<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 and six month periods ended August 31, 1998
[ ] 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: No: X
--- ---
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: The issuer had
4,024,990 common shares outstanding as of 8/31/98.
Transitional Small Business Disclosure Format (check one):
Yes: No: X
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<PAGE>
BEST COLLATERAL, INC.
FORM 10-QSB
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements
Balance Sheets as of August 31, 1998
and February 28, 1998 . . . . . . . . . . . . . . . . . . . 3
Statements of Operations for the three and six
month periods ended August 31, 1998 and 1997 . . . . . . . 4
Statements of Cash Flows for the three and six month
periods ended August 31, 1998 and 1997 . . . . . . . . . . 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
or Plan of Operation . . . . . . . . . . . . . . . . 9
Part II. Other Information
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities and use of proceeds . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of
Security Holders . . . . . . . . . . . . . . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . 16
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
BALANCE SHEETS
<TABLE>
<S> <C> <C>
8/31/98 2/28/98
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 62,611 $ 139,304
Pawn service charges receivable 373,534 327,185
Pawn loans receivable 2,871,267 2,504,608
Layaway sales receivable, net 282,080 250,479
Inventory, net 1,064,370 1,053,101
Income taxes receivable 74,538 74,538
Prepaid expenses and other 40,697 39,049
---------- ----------
Total current assets 4,769,097 4,388,264
Property and equipment, net 662,239 614,510
Deferred tax asset 10,318 10,318
Other assets 9,900 12,528
---------- ----------
Total assets $5,451,554 $5,025,620
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $3,244,000 $2,874,716
Accounts payable and accrued expenses 273,368 209,465
Accrued interest 182,572 167,800
Accrued income tax 2,490 0
Loans from stockholders 319,434 349,434
Convertible notes payable to employees 92,500 0
Deferred tax liability 65,861 65,861
---------- ----------
Total current liabilities 4,180,225 3,667,276
Convertible notes payable to employees
and directors 235,000 327,500
Convertible notes payable to others 75,000 75,000
---------- ----------
Total liabilities 4,490,225 4,069,776
---------- ----------
Stockholders' equity:
Preferred stock, no par value, 1,000,000
shares authorized; none issued - -
Common stock, $.10 par value, 50,000,000
shares authorized; 4,024,990 shares
issued and outstanding 402,499 402,499
Additional paid-in capital (235,180) (235,180)
Retained earnings 794,010 788,525
---------- ----------
Total stockholders' equity 961,329 955,844
---------- ----------
Total liabilities & stockholders' equity $5,451,554 $5,025,620
========== ==========
</TABLE>
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 AND SIX MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
Unaudited
Three Months Six Months
<TABLE>
<S> <C> <C> <C> <C>
8/31/98 8/31/97 8/31/98 8/31/97
Revenues:
Merchandise sales $ 806,140 $ 699,460 $1,504,478 $1,397,653
Pawn service charges 423,515 339,907 817,099 683,919
Gold melt income
(loss), net 382 - (3,216) -
---------- ---------- ---------- ----------
Total revenues 1,230,037 1,039,367 2,318,361 2,081,572
Cost of merchandise
sales (365,428) (327,143) (682,340) (652,759)
---------- ---------- ---------- ----------
Revenues net of cost
of sales 864,609 712,224 1,636,021 1,428,813
Selling, general &
administrative expenses:
Store operating (483,611) (426,607) (961,830) (822,943)
Administrative (207,700) (125,254) (390,965) (265,233)
---------- ---------- ---------- ----------
Operating income 173,298 160,363 283,226 340,637
Other income (expense):
Rental income 22,155 22,155 44,310 44,310
Interest and financing (103,320) (78,967) (194,214) (153,863)
Depreciation and
amortization (51,008) (33,650) (98,827) (67,500)
Amortization of excess
of fair value of net
assets acquired over
cost - - - 32,194
Other expenses (13,260) (16,943) (26,520) (37,221)
---------- ---------- ---------- ----------
Income (Loss) before
income taxes 27,865 52,958 7,975 158,557
Income tax benefit
(provision) (7,480) (21,400) (2,490) (53,700)
---------- ---------- ---------- ----------
Net income (loss) $ 20,385 $ 31,558 $ 5,485 $ 104,857
========== ========== ========== ==========
Net income (loss) per
share of common
stock basic $ 0.01 $ 0.01 $ 0.00 $ 0.03
========== ========== ========== ==========
Net income (loss) per share
of common diluted $ 0.01 $ 0.01 $ 0.00 $ 0.03
========== ========== ========== ==========
Weighted average shares outstanding
used in basic income
per share 4,024,990 3,999,990 4,024,990 3,999,990
========== ========== ========== ==========
Weighted average shares outstanding
used in diluted income
per share 4,427,490 4,427,490 4,427,490 4,427,490
========== ========== ========== ==========
</TABLE>
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 SIX MONTH PERIODS ENDED AUGUST 31, 1998 AND 1997
(Unaudited)
<TABLE>
<S> <C> <C>
8/31/98 8/31/97
Cash flows from operating activities:
Net income (loss) $ 5,485 $ 104,857
Adjustments to reconcile net income (loss)
to net cash provided by (used in)operations:
Depreciation and amortization 101,455 69,203
Amortization of excess of fair value
of net assets acquired over cost - (32,194)
Change in assets and liabilities:
Pawn service charges receivable (46,349) (6,761)
Layaway sales receivable (31,601) (10,476)
Income taxes receivable and payable 2,490 (63,300)
Inventory (11,269) (27,230)
Prepaid expenses and other (1,648) (9,744)
Accounts payable and accrued expenses 78,675 (559)
---------- ---------
Total adjustments 91,753 (81,061)
---------- ----------
Net cash provided by (used in) operating
activities 97,238 23,796
---------- ----------
Cash flows from investing activities:
Loans made, including loans renewed (4,611,717) (3,770,018)
Loans repaid, including loans renewed 3,784,803 3,224,312
Loans forfeited and transferred to
inventory 460,255 438,489
Purchase of property and equipment (146,556) (92,644)
---------- ----------
Net cash used in investing activities (513,215) (199,501)
---------- ----------
Cash flows from financing activities:
Borrowings under bank line of credit 920,000 390,000
Repayments of bank line of credit (550,716) (322,000)
Repayment of loan to stockholder (30,000) -
---------- ----------
Net cash provided by (used in) financing
activities 339,284 (68,000)
---------- ----------
Net decrease in cash (76,693) (107,705)
Cash at beginning of period 139,304 179,546
---------- ----------
Cash at end of period $ 62,611 $ 71,841
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 136,351 $ 149,562
========== ==========
Income taxes $ - $ 119,500
========== ==========
</TABLE>
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
AUGUST 31, 1998
(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 three and six month periods ended August 31, 1998
and 1997 may not necessarily be indicative of the operating results for
the full year.
NOTE 2: 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 3: BANK LOAN:
The bank loan contains covenants, including the requirements of a
minimum current ratio, a maximum debt to worth ratio and profitable
operations each quarter. At August 31, 1998 the Company was in
compliance with all covenants. At August 31, 1998 and 1997 the prime
rate was 8.50% per annum.
NOTE 4: NET INCOME (LOSS) PER COMMON SHARE
Three Months Six Months
<TABLE>
<S> <C> <C> <C> <C>
8/31/98 8/31/97 8/31/98 8/31/97
Basic:
Earnings:
Net income (loss)
applicable to basic
earning per share
calculation $ 20,385 $ 31,558 $ 5,485 $ 104,857
Weighted average number
of common shares
outstanding: 4,024,990 3,999,990 4,024,990 3,999,990
Net income (loss)
per share - basic $ 0.01 $ 0.01 $ 0.00 $ 0.03
========== ========== ========== ==========
</TABLE>
6
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
(UNAUDITED)
NOTE 4: NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
Three Months Six Months
<TABLE>
<S> <C> <C> <C> <C>
8/31/98 8/31/97 8/31/98 8/31/97
Diluted:
Earnings:
Net income (loss)
applicable to basic
earning per share
calculation $ 20,385 $ 31,558 $ 5,485 $ 104,857
Add: Interest
Relating to 10%
convertible
subordinate
notes $ 5,658 $ 5,025 $ 10,695 $ 11,055
Interest
relating to 8%
convertible
subordinate
notes $ 1,351 $ 1,110 $ 2,553 $ 2,442
---------- ---------- ---------- ----------
Net income (loss)
applicable to
diluted earnings
per share
calculations $ 27,394 $ 37,693 $ 18,733 $ 118,354
========== ========== ========== ==========
Weighted average
number of shares
outstanding:
Common shares 4,024,990 3,999,990 4,024,990 3,999,990
Additional shares
outstanding
assuming
conversion of
10% convertible
subordinated
notes 310,000 335,000 310,000 335,000
Additional shares
Outstanding
assuming
conversion of
8% convertible
subordinated
notes 92,500 92,500 92,500 92,500
---------- ---------- ---------- ----------
</TABLE>
7
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998
(UNAUDITED)
NOTE 4: NET INCOME (LOSS) PER COMMON SHARE (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
Weighted average
number of shares
outstanding,
as adjusted 4,427,490 4,427,490 4,427,490 4,427,490
---------- ---------- ---------- ----------
Net income (loss)
per share - diluted $ 0.01 $ 0.01 $ 0.00 $ 0.03
========== ========== ========== ==========
</TABLE>
NOTE 5: SUBSEQUENT EVENTS
On October 11, 1998, the Company acquired all of the assets of a
pawnshop located in Northern California. The assets acquired included
outstanding pawn loans, receivables, inventory, equipment, fixtures,
leasehold improvements, customer list, contract rights, transferable
licenses, trade name and supplies. The purchase price of $700,000 was
financed through a $425,000 increase in the Company's primary bank line
of credit and a $275,000 promissory note to the sellers. The effect on
the Company's balance sheet was the addition of assets comprised of
pawn loans receivable of $303,308, pawn service charges receivable of
$90,992, inventory of $170,000, layaway receivables of $15,000 and
fixed assets of 120,700.
8
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
BEST COLLATERAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to historical information, management's discussion and
analysis includes certain forward-looking statements regarding events
and financial trends which may affect the Company's future operating
results and financial position. Such statements can be identified by
their use of words such as "expects," "plans," "will," "estimates,"
"forecasts," "projects" and other words of similar meaning. These
statements are subject to risks and uncertainties that could cause the
Company's actual results and financial position to differ materially.
Influential factors include, but are not limited to: a change in
economic conditions in the markets served by the Company which could
affect the level of demand for pawn loans or previously owned
merchandise; a greater-than-anticipated competitive environment
resulting from the entrance into the California market by a large
pawnshop chain; a change in the regulatory environment including, but
not limited to, a change in the allowable interest rate structure or a
reduction in the ability to obtain required licenses and a limit on
available investment capital which may affect the Company's ability to
meet its growth expectations.
The Company does not assume the obligation to update any forward-
looking statement. Readers are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date
hereof. One must carefully consider any such statement and should
understand that many factors could cause actual results to differ from
the Company's prior results or its forward-looking statements. One
should carefully evaluate such statements in light of factors described
in the Company's filings with the Securities and Exchange Commission,
especially on Forms 10-KSB, 10-QSB and 8-K (if any).
PROSPECTIVE INFORMATION
On October 12, 1998, the Company acquired all of the assets of a
pawnshop located in Northern California. The assets acquired included
outstanding pawn loans, receivables, inventory, equipment, fixtures,
leasehold improvements, customer list, contract rights, transferable
licenses, trade name and supplies. The purchase price of $700,000 was
financed through a $425,000 increase in the Company's primary bank line
of credit and a $275,000 promissory note to the sellers. The effect on
the Company's balance sheet was the addition of assets comprised of
pawn loans receivable of $303,308, pawn service charges receivable of
$90,992, inventory of $170,000, layaway receivables of $15,000 and
fixed assets of 120,700. Acquired inventory in excess of inventory
required for the new store, not immediately liquidated through
wholesale or melting of precious metals, will be allocated to Company
stores based on inventory requirements and historical sales experience.
9
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
GENERAL
YEAR 2000 COMPLIANCE
The Company recognizes the need to ensure that its operations will not
be adversely impacted by Year 2000 software failures. The Company is
also assessing the potential overall impact of the impending century
change on its business, results of operation and financial position.
The Company has reviewed its information and operational systems in
order to identify those products, services or systems that are not Year
2000 compliant. As a result of this review, the Company has determined
that it will be required to modify or replace certain information and
operational systems so they will be Year 2000 compliant. These
modifications and replacements are being, and will continue to be, made
in conjunction with the Company's overall systems initiatives. The
Company expects to complete its Year 2000 project during the fiscal
1999 year. The Company anticipates that the total cost of Year 2000
compliance activities will not be material to the Company's financial
position or its results of operations.
The Company also faces risk to the extent that suppliers of products,
services and systems purchased by the Company and others with whom the
Company transacts business do not comply with Year 2000 requirements.
In the event any such third parties cannot provide the Company with
products, services or systems that meet the Year 2000 requirements
on a timely basis, or in the event Year 2000 issues prevent such third
parties from timely delivery of products or services required by the
Company, the Company's results of operations could be materially
adversely affected.
RESULTS OF OPERATIONS
SIX MONTH PERIODS ENDED AUGUST 31, 1998 VS. 1997
The following is a discussion of the Company's financial condition,
changes in its financial condition, and its results of operations for
the six month periods ended August 31, 1998 and 1997 (designated as
"Fiscal '99 Period" and "Fiscal '98 Period"). The discussion should be
read in conjunction with the financial statements, related notes and
other information included elsewhere in this report.
SALES
Merchandise sales increased $106,825 (7.6%) during the Fiscal '99
Period. Merchandise sales from stores operated in the Fiscal '98
Period ("Comparable Stores") decreased $-39,275 (-2.8%) during the
Fiscal '99 Period. Stores opened or acquired subsequent to the Fiscal
'98 Period ("New Stores") contributed merchandise sales of $146,100
(9.7%) during the Fiscal '99 period.
10
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
SALES (CONTINUED)
At the end of February 1998 the Company hired a regional manager
experienced in managing a multi-store environment to oversee and
improve its on-going operations and position the Company for future
growth. In addition, the Company hired a training manager at the
beginning of the second quarter to strengthen store operations and
training programs for new and existing store personnel.
During the Fiscal '99 Period the Company realized $-3,216 in net gold
melt loss. During the Fiscal '98 Period the Company did not melt any
excess precious metal. Revenue from melting excess precious metal is
an aspect of the Company's operations. The amount of income (loss)
derived from melting excess precious metal during any period is not
indicative of future results.
GROSS PROFIT
Gross profit from merchandise sales increased $77,244 (10.4%) during
the Fiscal '99 Period. Comparable Stores gross profit decreased
$10,200 (1.4%) during the Fiscal '99 Period. New Stores contributed
$87,443 (10.6%) of gross profit during the Fiscal '99 Period. Gross
profit as a percentage of merchandise sales increased to 54.6% for the
Fiscal '99 Period from 53.3% in the Fiscal '98 Period.
Aggregate inventory turnover was 1.2 during the Fiscal '99 Period
compared to 1.3 in the Fiscal '98 Period.
PAWN SERVICE CHARGES
Pawn service charge revenue increased $133,180 (19.5%) during the
Fiscal '99 Period. Comparable Stores pawn service charge revenue
increased $71,484 (10.5%) during the Fiscal '99 Period. New Stores
contributed $61,695 (7.6%) of pawn service charge revenue during the
Fiscal '99 Period.
Pawn loans outstanding increased $366,659 (14.6%) during the Fiscal '99
Period. Comparable Stores pawn loans outstanding increased by $254,893
(10.6%) during the Fiscal '99 Period. New Stores pawn loans
outstanding increased by $111,767 (113.1%) during the Fiscal '99
Period.
The average annual yield on pawn loans increased to 61.8% for the
Fiscal '99 Period compared to 61.7% in the Fiscal '98 Period. The
average loan amount outstanding in the aggregate pawn loan portfolio
increased 12.6% to $100.51 at the end of the Fiscal '99 Period.
11
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
PAWN SERVICE CHARGES (CONTINUED)
Under California law, the effective loan yield decreases as the loan
amount goes up to a loan principle amount of $2,500. It remains a goal
of management to increase the Company's aggregate pawn loans
outstanding and thus its gross pawn service charges revenue through
gathering a greater market share of the larger dollar, higher value
pawn loans. 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 (excluding net
gold melt (loss) income) were 41.4% during the Fiscal '99 Period
compared to 39.5% in the Fiscal '98 Period. Comparable Stores
operating expenses decreased to 37.1% of Comparable Stores revenue
during the Fiscal '99 Period compared to 39.5% in the Fiscal '98
Period. New Stores operating expenses contributed $177,183 (18.4%)
during the Fiscal '99 Period. New Store operating expenses were 85.3%
of New Stores revenues during the Fiscal '99 Period.
Corporate administrative expenses as a percent of total revenues
(excluding net gold melt (loss) income) increased to 16.8% in the
Fiscal '99 Period compared to 12.7% in the Fiscal '98 Period. The
administrative expense increase was primarily due to the hiring of a
regional manager, training manager and a human resource specialist,
replacement of the Company's accounting manager with a corporate
controller, and the associated placement and transition costs
associated with these additions.
12
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
RESULTS OF OPERATION
THREE MONTH PERIODS ENDED AUGUST 31, 1998 VS. 1997
The following is a discussion of the Company's financial condition,
changes in its financial condition, and its results of operations for
the three month periods ended August 31, 1998 and 1997 (designated as
"Fiscal '99 Period" and "Fiscal '98 Period"). The discussion should be
read in conjunction with the financial statements, related notes and
other information included elsewhere in this report.
SALES
Merchandise sales increased $106,680 (15.3%) during the Fiscal '99
Period. Merchandise sales from stores operated in the Fiscal '98
Period ("Comparable Stores") increased $18,105 (2.6%) during the Fiscal
'99 Period. Stores opened or acquired subsequent to the Fiscal '98
Period ("New Stores") contributed merchandise sales of $88,575 (11.0%)
during the Fiscal '99 period.
Merchandise sales for the second quarter of fiscal '99 increased 15.4%
over merchandise sales for the first quarter of fiscal '99. Comparable
Stores merchandise sales for the second quarter of fiscal '99 increased
12.0% over Comparable Stores merchandise sales for the first quarter of
fiscal '99. New Stores merchandise sales for the second quarter of
fiscal '99 increased 54.0% over New Stores merchandise sales for the
first quarter of fiscal '99.
The increase in second quarter of fiscal '99 merchandise sales over
first quarter of fiscal '99 was due to the hiring and training of store
personnel to fill staffing shortages. The Company hired a training
manager at the beginning of the second quarter to strengthen store
operations and training programs for new and existing store personnel.
Management believes that on-going operations for fiscal 1999 will
provide merchandise sales consistent with the results for the three
months ended August 31, 1998.
During the Fiscal '99 Period the Company realized $382 in net gold melt
income. During the Fiscal '98 Period the Company did not melt any
excess precious metal. Revenue from melting excess precious metal is
an aspect of the Company's operations. The amount of income (loss)
derived from melting excess precious metal during any period is not
indicative of future results.
13
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
GROSS PROFIT
Gross profit from merchandise sales increased $68,395 (18.4%) during
the Fiscal '99 Period. Comparable Stores gross profit increased
$16,721 (4.5%) during the Fiscal '99 Period. New Stores contributed
$51,675 (11.7%) of gross profit during the Fiscal '99 Period. Gross
profit as a percentage of merchandise sales increased to 54.7% for the
Fiscal '99 Period from 53.2% in the Fiscal '98 Period.
Aggregate inventory turnover was 1.3 for the Fiscal '99 Period compared
to 1.3 in the Fiscal '98 Period.
PAWN SERVICE CHARGES
Pawn service charge revenue increased $83,607 (24.6%) during the Fiscal
'99 Period. Comparable Stores pawn service charge revenue increased
$50,130 (14.8%) during the Fiscal '99 Period. New Stores contributed
$33,476 (7.9%) of pawn service charge revenue during the Fiscal '99
Period.
Pawn loans outstanding increased $235,330 (8.9%) during the Fiscal '99
Period. Comparable Stores pawn loans outstanding increased by $193,964
(7.9%) during the Fiscal '99 Period. New Stores pawn loans outstanding
increased by $41,366 (24.4%) during the Fiscal '99 Period.
The average annual yield on pawn loans increased to 61.8% for the
Fiscal '99 Period compared to 60.6% in the Fiscal '98 Period. The
average loan amount outstanding in the aggregate pawn loan portfolio
increased 12.6% to $100.51 at the end of the Fiscal '99 Period.
Under California law, the effective loan yield decreases as the loan
amount goes up to a loan principle amount of $2,500. It remains a goal
of management to increase the Company's aggregate pawn loans
outstanding and thus its gross pawn service charges revenue through
gathering a greater market share of the larger dollar, higher value
pawn loans. 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 (excluding net
gold melt (loss) income) were 39.3% during the Fiscal '99 Period
compared to 41.0% in the Fiscal '98 Period. Comparable Stores
operating expenses decreased to 35.2% of Comparable Stores revenue
during the Fiscal '99 Period compared to 41.0% in the Fiscal '98
Period. New Stores operating expenses contributed $93,864 (19.4%)
during the Fiscal '99 Period. New Store operating expenses were 76.9%
of New Stores revenues during the Fiscal '99 Period.
14
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION
OPERATING EXPENSES (CONTINUED)
Corporate administrative expenses as a percent of total revenues
(excluding net gold melt (loss) income) increased to 16.9% in the
Fiscal '99 Period compared to 12.1% in the Fiscal '98 Period. The
administrative expense increase was primarily due to the hiring of a
regional manager, training manager and a human resource specialist, and
the associated placement and transition costs associated with these
additions.
LIQUIDITY AND CAPITAL RESOURCES
During the six months ended August 31, 1998, the Company utilized cash
available at February 28, 1998 and $369,284 in net additional
borrowings on its bank line of credit to fund its pawn loan growth of
$366,659 and finance capital expenditures of $146,556. This and other
changes in the Company's assets and liabilities resulted in a $132,116
net decrease in its working capital.
During the six months ended August 31, 1998, the Company remodeled and
constructed leasehold improvements on the pawnshop acquired on
September 8, 1997. The remodeling and leasehold improvements included
new display fixtures, flooring, lighting, and other interior and
exterior improvements. In addition, the Company incurred expenditures
related to computer equipment upgrades as part of a continuing effort
to improve store operations. These expenditures were the main
contributor to the additions in property and equipment.
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 so that it will
not adversely impact the availability of funds for loan growth.
The Company's growth strategy is to expand its operations through the
acquisition of existing pawnshops and the establishment of start-up
pawnshops. The Company believes that it will finance its next several
acquisitions or start-ups through institutional lenders and private
individuals. 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 stores. 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 the fiscal 1999 year.
15
<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 SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
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.
16
<PAGE>
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Best Collateral, Inc.
---------------------
Registrant
Date: 10/15/1998 /s/ Robert E. Verhoeff
-----------------------
Robert E. Verhoeff
Vice President and
Chief Financial Officer
Date: 10/15/1998 /s/ Michael K. White
-----------------------
Michael K. White
Controller
17
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<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 62,611
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