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, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
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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
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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: 4,024,990 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 May 31, 1998
and February 28, 1998 3
Statements of Operations for the three
month periods ended May 31, 1998 and 1997 4
Statements of Cash Flows for the three month
periods ended May 31, 1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis
or Plan of Operations 8
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
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
BALANCE SHEETS
5/31/98 2/28/98
ASSETS (Unaudited) (Audited)
Current assets:
Cash $ 63,199 $ 139,304
Pawn service charges receivable 337,473 327,185
Pawn loans receivable 2,635,937 2,504,608
Layaway sales receivable, net 208,204 250,479
Inventory, net 1,068,506 1,053,101
Income taxes receivable 79,528 74,538
Prepaid expenses and other 48,418 39,049
---------- ----------
Total current assets 4,441,265 4,388,264
Property and equipment, net 639,293 614,510
Deferred tax asset 10,318 10,318
Other assets 11,076 12,528
---------- ----------
Total assets $5,101,952 $5,025,620
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank loans $2,974,000 $2,874,716
Accounts payable and accrued expenses 211,462 209,465
Accrued interest 167,751 167,800
Loans from stockholders 339,434 349,434
Deferred tax liability 65,861 65,861
---------- ----------
Total current liabilities 3,758,508 3,667,276
Convertible notes payable to employees
and directors 327,500 327,500
Convertible notes payable to others 75,000 75,000
---------- ----------
Total liabilities 4,161,008 4,069,776
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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; 4,024,990 shares
issued and outstanding 402,499 402,499
Additional paid-in capital (235,180) (235,180)
Retained earnings 773,625 788,525
---------- ----------
Total stockholders' equity 940,944 955,844
---------- ----------
Total liabilities & stockholders equity $5,101,952 $5,025,620
========== ==========
The accompanying notes are an integral
part of these financial statements
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED MAY 31, 1998 AND 1997
5/31/98 5/31/97
(Unaudited) (Unaudited)
Revenues:
Merchandise sales $ 698,338 $ 698,193
Pawn service charges 393,584 344,012
Gold melt (loss) income, net (3,598) -
---------- ----------
Total revenues 1,088,324 1,042,205
Cost of merchandise sales (316,912) (325,616)
---------- ----------
Revenues net of cost of sales 771,412 716,589
Selling, general & administrative expenses:
Store operating expenses (477,366) (396,336)
Administrative expenses (183,265) (139,979)
---------- ----------
Operating income 110,781 180,274
Other income (expense):
Rental income 22,155 22,155
Interest and financing costs (90,894) (74,896)
Depreciation and amortization (48,672) (33,850)
Amortization of excess of fair value
of net assets acquired over cost - 32,194
Other expenses (13,260) (20,278)
---------- ----------
(Loss) income before income taxes (19,890) 105,599
Income tax benefit (provision) 4,990 (32,300)
---------- ----------
Net (loss) income $ (14,900) $ 73,299
========== ==========
Net (loss) income per share of common
stock basic $ 0.00 $ 0.02
========== ==========
Net (loss) income per share of common
diluted $ 0.00 $ 0.02
========== ==========
Weighted average shares outstanding
used in basic income per share 4,024,990 3,999,990
========== ==========
Weighted average shares outstanding
used in diluted income per share 4,427,490 4,427,490
========== ==========
The accompanying notes are an integral
part of these financial statements
4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED MAY 31, 1998 AND 1997
5/31/98 5/31/97
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net (loss) income $ (14,900) $ 73,299
Adjustments to reconcile net (loss) income
to net cash provided by (used in)operations:
Depreciation and amortization 48,672 33,850
Amortization of excess of fair value
of net assets acquired over cost - (32,194)
Change in assets and liabilities:
Pawn service charges receivable (10,288) (1,414)
Layaway sales receivable 42,275 (16,861)
Income taxes receivable and payable (4,990) (84,700)
Inventory (15,405) (6,420)
Prepaid expenses and other (9,288) (2,191)
Accounts payable and accrued expenses 1,948 1,208
---------- ----------
Total adjustments 52,924 (108,722)
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Net cash provided by (used in) operating
activities 38,024 (35,423)
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Cash flows from investing activities:
Loans made, including loans renewed (2,240,687) (1,858,429)
Loans repaid, including loans renewed 1,886,073 1,647,398
Loans forfeited and transferred to
inventory 223,285 214,894
Purchase of property and equipment (72,084) (12,919)
---------- ----------
Net cash used in investing activities (203,413) (9,056)
---------- ----------
Cash flows from financing activities:
Borrowings under bank line of credit 421,000 160,000
Repayments of bank line of credit (321,716) (212,000)
Repayment of loan to stockholder (10,000) -
---------- ----------
Net cash provided by (used in) financing
activities 89,284 (52,000)
---------- ----------
Net decrease in cash (76,105) (96,479)
Cash at beginning of period 139,304 179,546
---------- ----------
Cash at end of period $ 63,199 $ 83,067
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 85,346 $ 54,396
========== ==========
Income taxes $ - $ 119,500
========== ==========
The accompanying notes are an integral
part of these financial statements
5
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 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-month periods ended May 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 May 31, 1998 the Company was out of
compliance with the profitability covenant. The Company has
requested that the bank waive the violation of the profitability
covenant. At May 31, 1998 and 1997 the prime rate was 8.50% and 8.75%
per annum, respectively.
NOTE 4: NET (LOSS) INCOME PER COMMON SHARE
5/31/98 5/31/97
(Unaudited) (Unaudited)
Basic:
Earnings:
Net (loss) income applicable to basic
earning per share calculation $ (14,900) $ 73,299
Weighted average number of common
shares outstanding: 4,024,990 3,999,990
Net (loss) income per share - basic $ 0.00 $ 0.02
========== ==========
6
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BEST COLLATERAL, INC.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998
(UNAUDITED)
NOTE 4: NET INCOME PER COMMON SHARE (CONTINUED)
5/31/98 5/31/97
(Unaudited) (Unaudited)
Diluted:
Earnings:
Net (loss) income applicable to basic
earning per share calculation $ (14,900) $ 73,299
Add: Interest relating to 10%
convertible subordinate notes 5,813 5,348
Interest relating to 8%
convertible subordinate notes 1,388 1,277
----------- ----------
Net (loss) income applicable to
diluted earnings per share
calculations $ (7,699) $ 79,924
========== ==========
Weighted average number of shares
outstanding:
Common shares 4,024,990 3,999,990
Additional shares outstanding assuming
conversion of 10% convertible
subordinated notes 310,000 335,000
Additional shares outstanding assuming
conversion of 8% convertible
subordinated notes 92,500 92,500
----------- ----------
Weighted average number of shares
outstanding, as adjusted 4,427,490 4,427,490
----------- ----------
Net (loss) income per share - diluted $ 0.00 $ 0.02
========== ==========
7
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN 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, 1998 ("Fiscal '99 Period") as compared
to the results of operations for the three month period ended May 31,
1997 ("Fiscal '98 Period"). The discussion should be read in
conjunction with the financial statements and related notes.
SALES
Merchandise sales increased $145 (0.0%) for the Fiscal '99 Period as a
result of a $57,380 (-8.2%) decrease in merchandise sales for stores
operated in the Fiscal '98 Period ("Comparable Stores") and a $57,525
(8.2%) contribution by stores opened or acquired subsequent to the
Fiscal '98 Period ("New Stores").
During the Fiscal '99 Period and Fiscal '98 Period, the Company
realized ($3,598) and $0, respectively, in net gold melt (loss) income.
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.
The stagnation in merchandise sales in the Fiscal '99 Period was due to
several factors including a shortage of store personnel caused by a
tight labor market, inexperience of new store personnel, store
remodeling, and tightening the qualifications for recording layaway
sales. 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.
GROSS PROFIT
Gross profit from merchandise sales increased $8,849 (2.4%) during the
Fiscal '99 Period. Comparable Stores gross profit decreased $26,920
(-7.2%) and New Stores contributed $35,769 (9.4%) during the Fiscal '99
Period. Gross profit as a percentage of merchandise sales increased to
54.7% for the Fiscal '99 Period from 53.4% in the Fiscal '98 Period.
Aggregate inventory turnover decreased to 1.1 for the Fiscal '99 Period
from 1.4 in the Fiscal '98 Period.
8
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
PAWN SERVICE CHARGES
Pawn service charge revenue increased $49,572 (14.4%) during the Fiscal
'99 Period. Comparable Stores increased $21,353 (6.2%) and New Stores
contributed $28,219 (7.2%) during the Fiscal '99 Period.
Pawn loans outstanding increased $131,329 (5.2%) the during Fiscal '99
Period. Comparable Stores pawn loans outstanding increased by $60,928
(2.5%) and New Stores increased by $70,401 (71.2%) during the Fiscal
'99 Period. The average annual yield on pawn loans decreased to 61.9%
for the Fiscal '99 Period compared to 63.0% in the Fiscal '98 Period.
The average loan amount in the aggregate pawn loan portfolio increased
3.7% during the Fiscal '99 Period.
The decline in the Company's average annual yield is attributable to an
increase in its average loan amount to $97 for the Fiscal '99 Period
compared to approximately $88 in the Fiscal '98 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 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 (excluding net
gold melt (loss) income) were 43.8% during the Fiscal '99 Period
compared to 38.1% in the Fiscal '98 Period. Comparable Stores
operating expenses increased to 39.3% of total revenue during the
Fiscal '99 Period compared to 38.1% in the Fiscal '98 Period. New
Stores operating expenses contributed $83,319 (17.4%) and were 97.2% 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 13.5% in the Fiscal '98 Period. The
administrative expense increase was primarily due to the hiring of a
regional 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.
LIQUIDITY AND CAPITAL RESOURCES
During the Fiscal '99 Period, the Company utilized cash available at
February 28, 1998 and $99,284 in net additional borrowings on its bank
line of credit to fund its pawn loan growth and finance capital
expenditures of $72,084. This and other changes in the Company's
assets and liabilities resulted in a $38,231 net decrease in its
working capital.
9
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company remodeled and constructed leasehold improvements on the
pawnshop acquired on September 8, 1997 during the Fiscal '99 Period.
The remodeling and leasehold improvements included new display
fixtures, flooring, lighting, and other interior and exterior
improvements. In addition, the Company incurred cost 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 and 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 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 the fiscal 1999 year.
10
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
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: 7/15/98 /s/ Robert E. Verhoeff
-----------------------
Robert E. Verhoeff
Vice President and
Chief Financial Officer
12