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 November 30, 1996.
[ ] 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 ___
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_
<PAGE>
BEST COLLATERAL, INC.
FORM 10-QSB
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of November 30, 1996 and February 29, 1996 3
Statements of Operations for the three and nine months ended
November 30, 1996 and 1995 4
Statements of Cash Flow for the nine months ended November 30,
1996 and 1995 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 12
Signature 12
2
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
BEST COLLATERAL, INC.
BALANCE SHEETS
Nov 30, Feb 29,
1996 1996
(Unaudited) (Audited)
Assets
Cash $ 77,374 $ 52,417
Pawn service charges receivable 294,148 205,377
Pawn loans 2,079,474 1,246,133
Layaway sales receivable, net 255,537 155,241
Inventory 965,332 672,791
Prepaid expenses 54,438 51,456
--------- ---------
Total current assets 3,726,303 2,383,415
Property and equipment, net 452,361 472,381
Other assets 18,238 24,388
--------- ---------
$ 4,196,902 $ 2,880,184
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses $ 95,833 $ 129,841
Income tax payable 177,037 12,444
Accrued interest 162,318 182,371
Bank line of credit 2,068,853 796,905
Loans from shareholders 349,434 349,434
Loans from directors 52,607 34,677
Deferred taxes 56,838 56,838
Bank term loans - current portion ---- 115,000
--------- ---------
Total current liabilities 2,962,920 1,677,510
Convertible notes payable to employee 252,500 252,500
Convertible notes payable to others 175,000 175,000
Deferred taxes - noncurrent 13,109 13,109
Bank term loans - noncurrent portion ---- 295,416
--------- ---------
Total liabilities 3,403,529 2,413,535
Excess of fair value of net assets acquired
over cost, net 64,387 ----
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 (321,180) (321,180)
Retained earnings 650,167 387,830
Total stockholders' equity 728,986 466,649
---------- ---------
$4,196,902 $2,880,184
========== =========
The accompanying notes are an integral part of these financial statements
3
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
BEST COLLATERAL, INC.
STATEMENTS OF OPERATIONS
For the three and nine months ended November 30, 1996 and 1995
(Unaudited)
Three Months Ended Nine Months Ended
November 30, November 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Sales $ 822,591 $ 493,912 $ 2,156,918 $ 1,429,500
Pawn service charges 325,748 206,241 903,204 601,287
Total revenues 1,148,339 700,153 3,060,122 2,030,787
Cost of sales (350,520) (225,068) (955,876) (629,845)
--------- -------- --------- ---------
Gross profit 797,819 475,085 2,104,246 1,400,942
Selling, general and
administrative expenses:
Store operating expenses (382,701) (306,982) (1,067,450) (852,145)
Administrative expenses (122,872) (120,495) (344,015) (339,729)
Operating income 292,246 47,608 692,781 209,068
Other income (expense):
Rental income 22,221 16,359 64,767 46,215
Interest expense (74,296) (51,183) (218,170) (145,941)
Depreciation (35,850) (21,950) (100,300) (55,370)
Amortization of excess of
fair value of net assets
acquired over cost 32,193 ---- 64,387 ----
Other expenses (23,162) (7,903) (66,235) (23,248)
Income before income
taxes 213,352 (17,069) 437,230 30,724
Income tax provision (85,343) 6,800 (174,893) (12,300)
-------- ------- -------- -------
Net income $128,009 $ (10,269) $ 262,337 $ 18,424
======== ======== ======== =======
Income per share of
common stock $ 0.03 $ (0.00) $ 0.07 $ 0.00
======== ========== ====== ======
The accompanying notes are an integral part of these financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Part I. Financial Information
Item 1. Financial Statements
BEST COLLATERAL, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended November 30, 1996 and 1995
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 262,337 $ 18,424
-------- -------
Adjustments to reconcile net income to net cash provided
by (used in) operations:
Depreciation and amortization 38,462 55,369
Change in assets and liabilities:
Pawn service charges receivable (35,782) (23,511)
Layaway sales receivable (100,296) (16,579)
Inventory 34,546 (6,972)
Prepaid expenses and other assets 618 5,098
Accounts payable and accrued expenses (54,061) 7,890
Income taxes payable 164,593 13,371
Total adjustments 48,080 34,666
------- -------
Net cash provided by operating activities 310,417 53,090
Cash flows from investing activities:
Loans made, including loans renewed (4,529,288) (2,796,567)
Loans repaid, including loans renewed 3,556,128 2,274,574
Inventory acquired through defaulted pawn loans 513,518 334,097
Capital expenditures (80,280) (312,155)
Acquisition of pawn shop assets (625,000) ----
--------- ---------
Net cash used in investing activities (1,164,922) (500,051)
Cash flows from financing activities:
Borrowings under bank lines of credit 1,978,308 959,431
Repayments of bank line of credit borrowings (706,360) (615,026)
Repayments of bank debt (410,416) (86,249)
Borrowings under loans payable to officer and directors 105,879 24,096
Repayments under loans payable to officer and directors (87,949) ----
Proceeds from issuance of convertible debt ---- 150,000
------- -------
Net cash provided by financing activities 879,462 432,252
Net increase (decrease) in cash 24,957 (14,709)
Cash at beginning of period 52,417 44,097
Cash at end of period $ 77,374 $ 29,388
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 228,993 $ 82,655
Income taxes $ 10,150 $ ----
The accompanying notes are an integral part of these financial statements
</TABLE>
5
<PAGE>
Part I. Financial Information
Item 1. Financial Statements
Best Collateral, Inc.
Notes to Financial Statements
November 30, 1996
(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 November 30, 1996 and 1995 may
not necessarily be indicative of the operating results for the full year.
Note 2: Acquisitions
During the nine month period ended November 30, 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 unaudited financial statements subsequent to the date of
acquisition.
Note 3: Reclasifications
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.
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
None
RESULTS OF OPERATIONS
The following discussion reflects the results of operations during the three
and nine month periods ended November 30, 1996 (the "Fiscal 1997 Periods") as
compared to the results of operations for the three and nine month periods
ended November 30, 1995 (the "Fiscal 1996 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
San Francisco. The assets acquired included outstanding loans, equipment, trade
fixtures, leasehold improvements, 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 of $373,699, pawn service charges of $52,989 and inventory of
$327,087. The fair market value of the acquired assets exceeded the purchase
price by $128,775 and the Company recorded a deferred credit of that amount.
This deferred credit is being amortized into the income statement over a
period of twelve months.
7
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Sales
The 66.6% and 50.9% increase in sales for the Fiscal 1997 Periods is a result
of 49.7% and 20.0% increase in sales for stores operated in the Fiscal 1996
Periods ("Comparable Stores") and a 10.3% and 11.1% contribution by stores
acquired or opened subsequent to the Fiscal 1996 Periods ("New Stores"). For
the nine months ended November 30, 1996, sales included a 9.5% contribution
from the melting of excess precious metal obtained in the May acquisition.
While income from melting excess precious metal is an aspect of the Company's
on-going operations, the amount of revenue derived during the nine month period
ended November 30, 1996 is unusually high and should not be counted on in
future periods. For Comparable Stores, sales increases are directly
attributable to increased customer traffic and a wider selection of higher
quality jewelry stemming from the May 1996 acquisition. Management believes
these positive impacts have leveled off and expects to realize additional
growth in its retail sales by continuing to identify and implement new
marketing programs to attract a more diverse clientele. Continued
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 $203,227 (75.6%) and
$401,387 (50.2%) in the Fiscal 1997 Periods, the gross profit percentage (as a
percentage of merchandise sales) was 57.4% and 55.7% in Fiscal 1997 Periods
compared to 54.5% and 56.0% in the Fiscal 1996 Periods. Comparable Stores gross
profits increased by $152,841 (56.9%) and $172,252 (21.6%) while their gross
profit percentage was 57.1% and 56.7% in the Fiscal 1997 Periods compared to
54.2% and 56.7% in the Fiscal 1996 Periods. New Stores contributed gross
profits of $50,386 and $138,711 at a gross profit percentage of 60.2% and
58.6%. For the nine months ended November 30, 1996, the Company realized gross
profits of $90,424 from the melting of excess inventory.
For the nine month period ended November 30, 1996, aggregate inventory turnover
improved to 1.53 compared to 1.18 for the nine months ended November 30, 1995.
Management believes that the balance desired between inventory turnover/
discounting and higher profits on merchandise sales was attained and believes
its gross profit percentage for the nine months ended November 30, 1996 is
indicative of what the Company should expect in the future.
8
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Pawn Service Charges
The 58.0% and 50.3% increase in revenue from pawn service charges in the Fiscal
1997 Periods is a result of a 47.5% and 38.2% increase in Comparable Stores
pawn service charges revenue and a contribution of 6.8% and 8.1% from New
Stores.
Pawn loans outstanding increased by $150,787 (7.9%) and $833,341 (66.9%) during
the Fiscal 1997 Periods. Comparable Store pawn loans outstanding grew by
$116,643 (9.4%) and 339,101 (17.3%) and New Stores grew by $34,144 (22.3%) and
$120,541 (180.3%). The loans obtained in the May acquisition added $373,699
during the nine month period ended November 30, 1996. The average annual yield
on pawn loans decreased to 69.8% for the nine month period ended November 30,
1996 compared to 77.2% for the nine month period ended November 30,1995.
The average annual yield for Comparable Stores was 68.9% in the nine month
period ended November 30, 1996 while New Stores had an 88.2% average annual
yield.
The decline in the Company's average annual yield is attributable to an increase
in its average loan outstanding. This is a result of the higher average loan
amounts obtained in the May acquisition and a concerted effort by the Company to
increase its market share of higher value pawn loans. As California law
prescribes, the effective loan yield decreases as the loan amount increases.
While the lending on higher value collateral has resulted in a net decrease
in the rate of return on the Company's loan portfolio, it has been a
contributing factor in the continued growth in the loan portfolio and
will provide the Company with a wider offering of highly marketable jewelry
inventory.
The average annual yield from new stores will tend to be greater than Comparable
Stores as the initial loans made tend to be for those customers who require
lower loan amounts. As the store becomes more established and recognized in the
community, customers with higher valued collateral initiate loan transactions.
This tendency results in an initial higher rate of return which will decline as
loans of greater value comprise a larger part of the pawn loans outstanding. The
Company believes it is prudent to balance a high rate of return in its lending
business with the desire to obtain higher quality merchandise for retail. This
practice allows the Company to maximize its revenue per employee and profit
potential.
Operating Expenses
Store operating expenses, as a percent of total revenues (net of the income
from the sale of melted precious metals in Fiscal 1997), were 33.4% and
37.4% in the Fiscal 1997 Periods compared to 43.9% and 42.0% in the Fiscal
1996 Periods. Comparable Stores decreased to 30.9% and 33.6% in the Fiscal
1997 while New Stores operating expenses were approximately 57.6% and 69.1%
during the same period.
The decrease in the Comparable Stores operating expense percentage is a result
of the continued increases in the stores' outstanding loan portfolio and gross
profit from retail sales with minimal additional personnel costs. The Company
expects that Comparable Stores operating expenses, as a percent of total
revenues, will decline somewhat further as the growth in their loan portfolio
continues. The operating expense percentage for New Stores should decline to
levels approximating the Comparable Stores percentage as their operations
mature and revenues increase.
9
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Corporate administrative expenses, as a percent of total revenues (net of the
income from the sale of melted precious metals in Fiscal 1997), decreased to
approximately 10.7% and 12.1% in the Fiscal 1997 Periods compared to 17.2% and
16.8% in the Fiscal 1996 Periods. There were no significant changes in the
expenses during the Fiscal 1997 Periods compared to the Fiscal 1996 Periods.
Liquidity and Capital Resources
During the nine months ended November 30, 1996, the Company invested $625,000
on the acquisition of the assets of a pawnshop and $80,280 for additions to
its fixed assets. Operational growth in those nine months required $57,478 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.
On September 9, 1996, 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 November 30, 1996) plus 1.0%. Interest is payable monthly and all
borrowings and accrued interest are due August 1, 1997.
During the nine months ended November 30, 1995, the Company invested $312,155
for additions to its fixed assets while working capital declined by $186,972.
The decline in the working capital was primarily due to the use of the lines
of credit to fund a portion of the fixed asset additions. Operations during
this period were funded through cash available at February 28, 1995, bank
borrowings and the placement of $150,000 of convertible debentures.
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 growth in
its inventory levels such that it will not adversely impact availability of
funds for loan growth.
10
<PAGE>
Part I. Financial Information
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
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 Company believes its cash flow from operations and cash available under its
line of credit will adequately cover its cash needs for operations during
fiscal 1997.
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
11
<PAGE>
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.
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 December 26, 1996 s/ Robert E. Verhoeff
Robert E. Verhoeff
Vice President and
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> NOV-30-1996
<CASH> 77374
<SECURITIES> 0
<RECEIVABLES> 2629159
<ALLOWANCES> (69380)
<INVENTORY> 965332
<CURRENT-ASSETS> 3726303
<PP&E> 876916
<DEPRECIATION> 424555
<TOTAL-ASSETS> 4196902
<CURRENT-LIABILITIES> 2962920
<BONDS> 0
0
0
<COMMON> 399999
<OTHER-SE> 328987
<TOTAL-LIABILITY-AND-EQUITY> 4196902
<SALES> 822591
<TOTAL-REVENUES> 1148339
<CGS> 350520
<TOTAL-COSTS> 350520
<OTHER-EXPENSES> 510171
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74296
<INCOME-PRETAX> 213352
<INCOME-TAX> 85343
<INCOME-CONTINUING> 128009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 128009
<EPS-PRIMARY> .03
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</TABLE>
