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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For fiscal year ended February 28, 1997.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____ to ____
COMMISSION FILE NUMBER: 0-17879
BEST COLLATERAL, INC.
(Name of small business issuer in its charter)
COLORADO 84-1107903
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2447 MISSION STREET, SAN FRANCISCO, CA 94110
(Address of principal executive offices) (Zip code)
(Issuer's telephone number): (415) 550-6674
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
$.10 Par Value Common Stock
---------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filiers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $3,999,802
State the aggregate market value of the voting stock held by non-affiliates
of the registrant: There is no established public trading market for the
registrant's Common Stock.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 3,999,990 shares
Documents incorporated by reference: Definitive proxy statement to be
filed on or before June 27, 1997, containing information required in Part III of
this Form 10-KSB.
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BEST COLLATERAL, INC.
YEAR ENDED FEBRUARY 28, 1997
INDEX TO FORM 10-KSB
PART I
Item Page
No. No.
- - ---- ----
1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . 8
4. Submission of Matters to a Vote of Security Holders . . . . . 8
PART II
5. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . 8
6. Management's Discussion and Analysis and Plan of
Operation . . . . . . . . . . . . . . . . . . . . . . . . 9
7. Financial Statements . . . . . . . . . . . . . . . . . . . . . 12
8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . 12
PART III
9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(A) of the
Exchange Act .. . . . . . . . . . . . . . . . . . . . . . . 13
10. Executive Compensation .. . . . . . . . . . . . . . . . . . . . 13
11. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . 13
12. Certain Relationships and Related Transactions .. . . . . . . . 13
PART IV
13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . 13
SIGNATURES
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PART I
Item 1. Business
GENERAL
The Company is a specialty financial and retail services business engaged
in owning and operating collateralized lending and previously-owned merchandise
retail outlets, also known as pawnshops. Pawnshops function as convenient
sources of consumer loans and as value-oriented retailers primarily of
previously-owned merchandise. A major growth strategy of the Company involves
the acquisition of existing pawnshops as well as establishing new locations.
Since March 1, 1993, the Company has acquired five pawnshops, two of which were
consolidated with an existing location, and has established two new outlets. As
of February 28, 1997, the Company owns and operates seven pawnshops located in
California. The Company's principal executive offices are located at 2447
Mission Street, San Francisco, California 94110 and its telephone number is
(415) 550-6674.
Through its lending operation, the Company makes relatively small,
non-recourse loans secured by pledges of tangible personal property. The Company
contracts for a pawn service charge, also referred to as an interest charge, to
compensate it for each loan transaction. Maximum pawn service charges, which
vary by loan amount, are regulated by the California Financial Code and consist
of a fixed initial charge for one to ninety days of the loan period, with an
additional charge for each subsequent month or portion thereof. On an annualized
basis, the effective interest rate currently ranges from 1,800% on a $1 loan to
21.7% on a $2,499 loan.
Pledged property is held through the term of the loan, which, in California
is four months with a ten day grace period unless otherwise earlier repaid or
renewed. In excess of 80% of the loans made by the Company are paid in full with
accrued service charges or are renewed after payment of the accrued service
charges. In the event that the borrower does not pay the loan in full or renew
the loan by the end of the ten day grace period, all borrower's right, title and
interest in the pledged property is forfeited and vests in the Company. The
forfeited, or unredeemed, property then becomes inventory available for sale in
the retail operations of the pawnshop.
LENDING OPERATION
The Company is engaged in the business of lending money on the security of
pledged tangible personal property consisting primarily of jewelry. The Company
also makes loans on tools, televisions and VCR's, stereophonic equipment,
musical instruments and equipment, firearms and other miscellaneous items. The
pledged property is intended to provide security to the Company for the
repayment of the loan.
As pawn loans are made without the borrower's personal liability, no
element of credit investigation or evaluation is involved. Instead, the Company
relies on its evaluation of the pledged personal property, and the possibility
of its forfeiture, as a basis for its lending decision. The Company contracts
for a pawn service charge to compensate it for the making of a loan. For the
fiscal year ended February 28, 1997, pawn service charges accounted for
approximately 31.3% of the Company's total revenues and 44.9% of its "net
revenues", defined as total revenues less the cost of merchandise sold. The
Company's procedure for making a loan is as follows:
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DETERMINATION OF COLLATERAL VALUE: The amount which the Company is willing
to finance is typically based on a percentage of the pledged personal property's
estimated resale value. The sources for the Company's determination of the
estimated resale value are numerous and include catalogues, blue books,
newspapers, direct mail advertisements and previously made similar pawn loan
transactions. The Company utilizes several different types of electronic and
manual equipment to verify authenticity and value of gold and precious stones.
These sources, together with the employees' experience in selling similar items
of merchandise within a pawnshop, influence the determination of the estimated
resale value of such items. The Company does not utilize a standard or mandated
percentage of estimated resale value in determining the amount to be financed.
Rather, the employee has the authority to determine the ratio of loan amount to
estimated resale value with the expectation that, if the item is subsequently
forfeited, its resale would yield a gross profit margin within parameters
established by management. If the loan is a renewal, the current estimated
resale value is checked for a change from the previous loan value.
LOAN TICKET: At the time a pawn transaction is entered into, a pawn loan
agreement, commonly referred to as a pawn ticket, is delivered to the borrower
(pledgor) that sets forth, among other things, the name and address of the
pawnshop, the name and address of the borrower, a description of the pledged
goods, including serial number if applicable, the amount of the loan, the
maturity date of the loan, the dollar amount of the maximum interest charge, any
storage or handling fees and a statement of the annualized interest rate. Also,
as required by law, an additional form is printed with a description of the
borrower, including name, address, height, weight, date of birth, and the number
of the driver's license or other approved identification. A copy of this form is
retained in the pawnshop for its records and a copy, with a fingerprint of the
borrower, is sent to the local police department.
REDEMPTION OF COLLATERAL: To redeem the loan, the borrower must present a
cash payment of the loan plus accrued interest and fees with the loan ticket. If
the borrower has lost the loan ticket, the customer must present the same
identification as that which was recorded on the original loan ticket. The
information on the identification and the physical characteristics of the
presenter of the identification is checked against the records of the original
transaction. If there is a match, the loan may be redeemed upon presentation of
the full amount due.
COLLATERAL NOT REDEEMED: In the event a borrower does not redeem or renew
the loan, the collateral is forfeited to the Company and becomes inventory
available for sale in the retail operations of the pawnshop. Consistent with
industry practice, the Company does not record loan losses or charge-offs
because the principal amount loaned plus the accrued service charges becomes the
carrying cost of the forfeited collateral ("inventory") that is to be recovered
through the retail function described below. However, the Company does evaluate
the salability of inventory and provides an allowance for shrinkage and over
valuation.
All of the Company's seven locations as of February 28, 1997 are located in
California. Maximum interest and pawn service charges are set by the California
Financial Code. On an annualized basis, the effective interest rate currently
ranges from 1,800% on a $1 loan to 21.7% on a $2,499 loan. Loans of $2,500 or
more are not regulated. During fiscal 1997, loans made by the Company were
outstanding for a maximum period of four months and eleven days and were
generally repaid or renewed at an earlier date. While the annualized interest
rate for the full term on an $80.00 loan (the Company's approximate average loan
in fiscal 1997) is about 52.5%, due to payment or renewal before the end of the
loan term, the Company's actual average annualized rate was approximately 68.4%.
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The table below shows the dollar amount of loans made (including renewals),
loans acquired, loans repaid or renewed and loans forfeited for the Company for
the years ended February 28, 1997 and 1995 and February 29, 1996:
1997 1996 1995
---- ---- ----
Loans made $6,445,292 $3,890,472 $3,095,043
Loans acquired 373,699 ---- 96,480
Loans repaid or renewed ( 5,155,064) ( 3,157,525) ( 2,510,132)
Loans forfeited ( 729,234) ( 461,358) ( 437,419)
------------ ------------ ------------
Net increase in pawn loans
outstanding at fiscal year end $ 934,693 $ 271,589 $ 243,972
------------ ------------ ------------
------------ ------------ ------------
Loans paid or renewed as a
percent of loans made 80.0% 81.2% 81.1%
------------ ------------ ------------
------------ ------------ ------------
As of February 28, 1997, the Company had 25,041 loans outstanding with an
aggregate balance outstanding of $2,180,826 for an average of $87.09 per loan
outstanding.
RETAIL OPERATION
The Company engages in the sale of unredeemed goods acquired when a pawn
loan is not repaid, used goods purchased from the general public and to a minor
extent new goods acquired from vendors. New goods consist primarily of accessory
merchandise which enhances the marketability of unredeemed goods, such as watch
bands, television remote controls and antennas and clasps for chains and
bracelets. For the year ended February 28, 1997, gross profit from sales of
inventory was approximately 51.7% of the Company's net revenues.
The Company does not give its customers any warranties on the used
merchandise sold. The Company accepts major credit cards and has a credit
program whereby a customer purchasing jewelry may, on approved credit, take the
merchandise with them and make payments over time. This program is administered
by a major bank which approves the credit and accepts responsibility to collect
the payments without recourse to the Company. Additionally, the Company allows
its customers to purchase inventory on a "layaway" plan whereby the customer
agrees to purchase an item by making an initial cash deposit representing a
small part of the selling price (generally 10% - 20%) and agrees to make
additional, non-interest bearing, payments on the balance of the selling price
in accordance with a specified schedule. The Company then separates the layaway
item from its inventory and holds the item until the selling price is paid in
full. The Company records layaways as a sale at the time of receiving the
initial cash deposit. Should the customer fail to make a required payment, the
item is returned to inventory at original cost and all previous payments
forfeited to the Company. To cover the difference between the inventory's
original cost and the remaining layaway sales receivable upon forfeiture, the
Company provides for an allowance against outstanding layaway receivables. At
February 28, 1997, the Company had layaway sales receivable of $320,153 with an
allowance for the net cost on potential forfeited layaways of $46,000.
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The Company's inventory is stated at the lower of cost (specific
identification) or market (net realizable value). Inventory consists of
merchandise acquired from forfeited loans, merchandise purchased directly from
the public and new merchandise purchased from vendors. The Company provides an
allowance for obsolescence and valuation based on management's evaluation of the
condition and salability of the merchandise. At February 28, 1997, total stated
value of inventory on hand was $931,452, after deducting $15,000 for the
allowance.
Operations
GENERAL
The predecessor company was founded as a privately held business some fifty
years ago. Until the early 1990's, the Company did not stress significant
increases in its outstanding pawn loans nor a rapid turnover of merchandise, but
had as a primary goal the accumulation of inventory.
In the early 1990's, management decided to participate in the consolidation
of ownership taking place in the industry. In order to position itself for
raising the capital necessary to fund the growth, the Company began having its
financial statements audited. As part of its overall strategy, in June of 1992,
the Company became a public company through a reverse merger with Macintosh
Video News, Inc., a publicly held Colorado corporation.
EMPLOYEES
Each pawnshop has a manager and assistant manager who are responsible for
supervising store personnel, assuring that the store is run in accordance with
the Company's established policies and procedures, and for operating their store
according to performance parameters consistent with the Company's store
operating plan. Store managers report to a Vice President of the Company.
At February 28, 1997, the Company had 35 employees. Of the total employees,
two were administrative and thirty-three were store level. None of the Company's
employees are covered by collective bargaining agreements. The Company considers
its employee relations to be satisfactory.
The Company's training program for new pawnshop employees consists
primarily of supervised on-the-job loan and sales experience conducted with
Company policies and procedures, new employee orientation also includes formal
jewelry sales and collateral evaluation training sessions, complete with manuals
and video presentations. Employee and employer conduct and responsibilities are
set forth in the Company's employee manual.
MANAGEMENT INFORMATION SYSTEMS AND CONTROLS
The Company's computerized point-of-pawn and point-of-sale data processing
system completely automates the recording of all transactions, operations and
calculations that occur within a pawnshop. From a controls perspective, the
system provides management with a database of all loans made and a perpetual
inventory system. The system utilizes a microcomputer-based, multi-tasking,
multi-user computer environment, which allows multiple transactions to occur
simultaneously. The Company is a primary consultant to its software vendor as
additional features and functions are considered and added to the system.
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The Company's management information system enables store managers and
senior management to monitor, control and anticipate business changes at the
Company's store operations. In addition to basic financial reporting, the system
facilitates internal management reports detailing an aged loan trial balance,
loans made, loans redeemed, loans forfeited, sales by category and by employee
and gross profit analysis by category and employee. A store customer's complete
loan history is maintained on-line, including their redemption history and
profitability. This enables loan assessors and processors to utilize a
customers' past payment history as well as the value of the collateral in order
to determine an appropriate loan value. Additionally, repeat customers can be
handled more expediently, thereby allowing a greater number of loans to be
processed per employee.
For inventory control and tracking, each collateral item taken in a pawn
transaction is assigned a bar code during the lending process. This ensures that
all the Company's inventory is properly bar coded as it becomes part of the
store's inventory. Through the use of scanning technology, the Company has
dramatically decreased the time requirement for physical inventories.
FUTURE EXPANSION
During fiscal 1997, the Company continued its strategy of expansion by
acquiring a pawnshop in northern California. The Company's objective is to
continue to expand the number of pawnshops it owns and operates primarily
through acquiring existing pawnshops which, based on management's assessment,
can benefit from the Company's management and operations expertise, or
establishing new locations that meet the Company's strategic requirements.
Management believes that such expansion will allow the Company to realize
greater efficiency in its supervision, administration and marketing by
decreasing the overall average cost of these activities per store.
The Company expects to concentrate its expansion in areas where it believes
the regulatory, demographic and competitive characteristics are conducive to a
successful pawnshop operation. In identifying potential pawnshop acquisitions,
the Company places emphasis on those with favorable lease arrangements, with
outstanding loan balances which provide sufficient pawn service charge income to
cover most of the store level fixed operating costs, where inventory and loans
outstanding primarily consist of jewelry and where the store is strategically
located in an area with significant foot traffic and easily accessible by public
transportation. For start-up locations, favorable lease arrangements, strategic
location and improving geographic density will constitute the primary decision
criteria. Utilizing this criteria, the Company opened two locations in the third
quarter of fiscal 1996.
Since March 1, 1993, the Company acquired the operating assets of three
stores, and acquired the pawn loans, and thus the customer base, of two other
stores which were closed and incorporated into an existing location. In all
acquisitions, the Company conducted its due diligence and negotiated the general
terms of an asset purchase agreement. Upon taking a physical count of all
inventory and loan collateral, final terms of the purchase agreement were
negotiated and, within several days, the transaction was closed. After the date
of closing, inventory on hand was entered into, and new loan transactions were
processed through, the Company's point-of-sale/point-of-pawn computer system.
This methodology is expected to guide the Company through its future
acquisitions.
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There are approximately 700 active licensed pawnshops in California, as
indicated by the records of the Collateral Loan and Secondhand Dealers
Association of California. While the Company believes it will be able to target
an adequate number of stores available for acquisition, a number of
unpredictable factors, including the Company's ability to raise additional
capital for acquisition purposes, may limit the Company's expansion activities.
Also, while the Company will seek existing personnel or hire new employees
capable of assuming managerial positions, there can be no assurance that
sufficient qualified personnel will be available to satisfy the Company's needs
with respect to its planned expansion.
COMPETITION
In connection with the lending of money, the Company competes with other
pawnshops and other types of financial institutions such as consumer finance
companies, which generally lend on an unsecured as well as a secured basis. The
vast majority of the Company's pawnshop competitors are independently owned and
operated "mom and pop" stores. The Company believes that the primary elements of
competition in the pawnshop industry are store location and design, the ability
to offer competitive loan amounts on items pawned, effective management of
store-level personnel and the quality of customer service. Additionally, as the
pawnshop industry consolidates, the Company believes that the ability to compete
effectively will be impacted by the sophistication level of a company's general
management and management information systems, its regional focus, market
concentration and access to capital.
In connection with its retail operations, the Company competes with
numerous other retail and wholesale stores, including jewelry stores and
outlets, discount retail stores, consumer electronics stores, firearm retailers
and other pawnshops. Competitive factors, in addition to several noted above,
include the ability to provide the consumer with a variety of quality
merchandise at a "bargain" price.
In both areas of its business, the Company faces competitors which have
greater financial resources. This, and certain of the conditions noted above,
may adversely affect the Company's revenues, profitability and ability to
expand.
REGULATION
The Company's pawnshop operations are subject to extensive regulation,
supervision and licensing under various federal, state and local statutes,
ordinances and regulations.
As all the Company's stores are within California, the Company is primarily
affected by the California Business and Professions Code and Financial Code.
These statutes prescribe, among other things, the term and maximum rates of
interest which a pawnshop may charge for certain loans. Additionally, as a
condition precedent to the issuance or renewal of a pawnbroker's license, an
applicant must file a pawnbroker's two-year nonrevocable surety bond in the
amount of $20,000 per store. As a condition precedent to the issuance of a new
pawnbroker's license (holders of secondhand dealers licenses, actively engaged
as a pawnbroker as of October 3, 1993, are not affected by this requirement), an
applicant must file a financial statement, reviewed and signed by a California
Certified Public Accountant, confirming the applicant has at least $100,000 in
the form of liquid assets readily available for use in the business or an
applicant may post a nonrevocable surety bond in the amount of $100,000.
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Stores that deal in firearms must comply with the regulations promulgated
by the United States Department of Treasury, Bureau of Alcohol, Tobacco and
Firearms which require each pawnshop dealing in firearms to maintain a permanent
written record of all transactions involving the receipt or disposition of guns.
As it is the Company's policy not to retail firearms in an urban area, only one
of the Company's stores is currently subject to these regulations.
At the local level, each of the Company's pawnshops voluntarily or pursuant
to municipal ordinances provide, to the police department having jurisdiction,
copies of all daily transactions involving pawn loans and goods purchased from
the general public. These daily transaction reports are designed to provide
local police with a detailed description of the goods involved, including serial
numbers, if any, and the name and address of the owner obtained from a valid
identification card. These tickets are used by law enforcement agencies to
determine rightful ownership. Goods held to secure pawn loans or goods purchased
which are determined to belong to an owner other than the borrower or seller are
subject to recovery by the rightful owner. While a risk exists that pledged or
acquired merchandise may be subject to claims of the rightful owner,
historically, the Company has not experienced a material number of claims of
this sort and the claims of this sort which the Company has experienced have not
had a material adverse affect on the Company's results of operations.
SUBSEQUENT EVENT
On May 6, 1997, the Board of Directors established a profit sharing plan
which covers all eligible employees. The Plan provides for contributions to be
made from the Company's profits, at the discretion of the Board of Directors,
not to exceed 15% of an individual's annual compensation. The Plan was made
effective for the fiscal year ended February, 28, 1997.
Item 2. Properties
As of April 30, 1997, the Company owned and operated seven pawnshops in
California. All of its locations are operated under non-cancelable operating
leases. Leased facilities are generally leased for a term of five years with one
or more options to renew. The Company's existing leases expire in fiscal years
1998 through 2004.
One of the Company's leased pawnshop locations is owned by the Company's
two principal stockholders. At two other locations, the Company subleases to
independent parties a portion of its leased property under a non-cancelable
sublease.
The Company maintains property insurance on each of its locations in
accordance with the terms of each lease. Additionally, the Company carries other
business insurance on its inventories, pawn loan collateral and for general
liability.
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Item 3. Legal Proceedings
No material legal proceedings to which the Company is a party or to which
the property of the Company is subject are pending or threatened.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matter was submitted to a vote of the security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
Item 5. Market For Common Equity And Related Stockholder Matters
There is no established public trading market for the Company's common
stock.
As of May 16, 1997, there were 142 shareholders' of record of the Company's
common stock. The total public float of the Company's common stock is 88,811
shares, less than 3% of the 3,999,990 shares issued and outstanding.
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Item 6. Management's Discussion And Analysis And Plan Of Operations
The following is a discussion of the Company's current financial condition
as well as its operations for the two fiscal years ended February 29, 1996 and
February 28, 1997 (designated as "1996" and "1997", respectively). This
discussion should be read in conjunction with the financial statements, related
notes and other information included elsewhere in this report.
Liquidity and Capital Resources
During 1997, the Company invested $625,000 on the acquisition of the assets
of a pawnshop and $83,267 for additions to its fixed assets. Working capital
increased by $155,082 to meet operational growth needs in 1997. The acquisition
was funded through a $700,000 increase in the Company's primary line of credit
with operational growth funded through cash available at February 29, 1996, net
cash provided by operations, loans from an employee and directors and bank
borrowings.
During 1997, the Company entered into a three million dollar ($3,000,000)
revolving line of credit arrangement with Bank of America, NA. This new line of
credit was used to consolidate all of the Company's existing lines of credit and
bank term loans and provide additional working capital. Borrowings under this
line of credit bear interest at the Bank's Reference Rate (8.25% at February 28,
1997) plus 1.5%. Interest is payable monthly and all borrowings and accrued
interest are due August 1, 1997. As of February 28, 1997, the amount outstanding
under this line of credit was $2,177,216 and it is management's expectation that
the arrangement will be renewed by the bank upon its due date.
During 1996, the Company invested $285,295 on leasehold improvements,
furniture and fixtures, additions to its computer systems and other fixed assets
primarily in connection with the establishment of two new locations. Working
capital decreased by $44,808 primarily due to the use of the Company's lines of
credit to fund its property and equipment additions. The Company funded its 1996
growth through cash available at February 28, 1995, net cash provided by
operations, the private placement of convertible notes payable and bank
borrowings.
For continuing operations, the Company's liquidity is greatly affected by
the amount of pawn loans outstanding. As it is a Company strategy to increase
its average loan portfolio within each store, the Company will continue to be
prudently aggressive in its loan policy and seek out opportunities to make loans
on collateral with greater value. The Company plans to manage the growth in its
inventory, by discounting prices or selling certain inventory items in the
wholesale market, such that any growth in its inventory levels will not
adversely impact availability of funds for loan growth.
It is also the Company's strategy to expand its operations through
acquisitions of existing or establishing new, start-up pawnshops. To this end,
the Company continues to discuss its financing requirements with institutional
lenders and private individuals. The Company believes that this type of
financing will be the manner in which it funds its next several acquisitions or
start-ups. It is expected that any such financing will be entered into on a case
by case basis. The Company expects any funding of this nature to be adequate to
allow for build out costs and pawn loan growth in the acquired or start-up
store. If adequate funding for acquiring or establishing additional pawnshops is
not available, the Company will have to further consider the effect of any
potential expansion on its liquidity.
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Results of Operations
1997 vs. 1996
SALES AND GROSS PROFIT
Merchandise sales in 1997 increased by $703,178 (36.2%) over 1996 as a
result of a $437,214 (22.5%) increase in sales for stores open in excess of one
year ("Comparable Stores") and a $265,964 (10.1%) contribution by stores open
less than one year ("New Stores"). The Comparable Stores increase includes an
estimated $240,000 improvement in sales due to the acquisition and consolidation
into an existing location of the pawnshop acquired during the year. Additional
improvement in sales from Comparable Stores came from inventory turnover
programs and increased inventory flow from the acquired store. While its
emphasis in store acquisition and inventory turnover will continue, management
does not believe the 1997 increase in sales for Comparable Stores is indicative
of the nature of future increases. Management expects that the on-going
operations of Comparable Stores will provide sales increases in the range of 4%
to 8%. Continued contributions from New Stores will be dependent on the
Company's ability to identify, obtain financing for, complete the acquisition or
establishment of, and successfully operate additional stores.
Other revenues consist primarily of net income derived from the melting of
excess precious metal. While income from melting excess precious metal is an
aspect of the Company's on-going operations, due to the quantity of excess
inventory obtained in the May 1996 acquisition, the amount of revenue derived in
1997 is higher than is typically expected and should not be counted on in future
periods.
While gross profits from merchandise sales increased by $367,449 (34.3%),
gross profit percentage (as a percentage of merchandise sales), declined to
54.4% in 1997 from 55.1% in 1996. Comparable Stores gross profits increased by
$206,016 (19.2%) while their gross profit percentage declined to 53.7% and New
Stores contributed gross profits of $161,433 at a gross profit percentage of
60.7%.
PAWN SERVICE CHARGES
The 1997 increase in revenue from pawn service charges over 1996 of
$425,264 (51.5%) is a result of a $352,573 (42.7%) increase in Comparable
Stores pawn service charges and a contribution of $72,691 (5.8%) from New
Stores.
Pawn loans outstanding increased by $934,693 (75.0%) during the 1997
period. Comparable Store pawn loans outstanding grew by $560,994 (45.1%) while
the loans obtained in the May acquisition added $373,699. The average annual
yield on pawn loans decreased to approximately 68.4% in 1997 compared to 76.5%
and 78.1% in 1996 and 1995, respectively. This decrease is primarily due to an
increase in the average loan amount to $80.00 from $60.00 in 1996 and $55.00 in
1995. Under California law, the effective loan yield decreases as the loan
amount goes up. As it has been a goal of management, through gathering a greater
market share of the higher value pawn loans in its different marketplaces, to
increase the Company's aggregate pawn loan outstanding balance and thus its
gross pawn service charges revenue, the average annual yield decrease was
expected. Management's intentions are to continue this practice until such point
in time as the gross pawn service charges revenue increases no longer outweigh
the increased investment in higher valued pawn loans.
10
<PAGE>
OPERATING EXPENSES
Store operating expenses, as a percent of total revenues, decreased to
approximately 38.1% in 1997 from 41.8% in 1996 and 39.9% in 1995. Comparable
Stores operating expense were 36.8%, 39.2% and 38.1% in 1997, 1996 and 1995,
respectively. New Stores operating expenses were 63.3%, 81.2% and 45.6% during
the same periods.
The overall reduction in the Comparable Stores operating expense percentage
is a result of continued improvements in store operating productivity . The high
store operating expense percentage for New Stores in 1997 and 1996 is primarily
due to the impact of the first year of operations for two newly established
stores opened in the third quarter of 1996. As the Company continues to improve
the operations of stores it has acquired and increase operations of newly
established stores as they mature, it is expected that store operating expenses
as a percent of total revenues will decline, for those stores.
Corporate administrative expenses, as a percent of total revenues, improved
to approximately 12.3% in 1997 from 15.4% in 1996 and 21.9% in 1995. While, as
more stores are acquired or established, the Company will need to increase its
overall administrative expenditures, management's intent is to continue to
reduce the percentage of administrative expense in relationship to the Company's
total revenues. No significant changes occurred in the components of
administrative expenses during 1997 compared to 1996.
1996 vs. 1995
SALES AND GROSS PROFIT
Merchandise sales in 1996 increased by $234,501 (13.5%) over 1995 as a
result of a $71,191 (4.1%) increase in sales for Comparable Stores and a
$163,310 (9.4%) contribution by New Stores. The Comparable Stores increase is
primarily a result of management's continued emphasis on improving aggregate
inventory turnover.
While gross profits from merchandise sales increased by $111,600 (11.3%),
gross profit percentage (as a percentage of merchandise sales), declined to
55.8% in 1996 from 57.0% in 1995. Comparable Stores gross profits increased by
$30,022 (3.0%) while their gross profit percentage declined to 56.4% and New
Stores contributed gross profits of $81,578 at a gross profit percentage of
50.0%. The Company's strategy of increasing inventory turnover while increasing
gross profits resulted in the decline of the gross profit percentage.
PAWN SERVICE CHARGES
The 1996 increase in revenue from pawn service charges over 1995 of
$152,183 (22.6%) is a result of a $102,102 (15.1%) increase in Comparable
Stores pawn service charges and a contribution of $50,081 (7.5%) from New
Stores.
For Company stores open at February 28, 1995, aggregate pawn loans
outstanding increased $204,711 (21.0%) in 1996, and for those stores opened
during 1996 aggregate pawn loans outstanding grew to $66,878 from their date of
opening. The average annual yield on pawn loans decreased to approximately 76.5%
in 1996 from approximately 78.1% in 1995 primarily due to an increase to $60.00
from $55.00 in the average per loan amount during the year. The Company's
decrease in its yield was an anticipated result of management's attempt to
gather greater market share of higher value pawn loans in the San Francisco
marketplace.
11
<PAGE>
OPERATING EXPENSES
Store operating expenses, as a percent of total revenues, increased to
approximately 41.8% in 1996 from 39.9% in 1995. Comparable Stores operating
expense declined to 39.2% in 1996 while New Stores operating expenses were 81.2%
during the same period.
The reduction in the Comparable Stores operating expense percentage is a
result of continued improvements in store operating productivity . The high
store operating expense percentage for New Stores is primarily due to the impact
of established stores opened in the third quarter.
Corporate administrative expenses, as a percent of total revenues, improved
to approximately 15.4% in 1996 from 21.9% in 1995. Total administrative expenses
for 1996 were less than 1995 due primarily to decreases in professional fees and
office expenses. These were partially offset by increases in wages and other
employee benefits.
Item 7. Financial Statements
The following financial statements of the Company are included as part of
this Form 10-KSB:
Page
Report of Independent Accountants. . . . . . . . . . . . . . . F-1
Financial Statements:
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations . . . . . . . . . . . . . . . . . . F-3
Statements of Stockholders' Equity . . . . . . . . . . . . . F-4
Statements of Cash Flows . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . . . . . . . F-6
Item 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
There have been no changes in or disagreements with accountants on
accounting and financial disclosure during the Company's two most recent fiscal
years.
12
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters And Control Persons; Compliance
With Section 16(A) Of The Exchange Act
Information with respect to this Item is incorporated by reference to the
Company's definitive proxy statement, to be filed on or before June 27, 1997.
Item 10. Executive Compensation
Information with respect to this Item is incorporated by reference to the
Company's definitive proxy statement, to be filed on or before June 27, 1997.
Item 11. Security Ownership Of Certain Beneficial Owners And Management
Information with respect to this Item is incorporated by reference to the
Company's definitive proxy statement, to be filed on or before June 27, 1997.
Item 12. Certain Relationships And Related Transactions
Information with respect to this Item is incorporated by reference to the
Company's definitive proxy statement, to be filed on or before June 27, 1997.
PART IV
Item 13. Exhibits And Reports On Form 8-K
(a) Exhibits
3. Articles of Incorporation and Bylaws
(a) Articles of Incorporation are incorporated by reference to the
Exhibits to the Registrant's Registration Statement on
Form S-18, Registration No. 33-27926-D.
(b) Amendments to the Articles of Incorporation are incorporated by
reference to the Exhibits to the Registrant's Report on
Form 8-K dated June 17, 1992.
(c) Articles of Merger are incorporated by reference to Exhibits to
the Registrant's Report on Form 8-K dated June 17, 1992.
(d) Bylaws are incorporated by reference to the Exhibits to the
Registrant's, Registration Statement on Form S-18,
Registration No. 33-27926-D.
13
<PAGE>
10. Material Contracts
(a) Lease (as amended) dated March 31, 1967, between the Registrant and the
Hearst Corporation is incorporated by reference to the
Registrant's Form 10-KSB for the fiscal year ended February 28,
1993.
(b) Lease dated October 15, 1991, between the registrant and Ronald J.
Verber and the Iscoff Family Trust (both affiliates of the
Company) is incorporated by reference to the Registrant's Form
10-KSB for the fiscal year ended February 28, 1993.
(c) Employment Agreement dated June 17, 1992, between the Registrant and
Ronald J. Verber, a Director and Officer of the Registrant is
incorporated by reference to the Registrant's Form 10-KSB for the
fiscal year ended February 28, 1993.
(d) Form of Non-Qualified Stock Option Agreement with Messes. Bartlett,
Gans and Strobin, Directors of the Registrant is incorporated by
reference to the Registrant's Form 10-KSB for the fiscal year
ended February 28, 1993.
(e) Asset Purchase Agreement dated June 30, 1993, between the Registrant
and Paula Elaine Newhouse, d.b.a. San Francisco Loan Association
is incorporated by reference to the Exhibits to the Registrant's
Form 10-QSB for the quarterly period ended May 31, 1993.
(f) Lease (including assignment, lessor's consent and extension option) for
premises located at 1013 Mission Street, San Francisco,
California, originally dated March 18, 1976 is incorporated by
reference to the Exhibits to the Registrant's Form 10-QSB for
the quarterly period ended May 31, 1993.
(g) Asset Purchase Agreement dated September 30, 1993 between the
Registrant and Reliable Mercantile & Loan Company, by and through
its owner, Bernard Blumenthal is incorporated by reference to the
Exhibits to the Registrant's Form 10-QSB for the quarterly period
ended August 31, 1993.
(h) Commercial lease for the premises located at 35 6th Street, San
Francisco, California, dated September 30, 1993 is incorporated
by reference to the Exhibits to the Registrant's Form 10-QSB for
the quarterly period ended August 31, 1993.
(i) Business Loan Agreement and Promissory Note dated September 17, 1993,
between the Registrant and Commercial Bank of San Francisco is
incorporated by reference to the Exhibits to the Registrant's
Form 10-KSB for the fiscal year ended February 28, 1994.
(j) Business Loan Agreement and Promissory Note dated February 3, 1994,
between the Registrant and Wells Fargo Bank, NA is incorporated
by reference to the Exhibits to the Registrant's Form 10-KSB for
the fiscal year ended February 28, 1994.
(k) Business Loan Agreement and Promissory Note(s) dated June 27, 1994,
between the Registrant and Wells Fargo Bank, NA is incorporated
by reference to the Exhibits to the Registrant's Form 10-QSB for
the quarterly period ended May 31, 1994.
14
<PAGE>
(l) Asset Purchase Agreement dated June 30, 1994, between the Registrant
and American Jewelry, Loan & Sports, Inc. is incorporated by
reference to the Exhibits to the Registrant's Form 10-QSB for the
quarterly period ended May 31, 1994.
(m) Commercial lease for the premises located at 402 E Street, Marysville,
California, dated June 30, 1994 is incorporated by reference to
the Exhibits to the Registrant's Form 10-QSB for the quarterly
period ended May 31, 1994.
(n) Loan Agreement and Promissory Note(s) dated December 28, 1994 between
the Registrant and Commercial Bank of San Francisco is
incorporated by reference to the Exhibits to the Registrant's
Form 10-QSB for the quarterly period ended November 30, 1994.
(o) Loan Agreement and Promissory Note(s) dated May 1, 1996 between the
Registrant and Commercial Bank of San Francisco is incorporated
by reference to the Exhibits to the Registrant's Form 10-KSB for
the fiscal year ended February 29, 1996.
.
(p) Asset Purchase Agreement dated May 1, 1996, between the Registrant and
Phillip R. Director, Personal Representative of the Estate of
George Elkins is incorporated by reference to the Exhibits to the
Registrant's Form 10-KSB for the fiscal year ended February 29,
1996.
(q) Business Loan Agreement dated September 9, 1996 between the Registrant
and Bank of America N.A.
11. Statement Regarding Computation of Per Share Earnings is incorporated
by reference to the Exhibits included herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the last quarter of
the period covered by this report.
15
<PAGE>
SIGNATURES
Pursuant to the reporting requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEST COLLATERAL, INC. May 23, 1997
By /s/ Ronald J. Verber By /s/ Robert E. Verhoeff
---------------------- ----------------------
Ronald J. Verber Robert E. Verhoeff
President and Chief Executive Vice President and
Officer Chief Financial Officer
Pursuant to the requirements of the Security Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Ronald J. Verber
- - ---------------------- President and Chairman May 27, 1997
Ronald J. Verber of the Board of Directors
/s/ Roean Iscoff
- - ---------------------- Vice President, May 27, 1997
Roean Iscoff Secretary and
Director
/s/ Flora Verber
- - ---------------------- Vice President May 27, 1997
Flora B. Verber and Director
/s/ David B. Verber
- - ---------------------- Vice President May 27, 1997
David B. Verber and Director
/s/ John P. Carver
- - ---------------------- Director May 27, 1997
John P. Carver
/s/ Martin S. Gans
- - ---------------------- Director May 27, 1997
Martin S. Gans
/s/ Edward A. Strobin
- - ---------------------- Director May 27, 1997
Edward A. Strobin
16
<PAGE>
BEST COLLATERAL, INC.
--------
REPORT ON AUDITS OF FINANCIAL STATEMENTS
AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996 AND
FOR THE YEARS THEN ENDED
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Best Collateral, Inc.:
We have audited the accompanying balance sheets of Best Collateral, Inc. as of
February 28, 1997 and February 29, 1996, and the related statements of
operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Best Collateral, Inc. as of
February 28, 1997 and February 29, 1996, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
San Francisco, California
April 25, 1997, except for Note 11 as to
which the date is May 6, 1997
<PAGE>
BEST COLLATERAL, INC.
BALANCE SHEETS
AS OF FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
Current assets:
Cash $ 179,546 $ 52,417
Pawn service charges receivable 307,839 205,377
Pawn loans receivable 2,180,826 1,246,133
Layaway sales receivable, net of allowance of $46,000 in 1997
and $19,000 in 1996, respectively 274,153 155,241
Inventory, net of allowance of $15,000 in 1997 and $10,000 in
1996, respectively 931,452 672,791
Prepaid expenses and other 13,801 51,456
---------- ----------
Total current assets 3,887,617 2,383,415
Property and equipment, net 424,897 472,381
Deferred tax asset 39,458 -
Other assets 18,338 24,388
---------- ----------
Total assets $ 4,370,310 $ 2,880,184
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $ 2,177,216 $ 911,905
Accounts payable and other accrued expenses 206,243 129,841
Income taxes payable 109,097 12,444
Accrued interest 157,900 182,371
Loans from stockholders 349,434 349,434
Loans from directors - 34,677
Deferred tax liability 107,645 56,838
---------- ----------
Total current liabilities 3,107,535 1,677,510
Convertible notes payable to employees and directors 252,500 252,500
Convertible notes payable to others 175,000 175,000
Deferred taxes - 13,109
Bank term loans - 295,416
---------- ----------
Total liabilities 3,535,035 2,413,535
---------- ----------
Excess of fair value of net assets acquired over cost, net 32,194 -
----------- ----------
Commitments (Note 9).
Stockholders' equity:
Preferred stock, no par value, 1,000,000 shares authorized;
none issued - -
Common stock, $.10 par value, 50,000,000 shares authorized;
3,999,990 shares issued and outstanding 399,999 399,999
Additional paid-in capital (257,680) (321,180)
Retained earnings 660,762 387,830
----------- ------------
Total stockholders' equity 803,081 466,649
----------- ------------
$ 4,370,310 $ 2,880,184
----------- ------------
----------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
BEST COLLATERAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
---------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenues:
Merchandise sales $ 2,649,203 $ 1,946,025
Pawn service charges 1,251,968 826,704
Gold melt income, net 98,631 28,802
------------ ------------
Total revenues 3,999,802 2,801,531
Cost of merchandise sales (1,207,971) (872,242)
------------ ------------
Revenues net of cost of sales 2,791,831 1,929,289
Selling, general and administrative expenses:
Store operating expenses (1,524,315) (1,171,365)
Administration expenses (489,635) (432,449)
------------ ------------
Operating income 777,881 325,475
Other income (expense):
Rental income 87,176 62,574
Interest and financing costs (362,599) (190,262)
Depreciation and amortization (134,150) (86,807)
Amortization of excess of fair value of net assets acquired over cost 96,581 -
Other expenses (75,062) (48,519)
------------ ------------
(388,054) (263,014)
Income before income taxes 389,827 62,461
Income tax provision (116,895) (32,857)
------------ ------------
Net income $ 272,932 $ 29,604
------------ ------------
------------ ------------
Net income per share of common stock $ 0.07 $ 0.01
------------ ------------
------------ ------------
Weighted average shares outstanding 3,999,990 3,999,990
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
BEST COLLATERAL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
---------------
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
ADDITIONAL
NUMBER PAID-IN RETAINED
OF SHARES PAR VALUE CAPITAL EARNINGS TOTAL
------------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at February 28, 1995 3,999,990 $ 399,999 $ (321,180) $ 358,226 $ 437,045
Net income for year ended February 29, 1996 - - - 29,604 29,604
----------- ----------- ----------- ---------- ----------
Balance at February 29, 1996 3,999,990 399,999 (321,180) 387,830 466,649
Issuance of warrants to purchase common
stock (Note 7) - - 63,500 - 63,500
Net income for year ended February 28, 1997 - - - 272,932 272,932
----------- ----------- ----------- ---------- ----------
Balance at February 28, 1997 3,999,990 $ 399,999 $ (257,680) $ 660,762 $ 803,081
----------- ----------- ----------- ---------- ----------
----------- ----------- ----------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
BEST COLLATERAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED FEBRUARY 28, 1997 AND FEBRUARY 29, 1996
-----------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 272,932 $ 29,604
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 134,150 86,807
Amortization of excess of fair value of net assets acquired over cost (96,581) -
Financing costs relating to issuance of warrants 63,500 -
Change in assets and liabilities:
Pawn service charges receivable (49,473) (34,752)
Layaway sales receivable (118,912) (19,853)
Income taxes payable 96,653 12,444
Inventory 68,426 (7,671)
Prepaid expenses and other assets 40,306 (9,340)
Accounts payable and accrued expenses 51,931 29,470
Deferred taxes (1,760) 19,413
----------- -----------
Total adjustments 188,240 76,518
----------- -----------
Net cash provided by operating activities 461,172 106,122
----------- -----------
Cash flows used in investing activities:
Loans made, including loans renewed (6,445,292) (3,890,472)
Loans repaid or renewed 5,155,064 3,157,525
Loans forfeited and transferred to inventory 729,234 461,358
Purchase of property and equipment (83,267) (285,295)
Acquisition of pawn shop assets (Note 10) (625,000) -
----------- -----------
Net cash used in investing activities (1,269,261) (556,884)
----------- -----------
Cash flows from financing activities:
Borrowings under convertible notes payable to related parties - 100,000
Borrowings under convertible notes payable to others - 50,000
Borrowings under loans payable to directors - 35,000
Repayments of loans to directors (34,677) (323)
Borrowings under bank lines of credit 2,323,338 1,199,141
Repayments of bank lines of credit (943,027) (809,736)
Repayments of bank term loans (410,416) (115,000)
----------- -----------
Net cash provided by financing activities 935,218 459,082
----------- -----------
Net increase in cash 127,129 8,320
Cash at beginning of year 52,417 44,097
----------- -----------
Cash at end of year $ 179,546 $ 52,417
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 323,570 $ 157,929
----------- -----------
----------- -----------
Income taxes $ 4,200 800
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
1. ORGANIZATION:
Best Collateral, Inc. (the Company) is engaged in acquiring, establishing
and operating pawnshops which lend money on the security of pledged
tangible personal property. The Company currently operates seven stores
in Northern California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
LOANS AND INCOME RECOGNITION:
Pawn loans (loans) are generally made on the pledge of tangible personal
property for four months plus a ten-day grace period. Pawn service
charges on loans, in excess of loan origination costs, are recognized
as income on a constant yield basis over the expected loan term.
If the loan is not repaid, the principal amount loaned plus accrued pawn
service charges become the cost of the forfeited collateral, which is
transferred into inventory.
Management limits its credit risk by lending against pledged property in
amounts less than the estimated resale value of the property.
LAYAWAYS:
Layaway sales are recorded as sales upon receipt of the initial payment.
The remaining receivable is classified as a current asset. If remaining
receivables are not paid, the layaway defaults and the layaway item
reverts back to inventory at original cost. Amounts already paid on
the defaulted layaways are considered income and are not returned to
the buyer. The Company provides an allowance for layaway sales
receivable based on management's estimate of the amount by which
uncollectible receivables would exceed the cost of the items reverting
back to inventory.
Continued
F-6
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
INVENTORY:
Inventory represents merchandise acquired from forfeited loans,
merchandise purchased directly from the public and new merchandise
purchased from vendors. Inventory is stated at the lower of cost or
market. The Company provides an allowance for obsolescence based on
management's evaluation of the merchandise.
PROPERTY AND EQUIPMENT:
Property and equipment are recorded at cost. Depreciation expense is
generally provided using the straight-line method over the estimated lives
of the assets or the related lease terms, whichever is less. Estimated
lives are as follows:
Furniture and fixtures 5 years
Leasehold improvements 4-10 years
The cost of assets sold or otherwise disposed of and the accumulated
depreciation thereon are eliminated from the accounts at the time of
disposition, and any resulting gain or loss is credited or charged to
income.
NONCOMPETE AGREEMENTS:
Noncompete agreements are recorded at the price agreed upon by the Company
and sellers, and are amortized on the straight-line basis over the term of
the agreement.
NET INCOME PER COMMON SHARE:
Net income per common share is computed based upon the weighted average
number of common and dilutive common equivalent shares outstanding during
the period. Common equivalent shares consist of stock options and
warrants. Primary and fully diluted net income per share are the same as
the effect of stock options, warrants and convertible debt would be
antidilutive or immaterial.
RECLASSIFICATIONS:
Certain amounts in the 1996 financial statements have been reclassified to
correspond to the 1997 presentation. These reclassifications did not
affect previously reported net income or retained earnings.
Continued
F-7
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued:
INCOME TAXES:
The Company reports income taxes in accordance with Statement of Financial
Accounting Standards No. 109, which requires an asset and liability
approach in accounting for income taxes. Accordingly, deferred tax assets
and liabilities arise from the differences between the tax basis of an
asset or liability and its reported amount in the financial statements.
Deferred tax amounts are determined by using the tax rates expected to be
in effect when the taxes will actually be paid or refunds received, as
provided under currently enacted tax law. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount
expected to be realized. Income tax expense or credit is the tax payable
or refundable, respectively, for the period plus or minus the change
during the period in deferred tax assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
Carrying amounts of certain of the Company's financial instruments
including cash, pawn service charges receivable, pawn loans receivable,
layaway sales receivable, accounts payable, and other accrued liabilities
approximate fair value due to their short maturities.
Pawn loans are outstanding for a relatively short period, generally 120
days or less. The rate of pawn service charge bears no relationship to
interest rate market movements. Generally, pawn loans may not be resold
to anyone but a licensed pawnbroker. For these reasons, management
believes that the fair value of pawn loans approximates their carrying
value.
Based on borrowing rates currently available to the Company for notes and
loans with similar terms, the carrying value of its long-term convertible
notes and bank term loans approximates fair value.
OTHER RECENT PRONOUNCEMENTS:
In February 1997, the Financial Accounting Standards Board ("FASB") issued
SFAS 128, "Earnings Per Share" which requires the disclosures of basic
earnings per share and diluted earnings per share. Also in February 1997,
the FASB issued SFAS 129, "Disclosure of Information About Capital
Structure" which requires the disclosures of liquidation preferences of
preferred stock and information in regards to any securities issued by
the Company within its financial statements. SFAS 128 and 129 are
effective for fiscal years beginning after December 15, 1997. Adoption
of SFAS 128 and 129 in 1998 is not expected to have a material effect on
the Company's financial position or results of operation.
Continued
F-8
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
3. PROPERTY AND EQUIPMENT:
Major classifications of property and equipment at February 28, 1997 and
February 29, 1996 were as follows:
1997 1996
Furniture and fixtures $ 448,880 $ 408,472
Leasehold improvements 433,573 390,714
---------- -----------
882,453 799,186
Accumulated depreciation (457,556) (326,805)
---------- -----------
$ 424,897 $ 472,381
---------- -----------
---------- -----------
Depreciation expense amounted to $130,751 and $83,407 for 1997 and 1996,
respectively.
4. BANK LOANS:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Prime plus 1.5% - $3,000,000 revolving line of credit available through
maturity at August 1, 1997, interest due monthly,
collateralized by all inventory and receivables of the Company, guaranteed by the
Company's two principal stockholders $ 2,177,216 -
Prime plus 1.75% - $800,000 revolving line of credit, interest due monthly,
available through maturity at August 15, 1996 - $ 786,905
Prime plus 2% - $50,000 revolving line of credit, available through maturity at
December 10, 1996, interest due monthly, guaranteed by the
Company's two principal stockholders - 10,000
Prime plus 2.5% - $525,000 term loans to a bank, $425,000 due in monthly
payments of $7,084 and interest through July 1, 1999, $100,000 due
in monthly payments of $1,667 and interest through December 31,
1999, collateralized by all Company assets, guaranteed by the
Company's two principal stockholders - 370,416
Prime plus 2% - $50,000 term loan to a bank due in monthly payments of
$833 and interest through January 15, 2000 - 40,000
------------- -----------
2,177,216 1,207,321
Less: current portion 2,177,216 911,905
------------- -----------
- $ 295,416
------------- -----------
------------- -----------
</TABLE>
Certain of these notes contain covenants, including the requirements of a
minimum current ratio, a maximum debt to worth ratio and profitable operations
each quarter. At February 28, 1997, the Company was in compliance with the bank
convenants. At February 28, 1997 and February 29, 1996, the prime rate was
8.25% per annum.
Continued
F-9
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
5. LOANS FROM RELATED PARTIES:
Certain stockholders of the Company have made uncollateralized loans to the
Company in the amount of $349,434 at February 28, 1997 and February 29,
1996. The loans are subordinate to the facilities covered under the bank
loan agreements, are due on demand and bear annual interest at the prime
rate (8.25% at February 28, 1997).
Total interest expense related to loans from related parties for the years
1997 and 1996 was $28,828 and $35,079, respectively.
In May 1996, a stockholder of the Company borrowed $400,000 from a
financial institution and used the funds to collateralize the line of
credit increase associated with the May 1996 store acquisition (refer to
Note 10). The Company agreed to pay for the interest expense incurred by
the stockholder on the amount borrowed. Interest expense reimbursed to
this stockholder for the year ended February 28, 1997 amounted to $16,969.
6. CONVERTIBLE NOTES:
At February 28, 1997, the Company had outstanding a $92,500 convertible
note payable to an employee bearing annual interest at 8%. This note was
issued in connection with the acquisition of a pawnshop in fiscal 1994,
prior to the seller becoming an employee of the Company. Subsequent to
year-end, this note was renewed and is now due on June 30, 1999. This note
may be converted into the Company's common stock for $1.00 per share at the
employee's option.
At February 28, 1997, the Company also had outstanding $160,000 of
noncurrent convertible notes payable to an employee and directors and
$175,000 of noncurrent convertible notes payable to others, bearing annual
interest at 10%. Payments of interest only are made in October and April.
Principal of $185,000 on these notes is payable on April 30, 2000 and
$150,000 on April 30, 2002. These notes may be converted into the
Company's common stock for $1.00 per share at the payee's option. At the
election of the Company, $185,000 of these notes may be redeemed after
April 30, 1997, and $150,000 of these notes after April 30, 1999, at the
redemption price of 105% of the principal amount plus accrued and unpaid
interest.
Total interest expense related to convertible notes payable to an employee
and directors for 1997 and 1996 approximated $40,900 and $11,208,
respectively.
All convertible notes payable are subordinate to the facilities covered
under the bank loan agreements.
Continued
F-10
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
6. CONVERTIBLE NOTES, CONTINUED:
The Company's long-term debt is scheduled to mature as follows:
LOANS FROM
RELATED CONVERTIBLE
FISCAL BANK LOANS PARTIES NOTES TOTAL
-------- ----------- ------------ ------------- ------------
1998 $ 2,177,216 $ 349,434 - $ 2,526,650
1999 - - - -
2000 - - $ 277,500 277,500
2001 - - - -
2002 - - 150,000 150,000
------------- ------------- ------------ ------------
Total $ 2,177,216 $ 349,434 $ 427,500 $ 2,954,150
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
7. STOCK OPTIONS AND WARRANTS:
In March 1993, in connection with entering into consulting arrangements,
the Company granted options to purchase shares of the Company's common
stock to three members of the Board of Directors. Under the Nonqualified
Stock Option Agreements, each option provides the holder the right to
purchase 200,000 shares of common stock at an option price of $1.00 per
share. The options are exercisable in equal increments after each of the
first three years in which these board members serve as consultants to the
Company. In August 1996, the Company granted an option to purchase 200,000
shares of common stock at an option price of $1.00 per share to a new
Director under provisions consistent with the 1993 Option Agreements. At
February 28, 1997, options for 600,000 of these shares are vested and
exercisable. The options expire ten years after their grant date.
In June 1993, the Company granted options to purchase shares of the
Company's common stock to a senior member of management. The options
provide the right to purchase 60,000 shares of common stock at an option
price of $1.00 per share after one year of service, and another 60,000
shares after two years of service. At February 28, 1997, options for
these 120,000 shares are vested and exercisable. The options expire ten
years after their grant date.
In January 1997, the Board of Directors modified the options which provide
the right to purchase 720,000 shares of common stock by reducing the
exercise price from $1.00 per share to $0.40 per share. No compensation
cost has been recognized in the Company's financial statements as the
modified exercise price approximated the current market value of the stock
as of the remeasurement date. Additional compensation cost in relation to
this modification has been included in the pro forma amounts below.
Continued
F-11
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
7. STOCK OPTIONS AND WARRANTS, CONTINUED:
In April 1996, in connection with the negotiation of the terms of certain
credit accommodations to be extended in favor of the Company, the Company
granted warrants to a commercial financial institution which entitles the
financial institution to purchase 125,000 shares at the exercise price of
the lower of $1.00 or the lowest price granted to any other investor ($0.40
per share as at February 28, 1997). The warrants were immediately vested
and exercisable upon grant, and expire ten years after their grant date.
Financing costs of $63,500 were recognized in 1997 in relation to this
grant.
Information regarding the Company's outstanding stock options and warrants
at February 28, 1997 is presented below:
<TABLE>
<CAPTION>
1997 1996
--------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 720,000 $0.57 720,000 $0.57
Granted 325,000 $0.40 - -
Exercised - - - -
Forfeited - - - -
Expired - - - -
---------- ---------- ---------- ----------
Outstanding at end of year 1,045,000 $0.52 720,000 $0.57
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Options exercisable at year-end 845,000 720,000
---------- ----------
---------- ----------
</TABLE>
The weighted average exercise price in the above table for 1996 and 1997
has been adjusted for modifications of the stock options which occurred in
1997.
The Company adopted the disclosure provisions of SFAS 123, "Accounting for
Stock Based Compensation", in 1997 and has applied APB Opinion 25 and
related Interpretations in accounting for its nonqualified stock options.
Accordingly, no compensation cost has been recognized for its stock
options. Had compensation cost for the Company's stock-based compensation
been determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and earnings per share
for the years ended February 28, 1997 and February 29, 1996 would have been
reduced to the pro forma amounts indicated below:
FEBRUARY 28, 1997 FEBRUARY 29, 1996
---------------------- ---------------------
EARNINGS EARNINGS
NET PER NET PER
INCOME SHARE INCOME SHARE
----------- --------- ---------- ----------
As reported $ 272,932 $0.07 $ 29,604 $0.01
Pro forma $ 220,605 $0.06 $ 29,604 $0.01
Continued
F-12
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
7. STOCK OPTIONS AND WARRANTS, CONTINUED:
The Black-Scholes option pricing model is a mathematical model by which a
fair value of equity instruments at a specified point in time is
determined, taking into account the time value of money, the expected
volatility of the underlying stock price and other variables.
The fair value of each of the Company's stock options and warrants is
estimated on the grant date using a modified Black-Scholes option pricing
model with the following weighted average assumptions: an expected life of
3 years, expected volatility of 40%, a dividend yield of 0%, and a risk
free interest rate of 6.14%. Using this model, the weighted average fair
value of options and warrants granted or repriced during 1997 was $0.26 per
share. Other option valuation models and the use of other assumptions
could produce differing option values. This fair value is not necessarily
representative of the underlying stock value.
The effect on the reported net income and earnings per share amounts in the
year ended February 28, 1997, the initial year of adoption of SFAS 123, is
not considered representative of the effects of the statement on reported
net income and earnings per share in future years.
The following table summarizes information about stock options and warrants
outstanding at February 28, 1997:
<TABLE>
<CAPTION>
OPTIONS & WARRANTS OUTSTANDING OPTIONS & WARRANTS EXERCISABLE
--------------------------------------------------------- ------------------------------------
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------------ ------------- ------------------ ----------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.40 520,000 6 YEARS $0.40 520,000 $0.40
$0.40 200,000 10 YEARS $0.40 - -
$0.40 125,000 10 YEARS $0.40 125,000 $0.40
$1.00 200,000 6 YEARS $1.00 200,000 $1.00
----------- ----------
1,045,000 845,000
----------- ----------
----------- ----------
</TABLE>
Continued
F-13
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
8. INCOME TAXES:
The provision for income taxes for the years ended February 28, 1997 and
February 29, 1996 is comprised of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current:
Federal $ 93,025 $ 9,460
State 25,630 3,984
--------- -------
118,655 13,444
--------- -------
Deferred:
Federal (1,150) 17,968
State (610) 1,445
--------- --------
(1,760) 19,413
--------- --------
Total provision $ 116,895 $ 32,857
---------- ----------
---------- ----------
</TABLE>
The primary components of temporary differences which give rise to deferred tax
assets (liabilities) at February 28, 1997 and February 29, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Current deferred tax asssets (liabilities):
Reserve - layaway sales receivable $ 9,914 $ 8,227
Reserve - inventory valuation 6,495 4,330
Accrued vacation 4,809 11,665
Pawn service charges receivable (133,294) (88,928)
Other 4,431 7,868
-------- ---------
Net deferred tax liability, current $(107,645) $ (56,838)
--------- -----------
--------- -----------
Noncurrent deferred tax assets (liabilities):
Depreciation and amortization $ 11,962 $ (13,109)
Deferred financing costs 27,496 -
--------- -----------
Net deferred tax asset (liability), noncurrent $ 39,458 $ (13,109)
--------- ----------
--------- ----------
</TABLE>
Continued
F-14
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
8. INCOME TAXES, CONTINUED:
Management has determined that the Company will be able to realize the tax
benefit of the net deferred tax asset based on the future reversal of
taxable temporary differences.
The Company's effective tax rate differs from the statutory federal rate of
34% as follows:
1997 1996
Tax at statutory federal rate $ 132,541 $ 21,237
State taxes 15,183 5,809
Permanent differences (32,454) -
Other 1,625 5,811
----------- ---------
$ 116,895 $ 32,857
----------- ----------
----------- ----------
9. COMMITMENTS:
The Company leases its facilities and automobiles under operating leases
with terms expiring in fiscal years 1998 through 2005. The two principal
stockholders of the Company are the lessor for one of the facilities. The
Company subleases to independent parties a portion of its leased properties
under noncancelable subleases. Three of the facilities and one of the
subleases have five-year renewal options.
At February 28, 1997, future minimum payments and sublease income under
these lease agreements are as follows:
<TABLE>
<CAPTION>
OPERATING LEASES
--------------------------
RELATED THIRD NET
PARTY PARTIES SUBLEASE COMMITMENT
--------- ------------ ----------- -----------
<S> <C> <C> <C> <C>
1998 $ 72,000 $ 158,433 $ 21,600 $ 208,833
1999 72,000 128,500 21,600 178,900
2000 72,000 118,595 21,600 168,995
2001 72,000 58,750 - 130,750
2002 72,000 62,550 - 134,550
Thereafter 72,000 47,650 - 119,650
---------- ---------- --------- ----------
$ 432,000 $ 574,478 $ 64,800 $ 941,678
---------- ---------- --------- ----------
---------- ---------- --------- ----------
</TABLE>
Continued
F-15
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
9. COMMITMENTS, CONTINUED:
Total rent expense and sublease income for the years ended February 28,
1997 and February 29, 1996 are summarized as follows:
1997 1996
Rent expense:
Related party $ 72,000 $ 72,000
Third parties 210,445 143,458
----------- ----------
282,445 215,458
Sublease income (87,176) (62,574)
------------ -----------
Net rent expense $ 195,269 $ 152,884
----------- -----------
----------- -----------
10. ACQUISITIONS:
On May 1, 1996, the Company acquired substantially all the assets of a
pawnshop for $625,000, funded through an increase in its primary line of
credit. The significant assets acquired include pawn loans receivable,
inventory and furniture and fixtures. This acquisition was recorded using
the purchase method.
The fair value of the acquired assets exceeded the purchase price. A
portion of the excess of the fair value of net assets acquired over cost
has been applied to reduce the amounts assigned to acquired noncurrent
assets. The remaining deferred credit, amounting to $128,775, represents
the unallocated portion of the excess of fair value of net assets acquired
over cost and is being amortized on the straight-line method over twelve
months. At February 28, 1997, the unamortized balance amounted to $32,194.
Unaudited pro forma financial information, as if the transaction occurred
at the beginning of the fiscal years presented, is not available.
11. PROFIT SHARING PLAN:
Subsequent to year-end the Board of Directors established a profit sharing
plan (the Plan) which covers all eligible employees, except for those
employees covered by a collective bargaining agreement who have elected to
be excluded from the Plan. The Plan provides for contributions to be made
from the Company's profit, at the discretion of the Board of Directors, not
to exceed 15% of total covered compensation. The Plan was approved for the
year ended February 28, 1997. Accordingly, contribution expense of $68,394
has been accrued in the Company's financial statements for 1997.
Continued
F-16
<PAGE>
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
---------------
12. FOURTH QUARTER ADJUSTMENTS:
Results for the fourth quarter of 1997 include an expense of $63,500
representing the fair value of warrants issued during the year, in
accordance with SFAS 123 (see Note 7). The issuance of the warrants
occurred in April 1996 and the expense should have been recorded in the
first quarter results of the Company. As a result of this expense, the
reported net income in the quarter ended May 31, 1996 would have been
$20,794 ($0.01 per share), reflecting the expense of $63,500 net of tax of
$25,400, instead of $58,894 ($0.01 per share) as reported.
F-17
<PAGE>
BEST COLLATERAL, INC.
Form 10-KSB
For the fiscal year ended February 28, 1997
EXHIBIT 11.1
Statement Regarding Calculation of per Share Earnings
For the years ended February 28, 1997 and February 29, 1996
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Primary:
Earnings:
Net income applicable to primary earning per share calculation $272,932 $29,604
--------- --------
Weighted average number of shares outstanding:
Common shares and equivalents 3,999,990 3,999,990
Additional shares outstanding assuming exercise of stock options ---- ----
reduced by the number of shares which could have been purchased with
the proceeds from the exercise of such options
Additional shares outstanding assuming exercise of warrants reduced by ---- ----
the number of shares which could have been purchased with the
proceeds from the exercise of such warrants
--------- --------
Weighted average number of shares outstanding, as adjusted: 3,999,990 3,999,990
--------- --------
--------- --------
Net income per share - primary $0.07 $0.01
--------- --------
--------- --------
Fully diluted:
Earnings:
Net income applicable to primary earnings per share calculation 272,932 29,604
Add: Interest relating to 10% convertible subordinate notes 23,450 16,080
Interest relating to 8% convertible subordinate notes 5,180 3,552
--------- --------
Net income applicable to primary earnings per share calculation 301,562 49,236
--------- --------
--------- --------
Weighted average number of shares outstanding:
Common shares and equivalents 3,999,990 3,999,990
Additional shares outstanding assuming exercise of stock options --* --*
reduced by the number of shares which could have been purchased with
the proceeds from the exercise of such options
Additional shares outstanding assuming exercise of warrants reduced by 0 --**
the number of shares which could have been purchased with the
proceeds from the exercise of such warrants
Additional shares outstanding assuming conversion of 10% convertible 335,000 335,000
subordinated notes
Additional shares outstanding assuming conversion of 8% convertible 92,500 92,500
subordinated notes
--------- --------
Weighted average number of shares outstanding, as adjusted 4,427,490 4,427,490
--------- --------
--------- --------
Net income per share - fully diluted 0.07 0.01
--------- --------
--------- --------
</TABLE>
*The effects of additional shares outstanding from the exercise of stock
options were excluded from the computation as the affect is antidilutive.
**The effects of additional shares outstanding from the exercise of warrants
were excluded from the computation as the affect is antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> FEB-01-1997
<CASH> 179,546
<SECURITIES> 0
<RECEIVABLES> 2,808,818
<ALLOWANCES> 46,000
<INVENTORY> 931,452
<CURRENT-ASSETS> 3,887,617
<PP&E> 882,453
<DEPRECIATION> 457,556
<TOTAL-ASSETS> 4,370,310
<CURRENT-LIABILITIES> 3,107,535
<BONDS> 0
0
0
<COMMON> 399,999
<OTHER-SE> 403,083
<TOTAL-LIABILITY-AND-EQUITY> 4,370,310
<SALES> 2,649,203
<TOTAL-REVENUES> 3,999,802
<CGS> 1,207,971
<TOTAL-COSTS> 2,013,950
<OTHER-EXPENSES> 25,455
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 362,599
<INCOME-PRETAX> 389,827
<INCOME-TAX> 116,895
<INCOME-CONTINUING> 272,932
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 272,932
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
