** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

 

Washington, D.C.20549

 

**FORM 10-QSB**

 

| **ý** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                            |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                              |
|       | **For the quarterly period ended  December 31, 2002.**                                                                                                            |
|       |                                                                                                                                                              |
|       |                                                                                                                                                              |
| **o**      | **TRANSITION  REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                           |
|       |                                                                                                                                                              |
|       | **For the transition period from             to            ** |

 

**CommissionFile No. 1-13919**

 

**PawnMart,Inc.**

(Exact name ofsmall business issuer as specified in its charter)

 

| **Delaware**                                                          |   | **75-2520896**                        |
|-----------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)      |   | (I.R.S. Employer  Identification No.) |
|                                                                  |   |                                  |
| **2175 Old Concord Road SE, Suite  200, Smyrna, Georgia  30080** |
| (Address of  principal executive offices)                             |
|                                                                  |   |                                  |
| **(678) 305-7211**                                                    |
| (Issuer’s  telephone number)                                     |

 

Check whether theregistrant filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Exchange Act after distribution of securities under a planconfirmed by a court. Yes ýNo o

 

The Company has 2,079,948shares of Common Stock, par value $0.01 per share, outstanding as of January31, 2003.

 

Transitional SmallBusiness Disclosure Format (Check one): Yes o No ý

 

 

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**PAWNMART,INC.**

** **

**INDEX**

 
| **PART I - FINANCIAL  INFORMATION** |
|-------------------------------------|
|                                |
| **Item 1**                          | Financial Statements |
|                                |   |
|                                | Balance Sheets as  of December 31, 2002 and June 30, 2002 |
|                                |   |
|                                | Statements  of Operations for the Three and Six Months Ended January 5, 2002, Two Months  Ended August 31, 2002, and Four and Six Months Ended December 31, 2002 |
|                                |   |
|                                | Statements  of Cash Flows for the Six Months Ended January 5, 2002, Two Months Ended  August 31, 2002, and Four and Six Months Ended December 31, 2002 |
|                                |   |
|                                | Notes to Financial  Statements |
|                                |   |
| **Item 2**                          | Management’s Discussion and Analysis or Plan of  Operation |
|                                |   |
| **Item 3**                          | Controls  and Procedures |
|                                |   |
| **PART II - OTHER INFORMATION**     |
|                                |   |
| **Item 1**                          | Legal Proceedings |
|                                |   |
| **Item 2**                          | Changes in  Securities |
|                                |   |
| **Item 3**                          | Defaults Upon Senior Securities |
|                                |   |
| **Item 4**                          | Submission of Matters to a Vote of Security  Holders |
|                                |   |
| **Item 5**                          | Other Information |
|                                |   |
| **Item 6**                          | Exhibits and Reports on Form 8-K |

 

2

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**PARTI.  FINANCIAL INFORMATION**

##### ** **

**ITEM 1.      FINANCIALSTATEMENTS**

**PAWNMART, INC.**

 

Balance Sheets

 
|                                                                                                                                                                    |   | **Reorganized  Company** |   | **Predecessor**    |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|--------------------|--------|
| **(In thousands, except share and per share data)**                                                                                                                     |   | **December  31, 2002**   |   | **June 30,  2002** |   |
|                                                                                                                                                                    |   | **(Unaudited)**          |   | **(Unaudited)**    |   |
| Assets                                                                                                                                                                  |   |                     |   |               |   |
| Current assets:                                                                                                                                                         |   |                     |   |               |   |
| Cash  and cash equivalents                                                                                                                                              |   | $                        | 1,311  |               | $      | 377 |   |
| Accounts  receivable                                                                                                                                                    |   | 80                       |   | 36                 |   |
| Pawn  service charges receivable                                                                                                                                        |   | 445                      |   | 330                |   |
| Pawn  loans                                                                                                                                                             |   | 4,056                    |   | 3,001              |   |
| Inventories, net                                                                                                                                                        |   | 2,396                    |   | 2,616              |   |
| Prepaid  expenses and other current assets                                                                                                                              |   | 244                      |   | 180                |   |
| Total current assets                                                                                                                                                    |   | 8,532                    |   | 6,540              |   |
| Property  and equipment, net                                                                                                                                            |   | 720                      |   | 840                |   |
| Debt  issuance costs, net                                                                                                                                               |   | —                   |   | 999                |   |
| Other  assets, including available for sale securities at December 31, 2002 of  $7,433                                                                                  |   | 7,554                    |   | 115                |   |
| Total  assets                                                                                                                                                           |   | $                        | 16,806 |               | $      | 8,494 |   |
|                                                                                                                                                                    |   |                     |   |               |   |
| Liabilities  and Stockholders’ Equity (Deficit)                                                                                                                    |   |                     |   |               |   |
| Current  liabilities:                                                                                                                                                   |   |                     |   |               |   |
| Accounts  payable and accrued liabilities                                                                                                                               |   | $                        | 701    |               | $      | 643 |   |
| Current  installments of notes payable — prepetition taxes                                                                                                         |   | 103                      |   | 3,864              |   |
| Prepetition  liabilities                                                                                                                                                |   | —                   |   | 12,540             |   |
| Total  current liabilities                                                                                                                                              |   | 804                      |   | 17,047             |   |
| Long  term debt                                                                                                                                                         |   |                     |   |               |   |
| Notes  payable — prepetition taxes, net of current portion                                                                                                         |   | 524                      |   | —             |   |
| Notes  payable — bank  line of credit,  matures January 31, 2004                                                                                              |   | 3,736                    |   | —             |   |
| Total  liabilities                                                                                                                                                      |   | 5,064                    |   | 17,047             |   |
| Redeemable  Preferred Stock:                                                                                                                                            |   |                     |   |               |   |
| Preferred  stock — Series A; $0.01 par value; 5% cumulative dividend, liquidation  preference $5.00 per share; 1,071,636   shares issued at December 31, 2002 |   | 5,358                    |   | —             |   |
| Stockholders’  equity (deficit):                                                                                                                                   |   |                     |   |               |   |
| Preferred  stock — $0.01 par value, 2,500,000 shares authorized:                                                                                                   |   | —                   |   | —             |   |
| Preferred  stock — Series B; 5% cumulative dividend,   liquidation  preference $5.00  per share ($2,500); 500,042 shares issued at December 31, 2002     |   | 5                        |   | —             |   |
| 8%  Convertible preferred stock (old), $6.00 par value, 416,667 shares  authorized; 416,667 shares issued and outstanding at June 30, 2002:                             |   | —                   |   | 2,500              |   |
| Common  stock  $0.01 par value; 10,000,000  shares authorized: 2,079,948 issued and outstanding as of December 31, 2002                                            |   | 21                       |   | —             |   |
| Common  stock (old), $0.01 par value; 20,000,000 shares authorized; 2,503,412 issued  and outstanding as of June 30, 2002                                               |   | —                   |   | 25                 |   |
| Series  A redeemable common stock (old) purchase warrants, $0.125 par value;  1,974,060 warrants issued and outstanding at June 30, 2002 (note 2)                       |   | —                   |   | 249                |   |
| Series  B redeemable common stock (old) purchase warrants, $0.0625 par value;  1,380,000 warrants issued and outstanding at June 30, 2002                               |   | —                   |   | 86                 |   |
| Additional  common stock purchase warrants                                                                                                                              |   | —                   |   | 60                 |   |
| Additional  paid-in capital                                                                                                                                             |   | 4,162                    |   | 22,004             |   |
| Retained  earnings (accumulated deficit)                                                                                                                                |   | 111                      |   | (33,407            | )      |
| Other  comprehensive income                                                                                                                                             |   | 2,085                    |   | —             |   |
| Less  treasury stock, at cost; 7,144 common shares (old) at June 30, 2002                                                                                               |   | —                   |   | (70                | )      |
| Total  stockholders’ equity (deficit)                                                                                                                              |   | 6,384                    |   | (8,553             | )      |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                              |   | $                        | 16,806 |               | $      | 8,494 |   |

 

See accompanying notes to financial statements.

 

3

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**PAWNMART, INC. AND SUBSIDIARIES**

 

 Statements of Operations

(Unaudited)

 
|                                                |   | **Reorganized  Company** |   | **Predecessor**      |   |
|-----------------------------------------------------|--------|--------------------------|--------|----------------------|--------|
|                                                |   | **Three  Months Ended**  |   |
| **(In thousands, except per share data)**           |   | **December  31, 2002**   |   | **January 5,  2002** |   |
|                                                |   |                     |   |                 |   |
| Revenues:                                           |   |                     |   |                 |   |
| Merchandise  sales                                  |   | $                        | 3,274  |                 | $      | 3,196 |   |
| Pawn  service charges                               |   | 1,399                    |   | 1,201                |   |
| Other                                               |   | 63                       |   | 56                   |   |
| Total  revenues                                     |   | 4,736                    |   | 4,453                |   |
|                                                |   |                     |   |                 |   |
| Cost  of sales                                      |   | 2,381                    |   | 2,254                |   |
| Gross  profit                                       |   | 2,355                    |   | 2,199                |   |
|                                                |   |                     |   |                 |   |
| Expenses:                                           |   |                     |   |                 |   |
| Store  operating expenses                           |   | 1,336                    |   | 1,568                |   |
| Corporate  administrative expenses                  |   | 720                      |   | 593                  |   |
| Interest  expense                                   |   | 69                       |   | 115                  |   |
| Depreciation  and amortization                      |   | 76                       |   | 127                  |   |
| Total  expenses                                     |   | 2,201                    |   | 2,403                |   |
|                                                |   |                     |   |                 |   |
| Operating  income (loss)                            |   | 154                      |   | (204                 | )      |
| Interest  and dividend income                       |   | 14                       |   | —               |   |
| Gain  on sale of marketable securities              |   | 88                       |   | —               |   |
| Net  income (loss) from continuing operations       |   | 256                      |   | (204                 | )      |
| Loss  from discontinued operations                  |   | —                   |   | (138                 | )      |
|                                                |   |                     |   |                 |   |
| Net  Income                                         |   | 256                      |   | (342                 | )      |
| Preferred  stock dividend requirement               |   | (98                      | )      | —               |   |
| Net  income (loss) allocable to common stockholders |   | $                        | 158    |                 | $      | (342 | ) |
|                                                |   |                     |   |                 |   |
| Income  (Loss) per common share (note 4):           |   |                     |   |                 |   |
| Basic                                               |   | $                        | .08    |                 | *      |   |
| Diluted                                             |   | $                        | .05    |                 | $      | * |   |

 

----

* Loss per share prior toPlan consummation and merger are not meaningful.

 

See accompanyingnotes to financial statements.

 

4

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**PAWNMART, INC. AND SUBSIDIARIES**

 

 Statements of Operations

(Unaudited)

 

(In thousands,except per share data)

 
|                                                |   | **Predecessor**                        |   | **Reorganized  Company**               |   |                                       |   |
|-----------------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|--------------------------------------------|--------|
|                                                |   | **Six Months  Ended  January 5, 2002** |   | **Two Months  Ended  August 31, 2002** |   | **Four  Months  Ended  December 31, 2002** |   | **Six Months  Ended  December 31, 2002** |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Revenues:                                           |   |                                   |   |                                   |   |                                       |   |   |   |
| Merchandise  sales                                  |   | $                                      | 6,951  |                                   | $      | 1,578                                      |   | $ | 4,204 |   | $ | 5,782 |   |
| Pawn  service charges                               |   | 2,610                                  |   | 853                                    |   | 1,818                                      |   | 2,671 |   |
| Other                                               |   | 156                                    |   | 38                                     |   | 78                                         |   | 116 |   |
| Total  revenues                                     |   | 9,717                                  |   | 2,469                                  |   | 6,100                                      |   | 8,569 |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Cost  of sales                                      |   | 5,289                                  |   | 1,075                                  |   | 3,053                                      |   | 4,128 |   |
| Gross  profit                                       |   | 4,428                                  |   | 1,394                                  |   | 3,047                                      |   | 4,441 |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Expenses:                                           |   |                                   |   |                                   |   |                                       |   |   |   |
| Store  operating expenses                           |   | 3,239                                  |   | 896                                    |   | 1,786                                      |   | 2,682 |   |
| Corporate  administrative expenses                  |   | 1,263                                  |   | 336                                    |   | 947                                        |   | 1,283 |   |
| Interest  expense                                   |   | 294                                    |   | 83                                     |   | 107                                        |   | 190 |   |
| Depreciation  and amortization                      |   | 250                                    |   | 63                                     |   | 99                                         |   | 162 |   |
| Total  expenses                                     |   | 5,046                                  |   | 1,378                                  |   | 2,939                                      |   | 4,317 |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Operating  income (loss)                            |   | (618                                   | )      | 16                                     |   | 108                                        |   | 124 |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Interest  and dividend income                       |   | —                                 |   | —                                 |   | 41                                         |   | 41 |   |
| Gain  on disposition of assets                      |   | —                                 |   | —                                 |   | 5                                          |   | 5 |   |
| Gain  (loss) on sale of marketable securities       |   | —                                 |   | —                                 |   | 88                                         |   | 88 |   |
| Reorganization  expenses                            |   | —                                 |   | (241                                   | )      | —                                     |   | (241 | ) |
| Net  income (loss) from continuing operations       |   | (618                                   | )      | (225                                   | )      | 242                                        |   | 17 |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Extraordinary  items:                               |   |                                   |   |                                   |   |                                       |   |   |   |
| Gain  on debt discharge                             |   | —                                 |   | 11,810                                 |   | —                                     |   | 11,810 |   |
| Loss  from discontinued operations                  |   | (132                                   | )      | —                                 |   |                                       |   | — |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Net  Income                                         |   | (750                                   | )      | 11,585                                 |   | 242                                        |   | 11,827 |   |
| Preferred  stock dividend requirement               |   | —                                 |   | —                                 |   | (131                                       | )      | (131 | ) |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Net  income (loss) allocable to common stockholders |   | $                                      | (750   | )                                      | $      | 11,585                                     |   | $ | 111 |   | $ | 11,696 |   |
|                                                |   |                                   |   |                                   |   |                                       |   |   |   |
| Income  (loss) per common share (note 4):           |   |                                   |   |                                   |   |                                       |   |   |   |
| Basic                                               |   | $                                      | *      |                                   | $      | *                                          |   | $ | .05 |   | $ | * |   |
| Diluted                                             |   | $                                      | *      |                                   | $      | *                                          |   | $ | .04 |   | $ | * |   |

 

----

* Loss per share prior toPlan consummation and merger are not meaningful.

 

See accompanyingnotes to financial statements.

 

5

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**PAWNMART, INC. AND SUBSIDIARIES**

 

Statements of Cash Flows

(Unaudited)

(In thousands)

 
|                                                                                |   | **Predecessor**                             |   | **Reorganized  Company**                 |   |                                           |   |
|-------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                |   | **Six Months    Ended   January 5,   2002** |   | **Two Months  Ended   August 31,  2002** |   | **Four  Months   Ended   December 31,   2002** |   | **Six Months    Ended   December 31,   2002** |   |
| Cash  flows from operating activities:                                              |   |                                        |   |                                     |   |                                           |   |   |   |
| Net  income (loss)                                                                  |   | $                                           | (750   | )                                        | $      | 11,585                                         |   | $ | 242 |   | $ | 11,827 |   |
| Adjustments  to reconcile net loss to net cash   used in operating activities: |   |                                        |   |                                     |   |                                           |   |   |   |
| Depreciation  and amortization                                                      |   | 250                                         |   | 63                                       |   | 99                                             |   | 162 |   |
| Amortization  of debt issuance costs                                                |   | —                                      |   | —                                   |   | —                                         |   | — |   |
| Gain  on debt discharge                                                             |   | —                                      |   | (11,810                                  | )      | —                                         |   | (11,810 | ) |
| Changes  in operating assets and liabilities,   net of effect of acquisition:  |   |                                        |   |                                     |   |                                           |   |   |   |
| Accounts  receivable                                                                |   | (89                                         | )      | (24                                      | )      | (19                                            | )      | (43 | ) |
| Pawn  service charges receivable                                                    |   | 184                                         |   | (45                                      | )      | (70                                            | )      | (115 | ) |
| Net  decrease (increase) in pawn loans                                              |   | 2,028                                       |   | (414                                     | )      | (640                                           | )      | (1,054 | ) |
| Inventories,  net                                                                   |   | 651                                         |   | 62                                       |   | 158                                            |   | 220 |   |
| Prepaid  expenses and other current assets                                          |   | (160                                        | )      | (3                                       | )      | (67                                            | )      | (70 | ) |
| Prepetition  liabilities, accounts payable and accrued liabilities                  |   | (2                                          | )      | (56                                      | )      | (70                                            | )      | (126 | ) |
|                                                                                |   |                                        |   |                                     |   |                                           |   |   |   |
| Net  cash provided by operating  activities                                    |   | 2,112                                       |   | (642                                     | )      | (367                                           | )      | (1,009 | ) |
|                                                                                |   |                                        |   |                                     |   |                                           |   |   |   |
| Cash  flows from investing activities:                                              |   |                                        |   |                                     |   |                                           |   |   |   |
| Cash  acquired in merger (1)                                                        |   | —                                      |   | —                                   |   | 2,565                                          |   | 2,565 |   |
| Purchases  of investments, net                                                      |   |                                        |   |                                     |   | (220                                           | )      | (220 | ) |
| Purchases  of property and equipment                                                |   | (33                                         | )      | —                                   |   | (164                                           | )      | (164 | ) |
| Net  cash provided by (used in) investing activities                                |   | (33                                         | )      | —                                   |   | 2,181                                          |   | 2,181 |   |
|                                                                                |   |                                        |   |                                     |   |                                           |   |   |   |
| Cash  flows from financing activities:                                              |   |                                        |   |                                     |   |                                           |   |   |   |
| (Principal  payments) borrowings on notes payable                                   |   | (2,652                                      | )      | 455                                      |   | (562                                           | )      | (107 | ) |
| Dividends  paid                                                                     |   |                                        |   | —                                   |   | (131                                           | )      | (131 | ) |
| Net  cash provided by (used in) financing activities                                |   | —                                      |   | 455                                      |   | (693                                           | )      | (238 | ) |
| Net  increase (decrease) in cash and cash equivalents                               |   | (573                                        | )      | (187                                     | )      | 1,121                                          |   | 934 |   |
| Cash  and cash equivalents at beginning of period                                   |   | 811                                         |   | 377                                      |   | 190                                            |   | 377 |   |
| Cash  and cash equivalents at end of period                                         |   | $                                           | 238    |                                     | $      | 190                                            |   | $ | 1,311 |   | $ | 1,311 |   |
|                                                                                |   |                                        |   |                                     |   |                                           |   |   |   |
| Supplemental  disclosures of cash flow information - Cash paid for interest         |   | $                                           | 297    |                                     | $      | 83                                             |   | $ | 102 |   | $ | 185 |   |

 

----

(1)           Non cash financing activities - Company acquired CMHI onAugust 30, 2002 including $2.6 million in cash and $5.1 million in marketablesecurities in exchange for  preferredstock.  See note 2 for more completeexplanation.

 

See accompanyingnotes to financial statements.

 

6

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**PAWNMART, INC. AND SUBSIDIARIES**

 

Notes to FinancialStatements

(Unaudited)

 

(1)       Basis of Presentation

 

Theaccompanying financial statements have been prepared in accordance with theAmerican Institute of Certified Public Accountants Statement of Position 90-7:“Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”(“SOP 90-7”) and generally accepted accounting principles for interim financialinformation and therefore do not include all disclosures necessary for completefinancial statements.  In the opinion ofmanagement, all adjustments have been made that are necessary for a fairpresentation of the financial position and results of operations as of and forthe periods presented.

 

TheBoard of Directors of the Company determined in May 2002 that it was in theCompany’s best interest to change its fiscal year end from the Saturday nearestJanuary 31 to June 30 to more accurately reflect the Company’s post bankruptcyoperating results. The results of operations for the interim periods endedDecember 31, 2002 and January 5, 2002 are not necessarily indicative of theresults that may be expected for the entire fiscal year or any other interimperiod.

 

Thefinancial statements should be read in conjunction with the financialstatements for the fiscal year ended February 2, 2002 included in the Company’sForm 10-K which has been previously filed with the Securities and ExchangeCommission.

 

PawnMart,Inc. (the “Company”), was incorporated in Delaware on January 13,1994.  The Company is a specialtyfinance and retail enterprise principally engaged in establishing and operatingstores which advance money secured by the pledge of tangible personal property,and buying and selling pre-owned merchandise. As of December 31, 2002, the Company owned and operated 25 storeslocated in Georgia, North Carolina, and South Carolina.

 

OnJuly 9, 2001 (the “Petition Date”), the Company filed a voluntary petition forrelief under Chapter 11 of the United States Bankruptcy Code (the “BankruptcyCode”) in the United States Bankruptcy Court for the Northern District ofTexas, Fort Worth Division (the “Bankruptcy Court”) in the case of PawnMart,Inc., Debtor, Case No. 01-44957-BJH-11. On May 20, 2002 (the “Confirmation Date”), the Bankruptcy Court enteredan order (the “Confirmation Order”) confirming the Company’s first amended planof reorganization (the “Plan”).  ThePlan became effective on May 31, 2002 (the “Effective Date”).

 

TheCompany successfully emerged from bankruptcy on August 30, 2002 when itconsummated a merger (the “Merger”) with C/M Holdings, Inc. (“CMHI”).  The reorganized Company adopted fresh-startreporting (Note 2) and gave effect to its emergence from bankruptcy andconsummation of the Plan on August 30, 2002, including recognition of certainreorganization expenses associated with the Merger in the Company’s Statementof Operations for the two months ended August 31, 2002.

 

Fresh-startreporting as set forth in SOP 90-7 requires that the reorganized Companyrestate its assets and liabilities to reflect their reorganization value, whichapproximates fair value at the date of the reorganization.  In so restating, SOP 90-7 required the reorganizedCompany to allocate its reorganization value to its assets based upon theirestimated fair value.  Each liabilityexisting on the Confirmation Date is to be stated at the present value ofamounts to be paid, determined using the appropriate discount rate.

 

7

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Thefresh-start reporting reorganization value of approximately $7.6 millionresulted in a net value of approximately $1.9 million to the new common equityholders after allowance for post confirmation liabilities of the reorganizedCompany of $5.8 million.  Thereorganization value was determined in consideration of several factors and byreliance on various valuation methods including discounted cash flow, bookvalue multiples of comparable companies in its industry, net realizable valueof  asset sales and other applicablemethods.  The calculated reorganizationvalue was based on estimates and assumptions about circumstances in arelatively high-risk investment scenario that have not yet taken place in whichthere are significant economic and competitive uncertainties beyond the controlof the reorganized Company.

 

Managementbelieves the reorganized Company has sufficient liquidity and capital resourcesto meet its financial obligations and to make planned capital expenditures anddebt payments as a result of the Merger. Future operating performance and expected cash flows will be subject tofinancial, economic and other factors affecting the business and operationsbeyond its control and will affect the Company’s ability to expand its businessanticipated in its financial plan.

 

Theinformation set forth in these financial statements is unaudited.  In the opinion of management, theinformation reflects all adjustments, which consist of normal recurringaccruals, that are necessary to present a fair statement of results of operationsof the Company for the interim periods presented.

 

(2)       Plan of Reorganization

 

Fresh-startAccounting

 

In theChapter 11 proceedings, substantially all liabilities as of the Petition Datewere subject to compromise under the Plan. Treatment of each class of claims is explained in detail in theCompany’s Form 10-K for the fiscal year ended February 2, 2002.

 

Underthe terms of the Plan, the Company cancelled all equity interests of its commonand preferred shareholders and interests of any holders of options andwarrants.  The Company issued 2,079,948shares of Common Stock to its unsecured creditors in exchange for indebtednessand in connection with the Merger of the Company with CMHI, which is owned inpart by Dwayne A. Moyers and Jeffrey A. Cummer, officers and directors of theCompany, issued 1,071,636 shares of Series A Preferred Stock and 500,042 SeriesB Preferred Stock to the former shareholders of CMHI.

 

TheCompany is paying the prepetition priority tax claims over a six year periodfrom the assessment date with interest at 7% per annum in quarterlyinstallments of approximately $35,000 in accordance with the Plan.

 

TheBankruptcy Court confirmed the Plan on May 20, 2002 with an Effective Date ofMay 31, 2002.  The consummation of thePlan was contingent on several material events including consummation of theMerger which occurred on August 30, 2002 which is reported herein as a materialbusiness combination.

 

TheCompany acquired 100 percent of the outstanding common stock of CMHI on August30, 2002.  The results of CMHI’soperations have been included in the financial statements since the date of theMerger.

 

TheCompany’s reorganization value, computed immediately before the Merger, was$7,567,000.

 

 

8

----

 

TheCompany adopted fresh-start reporting because holders of existing voting sharesimmediately before confirmation of the Plan received less than 50% of thevoting shares of the emerging entity; (all pre-confirmation equity interestswere cancelled), and the reorganization value is less than the postpetitionliabilities and allowed claims, as shown below.

 

Thereorganization value was determined in consideration of several factors and byreliance on various valuation methods including discounting cash flow, bookvalue multiples of comparable companies in its industry, net realizable valueof  asset sales and other applicablemethods.  The Company assigned no valueto the Company’s net operating loss carryovers in the calculation of itsreorganization value due to the lack of certainty of utilizing the netoperating loss based on historical operating results and the potentiallimitations on use resulting from the Plan.

 
|                                                         |   | **(in thousands)** |   |
|--------------------------------------------------------------|--------|--------------------|--------|
| Postpetition  current liabilities                            |   | $                  | 5,145  |   |
| Liabilities  deferred pursuant to the Plan                   |   | 700                |   |
| Liabilities  exchanged for equity in the reorganized Company |   | 11,810             |   |
| Total  postpetition liabilities and allowed claims           |   | 17,655             |   |
| Reorganization  value                                        |   | 7,567              |   |
| Excess  of liabilities over reorganization value             |   | $                  | 10,088 |   |

 

Afterconsideration of the Company’s debt capacity, extensive negotiations amongparties in interest, projected earnings before interest and taxes, free cashflow to interest and debt service and other capital considerations, it wasagreed that the Company’s organization capital structure prior to the Merger,is as  follows:

 
|                                          |   | **At August  30, 2002** |   |
|-----------------------------------------------|--------|-------------------------|--------|
|                                          |   | **(in  thousands)**     |   |
| Postpetition  current liabilities             |   | $                       | 1,274  |   |
| Notes  payable – priority tax claims (1) |   | 700                     |   |
| Post  confirmation bank line of credit        |   | 3,720                   |   |
| Common  stock                                 |   | 1,873                   |   |
|                                          |   | $                       | 7,567  |   |

 

----

(1)           Approximately$95,000 due in cash and $605,000 payable in quarter installments ofapproximately $100,000  per  year at 7% interest per annum.

 

9

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The effects of the Planon the Company’s balance sheet as of August 30, 2002 is as follows:

 
| **(in thousands)**                                              |   | **Prior to  Plan Consummation** |   | **Debt  Discharge** |   | **Fresh  Start Adjustments** |   | **Reorganized  Balance Sheet Prior to Merger** |   |
|-----------------------------------------------------------------|--------|---------------------------------|--------|---------------------|--------|------------------------------|--------|------------------------------------------------|--------|
| Assets                                                          |   |                            |   |                |   |                         |   |                                           |   |
| Current Assets                                                  |   |                            |   |                |   |                         |   |                                           |   |
| Cash  and cash equivalents                                      |   | $                               | 190    |                | $      | —                       |   | $                                              | — |   | $ | 190 |   |
| Receivables                                                     |   | 61                              |   | —              |   | —                       |   | 61                                             |   |
| Pawn  loan receivables                                          |   | 3,790                           |   | —              |   | —                       |   | 3,790                                          |   |
| Inventory  – net                                           |   | 2,554                           |   | —              |   | —                       |   | 2,554                                          |   |
| Prepaid  expenses and other current assets                      |   | 177                             |   | —              |   | —                       |   | 177                                            |   |
| Total  current assets                                           |   | 6,772                           |   |                |   |                         |   | 6,772                                          |   |
|                                                            |   |                            |   |                |   |                         |   |                                           |   |
| Property  and equipment, net                                    |   | 834                             |   | —              |   | (160                         | )      | 674                                            |   |
| Debt  issuance costs, net                                       |   | 1,000                           |   | —              |   | (1,000                       | )      | —                                         |   |
| Other  assets, net                                              |   | 121                             |   | —              |   | —                       |   | 121                                            |   |
| Total  assets                                                   |   | $                               | 8,727  |                | $      | —                       |   | $                                              | (1,160 | ) | $ | 7,567 |   |
|                                                            |   |                            |   |                |   |                         |   |                                           |   |
| Liabilities and  Stockholders’ Equity (Deficit)            |   |                            |   |                |   |                         |   |                                           |   |
| Current  liabilities                                            |   |                            |   |                |   |                         |   |                                           |   |
| Accounts  payable and accrued liabilities                       |   | $                               | 674    |                | $      | —                       |   | $                                              | — |   | $ | 674 |   |
| Notes  payable – prepetition taxes, current portion        |   | —                          |   | 195                 |   | —                       |   | 195                                            |   |
| Prepetition  liabilities                                        |   | 12,510                          |   | (12,510             | )      | —                       |   | —                                         |   |
| Notes  payable – bank line of credit                       |   | 3,720                           |   | (3,720              | )      | —                       |   | —                                         |   |
| Notes  payable                                                  |   | 600                             |   | —              |   | —                       |   | 600                                            |   |
| Total  current liabilities                                      |   | 17,504                          |   | (16,035             | )      | —                       |   | 1,469                                          |   |
| Long  term debt                                                 |   |                            |   |                |   |                         |   |                                           |   |
| Notes  payable – prepetition taxes, net of current portion |   | —                          |   | 505                 |   | —                       |   | 505                                            |   |
| Notes  payable – bank line of credit                       |   | —                          |   | 3,720               |   | —                       |   | 3,720                                          |   |
| Total  liabilities                                              |   | 17,504                          |   | (11,810             | )      | —                       |   | 5,694                                          |   |
| Stockholders’  equity (deficit)                            |   |                            |   |                |   |                         |   |                                           |   |
| Preferred  stock (old)                                          |   | 2,500                           |   | (2,500              | )      | —                       |   | —                                         |   |
| Common  stock (new)                                             |   | —                          |   | 21                  |   | —                       |   | 21                                             |   |
| Common  stock (old)                                             |   | 25                              |   | (25                 | )      | —                       |   | —                                         |   |
| Series  A redeemable Common Stock purchase warrants             |   | 249                             |   | (249                | )      | —                       |   | —                                         |   |
| Series  B redeemable Common Stock purchase warrants             |   | 86                              |   | (86                 | )      | —                       |   | —                                         |   |
| Additional  Common Stock purchase warrants                      |   | 60                              |   | (60                 | )      | —                       |   | —                                         |   |
| Additional  paid-in capital                                     |   | 22,004                          |   | 2,829               |   | (22,981                      | )      | 1,852                                          |   |
| Accumulated  deficit                                            |   | (33,631                         | )      | 11,810              |   | 21,821                       |   | —                                         |   |
| Less  treasury stock, at cost (old)                             |   | (70                             | )      | 70                  |   |                         |   | —                                         |   |
| Total  stockholders’ equity (deficit)                      |   | (8,777                          | )      | 11,810              |   | (1,160                       | )      | 1,873                                          |   |
| Total  liabilities and stockholders’equity (deficit)       |   | $                               | 8,727  |                | $      | —                       |   | $                                              | — |   | $ | 7,567 |   |

 

10

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OnAugust 30, 2002, the Company acquired 100 percent of the outstanding commonshares of C/M Holdings, Inc. (“CMHI”) pursuant the Plan.

 

Theaggregate purchase price for CMHI was approximately $7.8 million which was paidthrough the issuance of Series A and Series B Preferred Stock valued at $5.3million and $2.5 million, respectively. The value of the Preferred Stock was based on liquidation preferencesand dividend and conversion features.

 

Thefollowing table summarizes the estimated value of the acquired assets andliabilities assumed at the date of the Merger.

 
|                                    |   | **At August 30, 2002** |   |
|-----------------------------------------|--------|------------------------|--------|
|                                    |   | **(in thousands)**     |   |
| Current  assets                         |   | $                      | 2,725  |   |
| Property  and equipment, net            |   | 36                     |   |
| Other  assets and marketable securities |   | 5,117                  |   |
| Total  assets acquired                  |   | 7,878                  |   |
| Total  liabilities assumed              |   | 20                     |   |
| Net  assets acquired                    |   | $                      | 7,858  |   |

 

Of the$5.1 million in other assets, $5.0 million are investments in marketablesecurities.  The Company has classifiedthese securities as long term assets due to its intent to defer sale of thesesecurities to offset gains on disposition with accumulated net operatinglosses.

 

The following is acondensed consolidated  balance sheetAugust 30, 2002 (unaudited), which reflects the Merger:

 
| **(in thousands)**                               |   | **PawnMart,  Inc.   Reorganized   Balance Sheet   Prior to Merger** |   | **CMHI  Assets   Acquired and   Liabilities   Assumed as   of 8/30/2002** |   | **Reorganized    Balance Sheet   After Merger** |   |
|--------------------------------------------------|--------|---------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
| Assets                                           |   |                                                                |   |                                                                      |   |                                            |   |
| Current  assets                                  |   | $                                                                   | 6,772  |                                                                      | $      | 2,725                                           |   | $ | 9,497 |   |
| Property  and equipment, net                     |   | 674                                                                 |   | 36                                                                        |   | 710                                             |   |
| Other  assets                                    |   | 121                                                                 |   | 5,117                                                                     |   | 5,238                                           |   |
| Total  assets                                    |   | $                                                                   | 7,567  |                                                                      | $      | 7,878                                           |   | $ | 15,445 |   |
| Liabilities  and Stockholders’ Equity       |   |                                                                |   |                                                                      |   |                                            |   |
| Current  Liabilities                             |   | $                                                                   | 1,469  |                                                                      | $      | 20                                              |   | $ | 1,489 |   |
| Notes  Payable                                   |   | 4,225                                                               |   | —                                                                    |   | 4,225                                           |   |
|                                             |   | 5,694                                                               |   | 20                                                                        |   | 5,714                                           |   |
|                                             |   |                                                                |   |                                                                      |   |                                            |   |
| Redeemable  Preferred Stock                      |   |                                                                |   | 5,358                                                                     |   | 5,358                                           |   |
|                                             |   |                                                                |   |                                                                      |   |                                            |   |
| Stockholders’  Equity:                      |   | —                                                              |   | —                                                                    |   | —                                          |   |
| Preferred  Stock                                 |   | —                                                              |   | 5                                                                         |   | 5                                               |   |
| Common  Stock                                    |   | 21                                                                  |   | —                                                                    |   | 21                                              |   |
| Additional  Paid In Capital                      |   | 1,852                                                               |   | 2,495                                                                     |   | 4,347                                           |   |
| Total  liabilities and stockholders’ equity |   | $                                                                   | 7,567  |                                                                      | $      | 7,878                                           |   | $ | 15,445 |   |

 

11

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(3)                      NotesPayable

 

*Revolving Credit Facility-*

 

OnJuly 16, 2001 the Bankruptcy Court approved a $7,200,000 post-petition creditfacility (the “Post-Petition Credit Facility”) with Comerica Bank(“Comerica”).  The Post-Petition CreditFacility bore interest at the prevailing prime rate plus 4%.  Amounts available under the Post-PetitionCredit Facility were limited to certain percentages of pawn loans, inventories,and pawn service charges receivable and were collateralized by substantiallyall of the unencumbered assets of the Company. The Company was prohibited frompaying cash dividends or acquiring treasury stock under the terms of thePost-Petition Credit Facility.

 

ThePost-Petition Credit Facility was replaced with a new $4,500,000 creditfacility (the “Post-Confirmation Credit Facility”) effective September 1, 2002upon consummation of the Plan with the completion of the Merger on August 30,2002.  The Post-Confirmation CreditFacility bears interest at the current prevailing prime rate plus 2% andmatures on January 31, 2004.  Amountsavailable under the Post-Confirmation Credit Facility are limited to certainpercentages of pawn loans, inventories, and pawn service chargesreceivable.  The Post-ConfirmationCredit Facility is collateralized by substantially all of the unencumbered assetsof the Company.  At December 31, 2002,$3,736,000 was outstanding under the Post-Confirmation Credit Facility and anadditional $212,000 was available to the Company pursuant to the availableborrowing base.  Under the terms of thePost-Confirmation Credit Facility, the Company is required to maintain certainfinancial ratios and comply with certain other covenants.  The Company was in compliance with thesecovenants as of December 31, 2002.

 

*Subordinated Debt -*

 

OnJuly 16, 2001 the Bankruptcy Court approved a subordinated note in the amountof $600,000 from Hulen Pawn Shop Investors, L.L.C., which was beneficiallyowned in part by Dwayne A. Moyers and Jeffrey A. Cummer, officers and directorsof the Company (the “Hulen Note”).  TheHulen Note bore interest at the prevailing prime rate plus 5.0%.  The Hulen Note was collateralized by a liensubordinate to Comerica on the pawn loans, inventories and pawn loan servicecharges of the Company and was convertible into shares of Common Stock of thereorganized Company. The Company paid an origination fee of $24,000.  The Hulen Note was paid in full in September2002.

 

OnMarch 11, 1999 the Company commenced a public offering of up to $10,000,000 inprincipal amount of 12% Subordinated Notes due December 31, 2004 (the “2004Notes”).  The 2004 Notes were offered ona “best efforts” basis by participating National Association of SecuritiesDealers, Inc. broker-dealers (“NASD Broker-Dealers”).  Interest on the 2004 Notes was payable monthly commencing withthe second full calendar month following issuance.  The Company issued a total of $9,950,000 in principal amount ofthe 2004 Notes.  In connection with thesale of the 2004 Notes, the Company also issued Series A Warrants toparticipating NASD Broker-Dealers for the purchase of up to 600,000 shares ofthe Company’s Common Stock.  A total of594,060 Series A Warrants were granted in connection with the sale of the 2004Notes.  Under the Plan the 2004 Noteswere converted to Common Stock of the reorganized Company and the Series AWarrants were cancelled.

 

12

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(4)                      WeightedAverage Shares and Net Income (Loss) Per Common Share

 

Netloss per common share is calculated as required by FASB Statement of FinancialAccounting Standards No. 128, “Earnings Per Share” (“Statement No. 128”).  Statement No. 128 requires dual presentationof basic and diluted earnings per share and a reconciliation between the twoamounts.  Basic earnings per shareexcludes dilution, and diluted earnings per share reflects the potentialdilution that would occur if securities to issue Common Stock wereexercised.  In loss periods, dilutivecommon equivalent shares are excluded as the effect would be antidilutive.

 

Netloss per common share for periods prior to August 31, 2002 is not meaningfuldue to the cancellation of all equity interests pursuant to the Plan, which wasconsummated upon the completion of the Merger on August 30, 2002.

 

TheCompany issued 2,079,948 shares of Common Stock upon consummation of the Planand issued 500,042 shares of Series B Preferred Stock which is convertible atthe option of the holders into 1,720,130 shares of the Company’s CommonStock.  In loss periods, dilutive commonequivalent shares are excluded as the effect would be antidilutive.

 

Thereconciliation of basic and diluted weighted average common shares and thereconciliation for the basic and diluted earnings per common share for thethree and four month periods ended December 31, 2002 following consummation of the Plan and the issuance ofthe new common and convertible preferred stock pursuant to the Plan is asfollows:

 

 
| **For the Three Months Ended  December 31, 2002** |   | **Net  Earnings** |    | **Shares** |      | **Per Share** |   |
|---------------------------------------------------|--------|-------------------|---------|------------|-----------|---------------|--------|
|                                              |   |              |    |       |      |          |   |
| Basic  earnings per common share                  |   | $                 | 158,000 |       | 2,079,948 |          | $      | .08 |   |
| Effect  of preferred dividend-Series B            |   | 31,000            |    | 1,720,130  |      |          |   |
| Diluted  earnings per common share                |   | $                 | 189,000 |       | 3,800,078 |          | $      | .05 |   |

 
| **For the  Four Months Ended  December 31, 2002** |   | **Net Earnings** |    | **Shares** |      | **Per Share** | ** ** |
|---------------------------------------------------|--------|------------------|---------|------------|-----------|---------------|------------|
|                                              |   |             |    |       |      |          |       |
| Basic  earnings per common share                  |   | $                | 111,000 |       | 2,079,948 |          | $          | .05 |   |
| Effect  of preferred dividend-Series B            |   | 43,000           |    | 1,720,130  |      |          |       |
| Diluted  earnings per common share                |   | $                | 154,000 |       | 3,800,078 |          | $          | .04 |   |

 

13

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(5)                      OtherComprehensive Income

 

Other comprehensiveincome is as follows:

 
| **(in thousands)**                                  |   | **For the  Three Month  Period Ended  December 31, 2002** |   | **For the  Four Month  Period Ended  December 31, 2002** |   |
|-----------------------------------------------------|--------|-----------------------------------------------------------|--------|----------------------------------------------------------|--------|
|                                                |   |                                                      |   |                                                     |   |
| Net  income                                         |   | $                                                         | 256    |                                                     | $      | 242 |   |
| Unrealized  gain from available for sale securities |   | 1,911                                                     |   | 2,085                                                    |   |
|                                                |   |                                                      |   |                                                     |   |
| Comprehensive  Income                               |   | $                                                         | 2,167  |                                                     | $      | 2,103 |   |

 

14

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**ITEM 2****.****                             MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

 

### *Statements appearing in the following discussion thatare not historical facts are forward-looking statements (“forward-lookingstatements”) within the meaning of Section 27A of the Securities Act of 1933,as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,which are intended to be covered by the safe harbors created by thosesections.  Such forward-lookingstatements are necessarily estimates reflecting the best judgment of theCompany’s management based upon current information and involve known andunknown risks, uncertainties and other factors which may cause the actualresults, performance or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such forward-looking statements.  Such risks, uncertainties and other factors,include, but are not limited to, those set forth and those appearing from timeto time in filings made by the Company with the Securities and ExchangeCommission.  These risks, uncertaintiesand other factors should not be construed as exhaustive and the Company doesnot undertake, and specifically disclaims any obligation, to update anyforward-looking statements to reflect occurrences or unanticipated events orcircumstances after the date of such statements.*

 

*In addition, the followingdiscussion and analysis should be read in conjunction with the Company’sfinancial statements and notes thereto and other financial data included in theCompany’s Form 10-K for the fiscal year ended February 2, 2002.*

 

GENERAL

 

PawnMart, Inc. (the “Company”) is a specialty financeand retail enterprise principally engaged in establishing and operating storeswhich advance money secured by the pledge of tangible personal property andsell pre-owned merchandise to the value-conscious consumer.  The Company generates income throughcollection of a monthly service charge from advancing money to individualsbased primarily upon the estimated resale value of pledged personal propertysuch as jewelry, consumer electronics, tools, musical instruments, firearms,automobiles and other miscellaneous items and through profit realized on theretail sale of the unredeemed or other purchased pre-owned merchandise.

 

The Company’s total revenues are derived primarilyfrom service charges on loans and the proceeds from the sales of merchandiseinventory.  The Company’s pawn loans aregenerally made on the pledge of tangible personal property for one month, withan automatic sixty-day extension period. All pawn loans are collateralized by tangible personal property placedin the possession of the Company, except for automobile title loans.  During the term of an automobile title loan,the borrower is allowed to maintain possession of the collateral.  Pawn service charges are recognized whenloans are repaid or renewed.  If a loanis not repaid, the principal amount advanced on the loan, exclusive of anyuncollected pawn service charges, becomes the carrying value of the forfeitedcollateral (inventory), which is recovered through subsequent sales.

 

The Company filed for protection under the Bankruptcy Code on July 9,2001.  The Company operated as debtor inpossession throughout the bankruptcy proceedings. The Plan was filed onFebruary 15, 2002 and was amended on April 3, 2002.  A confirmation hearing for the Plan was held on May 20, 2002 andthe Plan was confirmed by the Bankruptcy Court as of that date with aneffective date of May 31, 2002.

 

Pursuant to the Plan, the Company issued 2,079,948 shares of CommonStock to its unsecured creditors in exchange for indebtedness.  The Company also completed a merger with C/MHoldings, Inc., a Texas corporation (“CMHI”), whereby the equity holders ofCMHI received two new classes of Preferred Stock, 1,071,636 shares of Series APreferred Stock and 500,042 shares of Series B Preferred Stock.  The 500,042 shares of Series B PreferredStock are convertible into 1,720,130 shares of Common Stock, or approximately45% of the total Common Stock.  The Companyalso negotiated a Post-Confirmation Credit Facility with Comerica in the amountof $4,500,000.  Terms of the Plan areset forth in the Company’s Form 10-K for the year ended February 2, 2002.

 

Selected elements of theCompany’s unaudited statements of operations are shown below for the threemonths and six months ended December 31, 2002 and January 5, 2002 as apercentage of total revenues.  Thefollowing table, as

 

15

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well as the discussion following, should be read in conjunction withthe Company’s financial statements and notes thereto and other financial dataincluded in the Company’s Form 10-K for the fiscal year ended     February 2, 2002.

 
|                                                                                                                         |   | **Three  Months Ended** |   | **Six Months  Ended** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|-----------------------|--------|
|                                                                                                                         |   | **December  31,  2002** |   | **January 5,  2002**  |   | **December  31,  2002** |   | **January 5,  2002** |   |
| Merchandise  sales                                                                                                           |   | 69.1                    | %      | 71.8                  | %      | 67.5 | % | 71.5 | % |
| Pawn  service charges                                                                                                        |   | 29.5                    |   | 27.0                  |   | 31.2 |   | 26.9 |   |
| Other  income                                                                                                                |   | 1.4                     |   | 1.2                   |   | 1.3 |   | 1.6 |   |
| Total  revenues                                                                                                              |   | 100.0                   |   | 100.0                 |   | 100.0 |   | 100.0 |   |
| Cost  of sales                                                                                                               |   | 50.3                    |   | 50.6                  |   | 48.2 |   | 54.4 |   |
| Gross  profit                                                                                                                |   | 49.7                    |   | 49.4                  |   | 51.8 |   | 45.6 |   |
| Store  operating expenses                                                                                                    |   | 28.2                    |   | 35.2                  |   | 31.3 |   | 33.3 |   |
| Store  contribution margin                                                                                                   |   | 21.5                    |   | 14.2                  |   | 20.5 |   | 12.3 |   |
| Corporate  administrative expenses (including reorganization items and other income but  excluding gain on debt discharge(1) |   | 13.0                    |   | 13.3                  |   | 16.2 |   | 14.4 |   |
| Interest  expense                                                                                                            |   | 1.5                     |   | 2.6                   |   | 2.2 |   | 3.0 |   |
| Depreciation  and amortization                                                                                               |   | 1.6                     |   | 2.9                   |   | 1.9 |   | 2.6 |   |
| Net  income (loss)                                                                                                           |   | 5.4                     |   | (4.6                  | )      | 0.2 |   | (7.7 | ) |

 

----

(1)  Extraordinary gain on debt discharge of$11,810,000 excluded from calculation.

** **

**RESULTS OF OPERATIONS**

 

*Three Months EndedDecember 31, 2002 Compared to Three Months Ended January 5, 2002*

 

Total revenues increased 6.4% to $4,736,000 during thethree months ended December 31, 2002 (the “Three Month 2003 Period”) ascompared to $4,453,000 during the three months ended January 5, 2002 (the“Three Month 2002 Period”).  Stores thatremained open for the full 12 months or more as of December 31, 2002 (the“Comparable Stores”) experienced a net increase in revenues of $863,000 or22.8% which is primarily attributable to improved store operating policiesimplemented during the Company’s reorganization.

 

Merchandise salesincreased 2.4% to $3,274,000 during the Three Month 2003 Period from $3,196,000during the Three Month 2002 Period. Sales in Comparable Stores for the Three Month 2003 Period increased$491,000 or 18.1%.

 

Pawn service chargesincreased $198,000 or 16.5% to $1,399,000 during the Three Month 2003 Periodfrom $1,201,000 during the Three Month 2002 Period primarily due to an increasein pawn loan balances of $1,055,000 as of December 31, 2002 as compared toJanuary 5, 2002.   Pawn service chargesfrom Comparable Stores increased $357,000 or 35.2% from $1,015,000 for theThree Month 2003 Period as compared to the Three Month 2002 Period.  The increase in pawn service charge incomeis due to improved controls on lending guidelines implemented during theCompany’s reorganization.

 

Gross profit increased 7.1% to $2,355,000 during theThree Month 2003 Period from $2,199,000 during the Three Month 2002 Periodprimarily due to increased pawn service charges. Gross profit for ComparableStores increased $419,000 for the Three Month 2003 Period as compared to theThree Month 2002 Period, a 22.1% increase. Gross profit as a percentage of total revenues increased to 49.7% duringthe Three Month 2003 Period as compared to 49.4% during the Three Month 2002Period primarily as a result lower margins on merchandise sales for ClosedStores in the Three Month 2002 Period.

 

Store operating expenses decreased 14.8% to $1,336,000for the Three Month 2003 Period from $1,568,000 during the Three Month 2002Period primarily due to reduction in expenses attributable the closing or saleof seven stores (“Closed Stores”) since the beginning of July 2002.  On a Comparable Store basis, store operatingexpenses

 

16

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were 28.3% oftotal revenues during the Three Month 2003 Period compared to 33.3% of totalrevenues during the Three Month 2002 Period primarily due to lower personnel andoccupancy costs as a percentage of total revenue.  Store operating expenses on a Comparable Store Basis increased$10,000 or 0.8% from $1,263,000 to $1,273,000 for the Three Month 2003 Periodcompared to the Three Month 2002 Period.

 

Store contribution margin(defined as total store revenues less direct operating expenses, which excludecorporate administrative expenses, interest expense, and depreciation andamortization expense) increased to $1,019,000 from $631,000 during the ThreeMonth 2003 Period compared to Three Month 2002 Period primarily due to theincreased pawn service charge income during the Three Month 2003 Period.  Store contribution margin on a ComparableStore basis increased $411,000 or 64.6% from $637,000 to $1,048,000 for theThree Month 2003 Period.

 

Corporate administrativeexpenses increased 21.4% to $720,000 during the Three Month 2003 Period from$593,000 during the Three Month 2002 Period primarily due to a $160,000increase in legal and professional fees related to the Company’s expensesrelated to reorganization and emergence from bankruptcy. Corporateadministrative expenses increased to 15.2% of total revenues during the ThreeMonth 2003 Period as compared to 13.3% during the Three Month 2002 Periodprimarily due to reduced revenues from store closings and due the costsattributed to the Company’s bankruptcy reorganization.

 

Interest expensedecreased $46,000 from $115,000 during the Three Month 2003 Period as comparedto the Three Month 2002 Period primarily due to decreased borrowings under theCredit Facility and due to the Company paying off the $600,000 subordinatednote upon consummation of its plan of reorganization.

 

*Six Months EndedDecember31, 2002 Compared to Six Months Ended January 5, 2002*

 

Total revenues decreased 11.8% to $8,569,000 duringthe six months ended December 31, 2002 (the “Six Month 2003 Period”) ascompared to $9,717,000 during the six months ended January 5, 2002 (the “SixMonth 2002 Period”).  The overall decreasewas attributable primarily to the closing or sale of 16 stores (“ClosedStores”) since the beginning of the prior fiscal year which accounted for$1,656,000 of the decrease.  Stores thatremained open for the full 12 months or more as of December 31, 2002 (the“Comparable Stores”) experienced a net increase in revenues of $323,000 or4.1%.

 

Merchandise salesdecreased 16.8% to $5,782,000 during the Six Month 2003 Period from $6,951,000during the Six Month 2002 Period primarily due to the loss of salesattributable to the Closed Stores of $1,185,000.  Sales in Comparable Stores for the Six Month 2003 Perioddecreased $134,000 or 2.3%.

 

Pawn service chargesincreased $61,000 or 2.3% to $2,671,000 during the Six Month 2003 Period from$2,610,000 during the Six Month 2002 Period primarily due to loan balanceincrease of $1,055,000.  The increasedloan balance was offset by the Company’s operating fewer stores for the SixMonth 2003 Period.  Pawn service chargesfrom Comparable Stores increased $480,000 or 22.2% from $2,157,000 for the SixMonth 2003 Period as compared to the Six Month 2002 Period.

 

Gross profit increased 0.3% to $4,441,000 during theSix Month 2003 Period from $4,428,000 during the Six Month 2002 Period. Grossprofit from Closed Stores in the Six Month 2002 Period totaled $704,000.  Gross profit for Comparable Stores increased$678,000 for the Six Month 2003 Period as compared to the Six Month 2002Period, an 18.2 % increase.  Grossprofit as a percentage of total revenues increased to 51.8% during the SixMonth 2003 Period as compared to 45.6% during the Six Month 2002 Periodprimarily as a result lower margins on merchandise sales for Closed Stores inthe Six Month 2002 Period.

 

Store operating expenses decreased to $2,682,000 forthe Six Month 2003 Period from $3,239,000 during the Six Month 2002 Periodprimarily due to reduction in expenses attributable to Closed Stores.  On a Comparable Store basis, store operatingexpenses were 30.4% of total revenues during the Six Month 2003 Period comparedto 32.1% of total revenues during the Six Month 2002 Period primarily due tolower personnel and occupancy costs as a percentage of total revenue.  Store operating expenses on a ComparableStore Basis decreased $35,000 or 1.4% to $2,550,000 from Six Month Period 2003.

 

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Store contribution margin(defined as total store revenues less direct operating expenses, which excludecorporate administrative expenses, interest expense, and depreciation andamortization expense) increased to $1,759,000 from $1,189,000 during the SixMonth 2003 Period compared to Six Month 2002 Period primarily due to the lowergross profit on merchandise liquidation sales for Closed Stores in the SixMonth 2002 Period.  Store contributionmargin on a Comparable Store Basis increased $714,000 or 62.6% from $1,138,000to $1,852,000 for the Six Month 2003 Period primarily due to the increase inpawn service charges on increased loan balances and improved gross margins onmerchandise sales.

 

Corporate administrativeexpenses, including restructuring costs of $241,000, increased 20.7% to$1,524,000 during the Six Month 2003 Period from $1,263,000 during the SixMonth 2002 Period primarily due to costs related to the financialrestructuring.  Corporate administrativeexpenses increased to 17.8% of total revenues during the Six Month 2003 Periodas compared to 13.0% during the Six Month 2002 Period primarily due to reducedrevenues from store closings and due the costs attributed to the Company’sbankruptcy reorganization.

 

Interest expensedecreased $104,000 from $294,000 during the Six Month 2003 Period as comparedto the Six Month 2002 Period primarily due to decreased borrowings under theCredit Facility and due to the Company paying off the $600,000 subordinatednote upon consummation of the Plan.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

At December 31, 2002, the Company’s primary sources ofliquidity were $1,311,000 in cash and cash equivalents, $445,000 in pawnservice charges receivable, $4,056,000 in pawn loans outstanding, and $2,396,000in inventories.  Additionally, theCompany has $7,433,000 in marketable securities held as a long term investmentdue to management’s intent to hold the securities for tax purposes. The Companyalso had $212,000 available to borrow under the Post-Confirmation CreditFacility.

 

Under the terms of thePlan approved by the Bankruptcy Court, the Company received an investment ofapproximately $7.8 million, of which $2.6 million was in cash, through theMerger, in exchange for two classes of Preferred Stock.  The Company issued 1,071,636 shares ofnon-voting Series A Preferred Stock and 500,042 shares of voting Series BPreferred Stock.  Both classes ofpreferred stock have a par value of $0.01 per share and pay a 5% annualcumulative cash dividend.  The dividendis payable quarterly.  The Series APreferred Stock must be redeemed by the Company for cash at $5.00 per sharebeginning three years after the Closing Date (August 30, 2002) in amounts of atleast 100,000 shares, or $500,000, per year. Each April 30 thereafter through 2009, an additional 100,000 shares mustbe redeemed at par value for cash.  OnApril 30, 2010, any unredeemed shares plus any accrued and unpaid dividendsmust be redeemed at par value for cash. The Series B Preferred Stock is not subjectto mandatory redemption.  After April30, 2009, the Series B Preferred Stock may be redeemed by the Company in cashat any time in whole or (with some exceptions), from time to time in part, atthe option of the Company, at $5.00 per share plus accumulated, unpaiddividends on the date of redemption. The Series B Preferred Stock is convertible into approximately 45% ofthe Company’s Common Stock on the date of issuance, subject to anti-dilutiveadjustment, and has voting rights on the same basis as the Common Stock.

 

The Company is dependenton the investment of cash and marketable securities provided in the Merger tofund projected operating losses during the fiscal year ended June 30, 2003 andto provide sufficient working capital to increase pawn loans and inventories tolevels necessary for the Company to be profitable.

 

The Company’sprofitability and liquidity is affected by the amount of loans outstanding,which is controlled in part by the Company’s lending decisions.  The Company is able to influence thefrequency of forfeiture of collateral by increasing or decreasing the amountloaned in relation to the sales value of the pledged property.  Tighter credit decisions generally result insmaller loans in relation to the estimated sales value of the pledged propertyand can thereby decrease the Company’s aggregate loan balance and,consequently, decrease pawn service charges. Additionally, lower loans in relation to the pledged property’sestimated sales value tend to slightly increase loan redemptions and improvethe Company’s liquidity.  Conversely,providing higher loans in relation to the estimated

 

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sales value of the pledged property can result in an increase in theCompany’s pawn service charge income. Higher average loan balances can also result in a slight increase inloan forfeitures, which increases the quantity of goods on hand and, unless theCompany increases inventory turnover, reduces the Company’s liquidity.

 

With the Company’s successfulemergence from bankruptcy, management believes the reorganized Company hassufficient liquidity and capital resources to meet its financial obligations,including planned capital expenditures and debt payments as a result of theMerger.  Future operating performanceand expected cash flows will be subject to financial, economic and otherfactors affecting the business and operations beyond its control and willaffect the Company’s ability to expand its business anticipated in itsfinancial plan.

 

**ITEM 3. CONTROLS AND PROCEDURES**

 

Based on their mostrecent evaluation, which was completed within ninety days of the filing of thisForm 10-QSB, the President and Chief Financial Officer have concluded that theCompany’s disclosure controls and procedures are effective to ensure thatinformation required to be disclosed in reports that the Company files orsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in Securities and ExchangeCommission rules and forms.  There wereno significant changes in the Company’s internal controls or other factors thatcould significantly affect these disclosure controls subsequent to the date oftheir evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

**PART II****. OTHER INFORMATION**

 

**ITEM 1****.****                            ****LEGAL PROCEEDINGS**

 

The Company filed itsPlan and Disclosure Statement on February 15, 2002 and filed its First AmendedPlan and First Amended Disclosure Statement on April 3, 2002.  The Disclosure Statement was approved by theBankruptcy Court on April 3, 2002.  ThePlan was confirmed by the Bankruptcy Court on May 20, 2002 with an EffectiveDate of May 31, 2002.  The Plan wasconsummated on August 30, 2002 with the consummation of the Merger.  All legal proceedings prior to the PetitionDate have been settled in the bankruptcy proceeding.

 

**ITEM****2.****                            ****CHANGES IN SECURITIESAND USE OF PROCEEDS**

 

The Company issued thefollowing securities pursuant to the consummation of its Plan; 2,079,948 sharesof Common Stock in exchange for approximately $10.8 million of prepetitionliabilities, and 1,071,636 shares of Series A Preferred Stock and 500,042shares of Series B Preferred Stock in exchange for $7.8 million of assetspursuant to the Merger.  All equityinterests that existed prior to the Effective Date were cancelled uponconsummation of the Plan.

 

**ITEM 3****.****                            ****DEFAULTS UPON SENIOR SECURITIES**

 

The Company was indefault on payment of interest on its 2004 Notes and on the payment ofdividends on its 8% Preferred Stock at the time of its bankruptcy filing.  No payments were made during the bankruptcyproceeding.  The 2004 Notes wereexchanged for equity in the reorganized Company under the terms of the Plan asdescribed herein and the interest of the holders of the 8% Preferred Stock wascancelled.

 

**ITEM 4****.****                            ****SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** - None

 

**ITEM 5.****                            ****OTHER INFORMATION** - None

 

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**ITEM 6****.****                             EXHIBITSAND REPORTS ON FORM 8-K**

 

**(a)           Exhibits**

** **
|   | **Number** |   | **Description**                                                                                                                                          |
|--------|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |   |                                                                                                                                                     |
|   | 10.1       |   | PawnMart, Inc. 2003 Stock Option Plan. (1)                                                                                                               |
|   |       |   |                                                                                                                                                     |
|   | 10.2       |   | PawnMart, Inc. 2003 Stock Incentive Plan. (1)                                                                                                            |
|   |       |   |                                                                                                                                                     |
|   | 10.3       |   | PawnMart, Inc. Capital Incentive Program dated  January 1, 2003 adopted by the Company’s board of directors on December 16,  2002. (2)              |
|   |       |   |                                                                                                                                                     |
|   | 99.1       |   | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |       |   |                                                                                                                                                     |
|   | 99.2       |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|   |       |
|        |            |        |                                                                                                                                                          |  |

 

(1)                      Filedas an exhibit to the registrant’s Definitive Proxy Statement filed on January28, 2003 (File No. 001-13919).

 

(2)                      Filedherewith.

 

**(b)           Reports on Form 8-K**

 

On November 20, 2002 theCompany filed a Form 8-K reporting the certification of Form 10-QSB for thequarter ended September 30, 2002 filed November 20, 2002.

 

On November 21, 2002 theCompany filed a Form 8-K reporting the certification of Form 10-QSB/A for thequarter ended September 30, 2002 filed November 21, 2002.

 

On November 26, 2002 theCompany filed a Form 8-K reporting the election of Mr. Carroll Dawson as adirector of the Company effective November 15, 2002.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|              | PAWNMART, INC. (Registrant) |
|-------------------|-----------------------------|
|              |                        |
|              |                        |
| February 14, 2003 | By:                         | /s/ John R. Boudreau |   |
|              |                        | John R. Boudreau, President and Chief |
|              |                        | Executive Officer |
|              |                        |
| February 14, 2003 | By:                         | /s/ Robert W. Schleizer |   |
|              |                        | Robert W. Schleizer, Executive Vice |
|              |                        | President and Chief Financial Officer |

 

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**CERTIFICATIONS**

 

I, John R. Boudreau, President and Chief ExecutiveOfficer of PawnMart, Inc., certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-QSB of PawnMart, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatement made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)           presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

# ** **

 
| Date: February 14, 2003 | /s/ John R. Boudreau                                     |
|-------------------------|----------------------------------------------------------|
|                    | John R. Boudreau, President and Chief  Executive Officer |

 

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**CERTIFICATIONS**

 

I, Robert W. Schleizer, Senior Vice President andChief Financial Officer of PawnMart, Inc., certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-QSB of PawnMart, Inc.;

 

2.             Basedon my knowledge, this quarterly report does not contain any untrue statement ofa material fact or omit to state a material fact necessary to make thestatement made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this quarterlyreport;

 

3.             Basedon my knowledge, the financial statements, and other financial informationincluded in this quarterly report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this quarterly report;

 

4.             Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

(a)           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)           presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

(a)           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

# ** **

 
| Date: February 14, 2003 | /s/ Robert W. Schleizer                                                     |
|-------------------------|-----------------------------------------------------------------------------|
|                    | Robert W. Schleizer, Executive Vice   President and Chief Financial Officer |

 

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**EXHIBIT INDEX**

 
| **Number** |   | **Description**                                                                                                                                          |
|------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3       |   | PawnMart, Inc. Capital Incentive Program dated  January 1, 2003 adopted by the Company’s board of directors on December 16,  2002.                  |
|       |   |                                                                                                                                                     |
| 99.1       |   | Certification of Principal Executive Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |
|       |   |                                                                                                                                                     |
| 99.2       |   | Certification of Principal Financial Officer  Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |

 

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