<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 three month and quarterly period ended May 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 [ ]
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 May 31, 1997 and February 28, 1997 3
Statements of Operations for the three months ended
May 31, 1997 and 1996 4
Statements of Cash Flow for the three months ended
May 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
<PAGE>
Part I. - Financial Information
Item 1. - Financial Statements
BEST COLLATERAL, INC.
BALANCE SHEETS
As of May 31, 1997 and February 28, 1997
<TABLE>
<CAPTION>
May 31, 1997 Feb 28, 1997
(Unaudited) (Audited)
ASSETS ------------ -----------
<S> <C> <C>
Curent assets:
Cash $ 83,067 $ 179,546
Pawn service charges receivable 309,253 307,839
Pawn loans receivable 2,176,963 2,180,826
Layaway sales receivable, net 291,014 274,153
Inventory 937,872 931,452
Prepaid expenses and other 16,592 13,801
---------- ----------
Total current assets 3,814,761 3,887,617
Property & equipment, net 404,816 424,897
Deferred tax asset 39,458 39,458
Other assets 16,888 18,338
---------- ----------
Total assets $4,275,923 $4,370,310
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable & accrued expenses $ 206,119 $ 206,243
Income tax payable 24,397 109,097
Accrued interest 159,232 157,900
Bank line of credit 2,125,216 2,177,216
Loans from stockholders 349,434 349,434
Deferred tax liability 107,645 107,645
---------- ----------
Total current liabilities 2,972,043 3,107,535
Convertible notes payable to employee & directors 252,500 252,500
Convertible notes payable to others 175,000 175,000
---------- ----------
Total liabilities 3,399,543 3,535,035
---------- ----------
Excess of fair value of net assets
acquired over cost, net 0 32,194
---------- ----------
Stockholders' equity:
Preferred stock, no par value, 1,000,000
shares authorized; none issued 0 0
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 734,061 660,762
---------- ----------
Total stockholders' equity 876,380 803,081
---------- ----------
Total liabilities & stockholders' equity $4,275,923 $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.
STATEMENTS OF OPERATIONS
For the three months ended May 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Revenues:
Merchandise sales $ 698,193 $ 518,692
Pawn service charges 344,012 281,491
Gold melt income, net 0 63,548
---------- ---------
Total revenues 1,042,205 863,731
Cost of merchandise sales (325,616) (231,717)
---------- ---------
Revenues net of cost of sales 716,589 632,014
Selling, general & administrative expenses:
Store operating expenses (396,336) (344,052)
Administrative expenses (139,979) (105,412)
---------- ---------
Operating income 180,274 182,550
Other income (expense):
Rental income 22,155 20,391
Interest expense & financing costs (74,896) (59,849)
Depreciation & amortization (33,850) (31,350)
Amortization of excess of fair value of
net assets acquired over cost 32,194 0
Other expenses (20,278) (13,585)
---------- ---------
Income before income taxes 105,599 98,157
Income tax provision (32,300) (39,263)
---------- ---------
Net income $ 73,299 $ 58,894
========== =========
Net income per share of common stock $.02 $.01
========== =========
Weighted average shares outstanding 3,999,990 3,999,990
========== =========
</TABLE>
The accompanying notes are an integral
part of these financial statements
4
<PAGE>
Part I. - Financial Information
Item 1. - Financial Statements
BEST COLLATERAL, INC.
STATEMENTS OF CASH FLOWS
For the three months ended May 31, 1997 and 1996
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 73,299 $ 58,894
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation & amortization 33,850 31,350
Amortization of excess of fair value of net
assets acquired over cost (32,194) 0
Change in assets & liabilities:
Pawn service charges receivable (1,414) 827
Layaway sales receivable, net (16,861) 1,084
Inventory (6,420) 29,824
Prepaid expenses & other assets (2,191) (16,061)
Accounts payable & accrued expenses 1,208 (23,131)
Income taxes payable (84,700) 32,263
---------- ---------
Total adjustments (108,722) 56,156
---------- ---------
Net cash (used in) provided by operating activities (35,423) 115,050
---------- ---------
Cash flows from investing activities:
Loans made, including loans renewed (1,858,429) (1,268,097)
Loans repaid or loans renewed 1,647,398 1,024,288
Loans forfeited & transferred to inventory 214,894 136,196
Purchase of property & equipment (12,919) (32,063)
Acquisition of pawnshop assets 0 (625,000)
---------- ---------
Net cash used in investing activities (9,056) (764,676)
---------- ---------
Cash flows from financing activities:
Borrowings under bank lines of credit 160,000 1,068,305
Repayments of bank lines of credit (212,000) (414,662)
Repayments of bank term loans 0 (28,750)
Borrowings under loans payable to employee & directors 0 74,000
Repayments of loans payable to employee & directors 0 (51,617)
---------- ---------
Net cash (used in) provided by financing activities (52,000) 647,276
---------- ---------
Net decrease in cash (96,479) (2,350)
Cash at beginning of period 179,546 52,417
---------- ---------
Cash at end of period $ 83,067 $ 50,067
========== =========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 54,396 $ 61,768
========== =========
Income taxes $ 119,500 $ 7,000
========== =========
</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 May 31, 1997 and 1996 may not
necessarily be indicative of the operating results for the full year.
NOTE 2: Acquisitions
During the three month period ended May 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 unaudited 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 operation.
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
month period ended May 31, 1997 (the "Fiscal 1998 Period") as compared to the
results of operations for the three month period ended May 31, 1996 (the
"Fiscal 1997 Period"). 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, 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.
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.
7
<PAGE>
Part I. - Financial Information
Item 2. - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Sales
The 34.6% increase in merchandise sales for the Fiscal 1998 Period is a result
of a 23.1% increase in sales for stores operated in the Fiscal 1997 Period
("Comparable Stores") and a 11.5% increase by the Combined Store primarily as
a result of the May 1996 acquisition. The Comparable Stores improvement
consisted of a $96,538 (143.4%) increase in merchandise sales for two stores
opened in November 1995 ("November 1995 Stores") and a $22,922 (5.9%) increase
for all other locations.
During the Fiscal 1997 Period, the Company realized $63,548 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 the three months ended May 31, 1996 is unusually high. For the three
months ended May 31, 1997, the Company did not melt any precious metal as the
Company anticipates that any excess inventory will be utilized in connection
with the opening or acquisition of a new store 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 months ended
May 31, 1997. Contributions from new stores will be dependent on the
Companys' 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 $85,602 (29.9%) during
the three months ended May 31, 1997, the gross profit percentage (as a
percentage of merchandise sales) declined to 53.4% in the Fiscal 1998 Period
from 55.4% in the Fiscal 1997 Period. The Combined Store contributed $26,288
(79.2%), the November 1995 Stores contributed $56,321 (147.8%) and all others
contributed $2,993 (1.4%).
The reduction in the gross profit percentage is a result of increases in the
Company's average loan amounts and management's continued emphasis on
improving aggregate inventory turnover through inventory markdowns and
clearance sales. For the three month period ended May 31, 1997, aggregate
inventory turnover improved to 1.36 compared to 1.27 for the three months
ended May 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 $62,521 (22.3%) increase in revenue from pawn service charges in the
Fiscal 1998 Period is a result of a $18,825 (25.8%) increase in the Combined
Store pawn service charges revenue and a contribution of $26,121 (118.0%) from
the November 1995 Stores and $17,575 (9.5%) from all other locations.
During the Fiscal 1998 Period total pawn loans outstanding decreased by
$3,863, although, for the twelve months ended May 31, 1997 pawn loans
outstanding increased by $93,441 (16.0%) for the Combined Store, by $204,298
(202.3%) for the November 1995 Stores and $190,478(19.1%) for all other
locations. Management believes these increases are a direct result of its
willingness to increase its ratio of loan to collateral value and its
attention to customer service and positive customer shopping experiences.
Management believes total pawn loans outstanding during fiscal 1998 will
grow in the range of 4% to 6% compared to the February 28, 1997 balance.
The average annual yield on pawn loans decreased to approximately 63.0% for
the three month period ended May 31, 1997 compared to 80.8% for the three
month period ended May 31,1996. This decrease is primarily due to an increase
in the average loan amount to approximately $87.60 for the Fiscal 1998 Period
compared to approximately $71.50 for the Fiscal 1997 Period. Under California
law, the effective loan yield decreases as the loan amount goes up. As it
remains a goal of management to increase the Companys' 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), decreased to approximately 38.1%
in the Fiscal 1998 Period from 43.0% in the Fiscal 1997 Period. The Fiscal
1998 Period store operating expense percentage for the Combined Store, the
November 1995 Stores and all other locations was 30.0%, 44.3% and 38.8%,
respectively.
The decrease in the overall store operating expense percentage is primarily a
result of improved revenues and operating efficiencies in the Combined Store
and the November 1995 Stores. Significant increases in store operating
expenses included the cost of additional store personnel, defaulted layaway
expense (the percent of defaulted layaway expense to merchandise sales
remained approximately the same) and increases in insurance expense.
Corporate administrative expenses, as a percent of total revenues (net of the
income from the precious metal melt in Fiscal 1997), increased to
approximately 13.5% in the Fiscal 1998 Period compared to 13.2% in the Fiscal
1997 Period. The increase in the Company's administrative expenses was
primarily due to the replacement of the Company's accounting manager with a
corporate controller and the associated placement and transition costs
associated with the change. While administrative expenses will somewhat
increase, management believes this makes the Company stronger and better
positioned to effectively control continued growth in its operations.
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 Fiscal 1998, the Company utilized cash available at February 28, 1997
and cash generated from operations to reduce its bank line of credit by
$52,000 and pay estimated income taxes of $119,500. This and other changes
in the Company's assets and liabilities resulted in a net increase in its
working capital of $48,473. Additionally, the Company invested $12,919 for
additions to fixed assets.
During Fiscal 1997, the Company invested $625,000 on the acquisition of the
assets of a pawnshop and $32,063 for additions to fixed assets. Operational
growth in 1997 required $3,031 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.
In its on-going effort to improve customer service and overall company image,
during the second quarter of fiscal 1998 the Company will remodel another of
its established stores. While the remodeling will include new display
fixtures, flooring, lighting, other interior and exterior improvements, the
Company expects that the total cost will be less than $85,000. These
improvements are to be financed by internally generated cash flow and the
Company's bank line of credit. As the improvements will be completed while
continuing store operations, management does expect some decline in its retail
merchandise sales, however, it does not expect the decline to be significant.
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 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
<PAGE>
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: July 14, 1997 /s/ Robert E. Verhoeff
----------------------
Robert E. Verhoeff
Vice President &
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1997
<PERIOD-END> MAY-31-1997
<CASH> 83,067
<SECURITIES> 0
<RECEIVABLES> 2,805,643
<ALLOWANCES> 28,413
<INVENTORY> 937,872
<CURRENT-ASSETS> 3,814,761
<PP&E> 895,371
<DEPRECIATION> 490,555
<TOTAL-ASSETS> 4,275,923
<CURRENT-LIABILITIES> 2,972,043
<BONDS> 0
0
0
<COMMON> 399,999
<OTHER-SE> 476,381
<TOTAL-LIABILITY-AND-EQUITY> 4,275,923
<SALES> 698,193
<TOTAL-REVENUES> 1,042,205
<CGS> 325,616
<TOTAL-COSTS> 536,315
<OTHER-EXPENSES> 221
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 74,896
<INCOME-PRETAX> 105,599
<INCOME-TAX> 32,300
<INCOME-CONTINUING> 73,299
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 73,299
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
