<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the six month and quarterly period ended August 31, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____ to ____
Commission file number 0-17879
BEST COLLATERAL, INC.
(Exact name of small business issuer as specified 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)
(415) 550-6674
(Issuer's telephone number)
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
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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
Transitional Small Business Disclosure Format (check one):
Yes No X
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BEST COLLATERAL, INC.
FORM 10-QSB
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of August 31, 1997 and February 28, 1997 3
Statements of Operations for the three and six months ended
August 31, 1997 and 1996 4
Statements of Cash Flow for the six months ended
August 31, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Default Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Securities Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
2
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Part I. Financial Information
Item 1. Financial Statements
BEST COLLATERAL, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
Aug 31, 1997 Feb 28, 1997
(Unaudited) (Audited)
------------ ------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 71,841 $ 179,546
Pawn service charges receivable 314,600 307.839
Pawn loans receivable 2,287,683 2,180,826
Layaway sales receivable, net 284,629 274,153
Inventory 958,682 931,452
Prepaid expenses and other 24,585 13,801
---------- ----------
Total current assets 3,942,020 3,887,617
Property and equipment, net 450,041 424,897
Deferred tax asset 39,458 39,458
Other assets 15,595 18,338
---------- ----------
Total assets $4,447,114 $4,370,310
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 208,551 $ 206,243
Income tax payable 45,797 109,097
Accrued interest 155,033 157,900
Bank line of credit 2,245,216 2,177,216
Loans from stockholders 349,434 349,434
Deferred tax liability 107,645 107,645
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Total current liabilities 3,111,676 3,107,535
Convertible notes payable to employee & directors 252,500 252,500
Convertible notes payable to others 175,000 175,000
---------- ----------
Total liabilities 3,539,176 3,535,035
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Excess of fair value of net assets
acquired over cost, net - 32,194
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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 issued & outstanding 399,999 399,999
Additional paid-in capital (257,680) (257,680)
Retained earnings 765,619 660,762
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Total stockholders' equity 907,938 803,081
---------- ----------
Total liabilities and stockholders' equity $4,447,114 $4,370,310
========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements
3
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
BEST COLLATERAL, INC.
STATEMENT OF OPERATIONS
For the three and six months ended August 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenues:
Merchandise sales $ 699,460 $ 610,548 $1,397,653 $1,129,240
Pawn service charges 339,907 295,965 683,919 577,456
Gold melt income, net - 26,950 - 90,498
---------- ---------- ---------- ----------
Total revenue 1,039,367 933,463 2,081,572 1,797,194
Cost of merchandise sales (327,143) (259,050) (652,759) (490,767)
---------- ---------- ---------- ----------
Revenues net of cost of
merchandise sales 712,224 674,413 1,428,813 1,306,427
Selling, general &
administrative expenses:
Store operating expenses (426,607) (340,697) (822,943) (684,749)
Administrative expenses (125,254) (115,731) (265,233) (221,143)
---------- ---------- ---------- ----------
Operating income 160,363 217,985 340,637 400,535
Other income (expense):
Rental income 22,155 22,155 44,310 42,546
Interest expense &
financing costs (78,967) (84,025) (153,863) (143,874)
Depreciation & amortization (33,650) (33,100) (67,500) (64,450)
Amortization of excess of
fair value of net assets
acquired over cost - 32,194 32,194 32,194
Other expenses (16,943) (29,488) (37,221) (43,073)
---------- ---------- ---------- ----------
Income before income taxes 52,958 125,721 158,557 223,878
Income tax provision (21,400) (50,287) (53,700) (89,550)
---------- ---------- ---------- ----------
Net income $ 31,558 $ 75,434 $ 104,857 $ 134,328
========== ========== ========== ==========
Net income per share of
common stock $ 0.01 $ 0.02 $ 0.03 $ 0.03
========== ========== ========== ==========
Weighted average shares
outstanding 3,999,990 3,999,990 3,999,990 3,999,990
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements
4
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Part I. Financial Information
Item 1. Financial Statements
BEST COLLATERAL, INC.
STATEMENTS OF CASH FLOWS
For the six months ended August 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 104,857 $ 134,328
Adjustment to reconcile net income to
net cash provided by operations:
Depreciation & amortization 37,009 32,256
Change in assets & liabilities,
net of assets acquired:
Pawn service charges receivable (6,761) (24,344)
Layaway sales receivable (10,476) (28,841)
Inventory (27,230) 113,614
Prepaid expenses & other assets (9,744) (11,820)
Accounts payable and accrued expenses (559) 43,886
Income taxes payable (63,300) 80,350
----------- -----------
Total adjustments (81,061) (205,101)
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Net cash provided by operating activities 23,796 339,429
----------- -----------
Cash flows from investing activities:
Loans made, including loans renewed (3,770,018) (2,769,072)
Loans repaid, including loans renewed 3,224,312 2,142,625
Inventory acquired through defaulted pawn loans 438,849 278,893
Capital expenditures (92,644) (60,177)
Acquisition of pawnshop assets - (625,000)
----------- -----------
Net cash used in investing activities (199,501) (1,032,731)
----------- -----------
Cash flows from financing activities:
Borrowings under bank line of credit 390,000 1,355,505
Repayments of bank line of credit borrowings (322,000) (612,252)
Repayments of bank debt - (57,500)
Borrowings under loans payable to officers &
directors - 105,879
Repayments under loans payable to officers &
directors - (54,817)
----------- -----------
Net cash provided by financing activities 68,000 736,815
----------- -----------
Net (decrease) increase in cash (107,705) 43,513
Cash at beginning of period 179,546 52,417
----------- -----------
Cash at end of period $ 71,841 $ 95,930
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 149,562 $ 118,508
=========== ===========
Income taxes $ 119,500 $ 3,300
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements
5
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1: Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete fiscal year financial statements. In the
opinion of management, all normal adjustments, including normal
recurring accruals, considered necessary for a fair presentation of the
results for such interim periods have been included. The results of
operations for the periods ended August 31, 1997 and 1996 may not
necessarily be indicative of the operating results for the full year.
Note 2: Acquisitions
During the six month period ended August 31, 1996, the Company purchased
the assets of a pawnshop. The acquisition has been accounted for as a
purchase, and the assets and operations of the acquired store have been
included in the accompanying financial statements subsequent to the date
of acquisition.
Note 3: Reclassifications
Certain items in previously reported financial statements have been
reclassified to conform to the presentation used in this Form 10-QSB.
There has been no change to previously reported net income or retained
earnings.
Note 4: Other Recent Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income". This statement establishes standards for reporting and
presentation of comprehensive income and its components, specifically
the change in equity during a period from transactions and other events
and circumstances from non-owner sources, in a full set of general
purpose financial statements. This statement is effective for periods
beginning after December 15, 1997. Application of this standard is not
expected to have a material effect on the Company's financial position
or results of operations.
On June 30, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("FAS 131"),
"Disclosures about Segments of an Enterprise and Related Information".
FAS 131 establishes standards for the way that a public enterprise
reports information about operating segments in annual financial
statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued
to shareholders. FAS 131 is effective for fiscal years beginning after
December 15, 1997 and requires restatement of earlier periods presented.
Management is currently evaluating the requirements of FAS 131.
6
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
BEST COLLATERAL, INC.
Management's Discussion and Analysis
PROSPECTIVE INFORMATION
Effective September 1, 1997, the Company entered into a lease agreement
for an available property in Northern California. The Company expects to
complete capital improvements, obtain all required licenses and begin
operations near the end of the third fiscal quarter. Merchandise
requirements will be primarily filled by existing available inventory
with additional merchandise obtained on a consignment basis. Funds for
capital improvements will be financed through the Company's bank line of
credit.
On September 8, 1997, the Company acquired all of the assets of a
pawnshop located in Northern California. The assets acquired included
outstanding pawn loans and accrued interest, equipment, trade fixtures,
leasehold improvements, contract rights, transferable licenses,
goodwill, trade name and supplies. The purchase price of $35,865 was
financed through the Company's bank line of credit.
The approximate effect on the Company's balance sheet is the addition of
assets comprised of pawn loans receivable of $16,000, pawn service
charges receivable of $4,000 and furniture and equipment of $15,865.
Merchandise requirements will be primarily filled by existing available
inventory with additional merchandise obtained on a consignment basis.
Upon completion of a detailed valuation of the assets acquired, some
purchase price allocation adjustment may be necessary.
RESULTS OF OPERATIONS
The following discussion reflects the results of operations during the
three and six month period ended August 31, 1997 (the "Fiscal 1998
Periods") as compared to the results of operations for the three and six
month period ended August 31, 1996 (the "Fiscal 1997 Periods"). The
discussion should be read in conjunction with the financial statements
and related notes.
General
On May 1, 1996, the Company acquired all of the assets of a pawnshop
located in Northern California. The assets acquired included outstanding
loans, equipment, trade fixtures, leasehold improvements, customer list,
contract rights, transferable licenses, goodwill, trade name, supplies
and inventory. The purchase price of $625,000 was financed through a
$700,000 increase in the Company's primary bank line of credit. The
effect on the Company's balance sheet was the addition of assets
comprised of pawn loans receivable of $373,699, pawn service charges
receivable of $52,989 and inventory of $327,087. Acquired inventory, not
immediately liquidated through wholesale or melting of precious metals,
was allocated to Company stores based on inventory requirements and
historical sales experience.
7
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
General (continued)
As the acquired store was located near another Company store, the
acquired assets were consolidated with existing operations. As a result
of this consolidation, the Company maximized the positive impact of the
acquired assets to its' operating income. While statements of income of
the acquired store were unavailable, management estimates that the
acquisition added approximately $240,000 to the combined stores'
("Combined Store") annual merchandise sales.
Sales
The 14.6% and 23.8% increase in merchandise sales for the Fiscal 1998
Periods is a result of a 9.8% and 17.3% increase in sales for stores
operated in the Fiscal 1997 Period ("Comparable Stores") and a 46.3% and
68.8% increase by the Combined Store primarily as a result of the May
1996 acquisition. The Comparable Stores improvement consisted of a
$42,034 (48.9%) and $138,572 (90.4%) increase in merchandise sales for
two stores opened in November 1995 ("November 1995 Stores") and a $9,426
(2.2%) and $32,348 (3.9%) increase for all other locations.
During the six months ended August 31, 1996, the Company realized
$90,498 in net gold melt income primarily from the melting of excess
precious metal acquired in the May 1996 acquisition. While income from
melting excess precious metal is an aspect of the Company's on-going
operations, the amount of revenue derived during that six months is
unusually high. For the six months ended August 31, 1997, the Company
did not melt any precious metal as the Company anticipates that any
excess inventory will be absorbed by inventory requirements of the store
acquired in September 1997 and additional anticipated store opening or
acquisition during the remainder of fiscal 1998.
Management believes that on-going operations for fiscal 1998 will
provide merchandise sales consistent with the results for the three and
six month period ended August 31, 1997. Contributions from new stores
will be dependent on the Company's ability to identify, obtain
financing, complete the acquisition or opening of, and successfully
operate additional stores.
Gross Profit
While gross profits from merchandise sales improved by $20,819 (6.0%)
and $106,421 (16.7%) during the fiscal 1998 Periods, the gross profit
percentage (as a percentage of merchandise sales) decreased to 53.3% in
the Fiscal 1998 Periods compared to 57.6% and 56.6% in the Fiscal 1997
Periods. The Combined Store contributed $5,173 (10.6%) and $31,468
(38.6%), the November 1995 Stores contributed $20,865 (41.6%) and
$77,186 (87.4%) while all others declined by $5,219 (-2.1%) and $2,233
(-0.5%).
The reduction in the gross profit percentage is a result of increases in
the Company's average loan amounts. For the six month period ended
August 31, 1997, aggregate inventory turnover declined to 1.30 compared
to 1.54 for the six months ended August 31, 1996.
8
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Pawn Service Charges
The $43,942 (14.9%) and $106,463 (18.5%) increase in revenue from pawn
service charges in the Fiscal 1998 Periods is a result of a $10,505
(13.8%) and $29,330 (19.7%) increase in the Combined Store pawn service
charges revenue, a contribution of $23,903 (83.4%) and $50,024 (98.5%)
from the November 1995 Stores and $9,534 (5.0%) and $27,109 (7.2%) from
all other locations.
Since February 28, 1997, pawn loans outstanding have increased by
$106,857 (4.9%). The average annual yield on pawn loans decreased to
approximately 61.7% for the six month period ended August 31, 1997
compared to 77.8% for the six month period ended August 31,1996. This
decrease is primarily due to an increase in the average loan amount to
approximately $92.55 for the six month period ended August 31, 1997
compared to approximately $76.03 for the six month period ended August
31, 1996. Under California law, the effective loan yield decreases as
the loan amount goes up. As it remains a goal of management to increase
the Company's aggregate pawn loans outstanding balance and thus its
gross pawn service charges revenue through gathering a greater market
share of the larger dollar, higher value pawn loans, the average annual
yield decrease was expected. Management's intentions are to continue
this practice until pawn service charge revenue increases no longer
outweigh the increased investment in higher valued pawn loans.
Operating Expenses
Store operating expenses, as a percent of total revenues (net of the
income from the precious metal melt in Fiscal 1997), were approximately
41.1% and 39.6% in the Fiscal 1998 Periods compared to 37.6% and 40.2%
in the Fiscal 1997 Periods. For the six months ended August 31, 1997,
the store operating expense percentage for the Combined Store, the
November 1995 Stores and all other locations were 31.8%, 49.1% and
39.2%, respectively.
In anticipation of opening or acquiring several locations in the third
fiscal period, the Company had increased second fiscal period costs
related to the recruitment and hiring of extra store level managerial
and staff employees. This directly contributed to the increased store
operating expense percentage for the three months ended August 31, 1997.
The decrease in the overall store operating expense percentage for the
six months ended August 31, 1997 is primarily a result of improved
revenues and operating efficiencies in the Combined Store and the
November 1995 Stores. Store operating expense increases included the
addition of store personnel, defaulted layaway expense (the percent of
defaulted layaway expense to merchandise sales remained approximately
the same) and increases in insurance and advertising costs.
Corporate administrative expenses, as a percent of total revenues (net
of the income from the precious metal melt in Fiscal 1997), decreased to
approximately 12.1% and 12.8% in the Fiscal 1998 Periods compared to
12.8% and 13.0% in the Fiscal 1997 Periods. Increases in the Company's
administrative expenses were primarily due to the replacement of the
Company's accounting manager with a corporate controller, the hiring of
a human resource specialist and the associated placement and transition
costs associated with these additions.
9
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Liquidity and Capital Resources
During the six month period ended August 31, 1997, the Company utilized
cash available at February 28, 1997, cash generated from operations and
$68,000 in additional borrowings on its bank line of credit to fund its
pawn loan growth and finance capital expenditures of $92,644. This and
other changes in the Company's assets and liabilities resulted in a net
increase in its working capital of $50,262.
During the six months ended August 31, 1996, the Company invested
$625,000 on the acquisition of the assets of a pawnshop and $60,177 for
additions to fixed assets. Operational growth in those six months
required $180,681 in additional working capital. 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 the third fiscal quarter, the Company will remodel and construct
leasehold improvements on the pawnshop acquired on September 8, 1997 and
the location associated with the September 1, 1997 lease. The remodeling
and leasehold improvements will include new display fixtures, flooring,
lighting, and other interior and exterior improvements. The Company
expects that the total improvement cost for these two locations of
approximately $175,000 will be financed by internally generated cash
flow and the Company's bank line of credit.
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 larger loans on collateral with greater value. The
Company plans to manage growth in its inventory levels such that it 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.
The annual renewal of the Company's bank line of credit on August 1,
1997, has been extended by the bank to November 1, 1997 while the
Company and the bank discuss an increase in the availability under the
line of credit. The Company believes its cash flow from operations and
anticipated renewal and increase in its cash availability under its line
of credit will adequately cover its cash needs for operations during
fiscal 1998.
10
<PAGE>
Part II. Other information
Item 1. Legal Proceedings.
From time to time, the Company is involved in litigation relating to
claims arising from its normal business operations, none of which is
expected, individually or in the aggregate, to have a material adverse
effect on the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Securities Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10. Material Contracts
None
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter
for which this report is filed.
11
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Best Collateral, Inc.
---------------------
(Registrant)
Date October 14, 1997 /s/ Robert E. Verhoeff
------------------------
Robert E. Verhoeff
Vice President and
Chief Financial Officer
12
