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7215 Lowell Boulevard
Westminster, CO 80030
(Address of principal executive offices)
(Zip Code)
(303) 657-3550
(Issuer's telephone number, including area code)
Indicate by check mark whether the Issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, No Par Value, 3,327,785 shares as of August 14, 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
June December
30, 2000 31, 1999
-------- --------
Current Assets:
Cash $ 438 $ 514
Service charges receivable 414 476
Pawn loans 2,557 2,828
Accounts receivable, net 10 27
Income taxes receivable 231 224
Deferred income taxes 13 58
Inventory, net 2,424 2,147
Prepaid expenses and other 235 256
------ ------
Total current assets 6,322 6,530
Property and equipment, at cost, net 1,295 1,406
Intangible assets, net 262 285
Deferred income taxes 30 --
Other assets 19 19
------ ------
$7,928 $8,240
====== ======
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 20 $ 170
Customer layaway deposits 40 33
Accrued expenses 247 365
Notes payable-related parties 186 186
Current portion of notes payable 66 85
------ ------
Total current liabilities 559 839
Line of credit 942 942
Notes payable, less current portion 657 660
------ ------
Total Liabilities 2,158 2,441
------ ------
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 521 550
------ ------
Total Stockholders' Equity 5,770 5,799
------ ------
$7,928 $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 Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
REVENUES:
Sales $ 1,169 $ 1,137 $ 2,480 $ 2,444
Pawn service charges 935 1,053 1,946 2,073
Other income 14 21 28 43
------- ------- ------- -------
Total Revenues 2,118 2,211 4,454 4,560
------- ------- ------- -------
COST OF SALES AND EXPENSES:
Cost of sales 954 886 1,967 1,912
Operations 763 881 1,632 1,733
Administration 286 267 540 512
Depreciation and
amortization 79 86 164 171
------- ------- ------- -------
Total Cost of Sales
and Expenses 2,082 2,120 4,303 4,328
------- ------- ------- -------
INCOME FROM OPERATIONS 36 91 151 232
------- ------- ------- -------
OTHER (EXPENSES)
Interest (66) (30) (134) (62)
Loss on disposal
of fixed assets (19) -- (19) --
------- ------- ------- -------
Total other (expenses) (85) (30) (153) (62)
------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (49) 61 (2) 170
PROVISION (BENEFIT) FOR INCOME TAXES (7) 24 9 56
------- ------- ------- -------
NET INCOME (LOSS) (42) 37 (11) 114
DIVIDENDS ON PREFERRED STOCK (7) (9) (18) (18)
------- ------- ------- -------
EARNINGS (LOSS) AVAILABLE
FOR COMMON STOCKHOLDERS $ (49) $ 28 $ (29) $ 96
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE $ (.02) $ .01 $ (.01) $ 0.03
======= ======= ======= =======
EARNINGS (LOSS) PER COMMON SHARE,
ASSUMING DILUTION $ (.02) $ 0.01 $ (.01) $ 0.03
======= ======= ======= =======
WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 3,328 3,686 3,328 3,686
======= ======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING,
ASSUMING DILUTION 3,328 3,765 3,328 3,745
======= ======= ======= =======
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)
Six Months Ended
June 30,
------------------
2000 1999
------- -------
CASH FLOWS (TO) FROM OPERATING ACTIVITIES:
Net income (loss) $ (11) $ 114
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on disposal of fixed assets 19 --
Depreciation and amortization 164 171
Deferred income taxes 15 1
Changes in:
Service charges receivable 62 (53)
Inventory (277) (30)
Accounts receivable 17 14
Income taxes receivable (7) 55
Prepaid expenses and other 21 (180)
Accounts payable (150) (20)
Accrued expenses (118) (115)
Customer layaway deposits 7 8
------- -------
Net Cash (Used) Provided by Operating Activities (258) (35)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Pawn loans made (3,995) (4,649)
Pawn loans repaid 2,733 3,040
Pawn loans forfeited 1,533 1,328
Purchase of property and equipment (49) (72)
------- -------
Net cash (used) Provided by Investing Activities 222 (353)
------- -------
CASH FLOWS (TO) FINANCING ACTIVITIES:
Dividends paid (18) (18)
Payments on notes payable and long-term debt (22) (49)
Payments on notes payable-related parties -- (51)
------- -------
Net Cash (Used) by Financing Activities (40) (118)
------- -------
NET (DECREASE)INCREASE IN CASH (76) (506)
CASH, beginning of period 514 831
------- -------
CASH, end of period $ 438 $ 325
======= =======
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 119 $ 58
======= =======
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 and six months ended June 30, 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.
5
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
GENERAL
U.S. Pawn, Inc. (the "Company") is one of five publicly traded pawnshop
operators in the United States. The Company operates pawnshops that lend money
on the security of pledged tangible personal property (a transaction commonly
referred to as a "pawn loan"), for which the Company receives a pawn service
charge to compensate it for the pawn loan. The pawn service charge is calculated
as a percentage of the pawn loan amount, in a manner similar to which interest
is charged on a loan, and has generally ranged from 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.
6
<PAGE>
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 and Six Months Ended June 30, 2000 ("2000Q" and "2000", respectively)
Compared to Three and Six Months Ended June 30, 1999 ("1999Q" and "1999",
respectively)
Revenues
--------
Total revenues for 2000Q and 2000 decreased 4% and 2% to $2,118,000 and
$4,454,000 from $2,211,000 and $4,560,000 for 1999Q and 1999, respectively. The
decrease in revenues is primarily due to a drop in pawn service charges to
$935,000 and $1,946,000 from $1,053,000 and $2,073,000, respectively, during
2000 as compared to 1999. As a percentage of total revenues, merchandise sales
represented 55% and pawn service charges were 44%, respectively, during the 2000
reporting periods. This revenue mix is consistent with the Company's
expectations and generally comparable to 1999. 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 the 2000 reporting periods, store operations generated merchandise sales
of $1,169,000 and $2,480,000 as compared to $1,137,000 and $2,444,000 during
1999. For the 2000 reporting periods, the Company's annualized inventory
turnover rate was 1.6 and 1.7 times with a gross profit margin on sales of 18.4%
and 20.7% as compared to 2.0 and 2.1 times with gross profit margin on sales of
22.1% and 21.8% for the 1999 reporting periods. 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.
7
<PAGE>
Pawn Service Charges
--------------------
During the 2000 reporting periods, store operations generated pawn service
charges of $935,000 and $1,946,000 as compared to $1,053,000 and $2,073,000 for
the 1999 periods. During 2000, the Company's pawn loan balance outstanding
decreased $271,000 or 9.6% to $2,557,000 from $2,828,000 at December 31, 1999.
Based on historical comparisons (e.g., during the comparable 1999 six month
period, the Company's pawn loan balance outstanding increased 10%), such a
decrease was not anticipated for 2000.
New pawn loans written decreased by $654,000 or 14% 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's
annualized pawn service charge on average pawn loans outstanding during 2000
equaled 145% as compared to 143% for 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 36% for
2000 as compared to 30% for 1999. The Company's forfeiture rate is believed to
be comparable within the pawn shop industry, and is meeting the Company's
expectations. The Company plans to utilize 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 the 2000 reporting periods decreased
slightly to $2,082,000 and $4,303,000 as compared to $2,120,000 and $4,328,000
for the 1999 reporting periods. As a percentage of total revenues, total cost of
sales and expenses for the 2000 reporting periods were 98% and 97% as compared
to 96% and 95% for 1999 reporting periods.
Operating Expenses
------------------
Operating expenses decreased by $118,000, or 13%, and $101,000, or 6%, during
the 2000 reporting periods as compared to the 1999 reporting periods. As a
percentage of total revenues, operating expenses decreased to 36% and 37% for
the 2000 reporting periods as compared to 40% and 38% for the 1999 reporting
periods, respectively. The decrease in operating expenses as a percentage of
revenues for 2000 is primarily attributable to a decrease in accrued lease
obligations for a store closure and a decrease in store personnel costs for
2000Q.
Administration
--------------
Administrative overhead increased during the 2000 reporting periods by $19,000,
or 7%, and $28,000, or 5% as compared to the 1999 reporting periods. As a
percentage of total revenues, administrative overhead increased to 14% and 12%
for the 2000 reporting periods from 12% and 11% as compared to the 1999
reporting periods. 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.
Depreciation and Amortization Expense
-------------------------------------
Depreciation and amortization expense decreased slightly during the 2000
reporting periods as compared to the 1999 reporting periods as various
depreciable assets reached their estimated useful lives and became fully
amortized to expense.
8
<PAGE>
Other Expense
-------------
Interest expense for the 2000 reporting periods increased by $36,000 and $72,000
as compared to the 1999 reporting periods. 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 (loss) from operations before income taxes for the 2000Q decreased by
$110,000 to a loss of $(49,000) from income of $61,000 as compared to 1999Q.
Income (loss) from operations before income taxes for the 2000 decreased by
$170,000 to a loss of $(2,000) from income of $170,000 as compared to 1999.
After accounting for the effects of income taxes and preferred dividends,
earnings (loss) attributable to common stockholders for the 2000 reporting
periods was $(49,000) and $(29,000) as compared to $28,000 and $96,000 as
compared to the 1999 reporting periods.
Earnings (Loss) Per Share
-------------------------
Earnings (loss) per share for the 2000 reporting periods equaled $(0.02) and
$(0.01) as compared to $0.01 and $0.03 for the 1999 reporting periods. The
number of common shares outstanding decreased by 357,625 from June 30, 1999 to
June 30, 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 $5,763,000 at June 30, 2000 from $5,691,000 at
December 31, 1999. Total assets decreased during 2000 by $312,000 mainly due to
decreases in cash, service charges receivable, pawn loans, property, equipment
and intangible assets. Total liabilities decreased by $283,000 at June 30, 2000
to $2,158,000 from $2,441,000 at December 31, 1999 mainly due to decreases in
accounts payable and other accrued expenses. Total stockholders' equity
decreased during 2000 by $29,000 as a result of losses, 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.
Currently, the Company has no plans to expand its operating base. The Company
expects to 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.
9
<PAGE>
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 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.
10
<PAGE>
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Date: August 14, 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
