**UNITED STATESSECURITIES 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  March 31, 2003.**                                                                                                                            |
|                             |   |                                                                                                                                                                           |
| **o**                            |   | **TRANSITION  REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                        |
|                             |   |                                                                                                                                                                           |
|                             |   | **for the transition period from              to             .** |
|                             |   |                                                                                                                                                                           |
| **Commission  File No. 1-13919** |

 

| **Xponential, Inc.  (Formerly PawnMart, Inc.)**                       |
|-----------------------------------------------------------------------|
| (Exact name of small  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 the registrant filed all documents and reports requiredto be filed by Section 12, 13 or 15(d) of the Exchange Act after distributionof securities under a plan confirmed by a court. Yes ýNo o

 

The Company has 2,079,948 shares of Common Stock, par value $0.01 pershare, outstanding as of April 30, 2003.

 

Transitional Small Business Disclosure Format (Check one):  Yes oNo ý

 

 

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**XPONENTIAL,INC.**

**INDEX**

 
| **PART I  -   FINANCIAL INFORMATION** |
|-------------------------------------------------|
|                                            |   |
| **Item 1**                                      | Financial Statements |
|                                            |   |
|                                            | Balance Sheets as of March 31, 2003 and  June 30, 2002 |
|                                            |   |
|                                            | Statements  of Operations for the Three and Nine Months Ended April 6, 2002, Two Months  Ended August 31, 2002, and Seven and Nine Months Ended March 31, 2003 |
|                                            |   |
|                                            | Statements  of Cash Flows for the Nine Months Ended April 6, 2002, Two Months Ended  August 31, 2002, and Seven and Nine Months Ended March 31, 2003 |
|                                            |   |
|                                            | 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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**PART I.  FINANCIAL INFORMATION**

 

**ITEM1.****                                        FINANCIALSTATEMENTS**

**XPONENTIAL, INC.**

 

Balance Sheets

 
| **(In  thousands, except share and per share data)**                                                                                                                         |   | **Reorganized  Company  March 31, 2003** |   | **Predecessor  June 30, 2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|--------------------------------|--------|
|                                                                                                                                                                         |   | **(Unaudited)**                          |   | **(Unaudited)**                |   |
| Assets                                                                                                                                                                       |   |                                     |   |                           |   |
| Current assets:                                                                                                                                                              |   |                                     |   |                           |   |
| Cash and cash  equivalents                                                                                                                                                   |   | $                                        | 1,973  |                           | $      | 377 |   |
| Accounts  receivable                                                                                                                                                         |   | 52                                       |   | 36                             |   |
| Pawn service  charges receivable                                                                                                                                             |   | 399                                      |   | 330                            |   |
| Pawn loans                                                                                                                                                                   |   | 3,624                                    |   | 3,001                          |   |
| Inventories, net                                                                                                                                                             |   | 2,114                                    |   | 2,616                          |   |
| Prepaid expenses  and other current assets                                                                                                                                   |   | 202                                      |   | 180                            |   |
| Total current assets                                                                                                                                                         |   | 8,364                                    |   | 6,540                          |   |
| Property and  equipment, net                                                                                                                                                 |   | 792                                      |   | 840                            |   |
| Debt issuance  costs, net                                                                                                                                                    |   | —                                   |   | 999                            |   |
| Other assets,  including available for sale securities at March 31, 2003 of $6,150  (Note 6)                                                                            |   | 6,296                                    |   | 115                            |   |
| Total assets                                                                                                                                                                 |   | $                                        | 15,452 |                           | $      | 8,494 |   |
|                                                                                                                                                                         |   |                                     |   |                           |   |
| Liabilities and  Stockholders’ Equity (Deficit)                                                                                                                         |   |                                     |   |                           |   |
| Current  liabilities:                                                                                                                                                        |   |                                     |   |                           |   |
| Accounts payable  and accrued liabilities                                                                                                                                    |   | $                                        | 719    |                           | $      | 643 |   |
| Current  installments of notes payable                                                                                                                                       |   | 160                                      |   | 3,864                          |   |
| Notes payable –  bank  line of credit, matures January  31, 2004  (note 3)                                                                                    |   | 2,228                                    |   | —                         |   |
| Prepetition  liabilities                                                                                                                                                     |   | —                                   |   | 12,540                         |   |
| Total current  liabilities                                                                                                                                                   |   | 3,107                                    |   | 17,047                         |   |
| Long term debt                                                                                                                                                               |   |                                     |   |                           |   |
| Notes payable –  net of current portion                                                                                                                                 |   | 431                                      |   | —                         |   |
| Total  liabilities                                                                                                                                                           |   | 3,538                                    |   | 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 March 31, 2003         |   | 5,358                                    |   | —                         |   |
| Stockholders’  equity (deficit):                                                                                                                                        |   |                                     |   |                           |   |
| Preferred stock  – $0.01 par value, 2,500,000 shares authorized:                                                                                                        |   | —                                   |   | —                         |   |
| Preferred stock  – Series B; convertible, 5% cumulative dividend,  liquidation  preference  $5.00 per share ($2,500); 500,042 shares issued at March 31, 2003 |   | 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 March 31, 2003                                                    |   | 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                                                                                                                                                  |   | 4,387                                    |   | 22,004                         |   |
| Retained  earnings (accumulated deficit)                                                                                                                                     |   | 295                                      |   | (33,407                        | )      |
| Other  comprehensive income                                                                                                                                                  |   | 1,848                                    |   | —                         |   |
| Less treasury  stock, at cost; 7,144 common shares (old) at June 30, 2002                                                                                                    |   | —                                   |   | (70                            | )      |
| Total  stockholders’ equity (deficit)                                                                                                                                   |   | 6,556                                    |   | (8,553                         | )      |
| Total  liabilities and stockholders’ equity (deficit)                                                                                                                   |   | $                                        | 15,452 |                           | $      | 8,494 |   |

 

See accompanying notes tofinancial statements.

 

3

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**XPONENTIAL,INC.**

 

Statements of Operations

(Unaudited)

 
|                                                |   | **Reorganized  Company** |   | **Predecessor**    |   |
|-----------------------------------------------------|--------|--------------------------|--------|--------------------|--------|
|                                                |   | **Three  Months Ended**  |   |
| **(In thousands, except per share data)**           |   | **March 31,  2003**      |   | **April 6,  2002** |   |
|                                                |   |                     |   |               |   |
| Revenues:                                           |   |                     |   |               |   |
| Merchandise  sales                                  |   | $                        | 3,158  |               | $      | 2,453 |   |
| Pawn service  charges                               |   | 1,377                    |   | 1,158              |   |
| Other                                               |   | 56                       |   | 41                 |   |
| Total revenues                                      |   | 4,591                    |   | 3,652              |   |
|                                                |   |                     |   |               |   |
| Cost of sales                                       |   | 2,288                    |   | 1,766              |   |
| Gross profit                                        |   | 2,303                    |   | 1,886              |   |
|                                                |   |                     |   |               |   |
| Expenses:                                           |   |                     |   |               |   |
| Store operating  expenses                           |   | 1,386                    |   | 1,444              |   |
| Corporate  administrative expenses                  |   | 868                      |   | 633                |   |
| Interest expense                                    |   | 69                       |   | 123                |   |
| Depreciation and  amortization                      |   | 73                       |   | 137                |   |
| Total expenses                                      |   | 2,396                    |   | 2,337              |   |
|                                                |   |                     |   |               |   |
| Operating income  (loss)                            |   | (93                      | )      | (451               | )      |
| Interest and  dividend income                       |   | 53                       |   | —             |   |
| Gain on sale of  marketable securities              |   | 543                      |   | —             |   |
| Net income (loss)  from continuing operations       |   | 503                      |   | (451               | )      |
|                                                |   |                     |   |               |   |
| Gain from  discontinued operations                  |   | —                   |   | 178                |   |
| Net Income                                          |   | 503                      |   | (273               | )      |
|                                                |   |                     |   |               |   |
| Preferred stock  dividend requirement               |   | 98                       |   | —             |   |
| Net income  (loss) allocable to common stockholders |   | $                        | 405    |               | $      | (273 | ) |
|                                                |   |                     |   |               |   |
| Income (Loss)  per common share (note 5):           |   |                     |   |               |   |
| Basic                                               |   |                     |   |               |   |   |   |
| Continuing  Operations                              |   | $                        | 0.19   |               | $      | (0.18 | ) |
| Discontinued  Operations                            |   | $                        | — |               | $      | 0.07 |   |
| Diluted                                             |   |                     |   |               |   |   |   |
| Continuing  Operations                              |   | $                        | 0.11   |               | $      | (0.18 | ) |
| Discontinued  Operations                            |   | $                        | — |               | $      | 0.07 |   |

 

See accompanying notes tofinancial statements.

 

4

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**XPONENTIAL,INC.**

 

Statements of Operations

(Unaudited)

 

(In thousands, except pershare data)

 
|                                                |   | **Predecessor**                        |   | **Reorganized  Company**               |   |                                     |    |
|-----------------------------------------------------|--------|----------------------------------------|--------|----------------------------------------|--------|------------------------------------------|---------|
|                                                |   | **Nine  Months  Ended  April 6, 2002** |   | **Two Months  Ended  August 31, 2002** |   | **Seven  Months  Ended  March 31, 2003** |    | **Nine  Months  Ended  March 31, 2003** |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Revenues:                                           |   |                                   |   |                                   |   |                                     |    |   |   |
| Merchandise  sales                                  |   | $                                      | 9,403  |                                   | $      | 1,578                                    |    | $ | 7,362 |   | $ | 8,940 |   |
| Pawn service  charges                               |   | 3,767                                  |   | 853                                    |   | 3,197                                    |    | 4,050 |   |
| Other                                               |   | 198                                    |   | 38                                     |   | 134                                      |    | 172 |   |
| Total revenues                                      |   | 13,368                                 |   | 2,469                                  |   | 10,693                                   |    | 13,162 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Cost of sales                                       |   | 7,054                                  |   | 1,075                                  |   | 5,342                                    |    | 6,417 |   |
| Gross profit                                        |   | 6,314                                  |   | 1,394                                  |   | 5,351                                    |    | 6,745 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Expenses:                                           |   |                                   |   |                                   |   |                                     |    |   |   |
| Store operating  expenses                           |   | 4,684                                  |   | 896                                    |   | 3,168                                    |    | 4,064 |   |
| Corporate  administrative expenses                  |   | 1,896                                  |   | 336                                    |   | 1,816                                    |    | 2,152 |   |
| Interest expense                                    |   | 416                                    |   | 83                                     |   | 176                                      |    | 259 |   |
| Depreciation and  amortization                      |   | 386                                    |   | 63                                     |   | 171                                      |    | 234 |   |
| Total expenses                                      |   | 7,382                                  |   | 1,378                                  |   | 5,331                                    |    | 6,709 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Operating income  (loss)                            |   | (1,068                                 | )      | 16                                     |   | 20                                       |    | 36 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Interest and  dividend income                       |   | —                                 |   | —                                 |   | 95                                       |    | 95 |   |
| Gain on  disposition of assets                      |   | —                                 |   | —                                 |   | 6                                        |    | 6 |   |
| Gain (loss) on  sale of marketable securities       |   | —                                 |   | —                                 |   | 631                                      |    | 631 |   |
| Reorganization expenses                             |   | —                                 |   | (241                                   | )      | —                                   |    | (241 | ) |
| Income (loss)  from continuing operations           |   | (1,068                                 | )      | (225                                   | )      | 752                                      |    | 527 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Gain from  discontinued operations                  |   | 46                                     |   | —                                 |   | —                                   |    | — |   |
| Extraordinary  items:                               |   |                                   |   |                                   |   |                                     |    |   |   |
| Gain on debt  discharge                             |   | —                                 |   | 11,810                                 |   | —                                   |    | 11,810 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Net Income                                          |   | (1,022                                 | )      | 11,585                                 |   | 752                                      |    | 12,337 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Preferred stock  dividend requirement               |   | —                                 |   | —                                 |   | (229                                     | )       | (229 | ) |
| Net income  (loss) allocable to common stockholders |   | $                                      | (1,022 | )                                      | $      | 11,585                                   |    | $ | 523 |   | $ | 12,108 |   |
|                                                |   |                                   |   |                                   |   |                                     |    |   |   |
| Income (loss)  per common share (note 5):           |   |                                   |   |                                   |   |                                     |    |   |   |
| Basic                                               |   |                                   |   |                                   |   |                                     |    |   |   |
| Continuing  Operations                              |   | $                                      | (0.43  | )                                      | $      | (0.09                                    | )  | $ | 0.25 |   | $ | — |   |
| Discontinued  Operations                            |   | 0.02                                   |   | —                                 |   | —                                   |    | — |   |
| Extraordinary  Items                                |   | —                                 |   | 4.72                                   |   | —                                   |    | — |   |
|                                                |   | $                                      | (0.41  | )                                      | $      | 4.63                                     |    | $ | 0.25 |   | $ | — |   |
| Diluted                                             |   |                                   |   |                                   |   |                                     |    |   |   |
| Continuing Operations                               |   | $                                      | (0.43  | )                                      | $      | (0.09                                    | )       | $ | 0.16 |   | $ | — |   |
| Discontinued  Operations                            |   | 0.02                                   |   | —                                 |   | —                                   |    | — |   |
| Extraordinary  Items                                |   | —                                 |   | 4.72                                   |   | —                                   |    | — |   |
|                                                |   | $                                      | (0.41  | )                                      | $      | 4.63                                     |    | $ | 0.16 |   | $ | — |   |

 

----

* Loss per share prior to Plan consummation and mergerare not meaningful.

 

See accompanying notes tofinancial statements.

 

5

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**XPONENTIAL,INC.**

 

Statements of Cash Flows

(Unaudited)

 

(In thousands)

 
|                                                                                         |   | **Predecessor**                         |   | **Reorganized  Company**                |   |                                      |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|-------------------------------------------|--------|
|                                                                                         |   | **Nine  Months  Ended  April 6,  2002** |   | **Two Months  Ended  August 31,  2002** |   | **Seven  Months  Ended  March 31,  2003** |   | **Nine  Months  Ended  March 31,  2003** |   |
| Cash flows from  operating activities:                                                       |   |                                    |   |                                    |   |                                      |   |   |   |
| Net income  (loss)                                                                           |   | $                                       | (1,022 | )                                       | $      | 11,585                                    |   | $ | 752 |   | $ | 12,337 |   |
| Adjustments to  reconcile net income (loss) to net cash   used in operating activities: |   |                                    |   |                                    |   |                                      |   |   |   |
| Depreciation and  amortization                                                               |   | 386                                     |   | 63                                      |   | 171                                       |   | 234 |   |
| 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                                                                         |   | (222                                    | )      | (24                                     | )      | 8                                         |   | (16 | ) |
| Pawn service  charges receivable                                                             |   | 230                                     |   | (45                                     | )      | (24                                       | )      | (69 | ) |
| Net decrease  (increase) in pawn loans                                                       |   | 2,416                                   |   | (414                                    | )      | (209                                      | )      | (623 | ) |
| Inventories, net                                                                             |   | 1,094                                   |   | 62                                      |   | 440                                       |   | 502 |   |
| Prepaid expenses  and other current assets                                                   |   | (64                                     | )      | (3                                      | )      | 25                                        |   | 22 |   |
| Prepetition  liabilities, accounts payable and accrued liabilities                           |   | (6,863                                  | )      | (56                                     | )      | 132                                       |   | 76 |   |
| Net cash  provided by operating activities                                                   |   | (4,045                                  | )      | (642                                    | )      | 1,295                                     |   | 653 |   |
|                                                                                         |   |                                    |   |                                    |   |                                      |   |   |   |
| Cash flows from  investing activities:                                                       |   |                                    |   |                                    |   |                                      |   |   |   |
| Cash acquired in  merger(1)                                                                  |   | —                                  |   | —                                  |   | 2,565                                     |   | 2,565 |   |
| Sale of  investments, net                                                                    |   | —                                  |   | —                                  |   | 871                                       |   | 871 |   |
| Purchases of  property and equipment                                                         |   | (69                                     | )      | —                                  |   | (304                                      | )      | (304 | ) |
| Net cash  provided by (used in) investing activities                                         |   | (69                                     | )      | —                                  |   | 3,132                                     |   | 3,132 |   |
|                                                                                         |   |                                    |   |                                    |   |                                      |   |   |   |
| Cash flows from  financing activities:                                                       |   |                                    |   |                                    |   |                                      |   |   |   |
| (Principal  payments) borrowings on notes payable                                            |   | 3,632                                   |   | 455                                     |   | (2,415                                    | )      | (1,960 | ) |
| Dividends paid                                                                               |   | —                                  |   | —                                  |   | (229                                      | )      | (229 | ) |
| Net cash  provided by (used in) financing activities                                         |   | 3,632                                   |   | 455                                     |   | (2,644                                    | )      | (2,189 | ) |
| Net increase  (decrease) in cash and cash equivalents                                        |   | (482                                    | )      | (187                                    | )      | 1,783                                     |   | 1,596 |   |
| Cash and cash  equivalents at beginning of period                                            |   | 811                                     |   | 377                                     |   | 190                                       |   | 377 |   |
| Cash and cash  equivalents at end of period                                                  |   | $                                       | 329    |                                    | $      | 190                                       |   | $ | 1,973 |   | $ | 1,973 |   |
|                                                                                         |   |                                    |   |                                    |   |                                      |   |   |   |
| Supplemental  disclosures of cash flow information –                                    |   |                                    |   |                                    |   |                                      |   |   |   |
| Cash paid for  interest                                                                      |   | $                                       | 391    |                                    | $      | 83                                        |   | $ | 164 |   | $ | 247 |   |

 

----

(1)  Non cashfinancing activities - Company acquired CMHI on August 30, 2002 including $2.6million in cash and $5.1 million in marketable securities in exchange for  preferred stock.  See note 2 for more complete explanation.

 

See accompanying notes tofinancial statements.

 

6

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**XPONENTIAL,INC.**

 

Notes to Financial Statements

(Unaudited)

 

(1)                    Basis ofPresentation

 

The accompanyingfinancial statements have been prepared in accordance with the AmericanInstitute 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.

 

The Board of Directors ofthe Company determined in May 2002 that it was in the Company’s best interestto change its fiscal year end from the Saturday nearest January 31 to June 30to more accurately reflect the Company’s post bankruptcy operating results. Theresults of operations for the interim periods ended March 31, 2003 and April 6,2002 are not necessarily indicative of the results that may be expected for theentire fiscal year or any other interim period.

 

The financial statementsshould be read in conjunction with the financial statements for the fiscal yearended February 2, 2002 included in the Company’s Form 10-K which has beenpreviously filed with the Securities and Exchange Commission.

 

Xponential, Inc.,formerly PawnMart, Inc. (the “Company”), was incorporated in Delaware onJanuary 13, 1994.  EffectiveFebruary 28, 2003, the Company changed its name to “Xponential, Inc.” TheCompany is a specialty finance and retail enterprise principally engaged inestablishing and operating stores which advance money secured by the pledge oftangible personal property, and buying and selling pre-owned merchandise.  As of March 31, 2003, the Company owned andoperated 26 stores located in Georgia, North Carolina, and South Carolina.

 

On July 9, 2001 (the“Petition Date”), the Company filed a voluntary petition for relief underChapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in theUnited States Bankruptcy Court for the Northern District of Texas, Fort WorthDivision (the “Bankruptcy Court”) in the case of PawnMart, Inc., Debtor, CaseNo. 01-44957-BJH-11.  On May 20, 2002(the “Confirmation Date”), the Bankruptcy Court entered an order (the“Confirmation Order”) confirming the Company’s first amended plan ofreorganization (the “Plan”).  The Planbecame effective on May 31, 2002 (the “Effective Date”).

 

The Company successfullyemerged from bankruptcy on August 30, 2002 when it consummated a merger (the“Merger”) with C/M Holdings, Inc. (“CMHI”). The reorganized Company adopted fresh-start reporting (Note 2) and gaveeffect to its emergence from bankruptcy and consummation of the Plan on August30, 2002, including recognition of certain reorganization expenses associatedwith the Merger in the Company’s Statement of Operations for the two monthsended August 31, 2002.

 

Fresh-start reporting asset forth in SOP 90-7 requires that the reorganized Company restate its assetsand liabilities to reflect their reorganization value, which approximates fairvalue at the date of the reorganization. In so restating, SOP 90-7 required the reorganized Company to allocateits reorganization value to its assets based upon their estimated fairvalue.  Each liability existing on theConfirmation Date is to be stated at the present value of amounts to be paid,determined using an appropriate discount rate.

 

7

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The fresh-start reportingreorganization value of approximately $7.6 million resulted in a net value ofapproximately $1.9 million to the new common equity holders after allowance forpost confirmation liabilities of the reorganized Company of $5.7 million.  The reorganization value was determined inconsideration of several factors and by reliance on various valuation methodsincluding discounted cash flow, book value multiples of comparable companies inits industry, net realizable value of asset sales and other applicable methods.  The calculated reorganization value was based on estimates andassumptions about circumstances in a relatively high-risk investment scenariothat have not yet taken place in which there are significant economic andcompetitive uncertainties beyond the control of the reorganized Company.

 

Management believes thereorganized Company has sufficient liquidity and capital resources to meet itsfinancial obligations and to make planned capital expenditures and debt paymentsas a result of the Merger.  Futureoperating performance and expected cash flows will be subject to financial,economic and other factors affecting the business and operations beyond itscontrol and will affect the Company’s ability to expand its businessanticipated in its financial plan.

 

In April 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 145, “Rescissionof FASB Statements 4, 44, and 64, Amendment of FASB Statement No. 13, andTechnical Corrections,” which, among other things, rescinded SFAS No. 4,“Reporting Gains and Losses from Extinguishment of Debt.” SFAS No. 4 requiredgains and losses from extinguishments of debt to be classified as extraordinaryitems, if material. Under SFAS No. 145, gains and losses on extinguishments ofdebt will no longer be classified as extraordinary unless they meet the unusualin nature and infrequency of occurrence criteria in the Accounting PrinciplesBoard’s Opinion No. 30, “Reporting the Results of Operations – Reporting theEffects of Disposal of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions,” which is expected to be rare.We adopted SFAS No. 145 on July 1, 2002. Therefore, gains or losses onextinguishment of debt prior to maturity are no longer classified asextraordinary items unless they meet the unusual in nature and infrequency ofoccurrence criteria, but there was no impact on our reported net income orloss.

 

In November 2002, theFASB issued Interpretation (FIN) 45, “Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers, an Interpretation of SFAS No. 5, “Accounting for Contingencies,” SFASNo. 57, “Related Party Disclosures,” and SFAS No. 107, “Disclosures about FairValue of Financial Instruments.” FIN 45 requires guarantors to recognize aliability at the inception of guarantee arrangements within its scope.Guarantors are also required to provide additional disclosures for guarantees.We adopted FIN 45 on January 1, 2003. There was no impact on our reported netincome or loss.   In January 2003, theFASB issued FIN 46, “Consolidation of Variable Interest Entities.” FIN 46clarifies the application of Accounting Research Bulletin 51, “ConsolidatedFinancial Statements,” for certain entities that do not have sufficient equityat risk for the entity to finance its activities without additionalsubordinated financial support from other parties or in which equity investorsdo not have the characteristics of a controlling financial interest (“variableinterest entities”). Variable interest entities within the scope of FIN 46 willbe required to be consolidated by their primary beneficiary. The primarybeneficiary of a variable interest entity is determined to be the party thatabsorbs a majority of the entity’s expected losses, receives a majority of itsexpected returns, or both. FIN 46 applies immediately to variable interestentities created after January 31, 2003, and to variable interest entities inwhich an enterprise obtains an interest after that date. It applies in thefirst fiscal year or interim period beginning after June 15, 2003, to variableinterest entities in which an enterprise holds a variable interest that itacquired before February 1, 2003. Our initial determination is that theadoption of the provisions of FIN 46 will not have a material impact upon ourfinancial condition or results of operations.

 

8

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On April 30, 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.” SFAS No. 149 improves financial reporting by requiringthat contracts with comparable characteristics be accounted for similarly. SFASNo. 149 clarifies the circumstances in which a contract with an initial netinvestment meets the characteristics of a derivative and when a derivativecontains a financing component. It also amends certain other existingpronouncements. SFAS No. 149 is effective for contracts entered into ormodified after June 30, 2003. We do not believe the effect of adopting thispronouncement will have a material impact on our financial statements.

 

(2)                    Plan ofReorganization - Fresh-start Accounting

 

In the Chapter 11proceedings, substantially all liabilities as of the Petition Date were subjectto compromise under the Plan.  Treatmentof each class of claims is explained in detail in the Company’s Form 10-K forthe fiscal year ended February 2, 2002.

 

Under the terms of thePlan, the Company cancelled all equity interests of its common and preferredshareholders and interests of any holders of options and warrants.  The Company issued 2,079,948 shares ofCommon Stock to its unsecured creditors in exchange for indebtedness and inconnection with the Merger of the Company with CMHI, which is owned in part byDwayne A. Moyers and Jeffrey A. Cummer, officers and directors of the Company,issued 1,071,636 shares of Series A Preferred Stock and 500,042 Series BPreferred Stock to the former shareholders of CMHI.  At the time of the Merger with CMHI, CMHI did not have anybusiness operations and principally held investments.

 

The Company is paying theprepetition priority tax claims over a six year period from the assessment datewith interest at 7% per annum in quarterly installments of approximately$35,000 in accordance with the Plan.

 

The Bankruptcy Courtconfirmed the Plan on May 20, 2002 with an Effective Date of May 31, 2002.  The consummation of the Plan was contingenton several material events including consummation of the Merger which occurredon August 30, 2002 which is reported herein as a material business combination.

 

The Company acquired 100percent of the outstanding common stock of CMHI on August 30, 2002.  The results of CMHI’s operations have beenincluded in the financial statements since the date of the Merger.

 

The Company’sreorganization value, computed immediately before the Merger, was $7,567,000.

 

9

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The Company adoptedfresh-start reporting because holders of existing voting shares immediatelybefore confirmation of the Plan received less than 50% of the voting shares ofthe emerging entity; (all pre-confirmation equity interests were cancelled),and the reorganization value is less than the postpetition liabilities andallowed claims, as shown below.

 

The reorganization valuewas determined in consideration of several factors and by reliance on variousvaluation methods including discounting cash flow, book value multiples ofcomparable companies in its industry, net realizable value of  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 |   |

 

After consideration ofthe Company’s debt capacity, extensive negotiations among parties in interest,projected earnings before interest and taxes, free cash flow to interest anddebt service and other capital considerations, it was agreed that the Company’sorganization 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 of approximately $100,000  per year at 7% interest per annum.

 

10

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The effects of the Plan on the Company’s balance sheetas 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      |                | $          | —                        |       | $                                                | (1,160     | ) | $ | 7,567 |   |

 

11

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On August 30, 2002, theCompany acquired 100 percent of the outstanding common shares of C/M Holdings,Inc. (“CMHI”) pursuant the Plan.

 

The aggregate purchaseprice for CMHI was approximately $7.8 million which was paid through theissuance of Series A and Series B Preferred Stock valued at $5.3 million and$2.5 million, respectively.  The valueof the Preferred Stock was based on liquidation preferences and dividend and conversionfeatures.

 

The following tablesummarizes the estimated value of the acquired assets and liabilities assumedat 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 inother assets, $5.0 million are investments in marketable securities.  The Company has classified these securitiesas long term assets due to its intent to defer sale of these securities tooffset gains on disposition with accumulated net operating losses.

 

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

 
| **(in  thousands)**                              |   | **Xponential,  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 |   |

 

12

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(3)                    NotesPayable

 

*RevolvingCredit Facility-*

 

On July 16, 2001 theBankruptcy Court approved a $7,200,000 post-petition credit facility (the“Post-Petition Credit Facility”) with Comerica Bank (“Comerica”).  The Post-Petition Credit Facility boreinterest at the prevailing prime rate plus 4%. Amounts available under the Post-Petition Credit Facility were limitedto certain percentages of pawn loans, inventories, and pawn service chargesreceivable and were collateralized by substantially all of the unencumberedassets of the Company. The Company was prohibited from paying cash dividends oracquiring treasury stock under the terms of the Post-Petition Credit Facility.

 

The Post-Petition CreditFacility was replaced with a new $4,500,000 credit facility (the“Post-Confirmation Credit Facility”) effective September 1, 2002 uponconsummation 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. Amounts available under the Post-Confirmation Credit Facility arelimited to certain percentages of pawn loans, inventories, and pawn servicecharges receivable.  ThePost-Confirmation Credit Facility is collateralized by substantially all of theunencumbered assets of the Company.  AtMarch 31, 2003, $2,228,000 was outstanding under the Post-Confirmation CreditFacility and an additional $1,315,000 was available to the Company pursuant tothe available borrowing base.  Under theterms of the Post-Confirmation Credit Facility, the Company is required tomaintain certain financial ratios and comply with certain other covenants.  The Company was in compliance with thesecovenants as of March 31, 2003.

 

*SubordinatedDebt -*

 

On July 16, 2001 theBankruptcy Court approved a subordinated note in the amount of $600,000 fromHulen Pawn Shop Investors, L.L.C., which was beneficially owned in part byDwayne A. Moyers and Jeffrey A. Cummer, officers and directors of the Company(the “Hulen Note”).  The Hulen Note boreinterest at the prevailing prime rate plus 5.0%.  The Hulen Note was collateralized by a lien subordinate toComerica on the pawn loans, inventories and pawn loan service charges of theCompany and was convertible into shares of Common Stock of the reorganizedCompany.  The Company paid anorigination fee of $24,000.  The HulenNote was paid in full in September 2002.

 

On March 11, 1999 theCompany commenced a public offering of up to $10,000,000 in principal amount of12% Subordinated Notes due December 31, 2004 (the “2004 Notes”).  The 2004 Notes were offered on a “bestefforts” basis by participating National Association of Securities Dealers,Inc. broker-dealers (“NASD Broker-Dealers”). Interest on the 2004 Notes was payable monthly commencing with thesecond full calendar month following issuance. The Company issued a total of $9,950,000 in principal amount of the 2004Notes.  In connection with the sale ofthe 2004 Notes, the Company also issued Series A Warrants to participating NASDBroker-Dealers for the purchase of up to 600,000 shares of the Company’s CommonStock.  A total of 594,060 Series AWarrants were granted in connection with the sale of the 2004 Notes.  Under the Plan the 2004 Notes were convertedto Common Stock of the reorganized Company and the Series A Warrants werecancelled.

 

13

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(4)                    StockOption Plan

 

Effective January 1,2003, the Company adopted the fair value method defined in SFAS No. 123,“Accounting for Stock-Based Compensation,” in accounting for our stock optionplans, where previously the Company applied Accounting Principles Board’sOpinion No. 25, (“APB No. 25”), “Accounting for Stock Issued to Employees,” andrelated Interpretations. SFAS No. 123 indicates that the fair value method isthe preferable method of accounting, and we have elected to apply it for alloptions granted for the Reorganized Company. Under APB No. 25, compensation costs related to stock options issuedpursuant to compensatory plans are measured based on the difference between thequoted market price of the stock at the measurement date (ordinarily the dateof grant) and the exercise price and should be charged to expense over theperiods during which the grantee performs the related services.  No stock-based employee compensation expensewas recognized in the period ended April 6, 2002.  All outstanding stock option grants of the Predecessor Companywere cancelled in accordance with the Company’s reorganization plan which wasconfirmed on May 20, 2002.

 

In December 2002, theFASB amended SFAS No. 123 by issuing SFAS No. 148,” Accounting for Stock-BasedCompensation—Transition and Disclosure,” which we adopted upon issuance.  SFAS No. 148 is effective for financialstatements for years ending after December 15, 2002, and provides alternativemethods for transition for entities that voluntary change to the fair valuebased method of accounting for stock-based employee compensation. The Companyrecognized $8,000 of compensation expense for options granted during the threeand nine month periods. 

 

The Company adopted its2003 Stock Option Plan (“Stock Option Plan”) and 2003 Stock Incentive Plan(“Incentive Plan”) effective January 1, 2003. Under the Stock Option Plan stock options have been awarded to directors, officers andemployees.  These stock options vesteither immediately or over a period up to two years from the date of grant andexpire ten years thereafter. 

 

A total of 675,000 sharesof common stock were reserved for grant under the Stock Option Plan and 325,000shares were reserved  under theIncentive Plan.  In February 2003, we grantedoptions covering 455,000 common shares from the Stock Option Plan of which299,000 shares were immediately exercisable. The grant of the remaining options covering 156,000 common shares arecontingent upon the Company achieving earnings before taxes, interest,depreciation and amortization (“EBITDA”) of $500,000 for the fiscal year endedJune 30, 2003, and will vest 66 2/3% on June 30, 2004 and 33 1/3% on June 30,2005, if granted.  Because it isprobable that these options will be earned, the Company has determined that thecost for these options should be recorded. The total net cost is $8,000 whichmay change depending on the fair market value of these options at June 30, 2003when they are earned. The cost of these options will be amortized over the vestingperiod described above. The Incentive Plan provides an opportunity to employeesof the Company to purchase common shares directly from the Company throughpayroll deductions. As of March 31, 2003, no shares have been issued under theIncentive Plan.

 

The following tablesummarizes the stock option activity of the Reorganized Company from the timeit emerged from bankruptcy:

 
|                            |   | **Weighted  Average**  |   |
|---------------------------------|--------|------------------------|--------|
|                            |   | **Number of  Options** |   | **Exercise  Price** |   |
| Outstanding at  August 30, 2002 |   | —                 |   | — |   |
| Granted                         |   | 455,000                |   | $ | 1.00 |   |
| Exercised                       |   | —                 |   | — |   |
| Forfeited                       |   | —                 |   | — |   |
|                            |   |                   |   |   |   |
| Outstanding at  March 31, 2003  |   | 455,000                |   | $ | 1.00 |   |
|                            |   |                   |   |   |   |
| Exercisable at  March 31, 2003  |   | 299,000                |   | $ | 1.00 |   |

** **

 

14

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

 

Net income (loss) percommon 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.

 

The Company issued2,079,948 shares of Common Stock upon consummation of the Plan and issued500,042 shares of Series B Preferred Stock which is convertible at the optionof the holders into 1,720,130 shares of the Company’s Common Stock.  In loss periods, dilutive common equivalentshares are excluded as the effect would be antidilutive.

 

The reconciliation ofbasic and diluted weighted average common shares and the reconciliation for thebasic and diluted earnings per common share for the three and seven monthperiods ended  March 31, 2003 followingconsummation of the Plan and the issuance of the new common and convertible preferredstock pursuant to the Plan is as follows:

 
| **For the Three Months Ended  March 31, 2003** |   | **Net Income  Allocable to Common Shareholders** |    | **Shares** |      | **Per Share** |   |
|------------------------------------------------|--------|--------------------------------------------------|---------|------------|-----------|---------------|--------|
|                                           |   |                                             |    |       |      |          |   |
| Basic earnings  per common share               |   | $                                                | 405,000 |       | 2,079,948 |          | $      | 0.19 |   |
|                                           |   |                                             |    |       |      |          |   |
| Effect of  preferred dividend-Series B         |   | 31,000                                           |    | 1,720,130  |      |          |   |
|                                           |   |                                             |    |       |      |          |   |
| Diluted earnings  per common share             |   | $                                                | 436,000 |       | 3,800,078 |          | $      | 0.11 |   |

 
| **For the Seven Months Ended  March 31, 2003** |   | **Net Income  Allocable to Common Shareholders** |    | **Shares** |      | **Per Share** |   |
|------------------------------------------------|--------|--------------------------------------------------|---------|------------|-----------|---------------|--------|
|                                           |   |                                             |    |       |      |          |   |
| Basic earnings  per common share               |   | $                                                | 523,000 |       | 2,079,948 |          | $      | 0.25 |   |
|                                           |   |                                             |    |       |      |          |   |
| Effect of  preferred dividend-Series B         |   | 74,000                                           |    | 1,720,130  |      |          |   |
|                                           |   |                                             |    |       |      |          |   |
| Diluted earnings  per common share             |   | $                                                | 597,000 |       | 3,800,078 |          | $      | 0.16 |   |

 

15

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Series A preferred shareshave been excluded from the computation of diluted earnings per share becausethe shares are not convertible into common shares and are not dilutive.  Additionally, dividends paid  to the Series A preferred shareholders inthe amounts of $67,000 and $155,000 during the three months and seven monthsended March 31, 2003, respectively are not included in the computation ofdiluted earnings per share.

 

Shares available forissue under the Stock Option Plan have been excluded from the computationbecause they are antidilutive.

 

(6)                    Investmentsin Marketable Securities

 

Marketable equitysecurities have been categorized as available-for-sale and carried at fairvalue.  Unrealized gains and losses foravailable-for-sale securities are included as a component of shareholders’equity net of tax until realized. Realized gains and losses on the sale of securities are based on thespecific identification method.  TheCompany continually reviews its investments to determine whether a decline infair value below the cost basis is other than temporary.  If the decline in the fair value is judgedto be other than temporary, the cost basis of the security is written down tofair value and the amount of the write-down is included in the consolidatedstatement of operations

 

As of March 31, 2003, theCompany owned the following marketable securities:

 
| **(in thousands)** |   | **Cost** |   | **Unrealized  Gain** |   | **Market  Value** |   |
|--------------------|--------|----------|--------|----------------------|--------|-------------------|--------|
|               |   |     |   |                 |   |              |   |
| Stocks             |   | $        | 3,429  |                 | $      | 1,820             |   | $ | 5,249 |   |
| Bonds              |   | 873      |   | 28                   |   | 901               |   |
|               |   |     |   |                 |   |              |   |
| Total              |   | $        | 4,302  |                 | $      | 1,848             |   | $ | 6,150 |   |

 

(7)                    OtherComprehensive Income

 

Other comprehensiveincome is as follows:

 
| **(in  thousands)**                                                   |   | **For the  Three Month  Period Ended  March 31, 2003** |   | **For the  Seven  Month Period Ended  March 31, 2003** |   |
|-----------------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                  |   |                                                   |   |                                                   |   |
| Net income                                                            |   | $                                                      | 503    |                                                   | $      | 752 |   |
| Unrealized gain  reclassified as realized gain from sale of securites |   | (543                                                   | )      | (631                                                   | )      |
| Unrealized gain  (loss) from available for sale securities            |   | 306                                                    |   | 2,479                                                  |   |
|                                                                  |   |                                                   |   |                                                   |   |
| Comprehensive  Income                                                 |   | $                                                      | 266    |                                                   | $      | 2,600 |   |

 

16

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

 

*Statementsappearing in the following discussion that are not historical facts areforward-looking statements (“forward-looking statements”) within the meaning ofSection 27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended, which are intended to be coveredby the safe harbors created by those sections. Such forward-looking statements are necessarily estimates reflecting thebest judgment of the Company’s management based upon current information andinvolve known and unknown risks, uncertainties and other factors which maycause the actual results, performance or achievements of the Company, orindustry results, to be materially different from any future results,performance or achievements expressed or implied by such forward-lookingstatements.  Such risks, uncertaintiesand other factors, include, but are not limited to, those set forth and thoseappearing from time to time in filings made by the Company with the Securitiesand Exchange Commission.  These risks,uncertainties and other factors should not be construed as exhaustive and theCompany does not undertake, and specifically disclaims any obligation, toupdate any forward-looking statements to reflect occurrences or unanticipatedevents or circumstances after the date of such statements.*

 

*Inaddition, the following discussion and analysis should be read in conjunctionwith the Company’s financial statements and notes thereto and other financialdata included in the Company’s Form 10-K for the fiscal year ended February 2,2002.*

 

GENERAL

 

Xponential, Inc. (the “Company”) is a specialtyfinance and retail enterprise principally engaged in establishing and operatingstores which advance money secured by the pledge of tangible personal propertyand sell 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 revenues are derived primarily fromservice charges on loans and the proceeds from the sales of merchandiseinventory.  The Company’s loans aregenerally made on the pledge of tangible personal property for one month, withan automatic extension period up to sixty days.  All 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 BankruptcyCode on July 9, 2001.  The Companyoperated as debtor in possession throughout the bankruptcy proceedings. ThePlan was filed on February 15, 2002 and was amended on April 3, 2002.  A confirmation hearing for the Plan was heldon May 20, 2002 and the Plan was confirmed by the Bankruptcy Court as of thatdate with an effective date of May 31, 2002.

 

Pursuant to the Plan, the Company issued 2,079,948shares of Common Stock to its unsecured creditors in exchange forindebtedness.  The Company alsocompleted a merger with C/M Holdings, Inc., a Texas corporation (“CMHI”),whereby the equity holders of CMHI received two new classes of Preferred Stock,1,071,636 shares of Series A Preferred Stock and 500,042 shares of Series BPreferred Stock.  The 500,042 shares ofSeries B Preferred Stock are convertible into 1,720,130 shares of Common Stock,or approximately 45% of the total Common Stock.  The Company also negotiated a Post-Confirmation Credit Facilitywith Comerica in the amount of $4,500,000. Terms of the Plan are set forth in the Company’s Form 10-K for the yearended February 2, 2002.

 

Selected elements of the Company’s unauditedstatements of operations are shown below for the three months and nine monthsended March 31, 2003 and April 6, 2002 as a percentage of total revenues.  The following table, as well

 

17

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as the discussion following, should be read in conjunction with theCompany’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** |   | **Nine Months  Ended** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|------------------------|--------|
|                                                                                                                         |   | **March 31,  2003**     |   | **April 6,  2002**     |   | **March 31,  2003** |   | **April 6,  2002** |   |
| Merchandise  sales                                                                                                           |   | 68.8                    | %      | 67.2                   | %      | 67.9 | % | 70.3 | % |
| Pawn service  charges                                                                                                        |   | 30.0                    |   | 31.7                   |   | 30.8 |   | 28.2 |   |
| Other income                                                                                                                 |   | 1.2                     |   | 1.1                    |   | 1.3 |   | 1.5 |   |
| Total revenues                                                                                                               |   | 100.0                   |   | 100.0                  |   | 100.0 |   | 100.0 |   |
| Cost of sales                                                                                                                |   | 49.8                    |   | 48.4                   |   | 48.8 |   | 52.8 |   |
| Gross profit                                                                                                                 |   | 50.2                    |   | 51.6                   |   | 51.2 |   | 47.2 |   |
| Store operating  expenses                                                                                                    |   | 30.2                    |   | 39.5                   |   | 30.9 |   | 35.0 |   |
| Store  contribution margin                                                                                                   |   | 20.0                    |   | 12.1                   |   | 20.3 |   | 12.2 |   |
| Corporate  administrative expenses (including reorganization items and other income but  excluding gain on debt discharge(1) |   | 18.9                    |   | 17.3                   |   | 18.2 |   | 14.2 |   |
| Interest and  dividend (income)                                                                                              |   | (1.2                    | )      | —                 |   | (0.7 | ) | — |   |
| (Gain) on sale  of marketable securities                                                                                     |   | (11.8                   | )      | —                 |   | (4.8 | ) | — |   |
| Interest expense                                                                                                             |   | 1.5                     |   | 3.4                    |   | 2.0 |   | 3.1 |   |
| Depreciation and  amortization                                                                                               |   | 1.6                     |   | 3.8                    |   | 1.8 |   | 2.9 |   |
|                                                                                                                         |   |                    |   |                   |   |   |   |   |   |
| Net income  (loss)                                                                                                           |   | 11.0                    | %      | (12.4                  | )%     | 3.8 | %  | (8.0 | )% |

 

----

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

 

RESULTS OF OPERATIONS

 

*Three Months Ended March 31, 2003Compared to Three Months Ended April 6, 2002*

 

Total revenues increased 25.7% to $4,591,000 duringthe three months ended March 31, 2003 (the “Three Month 2003 Period”) ascompared to $3,652,000 during the three months ended April 6, 2002 (the “ThreeMonth 2002 Period”).  Stores thatremained open for the full 12 months or more as of March 31, 2003 (the“Comparable Stores”) experienced a net increase in revenues of $1,009,000 or29.0% which is primarily attributable to improved store operating policiesimplemented during the Company’s reorganization.

 

Merchandise sales increased 28.8% to $3,158,000 duringthe Three Month 2003 Period from $2,453,000 during the Three Month 2002Period.  Sales in Comparable Stores forthe Three Month 2003 Period increased $760,000 or 32.6 %.  The increase in sales is primarilyattributable to a company-wide focus on inventory turnover and the sale ofexcess gold jewelry as scrap due to the recent increase in market prices forgold.

 

Pawn service charges increased $219,000 or 18.9% to$1,377,000 during the Three Month 2003 Period from $1,158,000 during the ThreeMonth 2002 Period primarily due to an increase in pawn loan balances of$692,000 as of March 31, 2003 as compared to April 6, 2002.   Pawn service charges from Comparable Storesincreased $233,000 or 21.0% from $1,113,000 for the Three Month 2003 Period ascompared to the Three Month 2002 Period. The increase in pawn service charge income is due to improved and consistentapplication of lending guidelines implemented during the Company’sreorganization.

 

Gross profit increased 22.1% to $2,303,000 during theThree Month 2003 Period from $1,886,000 during the Three Month 2002 Periodprimarily due to increased pawn service charges and increased gross profit onhigher merchandise sales. Gross profit for Comparable Stores increased $378,000for the Three Month 2003 Period as compared to the Three Month 2002 Period, a20.0% increase.  Gross profit as apercentage of total revenues decreased to 50.2% during the Three Month 2003Period as compared to 51.6% during the Three Month 2002 Period primarily as aresult lower margins on discounted aged merchandise sales  in the Three Month 2003 Period.

 

18

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Store operating expenses decreased 4.0% to $1,386,000for the Three Month 2003 Period from $1,444,000 during the Three Month 2002Period primarily due to reduction in expenses attributable the closing or saleof nine stores (“Closed Stores”) since the beginning of July 2002.  On a Comparable Store basis, store operatingexpenses were 30.2% of total revenues during the Three Month 2003 Periodcompared to 39.5% of total revenues during the Three Month 2002 Periodprimarily due to lower personnel and occupancy costs as a percentage of totalrevenue.  Store operating expenses on aComparable Store Basis decreased $53,000 or 3.9% from $1,353,000 to $1,300,000for the Three Month 2003 Period compared to the Three Month 2002 Period.

 

Store contribution margin (defined as total storerevenues less direct operating expenses, which exclude corporate administrativeexpenses, interest expense, and depreciation and amortization expense)increased to $917,000 from $442,000 during the Three Month 2003 Period comparedto Three Month 2002 Period primarily due to the increased pawn service chargeincome and increased gross profit on merchandise sales during the Three Month2003 Period.  Store contribution marginon a Comparable Store basis increased $431,000 or 81.0% from $532,000 to$963,000 for the Three Month 2003 Period.

 

Corporate administrative expenses increased 37.1% to$868,000 during the Three Month 2003 Period from $633,000 during the ThreeMonth 2002 Period primarily due to an recognition of $167,000 in compensationexpense for stock option grants and incentive executive compensation. Corporateadministrative expenses increased to 18.9% of total revenues during the ThreeMonth 2003 Period as compared to 17.3% during the Three Month 2002 Period.

 

Interest expense decreased $54,000 from $123,000during the Three Month 2003 Period as compared to the Three Month 2002 Periodprimarily due to decreased borrowings under the Credit Facility and due to theCompany paying off the $600,000 subordinated note upon consummation of its planof reorganization.

 

*Nine Months Ended December 31, 2002Compared to Nine Months Ended April 6, 2002*

 

Total revenues decreased 1.5% to $13,162,000 duringthe nine months ended March 31, 2003 (the “Nine Month 2003 Period”) as comparedto $13,368,000 during the nine months ended April 6, 2002 (the “Nine Month 2002Period”).  The overall decrease wasattributable primarily to the closing or sale of nine stores (“Closed Stores”)since July 2002.  A decrease in  total revenues of  $1,395,000 is attributable to the store closings.  The decrease was offset by an  increase in total revenues of $1,188,000 or10.3% in stores that remained open for the full 12 months or more as of March31, 2003 (the “Comparable Stores”).

 

Merchandise sales decreased 4.9% to $8,940,000 duringthe Nine Month 2003 Period from $9,403,000 during the Nine Month 2002 Periodprimarily due to the loss of sales attributable to the Closed Stores of$943,000.  Sales in Comparable Storesfor the Nine Month 2003 Period increased $479,000 or 5.9%.

 

Pawn service charges increased $283,000 or 7.5% to$4,050,000 during the Nine Month 2003 Period from $3,767,000 during the nineMonth 2002 Period primarily due to loan balance increase of $961,000.  The increased loan balance was offset by theCompany’s operating fewer stores for the Nine Month 2003 Period.  Pawn service charges from Comparable Storesincreased $480,000 or 5.9% to $3,985,000 for the Nine Month 2003 Period ascompared to the Nine Month 2002 Period.

 

Gross profit increased 6.8% to $6,745,000 during the NineMonth 2003 Period from $6,314,000 during the Nine Month 2002 Period.  Gross profit for Comparable Stores increased$1,057,000 for the Nine Month 2003 Period as compared to the Nine Month 2002Period, an 18.9% increase.  Gross profitas a percentage of total revenues increased to 51.3% during the Nine Month 2003Period as compared to 47.2% during the Nine Month 2002 Period primarily as aresult lower margins on merchandise sales for Closed Stores in the Nine Month2002 Period.

 

Store operating expenses decreased to $4,064,000 forthe Nine Month 2003 Period from $4,684,000 during the Nine Month 2002 Periodprimarily due to reduction in expenses attributable to Closed Stores.  On a Comparable Store basis, store operatingexpenses were 30.3% of total revenues during the Nine Month 2003 Periodcompared to 34.1% of total revenues during the Nine Month 2002 Period primarilydue to lower personnel and occupancy costs as a

 

19

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percentage of total revenue. Store operating expenses on a Comparable Store Basis decreased $89,000or 2.3% to $3,850,000 in Nine Month Period 2003.

 

Store contribution margin (defined as total storerevenues less direct operating expenses, which exclude corporate administrativeexpenses, interest expense, and depreciation and amortization expense)increased to $2,681,000 from $1,630,000 during the Nine Month 2003 Periodcompared to Nine Month 2002 Period primarily due to the lower gross profit onmerchandise liquidation sales for Closed Stores in the Nine Month 2002Period.  Store contribution margin on aComparable Store Basis increased $1,058,000 or 18.9% from $1,666,000 to$2,813,000 for the Nine Month 2003 Period primarily due to the increase increasedpawn service charges on increased loan balances and improved gross margins onmerchandise sales.

 

Corporate administrative expenses, includingrestructuring costs of $241,000, increased 13.5% to $2,152,000 during the NineMonth 2003 Period from $1,896,000 during the Nine Month 2002 Period primarilydue to costs related to the financial restructuring and due to the $167,000 inincentive compensation expense. Corporate administrative expenses increased to18.18% of total revenues during the Nine Month 2003 Period as compared to 14.2%during the Nine Month 2002.

 

Interest expense decreased $157,000 from $416,000during the Nine Month 2003 Period as compared to the Nine Month 2002 Periodprimarily due to decreased borrowings under the Credit Facility and due to theCompany paying off the $600,000 subordinated note upon consummation of thePlan.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At March 31, 2003, the Company’s primary sources ofliquidity were $1,973,000 in cash and cash equivalents, $399,000 in pawnservice charges receivable, $3,624,000 in pawn loans outstanding, and$2,114,000 in inventories. Additionally, the Company had $6,151,000 in marketable securities.  The Company also had $1,315,000 available toborrow under the Post-Confirmation Credit Facility.

 

Under the terms of the Plan approved by the BankruptcyCourt, the Company received an investment of approximately $7.8 million, ofwhich $2.6 million was in cash, through the Merger, in exchange for two classesof Preferred Stock.  The Company issued1,071,636 shares of non-voting Series A Preferred Stock and 500,042 shares ofvoting Series B Preferred Stock.  Bothclasses of preferred stock have a par value of $0.01 per share and pay a 5%annual cumulative cash dividend.  Thedividend is payable quarterly.  TheSeries A Preferred Stock must be redeemed by the Company for cash at $5.00 pershare beginning three years after the Closing Date (August 30, 2002) in amountsof at least 100,000 shares, or $500,000, per year.  Each April 30 thereafter through 2009, an additional 100,000shares must be redeemed at par value for cash. On April 30, 2010, any unredeemed shares plus any accrued and unpaiddividends must be redeemed at par value for cash. The Series B Preferred Stockis not subject to mandatory redemption. After April 30, 2009, the Series B Preferred Stock may be redeemed bythe Company in cash at any time in whole or (with some exceptions), from timeto time in part, at the option of the Company, at $5.00 per share plusaccumulated, unpaid dividends on the date of redemption.  The Series B Preferred Stock is convertibleinto approximately 45% of the Company’s Common Stock on the date of issuance,subject to anti-dilutive adjustment, and has voting rights on the same basis asthe Common Stock.

 

The Company is dependent on the investment of cash andmarketable securities provided in the Merger to fund operations during thefiscal year ended June 30, 2003 and to provide sufficient working capital toincrease pawn loans and inventories to levels necessary for the Company to beprofitable.

 

The Company’s profitability and liquidity is affectedby the amount of loans outstanding, which is controlled in part by theCompany’s lending decisions.  TheCompany is able to influence the frequency of forfeiture of collateral byincreasing or decreasing the amount loaned in relation to the sales value ofthe pledged property.  Tighter creditdecisions generally result in smaller loans in relation to the estimated salesvalue of the pledged property and can thereby decrease the Company’s aggregateloan balance and, consequently, decrease pawn service charges.

 

20

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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 sales value of the pledgedproperty can result in an increase in the Company’s pawn service chargeincome.  Higher average loan balancescan also result in a slight increase in loan forfeitures, which increases thequantity of goods on hand and, unless the Company increases inventory turnover,reduces the Company’s liquidity.

 

With the Company’s successful emergence frombankruptcy, management believes the reorganized Company has sufficientliquidity and capital resources to meet its financial obligations, make plannedcapital expenditures and debt payments as a result of the Merger.  Future operating performance and expectedcash flows will be subject to financial, economic and other factors affectingthe business and operations beyond its control and will affect the Company’sability to expand its business anticipated in its financial plan.

 

**ITEM 3.  CONTROLS AND PROCEDURES**

 

Based on their most recent evaluation, which wascompleted within ninety days of the filing of this Form 10-QSB, the Presidentand Chief Financial Officer have concluded that the Company’s disclosurecontrols and procedures are effective to ensure that information required to bedisclosed in reports that the Company files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules andforms.  There were no significantchanges in the Company’s internal controls or other factors that couldsignificantly affect these disclosure controls subsequent to the date of theirevaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

**PART II.  OTHERINFORMATION**

 

**ITEM1.        LEGAL PROCEEDINGS**

 

The Company filed its Plan and Disclosure Statement onFebruary 15, 2002 and filed its First Amended Plan and First Amended DisclosureStatement on April 3, 2002.  TheDisclosure Statement was approved by the Bankruptcy Court on April 3,2002.  The Plan was confirmed by theBankruptcy Court on May 20, 2002 with an Effective Date of May 31, 2002.  The Plan was consummated on August 30, 2002with the consummation of the Merger. All legal proceedings prior to the Petition Date have been settled inthe bankruptcy proceeding.

 

**ITEM2.        CHANGES IN SECURIT****IES AND USEOF PROCEEDS**

 

The Company issued the following securities pursuantto the consummation of its Plan; 2,079,948 shares of Common Stock in exchangefor approximately $10.8 million of prepetition liabilities, and 1,071,636shares of Series A Preferred Stock and 500,042 shares of Series BPreferred Stock in exchange for $7.8 million of assets pursuant to theMerger.  All equity interests thatexisted prior to the Effective Date were cancelled upon consummation of thePlan.

 

**ITEM3.        DEFAULTS UPON SENI****ORSECURITIES**

 

The Company was in default on payment of interest onits 2004 Notes and on the payment of dividends on its 8% Preferred Stock at thetime of its bankruptcy filing.  Nopayments were made during the bankruptcy proceeding.  The 2004 Notes were exchanged for equity in the reorganizedCompany under the terms of the Plan as described herein and the interest of theholders of the 8% Preferred Stock was cancelled.

 

21

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**ITEM 4.        SUBMISSION OF MATT****ERS TO A VOTE OF SECURITY HOLDERS**

 

An annual meeting of the stockholders of the Companywas held on February 28, 2003.  At thatmeeting the following matters were submitted to a vote of the stockholders:

 

1)   The holders of shares of Common Stock areentitled to elect three members of the Board of Directors of the Company.  Management’s three Common Stock nomineeslisted in the proxy statement pertaining to the meeting were elected directorsfor the ensuing year.  Of the 2,079,948shares of Common Stock present in person or presented by proxy at the meeting,the number of shares of Common Stock voted for, and the number of shares ofCommon Stock as to which authority to vote in the election was withheld, wereas follows with respect to each of the Common Stock nominees:

 
| **Name**           |   | **Shares  Voted  For Election** |   | **Shares as  to Which Voting  Authority Withheld** |   |
|--------------------|--------|---------------------------------|--------|----------------------------------------------------|--------|
|               |   |                            |   |                                               |   |
| John R. Boudreau   |   | 699,701                         |   | 6,189                                              |   |
| Donnelly  McMillen |   | 699,701                         |   | 6,189                                              |   |
| Carroll Dawson     |   | 700,939                         |   | 4,951                                              |   |

 

The holders of shares of Series B Preferred Stock areentitled to elect four members of the Board of Directors of the Company.  Management’s four Series B Preferred Stocknominees listed in the proxy statement pertaining to the meeting were electeddirectors for the ensuing year.  Of the500,042 shares of Series B Preferred Stock present in person or presented byproxy at the meeting, the number of shares of Series B Preferred Stock votedfor, and the number of shares of Series B Preferred Stock as to which authorityto vote in the election was withheld, were as follows with respect to each ofthe Series B Preferred Stock nominees:

 
| **Name**            |   | **Shares  Voted  For Election** |   | **Shares as  to Which Voting  Authority Withheld** |   |
|---------------------|--------|---------------------------------|--------|----------------------------------------------------|--------|
|                |   |                            |   |                                               |   |
| Jeffrey A. Cummer   |   | 445,207                         |   | 0                                                  |   |
| Dwayne A. Moyers    |   | 445,207                         |   | 0                                                  |   |
| James R. Richards   |   | 445,207                         |   | 0                                                  |   |
| Robert W. Schleizer |   | 445,207                         |   | 0                                                  |   |

 

A proposal to ratify theappointment of Grant Thornton LLP as independent auditors of the Company forthe year ended June 30, 2003 was approved. Of the 2,079,948 shares of Common Stock and 500,042 shares of Series BPreferred Stock (with each such share being entitled to 3.44 votes) present orrepresented by proxy at the meeting voting together as a single class,2,185,162 shares were voted for the proposal, 39,145 shares were voted againstthe proposal, and 13,095 shares abstained from voting with respect to theproposal.

 

A proposal to approve the2003 Stock Option Plan was approved.  Ofthe 2,079,948 shares of Common Stock and 500,042 shares of Series B PreferredStock (with each such share being entitled to 3.44 votes) present orrepresented by proxy at the meeting voting together as a single class,2,077,128 shares were voted for the proposal, 132,335 shares were voted againstthe proposal, and 27,939 shares abstained from voting with respect to theproposal.

 

A proposal to approve the2003 Stock Incentive Plan was approved. Of the 2,079,948 shares of Common Stock and 500,042 shares of Series BPreferred Stock (with each such share being entitled to 3.44 votes) present orrepresented by proxy at the meeting voting together as a single class,2,081,254 shares were voted for the proposal, 128,209 shares were voted againstthe proposal, and 27,939 shares abstained from voting with respect to theproposal.

 

22

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A proposal to amend theCertificate of Incorporation to change the name of the Company wasapproved.  Of the 2,079,948 shares ofCommon Stock and 500,042 shares of Series B Preferred Stock (with each suchshare being entitled to 3.44 votes) present or represented by proxy at themeeting voting together as a single class, 2,186,356 shares were voted for theproposal, 42,446 shares were voted against the proposal, and 8,600 shares abstainedfrom voting with respect to the proposal.

 

 

**ITEM 5.****                        OTHERINFORMATION******- None

 

 

**ITEM 6.****                        EXHIBITSAND REPOR****TS ON FORM 8-K**

 

**(a)****                                  Exhibits**

 
| **Number** |   | **Description**                                                                                                                                             |
|------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |   | Certificate  of Amendment of Certificate of Incorporation of PawnMart, Inc.(1)                                                                              |
|       |   |                                                                                                                                                        |
| 3.2        |   | Amendment  Number One to Amended and, Restated Bylaws of PawnMart, Inc.(1)                                                                                  |
|       |   |                                                                                                                                                        |
| 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.(1) |
|       |   |                                                                                                                                                        |
| 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) |

 

----

(1)        Filed herewith.

 

**(b)           Reportson Form 8-K**

 

None

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|         | XPONENTIAL, INC.  (Registrant)         |
|--------------|----------------------------------------|
|         |                                   |
|         |                                   |
| May 15, 2003 | By:                                    |  /s/ John R.  Boudreau |   |
|         | John R.  Boudreau, President and Chief |
|         | Executive  Officer                     |
|         |                                   |
| May 15, 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 Xponential, Inc., certify that:

 

1.             Ihave reviewed this quarterly report on Form 10-QSB of Xponential, 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: May 15, 2003 | /s/ John R. Boudreau                                     |
|--------------------|----------------------------------------------------------|
|               | John R. Boudreau, President and Chief  Executive Officer |

 

24

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**CERTIFICATIONS**

 

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

 

1.             Ihave reviewed this quarterly report on Form 10-QSB of Xponential, 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: May 15, 2003 | /s/ Robert W. Schleizer                                                     |
|--------------------|-----------------------------------------------------------------------------|
|               | Robert W. Schleizer, Executive Vice   President and Chief Financial Officer |

 

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