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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(MARK ONE)
/X/ Annual report under Section 13 or 15(d) of the Securities Act of
1934 (Fee required)
For the fiscal year ended March 31, 1996
/ / Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No fee required)
For the transition period from ________ to _________.
Commission file number: 0-26680
Nicholas Financial, Inc.
(Name of Small Business Issuer in its Charter)
British Columbia, Canada 8736-3354
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization Identification No.)
2454 McMullen Booth Road, Building C
Clearwater, Florida 34619
(Address of Principal Executive Offices) (Zip Code)
(813) 726-0763
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
Name of Each Exchange
Title of Each Class on Which Registered
- - - - -------------------------- ---------------------
- - - - -------------------------- ---------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
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
This Form 10-KSB consists of XX pages. Exhibits are indexed at page
XX.
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PART I
Item 1. Business
General
Nicholas Financial, Inc. ("Nicholas Financial-Canada") is a
Canadian holding company incorporated under the laws of British
Columbia. The business activities of Nicholas Financial-Canada are
conducted through its wholly-owned subsidiaries formed pursuant to the
laws of the State of Florida, Nicholas Financial, Inc. ("Nicholas
Financial") and Nicholas Data Services, Inc., ("NDS"). Nicholas
Financial is a specialized consumer finance company engaged primarily
in acquiring and servicing installment contracts for purchases of used
automobiles and light trucks. NDS is engaged in designing,
developing, marketing and support of industry specific computer
application software for small businesses located primarily in the
Southeast United States. Nicholas Financial's financing activities
accounted for approximately 90.3% of consolidated revenues for the
fiscal year ended March 31, 1996 and NDS's activities accounted for
approximately 9.7% of such revenues.
Nicholas Financial-Canada, Nicholas Financial and NDS are
hereafter collectively referred to as the "Company". Unless otherwise
specified, all financial information herein is designated in United
States currency.
The Company's principal executive offices are located at 2454
McMullen Booth Road, Building C, Clearwater Florida 34619, and its
telephone number is (813) 726-0763.
Background
NDS was formed pursuant to the laws of the State of Florida on
March 18, 1985 to engage in the design, development and marketing of
computer software programs. On July 28, 1986 Nicholas Data Services,
Ltd. was incorporated as a Limited Company pursuant to the laws of
British Columbia, Canada. Concurrent with the formation of Nicholas
Data Services, Ltd. the shareholders of NDS exchanged all their stock
in NDS for shares of stock in Nicholas Data Services, Ltd. and NDS
became a wholly-owned subsidiary of Nicholas Data Services, Ltd. On
July 20, 1993, Nicholas Data Services, Ltd. changed its name to
Nicholas Financial, Inc. in order to reflect the shift in primary
focus of its business operations from a software company to a
financial services company. On July 23, 1990 Nicholas Financial was
formed pursuant to the laws of the State of Florida.
From inception through July 1990, the Company was engaged
exclusively in designing, developing and marketing computer software
programs. Since July 1990, the primary focus of the Company's
business has been the purchasing and servicing of installment sales
contracts for used automobiles and light trucks. The decision to
change the focus of the Company's business was based upon management's
belief that the consumer finance industry offered greater potential to
the Company for growth than the computer software industry because of
the intense price competition that then existed in the computer
industry. Additional factors considered by management in deciding to
redirect the business activities of the Company were the availability
of financing sources to enable it to enter that business, the
availability of personnel with experience in the finance business, and
the expertise of its personnel in developing computer software
applications, which enabled it to develop the accounting and other
systems necessary to manage a portfolio of installment sale contracts.
Since changing the focus of its business actives, revenues
realized by the Company from the operations of the software business
have decreased slightly. During that period, revenues from the
finance business have increased from $88,546 in fiscal 1991, its first
full year of operations, to $5,267,530 in the fiscal year ended
March 31, 1996.
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Automobile Finance Business
The Company is engaged in the business of providing financing
programs, primarily on behalf of purchasers of used cars and light
trucks who meet the Company's credit standards, but who do not meet
the credit standards of traditional lenders, such as banks and credit
unions, because of the age of the vehicle being financed, the
customer's job instability or credit history. Unlike traditional
lenders who look primarily to the credit history of the borrower in
making lending decisions and typically finance new automobiles, the
Company is willing to purchase installment sales contracts for
purchases made by borrowers who do not have a good credit history and
for older model and high mileage automobiles. In making decisions
regarding the purchase of a particular installment sales contract the
Company considers the following factors related to the borrower,
current and prior job status, history in making installment payments
for automobiles, current income, general credit history, prior
experience with Contracts purchased from the dealer from which the
Company is purchasing the Contract, and the value of the automobile in
relation to the purchase price of the installment sales contract.
The Company's automobile finance programs are currently conducted
only in the state of Florida under the name Nicholas Financial, Inc.
As of March 31, 1996 the Company had non-exclusive agreements with
approximately 400 dealers in the State of Florida for the purchase of
retail installment sales contracts (the "Contracts") that meet the
Company's financing criteria. The dealer agreements require the
dealer to originate Contracts in accordance with the Company's
guidelines.
From July 1990 through March 31, 1996, the Company had purchased
over 7,685 Contracts with an initial principal amount aggregating
approximately $48,794,000. The average initial principal amount of
Contracts purchased by the Company was approximately $8,000, with an
initial term of 36 months. The Contracts were purchased by the
Company from automobile dealers at an average discount of
approximately 12% from their initial principal amount.
The obligers under the Contracts typically make down payments, in
the form of cash or trade-in, ranging from 10% to 20% of the sale
price of the vehicle financed. The balance of the purchase price of
the vehicle plus taxes, title fees and, if applicable, premiums for
accident and health insurance and/or credit life insurance, is
generally financed over a period of 12 to 60 months. Accident and
health insurance coverage enables the borrower to make required
payments under the Contract in the event the borrower becomes unable
to work because of illness or accident and credit life insurance pays
the borrower's obligations under the Contract upon his or her death.
The annual percentage rate ("APR") is the actual cost of
borrowing money, expressed in form of the annual interest rate payable
by the borrower. The APR for Contracts purchased by the Company range
from 18% to 30%. As of March 31, 1996, the average APR on Contracts
owned by the Company was 24.83% and the average discount from the
initial principal amount on Contracts purchased by the Company was
12%.
The Company purchases Contracts from the automobile dealer at a
negotiated price that is less than the original principal amount being
financed by the purchaser of the automobile. The amount of the
discount depends upon factors such as the age and value of the
automobile, the credit worthiness of the purchaser and competitive
conditions in the industry. Historically, the Contracts purchased by
the Company have been purchased at discounts that range from 5% to 30%
of the original principal amount of the Contract, with the average
discount being approximately 12%. In addition to the discount, the
Company charges the dealer a processing fee of $75.00 per Contract
purchased. Because of competitive conditions in the industry, all
Contracts purchased by the Company since April 1, 1992 have been
purchased from dealers without recourse against the dealer, meaning
that the Company, not the dealer, bears the risk of nonpayment by the
borrower under the Contract. Prior to then, some Contracts were
acquired with full recourse against the dealer for nonpayment by the
borrower. As of March 31, 1996, substantially all of the Company's
loan portfolio consisted of Contracts that were purchased without
recourse against the dealer. Although substantially all the Contracts
in the Company's loan portfolio were acquired without recourse, the
dealer remains liable to the Company for liabilities arising from
certain representations and warranties made by the dealer with respect
to compliance with applicable federal and state laws and valid title
to the vehicle.
The Company purchases a Contract only after the Company and the
automobile dealer arrive at a negotiated price for the Contract and
the dealer has provided the Company with the requisite proof that the
vehicle is properly titled, that the Company has a perfected first
priority lien on the financed vehicle, that the customer has obtained
the required collision
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insurance naming the Company as loss payee, that the installment sales
contract has been fully and accurately completed and validly executed.
Once the Company has received and approved all required documents, it
pays the dealer for the Contract and commences servicing the Contract
through maturity.
The Company requires the owner of the vehicle to obtain and
maintain collision insurance, naming the Company as a loss payee, in
an amount not less than the value of the vehicle, with a deductible of
not more than $500. The Company does not offer collision insurance.
The Company offers purchasers of vehicles certain other insurance
products. These products are offered on behalf of the Company by the
automobile dealer, typically at the time of sale, and consist of a
roadside assistance plan, mechanical breakdown protection plan, credit
life insurance, credit accident and health insurance and credit
property insurance. Insurance products are offered by the Company as
agent for Voyager Property & Casualty Insurance Company. If the
purchaser so desires, the cost of these products may be included in
the amount financed under the Contract. As of March 31, 1996, less
than 1% of the borrowers under Contracts in the Company's loan
portfolio had elected to purchase insurance products offered by the
Company.
The Company is also licensed to make small direct consumer loans.
Although the Company is licensed to make loans of up to $25,000, the
average loan made to date by the Company has an initial principal
balance of approximately $2,795. The Company does not expect the
average loan size to increase significantly within the foreseeable
future and does not presently intend to make loans at or near the
maximum size permitted under its license. The Company offers loans
primarily to borrowers under the Contracts purchased by the Company.
In deciding whether or not to make a loan the Company considers the
individual's credit history, job stability and income and impressions
created during a personal interview with a Company loan officer.
Additionally, because approximately 90% of the direct consumer loans
made to date have been made to borrowers under Contracts purchased by
the Company, the payment history of the borrower under the Contract is
a significant factor in making the loan decision. The direct consumer
loan program was implemented in April 1995 and is not currently a
significant source of revenue for the Company. As of March 31, 1996
loans made by the Company pursuant to its direct consumer loan program
constituted approximately 3% of the aggregate principal amount of the
Company's loan portfolio. As of March 31, 1996, the average APR for
direct consumer loans made by the Company was 25.29%, with the range
being from 20% to 30%.
In connection with its direct consumer loan program the Company
also offers health and accident insurance coverage and credit life
insurance to borrowers. Borrowers in approximately 95% of the 246
loan transactions closed by the Company as of March 31, 1996 had
elected to purchase insurance coverage offered by the Company. The
cost of this insurance is included in the amount financed by the
borrower.
As of March 31, 1996, approximately 97% of the aggregate
outstanding principal balance of loans in the Company's loan portfolio
was comprised of Contracts purchased from automobile dealers and 3%
consisted of loans made pursuant to the Company's direct loan program.
The Company currently typically purchases between 150 and 350 indirect
contracts each month and originates between 30 and 50 direct consumer
loans each month.
The Company currently operates ten branch offices in Florida.
These offices are located in Clearwater, Pinellas Park, Tampa,
Lakeland, Orlando, Ocala, Tallahassee, Melbourne, Ft. Myers, and Ft.
Lauderdale Florida. Contract purchases are approved or rejected by
the branch manager at the branch location based upon criteria
established by the Company. If a particular transaction does not meet
the criteria established by the Company, a branch manager does not
have the authority to purchase the Contract without the prior approval
of home office management.
Financing Sources
The Company financed the acquisition of contracts with its
retained earnings, cash flow from the operations, loans from investors
and insiders and a line of credit with a lending institution. In
March 1993, the Company expanded its financing sources by securing a
$4,000,000 revolving line of credit with BA Business Credit, Inc.
("BankAmerica"). The line of credit was increased to $6 million in
March 1994, $20 million in June 1994 and $25 million in May 1996.
As of March 31, 1996, the Company owed approximately $2.23
Million to 12 investors who purchased notes issued by the Company.
These notes bear interest at rates from 10 1/2% to 12%. In most
cases, the Company's obligation to repay the note is subordinated to
payment of its payment obligations under the BankAmerica line of
credit.
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Interest Rates and Revolving Line of Credit
The BankAmerica line of credit is secured by finance receivables
and other assets of the Company. The interest rate payable by the
Company on funds drawn down under the line of credit decreases as the
amount drawn down increases. For the first $10 million drawn down the
interest rate is 1.75% over the base prime rate as announced and
published from time to time by BankAmerica. After the amount drawn
down exceeds $10 million, the interest rate on the entire amount
decreases to 1.25% over the base prime rate until the amount drawn
down exceeds $15 million, when the rate decreases to 1.00% over such
base prime rate. In addition to interest, the Company also pays a
monthly fee to BankAmerica equal to .25% of the amount available under
the line of credit that has not been drawn down. As of March 31,
1996, the Company had drawn down approximately $13.1 million under the
line of credit. As of that date the interest rate payable by the
Company under the line of credit was 9.5%. The revolving line expires
in May 1998.
Private Note Offerings
From April 2, 1992 through June 30, 1995, the Company has from
time to time issued promissory notes in private offerings to investors
(the "Notes"). The Company used the proceeds from sale of the Notes
to purchase Contracts. As of March 31, 1996, the Company had issued
14 Notes to 12 investors. As of March 31, 1996, the outstanding
principal balance of the Notes outstanding as of that date was $2.26
million. Six investors, who purchased Notes aggregating $821,730,
were either directors of Nicholas Financial or their immediate family
members. One Note for $500,000 was purchased by an individual who
owns more than 5% of the outstanding shares of Common Stock.
The Notes bear interest at rates ranging from 10.5% to 12%. Two
of the notes are payable in quarterly installments of principal and
interest. The remaining twelve notes are payable interest only in
quarterly or semi-annual intervals. The entire principal balance of
these notes will be due upon maturity. The Notes mature at various
time from April 1996 through June 1998. In seven of the fourteen
notes, the Company granted the holder the right to exchange the Note
for Common Stock at prices that range from $1.75 to $2.00 per share.
Underwriting Guidelines
The Company's typical customer is approximately 30 years old, has
a monthly gross income of approximately $1,500 and a credit history
that fails to meet the lending standards of banks and credit unions.
Among the credit problems experienced by the Company's customers that
resulted in a poor credit history are: unpaid revolving credit card
obligations; unpaid medical bills; unpaid student loans; prior
bankruptcy; and evictions for nonpayment of rent. The Company
believes that its customer profile is similar to that of its direct
competitors.
The Company uses essentially the same criteria in analyzing the
purchase of a Contract as it does in analyzing a direct consumer loan.
Lending decisions regarding direct consumer loans are made based upon
a review of the customer's loan application, credit history, job
stability, income, in-person interviews with a Company loan officer
and the value of the collateral offered by the borrower to secure the
loan. To date, since approximately 90% of the Company's direct loans
have been made to individuals whose automobiles have been financed by
the Company, the customer's payment history under the automobile
installment sale agreement is a significant factor in the lending
decision. The decision process with respect to the purchase of
Contracts is similar, however, the customer's prior payment history
with automobile loans is weighted more heavily in the decision making
process and the collateral value of the automobile being financed is
taken into account.
After reviewing the information included in the loan application
and taking the other factors into account, Company representatives
categorize the borrower using traditional credit classifications of
"A", indicating high credit-worthiness, through "D", indicating lower
credit-worthiness.
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In the absence of other factors, such as a favorable payment
history on a Contract held by the Company, the Company generally makes
direct consumer loans only to individuals rated in categories "B" or
higher. Contracts are financed for individuals who fall within all
four acceptable rating categories utilized, "A" through "D". Usually
borrowers who fall within the two highest categories are purchasing a
two to four year old, low mileage used automobile from the inventory
of a new car dealer, while borrowers in the two lowest categories are
purchasing an older, high mileage automobile from an independent used
automobile dealer. Approximately 5% of the loans financed by the
Company are with customers rated in the "A" category, 10% are rated
"B", 65% are rated "C" and 20% are rated "D".
Upon credit approval and the receipt of all required title and
insurance documentation, the Company pays the dealer for the Contract.
The Company typically purchases the Contract for a price that
approximates the wholesale value of the automobile being financed.
The amount the Company is willing to pay a dealer for a particular
Contract depends upon the credit rating of the customer. The Company
will pay more (e.g. purchase the Contract at a smaller discount from
the original principal amount) for Contracts as the credit risk of the
customer improves, but the amount paid to the dealer rarely exceeds
the wholesale value of the vehicle. The discounts from the initial
principal amount of Contracts purchased by the Company range from 5%
to 30%. The Company's current established guidelines for discounts
are 7.5% for borrowers rated in the "A" category, 10% for those in the
"B" and the "C" categories and 20% for those in the "D" category.
Purchases of Contracts at discounts that do not fall within the
guidelines requires the prior approval of the Company's senior
management. Approximately 25% of the Contracts that have been
purchased by the Company were purchased with discounts that do not
fall within the guidelines.
Servicing and Monitoring of Contracts
The Company requires all customers to obtain and maintain
collision insurance covering damage to the vehicle. Failure to
maintain insurance constitutes a default under the Contract and the
Company may at its discretion, repossess the vehicle. To reduce
potential loss due to insurance lapse, the Company has the legal and
contractual right to force place its own collateral protection
insurance policy which covers loss due to physical damage to vehicles
not covered by collision insurance.
The Company's Management Information Services personnel maintain
a number of reports to monitor compliance by borrowers with their
obligations under Contracts and direct loans made by the Company.
These reports may be accessed on a real-time basis by management
personnel, including branch office managers, at computer terminals
located in the main office and each branch office. The reports
include: delinquency aging reports, insurance due reports, customer
promises reports, vehicle information reports, purchase reports,
dealer analysis reports, static pool reports, and repossession
reports.
The delinquency report is an aging report that provides basic
information regarding each account and reports accounts that are past
due. The report includes information such as the account number,
address of the borrower, home and work phone numbers of the borrower,
original term of the Contract, number of remaining payments,
outstanding balance, due dates, date of last payment, number of days
past due, scheduled payment amount, amount of last payment, total past
due, and special payment arrangements or agreements.
Accounts that are less than 120 days matured are reported one day
past due after their due date. After an account has matured more than
120 days, it does not show up on the delinquency report until it is 11
days past due, at which time a late charge is assessed. Once an
account become 30 days past due, repossession proceedings are
implemented unless the borrower provides the Company with an
acceptable explanation for the delinquency and displays a willingness
and ability to make the payment, and there is an agreed upon plan to
return the account to current status. When an account is 60 days past
due, the Company ceases amortization of the Contract and repossession
proceedings are initiated. At 120 days delinquent, if the vehicle has
not yet been repossessed, the account is written off. Once a vehicle
has been repossessed, it no longer appears on the delinquency report.
It then appears on the Company's repossession report and is sold,
either at auction or to an automobile dealer.
When an account becomes delinquent, the Company immediately
contacts the borrower to determine the reason for the delinquency and
to determine if arrangements for payment can appropriately be made.
Once payment arrangements acceptable to the Company have been made,
the information is entered in its data base and generated on a
"Promises Report" which is utilized by the collection staff for
account follow up.
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The Company also generates an insurance report to monitor
compliance with the insurance obligations imposed upon borrowers.
This report includes the account number, name and address of the
borrower, information regarding the insurance carrier, summarizes the
insurance coverage, identifies the expiration date of the policy, and
basic information regarding payment dates and term of the Contract.
This report helps the Company in identifying borrowers whose insurance
policy is up for renewal or in jeopardy of being canceled. The
Company sends written notices to, and makes direct contact with,
borrowers whose insurance policies are about to lapse or be canceled.
If the borrower fails to provide proof of coverage within 30 days of
notice, the Company has the option of purchasing insurance and adding
the cost to the balance of the Contract.
The Company prepares a repossession report that provides
information regarding repossessed vehicles and aids the Company in
disposing of repossessed vehicles. In addition to information
regarding the borrower, this report provides information regarding the
date of repossession, date the vehicle was sold, number of days it was
held in inventory prior to sale, year and make and model of the
vehicle, mileage, payoff amount on the Contract, NADA book value,
black book value, suggested sale price, location of the vehicle,
original dealer, and notes other information that may be helpful to
the Company such as the condition of the vehicle.
The Company also prepares a dealer analysis report that provides
information regarding each dealer from which it purchases Contracts.
This report allows the Company to analyze the volume of business done
which each dealer and the terms on which it purchased Contracts from
the dealer.
The Company's policy is to aggressively pursue legal remedies to
collect deficiencies from customers. The Company has repossessed
approximately 15% of the vehicles financed under the Contracts.
Delinquency notices are sent to customers and verbal requests for
payment are made beginning when an account becomes 11 days delinquent.
When an account becomes 30 days delinquent and the borrower has not
made payment arrangements acceptable to the Company or has failed to
respond to the requests for payment, a repossession request form is
prepared by the responsible branch office employee for approval by the
branch manager for the vicinity in which the borrower lives. Once the
repossession request has been approved by the branch manager, the
repossessor delivers the vehicle to an automobile dealer specified by
the Company which holds it for the Company. The Company maintains
relationships with several repossession firms which repossess vehicles
for a fee that ranges from $100 to $250 for each vehicle repossessed.
As required by Florida law, the customer is notified by certified
letter that the vehicle has been repossessed and that to retain the
vehicle he must make arrangements satisfactory to the Company and pay
the amount owed under the Contract within ten days after delivery of
the letter. The minimum requirement for return of the vehicle is
payment of all past due amounts under the Contract and all expenses of
repossession incurred by the Company. If satisfactory arrangements
for return of the vehicle are not made within the statutory period,
the Company then sends title to the vehicle to the state title
transfer department which then registers the vehicle in the name of
the Company. The Company then either sells the vehicle to a dealer or
has it transported to an automobile auction for sale. On average,
approximately 30 days lapse between the time the Company takes
possession of a vehicle and the time it is sold by a dealer or at
auction. During its most recent fiscal year, repossessed vehicles
have been sold at prices that average approximately $1,000 less than
the price paid by the Company for the Contract. When the Company
determines that there is a reasonable likelihood of recovering part or
all of any deficiency against the borrower under the Contract, it
pursues legal remedies available to it including law suits, judgement
liens and wage garnishments. Historically, the Company has recovered
approximately 15% of deficiencies from such borrowers.
Marketing and Advertising
The Company relies on its branch managers to solicit agreements
for the purchase of Contracts with automobile dealers located within a
radius of 25 miles of the branch office as its sole marketing
activity. The branch manager provides dealers with information
regarding the Company and the general terms upon which the Company is
willing to purchase Contracts. The Company presently has no plans to
implement any other forms of advertising for the purchase of Contracts
such as radio or newspaper advertisements.
Currently, the primary method utilized by the Company in
soliciting borrowers under its direct consumer loan program is direct
mailings to individuals who have a good credit history under Contracts
purchased by the Company. The Company intends to expand its
solicitation of such loans when management believes its staff is
adequately trained to evaluate credit risks associated with such
loans.
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The Used Car Industry
The used car industry in the United States can be characterized
as a mature but growing market. According to statistics from the
National Automobile Dealers Association, in 1992 aggregate used car
retail purchases by consumers totalled 22 million vehicles. These
sales resulted in an aggregate in excess of $110 billion in sales,
both by franchised dealers and independent used car dealers. The
United States Department of Commerce reported the overall growth of
used car retail purchases by consumers between the years March 1979
and 1992 to be in excess of 10% annually. The Company targets
customers who earn between $15,000 - $35,000 per year. Typically,
individuals with a gross annual income of less than $24,000 cannot
meet the requirements of traditional lenders to finance an automobile
costing over $10,000. According to information complied by the
University of Florida and published in the 1994 Florida Statistical
Abstract, the average per capita income of the total Florida work
force was $20,857 and there were approximately 5,567,000 persons in
the Florida work force.
Computerized Information System
The Company's operations utilize integrated computer systems
developed by NDS to enhance its ability to respond to customer
inquiries, to monitor the performance of its investment portfolio and
the performance of individual borrowers under Contracts. All
personnel are provided with instant, simultaneous access to
information from a single shared database. The Company has created
specialized programs to automate the tracking of loans from the point
of inception. The capacity of the networking system has been expanded
to include the Company's branch office locations. See the discussion
under Servicing and Monitoring of Contracts for a summary of the
different reports prepared by the Company.
Strategy
The Company intends to continue its expansion through the
purchase of additional Contracts and the expansion of its direct
consumer loan program. In order to increase the size of its
investment portfolio of Contracts, it will be necessary for the
Company to open additional branch offices and increase the size of its
revolving line of credit arrangement, either with Bank of America or
another lender. The Company believes that opportunity for growth
continues to exist in the State of Florida and for the foreseeable
future intends to concentrate its expansion activities there. The
Company has identified Pensacola, Jacksonville and Boca Raton as areas
in Florida in which it plans to open additional branch offices during
1996. In order to increase the size of its Gross Receivables the
Company is currently negotiating with several private investors and
financial institutions that specialize in equity funding. The Company
believes that the addition of more equity will make it possible for
the Company to continue to meet or exceed its covenants under the loan
agreement with Bank of America,
increase the amount of funds drawn down under its line of credit and
to draw down funds under the line at a faster rate. See Interest
Rates and Revolving Line of Credit for a summary of some of the
financial covenants undertaken by the Company in connection with the
Bank of America line of credit. The Company also intends to continue
its policy of not paying dividends and using any earnings from
operations to purchase Contracts or make direct consumer loans.
The Company's recently implemented direct consumer loan program
is directed by a manager located in its home office. The direct loan
manager is responsible for training personnel located in the branch
offices to solicit and close loan transactions. Currently, the
Company solicits consumer loans primarily from borrowers under
Contracts purchased by the Company. The Company's current direct
consumer loan portfolio consists almost exclusively of loans made to
either current or previous borrowers under Contracts purchased by the
Company. The Company has a $2,000,000 credit facility from
BankAmerica to initially fund its direct loan activities. As of March
31, 1996, $276,458 had been drawn down under that credit line.
Subject to its ability to expand the size of the credit line, the
Company intends to expand its solicitation of such loans when
management believes its staff is adequately trained to evaluate credit
risks associated with such loans. The Company contemplates that such
solicitations will include advertising in local newspapers, direct
mailings and telemarketing.
<PAGE> 9
Competition
The consumer finance industry is fragmented and highly
competitive. There are numerous financial service companies that
provide consumer credit in the markets served by the Company including
banks, other consumer finance companies, and captive finance companies
owned by automobile manufacturers and retailers. Many of these
companies have significantly greater resources than the Company. As
other lenders enter into this market, competition for the Company's
target customer is expected to increase. The Company does not believe
that increased competition for the purchase of Contracts will cause a
reduction in the interest rate payable by the purchaser of the
automobile. However, increased competition for the purchase of
Contracts will enable automobile dealers to shop for the best price,
thereby causing a reduction in the discount from the initial principal
amount at which the Company will be able to purchase Contracts.
The Company's target market consists of persons who are generally
unable to obtain traditional used car financing because of their
credit history, the vehicle's mileage or age. The Company has been
able to expand its automobile finance business in the non-prime credit
market by offering to purchase Contracts on terms that are competitive
with those of other companies which purchase automobile receivables in
that market segment. Because of the daily contact that many of its
employees have with automobile dealers located throughout the market
areas served by it, the Company is generally aware of the terms upon
which its competitors are offering to purchase Contracts. The
Company's policy is to modify its terms if necessary to remain
competitive. The Company continues to analyze new lending programs
and marketing methods which may be implemented with the objective of
increasing its market share, including the possibility of offering to
purchase portfolios of seasoned Contracts from dealers in bulk
transactions from $50,000 to $750,000.
The Company's ability to compete effectively with other companies
offering similar financing arrangements depends upon maintaining close
business relationships with dealers of used motor vehicles. No single
dealer out of the approximately 400 dealers that the Company has
contractual relationships with accounted for over 5% of its business
volume in the past year.
Regulation
The Company's financing and insurance operations are subject to
regulation, supervision and licensing under various federal, state and
local statutes and ordinances. Additionally, the procedures that must
be followed by the Company in connection with the repossession of
vehicles securing Contracts are regulated by the State of Florida. To
date, the Company's operations have been conducted exclusively in the
State of Florida, accordingly, the laws of the State of Florida as
well as applicable federal laws, govern the Company's operations.
Compliance with existing laws and regulations applicable to the
Company has not had a material adverse effect on the Company's
operations.
Management believes that it maintains all requisite licenses and
permits and is in substantial compliance with all applicable local,
state and federal regulations.
The Company has been issued a Retail Installment Seller's License
and a Sales Finance Company License by the Florida Department of
Banking and Finance. Pursuant to regulations of the State of Florida
governing the Company's financing business activities, the Department
of Banking and Finance conducts a review of the Company's activities,
at least annually, to monitor compliance with the applicable
regulations. The regulations govern, among other matters, licensure
requirements, requirements for maintenance of proper records, payment
of required fees to the State of Florida, maximum interest rates that
may be charged on loans to finance used vehicles, and proper
disclosure to customers regarding financing terms.
Computer Software Business
Since it's formation in 1985 Nicholas Data Services, Inc. ("NDS")
has been engaged in the design, development and marketing of industry
specific accounting software and technical services to small
businesses, primarily in the Southeast United States. Its principal
product is ROUTEMAN, a receivables account tracking and scheduling
<PAGE> 10
software program that is currently installed in over 600 pest control
and service related companies. The software packages that have been
developed by NDS are available in Unix, Xenix, Novell and DOS
versions. The Company has not sought patent or trademark protection
for its products. The Company decided to redirect its business
activities to consumer finance in July 1990 and no longer actively
markets any computer software products and does not seek to expand
this line of business, although the Company continues to service
existing NDS customers. As of March 31, 1996, the operations of NDS
accounted for 9.7% of the combined revenues of the Company. Because
the Company does not intend to expand its software operations, it does
not monitor competition; however, the Company is aware of a number of
competitors that offer competitive products and services as their
primary business.
Management believes that NDS and its software and hardware design
expertise is integral to the financing activities of the Company. All
of the financial application software used in the Company's consumer
finance business is designed and maintained by NDS. All of the
computer systems and telecommunication systems linking the branch
offices were designed, configured, installed and are maintained by the
NDS staff engineers. NDS will continue to support its customer base
while servicing the requirements of the Company's financing
activities.
Employees
The Company's executive management and various support functions
are centralized at the Company's corporate headquarters in Clearwater,
Florida. As of March 31, 1996 the Company employed a total of 41
persons, five of whom work for NDS and 36 of whom work in the finance
activities. The Company provides health and life insurance, long-term
disability insurance, dental insurance, employee stock options and a
401(k) plan for all employees. No employees are covered by a
collective bargaining agreement and the Company believes it has good
relations with its employees.
Item 2. Properties
The Company rents its home office and branch office facilities.
Its home office, located at 2454 McMullen Booth Road, Building C in
Clearwater, Florida, consists of approximately 4,500 square feet. The
Company occupies the space pursuant to a lease that commenced on July
1, 1995 and expires on June 30, 1999. The lease provides for certain
rent abatements during the first year. During the first year rent is
payable at a rate of $2,182 per month. In the second year, the
monthly rate is $4,251, with annual increases of approximately 2.25%
in each subsequent year of the lease. In the opinion of management,
the current home office space is adequate to meet the needs of the
Company for the foreseeable future.
The Company's branch offices all consist of approximately 1,000
square feet and are located in shopping centers or strip malls. These
offices are occupied pursuant to leases with an initial term of from
one to three years at annual rates ranging from $6 to $11 per square
foot.
Item 3. Legal Proceedings
The Company is not a party to any material pending legal
proceedings other than ordinary routine litigation incidental to its
business none of which, in the opinion of management, will have a
material effect on the Company's financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE> 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock has been listed for trading on the
Vancouver Stock Exchange since 1987 under the symbol "NFC.U" it is
also traded on the OTC Bulletin Board under the symbol "NCFNF".
The Company is authorized to issue 20,000,000 shares of Common
Stock, no par value, and 5,000,000 shares of Preferred Stock. Each
share of Common Stock is entitled to one vote at all meetings of
shareholders. All shares of Common Stock are equal to each other with
respect to liquidation rights and dividend rights. In the event of
liquidation, dissolution or winding up of the Company, holders of the
Common Stock will be entitled to receive on a pro rata basis all
assets of the Company remaining after satisfaction of all liabilities.
There are no preemptive rights to purchase additional shares of Common
Stock.
Holders of Common Stock are entitled to receive dividends if and
when declared by the Board of Directors out of funds legally available
therefor. It has been the Company's policy to retain earnings to
finance the growth of its business. Accordingly, the Company has not
issued a cash dividend and has no plans to do so in the near future.
As of March 31, 1996 the Company had not issued, and had no plans
to issue, any shares of its Preferred Stock. The Preferred Stock may
be issued in series with each series having such rights as to
dividends and liquidation as determined by the Company's Board of
Directors.
The following table reflects the high and low prices for the Company's
common stock during the periods indicated as reported on the Vancouver
Stock Exchange.
Price Range of Common Stock*
<TABLE>
<CAPTION>
High Low
Year ended March 31, 1996 Cdn U.S. Cdn U.S.
<S> <C> <C> <C> <C>
First Quarter ........... $2.25 $1.65 $2.06 $1.50
Second Quarter........... $3.36 $2.50 $2.69 $2.00
Third Quarter............ $3.55 $2.60 $2.93 $2.15
Fourth Quarter........... $3.30 $2.42 $2.39 $1.75
</TABLE>
<TABLE>
<CAPTION>
High Low
Year ended March 31, 1995 Cdn U.S. Cdn U.S.
<S> <C> <C> <C> <C>
First Quarter ........... $2.20 $1.57 $1.80 $1.28
Second Quarter........... $3.05 $2.17 $1.81 $1.28
Third Quarter............ $2.80 $1.99 $2.15 $1.53
Fourth Quarter........... $2.20 $1.57 $1.65 $1.17
<FN>
- - - - -----------------
* As reported on the Vancouver Stock Exchange. These prices have
been converted from Canadian to U.S. Dollars at an exchange rate
in effect on the date that the price disclosed was reported on
the Vancouver Stock Exchange. Presently the U.S. market
dominates the trading activity in the Company's shares.
</TABLE>
As of March 31, 1996 there were approximately 438 stockholders of
record of the Company's Common Stock.
The Company's stock became publicly traded in September 1987 when
it issued shares listed on the Vancouver Stock Exchange to the public.
At that time, virtually all of the 3,208,335 issued and outstanding
shares were owned by US shareholders who exchanged their shares in
<PAGE> 12
Nicholas Data Services, Inc. (Florida) for shares in NDS Limited
(Canada). The Company issued 850,000 shares to the public at that
time and sold them to several hundred Canadian citizens as well as
less than 100 US citizens. Today there are approximately 5,800,000
shares outstanding, of which employees, directors, and officers of the
Company own in excess of 3,000,000. There are currently approximately
400 US shareholders who own an aggregate of approximately 5,000,000
shares.
It has been the Company's policy to retain earnings to finance the
growth of its business. Accordingly, the Company has not issued a
cash dividend and has no plans to do so in the near future. The
Company will reassess its cash dividend policy from time to time and
may issue cash dividends in the future if circumstances warrant. No
cash dividends were declared for the fiscal years ended March 31, 1996
and 1995.
Outstanding Options and Warrants and Conversion Rights
As of March 31, 1996, the Company had granted options to purchase an
aggregate of 384,500 shares of Common Stock to 34 employees, officers,
and directors. These options are exercisable at prices ranging from Cdn.
$.48 per share to Cdn.$3.23 per share. The options expire at
various times from April 1996 through September 2000.
The Company currently has two warrants outstanding. Mr. Vosotas
holds a warrant pursuant to which he has the right to purchase
1,000,000 shares of Common Stock at a price of Cdn $2.55. per share at
any time prior to June 3, 1999. The other warrant issued May 12, 1995
for 53,571 shares of Common Stock, is held by Stephen G. Blume.
Pursuant to that warrant, Mr. Blume may purchase Common Stock at a price
of Cdn. $2.27 per share prior to May 12, 1997. As of March 31, 1996,
neither Mr. Vosotas nor Mr. Blume had purchased any shares pursuant to
their warrants.
Six individuals have the right to convert their Notes into Common
Stock at a price of $2.00 per share and one individual has the right
to convert his note into Common stock at $1.75 per share. These
rights expire upon the maturity date of the respective Notes, from
November 1997 through June 1998.
Item 6. Management's Discussion and Analysis of Condition and Results
of Operations
Overview
Consolidated Net income increased in fiscal year ending March 31,
1996 to $662,151 or $.11 per share from $623,595 or $.10 per share in
fiscal year ending March 31, 1995. Earnings for the year were
favorably impacted by the strong contribution of Nicholas Financial
Inc. which accounted for over 90% of the consolidated revenues and
100% of the profits.
In fiscal year 1995 the Company adopted a change in accounting
principle that resulted in a cumulative effect of $71,218, or $.01 per
share. This change was made following a determination by the Company
that a more appropriate method of accounting for the discount at which
the Company purchases Contracts from automobile dealers is to record
all or a portion of the discount as an allowance for losses against
the unpaid balance of the Contract. Utilization of this method
reports Contracts at their estimated net realizable value at the date
of purchase by the Company and charges losses against the discount.
If, at the time of purchase of a Contract, the Company determines that
the amount of the discount does not provide a sufficient allowance for
anticipated losses, a portion of unearned finance charges will also be
added to the allowance for losses. It actual losses exceed the amount
of the reserve, such losses are charged against income as incurred.
If actual losses are less than the amount of the reserve, the excess
amount is amortized into income as an adjustment of the interest
yield.
The Company believes that the change in accounting for losses more
accurately reports the economic event which takes place at the time of
purchase of Contracts, more accurately reflects the Company's assets
and liabilities, and better matches its costs and revenues.
<PAGE> 13
The following table sets forth certain financial data:
<TABLE>
<CAPTION>
- - - - ----------------------------------------------------------------------
Years Ended March 31 1996 1995
- - - - ----------------------------------------------------------------------
<S> <C> <C>
Average Net Finance Receivables (1) 20,004,986 12,013,883
Average Indebtedness (2) 14,185,584 8,228,276
Total Revenues 5,267,530 3,514,246
Interest Expense 1,517,181 897,553
Net Interest Income 3,745,349 2,616,693
- - - - ----------------------------------------------------------------------
Gross Portfolio Yield (3) 26.33% 29.25%
Average Cost of Borrowed Funds (2) 10.70% 10.91%
Net Interest Spread (4) 15.63% 18.34%
- - - - ----------------------------------------------------------------------
Net Portfolio Yield (3) 18.75% 21.78%
- - - - ----------------------------------------------------------------------
<FN>
(1) Average net finance receivables represent the average of net
finance receivables throughout the year. Net finance receivables
represents gross finance receivables less any unearned finance
charges related to those receivables.
(2) Average Indebtedness represents the average outstanding borrowings
under the senior credit line, subordinated debt and notes payable.
Average cost of borrowed funds represents interest expense as
percentage of average indebtedness.
(3) Gross portfolio yield represents total revenues as a percentage of
average finance receivables. Net portfolio yield represents net
interest income as a percentage of average finance receivables.
(4) Net interest spread represents the gross portfolio yield less the
average cost of borrowed funds.
</TABLE>
Financial Services
Nicholas Financial, Inc. is the Company's Financial Services
subsidiary which operates ten branch locations and serviced a network
of 400 dealers as of March 31, 1996. Nicholas Financial Inc. provides
retail used car buyers a financing source where traditional sources
are not readily available. Nicholas Financial Inc.'s revenue,
predominantly finance charge income, increased 50% to $5,267,530,
million in fiscal 1996 from $3,514,246 in fiscal 1995. The Net
Finance Receivable value of Automobile Installment Notes totalled
$18.3 million, an increase of 43% from $12.8 million at March 31,
1995. The Gross Finance Receivable value rose 41% to $27.8 million at
March 31, 1996 from $19.7 million at March 31, 1995. Net Finance
Receivables are calculated by subtracting Unearned Interest, Non-
refundable Reserve and Allowance for Credit Losses from Gross Finance
Receivables.
Computer Software Business
Nicholas Data Services, Inc. ("NDS") is engaged in the design,
development and marketing of industry specific accounting software and
technical services. The Company decided to redirect its business
activities to consumer finance in July 1990 and no longer develops or
actively markets any computer software products and does not seek to
expand this line of business, although the Company continues to
service existing NDS customers. In fiscal 1996, the revenues of NDS
were $565,465 compared with fiscal 1995 revenues of $603,261, a
decrease of 6%. Operating loss for fiscal 1996 was $20,298 compared
with a loss of $13,585 for fiscal 1995. Because of its decision to
redirect its activities to the finance business, the Company expects
both operating revenues and income of NDS to continue to decline.
<PAGE> 14
Operating Expenses
Operating expenses excluding provision for credit losses and interest
expense, increased to $2.8 million in fiscal 1996 from 2.0 million in
fiscal 1995. This increase of 39% was directly attributable to the costs
associated with the opening of the two new branch offices in West
Central Florida along with staffing, capital equipment and related
expenses. The Company has increased its work force over the last 3 years
from 12 to 41 full time employees. At March 31, 1996, the company operated
nine branches in Florida. In May of 1996 the Company opened it's 10th branch
in Fort Lauderdale, Florida.
Interest Expense
Interest expense increased to $1,517,181 in fiscal 1996 as compared
to $897,553 in the prior year due to an increase in average
outstanding debt of $8.23 million to $14.19 million. The Company's
effective average cost of borrowing decreased from 10.91% for the year
ended March 31, 1995 to 10.70% for the year ended March 31, 1996. In
June 1994 the Company successfully renegotiated the fixed rate portion
of interest that its principal lender, BankAmerica, charges from 3%
above the stated prime rate to 1.75% above such rate with the rate
further reducing to 1.25% above prime when the total amount of
borrowings exceeds $10 million and further decreasing to 1% above
prime when the total amount borrowed under the BankAmerica revolving
line of credit exceeds $15 million. The Company has met the $10
million threshold; consequently, the current interest rate being paid
by the Company under that credit line is the prime rate plus 1.25%.
Analysis of Credit Losses
Because of the nature of the borrowers under the Contracts and its
direct consumer loan program, the Company considers the establishment
of adequate reserves for credit losses to be imperative. The Company
batches its Contracts into pools for purposes of establishing reserves
for losses. Each such pool consists of the loans processed by a
Company branch office during a fiscal quarter. The average pool
consists of 118 Contracts with an aggregate initial principal amount
of approximately $1,120,000. As of March 31, 1996, the Company had 82
active pools. The effective APR for these pools ranges from 20% to
30% and the discount averages between 10% and 12%. Loan pools are
analyzed monthly and recomputes the effective return for each pool
based upon changes during the month.
The company pools contracts according to branch location because
the branches purchase contracts in different markets located in the
State of Florida. All contracts purchased by a branch during a fiscal
quarter comprise a pool. This method of pooling by branch and quarter
allows the company to evaluate the different markets where the
branches operate. The pools also allow the company to evaluate the
different levels of customer income, stability, credit history, and
the types of automobiles purchased in each market. The average pool is
approximately 1,120,000 and contains an average of 118 contracts. The
weighted average yield is 22.5% and the weighted average APR is 24%.
The average discount on contracts purchased is between 10% - 12%.
A pool, which is comprised of all Contracts purchased by a branch
during each three-month period, retains an amount equal to 100% of the
discount into a nonrefundable dealer reserve. In situations where the
discount is determined to be insufficient to absorb all of the
potential losses associated with the pool, unearned income will be
added to reserves until total reserves have reached the appropriate
level. If the nonrefundable reserve and the unearned revenue reserve
are exhausted for a pool which is not fully liquidated , then a charge
to income will be used to reestablish the reserves. If a pool is fully
liquidated and has excess reserves, the excess reserves are accreted
into income.
In analyzing a pool, the Company considers the performance of prior
pools originated by the branch office, the performance of prior
Contracts purchased from the dealers whose Contracts are included in
the current pool, the credit rating of the borrowers under the
Contracts in the pool, and current market and economic conditions. Each
pool is analyzed monthly to determine if the loss reserves are
adequate and adjustments are made if they are determined to be
necessary. As of March 31, 1996, the Company had established reserves
for losses on Contracts of $3,074,860, or 11.05% of gross outstanding
receivables under the Contracts. The historical default rate for
Contracts purchased by the Company has been approximately 15% percent,
i.e., 15% of the Contracts are never fully paid. The experience of
the Company is that the longer the period of time during which the
borrower has made payments under his Contract, the less likelihood
there is of a default. Historically, approximately 60% percent of the
losses experienced by the Company have occurred during the first third
of the Contract terms.
<PAGE> 15
Because of the small number of loans currently outstanding, loans
made by the Company's in its direct consumer loan program are
currently analyzed as made and a reserve for losses established at
that time. When the volume of such loans increases, the Company
intends to utilize a pooling arrangement similar to that used in
connection with Contracts in establishing reserves. As of March 31,
1996, the Company had experienced immaterial losses under its direct
consumer loan program; however, the program was implemented in April
1995 and these results cannot be considered representative of results
that will be experienced in the future. As of March 31, 1996, the
Company had established reserves for losses on direct consumer loans
of $10,836, or 1.92% of gross outstanding receivables under the loans.
The Company defines any account that is more than ten days past due
as "delinquent." The following tables present certain information
regarding the delinquency rates experienced by the Company with
respect to Contracts and under its direct consumer loan program:
<TABLE>
<CAPTION>
Year Ended Year Ended
March 31, 1996 March 31, 1995
-------------------- --------------------
<S> <C> <C>
Contracts
Net Amount Outstanding $27,250,451 $19,713,879
</TABLE>
<TABLE>
<CAPTION
Dollar Dollar
Delinquencies Amount Percent* Amount Percent*
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
30 to 59 days $1,346,150 4.94% $777,623 3.94%
60 to 89 days 326,542 1.20% 60,331 0.31%
90 + days 44,746 0.16% 6,865 0.03%
Total Delinquencies $1,717,438 $844,819
*Total Delinquencies as
percent of outstanding
balance 6.30% 4.29%
Direct Loans
Net Amount Outstanding $459,147
Delinquencies
30 to 59 days 321 0.07%
60 to 89 days 3,197 0.70%
90 + days 0 0.00%
-------- -------
Total Delinquencies $3,519
Total Delinquencies as a
% of Installment Cont. 0.77%
</TABLE>
Income Taxes
The provision for income taxes in fiscal 1996 increased 16% to
$396,750 from $341,831 in fiscal 1995 as a result of higher pretax
income.
<PAGE> 16
Liquidity And Capital Resources
The Company's cash flows for the years ended March 31 1996 and 1995
are summarized as follows:
<TABLE>
<CAPTION>
March 31, March 31,
1996 1995
------------- -------------
<S> <C> <C>
Cash provided by (used in):
Operations $1,234,592 $1,544,685
Investing Activities -
(primarily purchase of installment
contracts) (6,128,516) (5,912,641)
Financing activities 5,101,373 4,374,474
Net increase (decrease) 207,449 6,518
</TABLE>
The Company's primary use of working capital during fiscal year
1996 was the funding of the purchase of Contracts. The Contracts were
financed partially through borrowings on the BankAmerica line of
credit. This credit line is secured primarily by Contracts and
provides the Company with financing to increase the number of
Contracts for its loan portfolio.
Since inception, the Company has funded operations from the
following sources: borrowing under the line of credit agreement with
Bank of America, proceeds from the issuance of subordinated debt,
funds provided from payments received under Contracts, and cash flows
from operating activities.
The increase in net cash flows used in investing activities
during fiscal 1996 was primarily attributable to the growth in the
size of the Contract portfolio owned by the Company.
In May of 1996, through a series of negotiations, the Company
increased its line of credit to $25,000,000 from $20,000,000. The
Company was also able to increase the percentage of contracts that
qualify for funding and reduce the amount of subordinated debt
required by BankAmerica.
The Company intends to continue opening additional branches and
increase its portfolio of Contracts. In order to meet its fiscal 1997
funding needs, the Company will require additional capital resources
to supplement its expected cash flows from operations. The Company is
exploring several alternative financing sources in order to satisfy
its ongoing needs for additional capital resources. The Company will
make additional capital expenditures as it opens new branches and
increases the number of employees. The capital needs of such
expansion is not expected to be material.
Impact of Inflation
The Company is affected by inflation primarily by increased operating
costs and expenses. Inflationary pressures on operating costs and
expenses have been offset by the Company's continued emphasis on tight
operating and cost controls and to a lesser extent by modest increases
in support rates from its software subsidiary, Nicholas Data Services.
The Company's strong balance sheet enabled it to negotiate favorable
interest rates which minimized the impact of prime rate increases.
The Company is dependent upon the line of credit arrangement with
BankAmerica for the significant source of funds with which to purchase
Contracts. Any increase in the interest rate payable by the Company
under that line, or any replacement credit facility, would increase
the costs of such borrowings with a corresponding decrease in net
income. For example, if the interest rate payable on amounts
outstanding under the BankAmerica line of credit on March 31, 1996
were increased by 1%, the annual interest cost to the Company would
increase by approximately $130,000, before the effect of income taxes.
<PAGE> 17
The Company believes that a downturn in the economy would
increase the number of purchasers of automobiles financed with
Contracts. During a modest downturn in economic activity more people
will experience a reduction in income because of downsizing, fewer and
smaller raises and the necessity of accepting lower paying jobs. In
addition, it may be difficult for individuals who have over-extended
themselves to meet their debt obligations and they may find it
necessary to purchase used automobiles rather than new ones. Although
the number of potential customers can be expected to increase during
periods of slow economic activity, the number of defaults in payment
obligations can also be expected to increase with a resulting increase
in repossessions of vehicles securing Contracts. The Company is not
able to predict whether or not the net effect of such a downturn would
be favorable or unfavorable to the operating results of the Company,
although the Company believes that a severe downturn in economic
activities would have an adverse effect on its business.
The maximum finance charges that may be charged the borrower in
connection with the financing of a used automobile is determined by
the Florida legislature and is set forth in the Florida statutes.
Generally, the older the automobile, the higher the interest rate that
may be charged. If the Florida legislature were to reduce the
statutory interest rates that can be charged, the return realized by
the Company on Contracts would be reduced unless it could offset the
reduction with a corresponding reduction in funding costs (such as
through the infusion of equity or a lower interest rate on its line of
credit) or an increase in the discount at which it purchases
Contracts.
Future Expansion
The Company intends to continue its expansion through the
purchase of additional Contracts and the expansion of its direct
consumer loan program. In order to increase the size of its
investment portfolio of Contracts, it will be necessary for the
Company to open additional branch offices and increase the size of its
revolving line of credit arrangement, either with Bank of America or
another lender. The Company is currently negotiating with several
private investors and financial institutions that specialize in
investing in subordinated debt. The Company believes that the
addition of more debt that is subordinate to the Bank of America line
of credit will make it possible for the Company to continue to meet or
exceed its covenants under the loan agreement with Bank of America,
increase the amount of funds drawn down under its line of credit and
to draw down funds under the line at a faster rate. The Company also
intends to continue its policy of not paying dividends and using any
earnings from operations to purchase Contracts or make direct consumer
loans.
The Company believes that opportunity for growth continues to
exist in the State of Florida and for the foreseeable future intends
to concentrate its expansion activities there. The Company has
identified Pensacola, Jacksonville and Boca Raton as areas in Florida
in which it plans to open additional branch offices during 1996.
Item 7. Financial Statements
The following financial statements are filed as part of this report;
Report of Independent Auditors . . . . . . . . . . . . . . . . F - 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . F - 2
Consolidated Statements of Income and Retained Earnings . . . F - 3
Consolidated Statements of Cash Flows . . . . . . . . . . . . F - 5
Notes to the Consolidated Financial Statements . . . . . . . . F - 6
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE> 18
PART III
Item 9. Directors, Executive Officers, Promotors and Control Persons
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Peter L. Vosotas 54 Chairman, Chief Executive Officer and
President of Nicholas Financial-Canada,
Nicholas Financial and NDS
Raymond Cottrell 49 Director of Nicholas Financial-Canada
Joseph G. Bowes 41 Director of Nicholas Financial-Canada
Keith A. Bertholf 40 Director of Nicholas Financial and NDS and
Secretary and Vice President-Operations
of Nicholas Financial-Canada, Nicholas Financial
and NDS
Ralph T. Finkenbrink 35 Vice President-Finance of Nicholas
Financial-Canada, Nicholas Financial and NDS
Ellis P. Hyman 57 Director of Nicholas Financial and NDS
Stephen Bragin 64 Director of Nicholas Financial and NDS
</TABLE>
All directors hold office until the next annual meeting of the
shareholders of the Company or until their successors have been
elected and qualified. Officers serve at the discretion of the board
of Directors. Additional information regarding the directors and
officers is set forth below.
Peter L. Vosotas is the founder of the Company and majority
stockholder of Nicholas Financial-Canada. He has served as Chairman,
Chief Executive Officer and President of Nicholas Financial-Canada and
each subsidiary since formation. Prior to forming the Company, Mr.
Vosotas held a variety of Sales and Marketing positions with Ford
Motor Company, GTE and AT&T Paradyne Corporation. Mr Vosotas attended
the United States Naval Academy and earned a Bachelor of Science
Degree in Electrical Engineering from the University of New Hampshire.
Raymond Cottrell has served as a Director of Nicholas Financial-
Canada since November 1990. Since 1987, he has been a Director and
President of Grey Point Capital, Inc., ERI Ventures Inc.and ICM
Ventures, Inc., all located in Vancouver, British Columbia. Mr.
Cottrell has been Executive Vice President of Biocoll Medical
Corp.since September, 1994. He is a member of the Board of Directors
of Golden Knight Resources, Inc., and Annex Ventures Inc.
Joseph G. Bowes has served as a director of Nicholas Financial-
Canada since June 1991. He has been a self-employed Financial
Consultant in Vancouver, British Columbia since 1990. Prior to
starting his consulting firm, Mr. Bowes was Vice President, Finance
and Administration and Director of Achievers International, Vancouver,
B.C. Mr. Bowes is a Chartered Public Accountant and received a
Masters Degree in Business Administration from the University of
Western Ontario.
Ellis P. Hyman has served as a Director of Nicholas Financial and
NDS since September 1986. Dr. Hyman has been a practicing dentist in
Clearwater, Florida for over fifteen years.
Stephen Bragin has served as a Director of Nicholas Financial and
NDS since May 1989. Since 1993, Mr. Bragin has been Development
Director, University of South Florida, Tampa, Florida. Prior to his
involvement with the University, Mr Bragin was, for 36 years, a
principal in a commercial citrus business based in Clearwater,
Florida. He is also a director of Curlew Gardens, Clearwater Florida,
and The First National Bank of Commerce, Clearwater, Florida.
<PAGE> 19
Keith A. Bertholf has been an employee of the Company since March
1985 and held a variety of sales and marketing positions with the
Company prior to his appointment as Vice President-Operations of
Nicholas Financial and NDS in 1991. He has been a Director and
Secretary of Nicholas Financial and NDS since 1992. Mr. Bertholf
received a Bachelors Degree in Accounting from the University of
Kansas.
Ralph T. Finkenbrink has been employed by the Company since
August 1988. Mr. Finkenbrink held the position of Controller prior to
assuming his present duties in 1992. Prior to joining the Company, he
was a staff accountant for MBI, Inc. from January 1984 to March 1985
and Inventory Control Manager for The Dress Barn, Inc. from March 1985
to December 1987. Mr. Finkenbrink received his Bachelor of Science
Degree in Accounting from Mount St. Mary's University in Emmitsburg,
Maryland.
Item 10. Executive Compensation
Executive Officers
The following table sets forth a summary of compensation paid by
the Company to its Chief Executive Officer. There are no other
officers who received compensation exceeding in the aggregate
$100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
(stated in U.S. dollars)
Securities Underlying
Name and Position Year Salary Bonus Options
- - - - ----------------------- ---- ------- ------- ---------
<S> <C> <C> <C> <C>
Peter L. Vosotas 1996 $98,000 $21,864 100,000
Chief Executive Officer 1995 $88,000 $23,900 100,000
and Director 1994 $88,000 $25,800 100,000
</TABLE>
<TABLE>
<CAPTION>
Option Grants During The Most Recently Completed Fiscal Year
% Of Total Market Price
Options Of Securities
Options Granted To Exercise Or Expiration
Name of Executive Granted To All Employees Underlying Options On Date Expire
Granted Officer (#) In Fiscal Year ($/SHARE) Of Grant($/SHARE) Date
- - - - ----------------- ---------- -------------- ----------- ----------------- ------
<S> <C> <C> <C> <C>
Ralph Finkenbrink 20,000 41.67 $2.40 $2.40 September 8, 2000
</TABLE>
There are no other plans in effect pursuant to which cash or non-
cash compensation was paid or distributed to the executive officers
during the most recent fiscal year or pursuant to which compensation
is proposed to be paid or distributed in a subsequent year.
The only other benefit plans offered at the present time are
health and life insurance, long-term disability insurance, dental
insurance, and a 401(k) plan. All of these plans are available to all
full-time employees on a non-discriminatory basis.
The current policy of the Company is to compensate directors who
are not officers $400 for attending each director's meeting.
Directors are reimbursed for related out-of-pocket expenses of
attending meetings.
<PAGE> 20
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth certain information regarding the
Common Stock owned on March 31, 1996, by (1) any person (including any
"group") who is known by the Company to own beneficially more than 5%
of its outstanding Common Stock, (2) each director and officer, and
(3) all officers and directors as a group.
<TABLE>
<CAPTION>
Name and Address Shares Owned Percentage
- - - - ------------------------ -------------- ------------
<S> <C> <C>
Peter L. Vosotas
2454 McMullen Booth Road
Clearwater, FL 34619 3,333,500 (1) 46.09%
Keith A. Bertholf
2454 McMullen Booth Road
Clearwater, FL 34619 158,800 (2) 2.20%
Stephen Bragin
2454 McMullen Booth Road
Clearwater, FL 34619 157,708 (3) 2.19%
Dr. Ellis Hyman
2454 McMullen Booth Road
Clearwater, FL 34619 255,250 (4) 4.35%
Raymond Cottrell
2250-650 W. Georgia St.
Vancouver, B.C., V6B-4N7 16,000 (5) *
Joseph Bowes
1826 W. 63rd. Avenue
Vancouver, B.C. V6P-2J1 11,000 (6) *
Stephen G. Blume
6350 118th Avenue North
Largo, Florida 366,984 (7) 5.07%
All directors and officers
as a group (6 persons) 3,932,258 (8) 54.33%
<FN>
* Represents less than 1% of the outstanding Common Stock.
(1) Includes 100,000 shares issuable upon exercise of certain
options and 1,000,000 shares issuable upon exercise of warrants
exercisable within 60 days of March 31, 1996.
(2) Includes 54,000 shares issuable upon exercise of certain options
exercisable within 60 days of March 31, 1996.
(3) Includes 90,000 shares issuable upon exercise of certain options
and conversion of Notes exercisable within 60 days of March 31, 1996.
(4) Includes 75,000 shares issuable upon conversion of Notes exercisable
within 60 days of March 31, 1996.
(5) Includes 16,000 shares issuable upon exercise of certain options
exercisable within 60 days of March 31, 1996.
(6) Includes 11,000 shares issuable upon exercise of certain options
exercisable within 60 days of March, 1996.
(7) Includes 53,571 shares issuable upon exercise of a warrant exercisable
within 60 days of March 31, 1996.
(8) Includes 1,346,000 shares issuable upon exercise of certain options,
warrants and compensation arrangements exercisable within 60 days of
March 31, 1996.
</TABLE>
<PAGE> 21
Item 12. Certain Relationships and Related Transactions
The Company has granted Peter L. Vosotas a warrant to purchase up to
1,000,000 shares of its Common Stock in consideration for certain
personal guarantees given by him in connection with the $25 million
BankAmerica line of credit. Concurrent with the granting of the
warrant, a previously outstanding warrant for the purchase of up to
550,000 shares of Common Stock that was granted to Mr. Vosotas in
connection with the initial $4,000,000 line of credit was amended.
Mr. Vosotas has the right to purchase shares of Common Stock at a
price of $2.55 Cd. at any time prior to June 3, 1999. As of March 31,
1996, Mr. Vosotas had not exercised rights to purchase shares under
the warrant.
A family trust and several members of Mr. Vosotas's family have
purchased Notes from the Company. In April 1992, the Paula J. Vosotas
Family Trust purchased a $30,000 Note. The Note was replaced in
September 1992 by a $50,000 Note in connection with an additional
investment. This Note accrues interest at 12% per annum with all
principal and accrued interest due and payable at maturity, April 2,
1996. In connection with this Note, the Company issued 3,000 shares
of Common Stock to the holder.
In May 1994 Paula J. Vosotas, wife of Peter L. Vosotas, loaned
$150,000 to the Company. This Note bears interest at 12% per annum.
Principal and interest on this Note is payable upon demand. ennifer L.
Vosotas, daughter of Peter L. Vosotas, has loaned the ompany an
aggregate of $20,000 beginning in December 1993. Interest n this loan
accrues at the rate of 12% per annum. Principal and any accrued interest
on this loan are payable upon demand.
On April 16, 1992 and February 28, 1994, Stephen Bragin made two
loans to the Company for $150,000 each. Both of these Notes bear
interest at 12% per annum. Principal and interest on the first Note
is payable in quarterly installments. Under the second Note, the
Company makes semi-annual payments of interest only. Payment of the
second Note is subordinated to payment of the BankAmerica line of
credit. The Notes mature on April 17, 1996 and February 28, 1998,
respectively. Mr. Bragin has the option of converting the second Note
into Common Stock at a price of $2.00 per share.
On April 20, 1992 and January 26, 1994, Dr. Ellis Hyman made two
loans to the Company for $150,000 each. These Notes bear interest at
12% per annum. The Company makes payments of interest only under both
of these Notes. The first Note requires interest to be paid quarterly
and the second Note requires semi-annual payments. Payment of both
Notes is subordinated to payment of the BankAmerica line of credit.
The Notes mature on April 20, 1996 and January 26, 1998, respectively.
Dr. Hyman has the option of converting the second Note into Common
Stock at a price of $2.00 per share. On April 19th Dr. Hyman requested
to extend the maturity date on his 1st note to April 20, 2000 and also
increase the size of the note to $200,000. The Company agreed to the
extension.
<PAGE> 22
Item 13. Exhibits and Reports on Form 8-K
Insert # 1
(a) Exhibits
3.1 Articles of Incorporation and By-Laws
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
4.1 Stock Certificate
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
10.1.1 Loan and Security Agreement dated March 31, 1993 between BA
Business Credit, Inc. and Nicholas Financial, Inc.
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
10.1.2 Loan Modification Agreement dated January 14, 1994
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
10.1.3 Temporary Line Increase Agreement dated Mach 28, 1994
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
10.1.4 Second Loan Modification Agreement dated June 3, 1994
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
10.1.5 Amendment No. 3 to Loan Agreement dated July 5, 1994
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
10.1.6 Amendment No. 4 to Loan Agreement and Security Agreement
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
10.1.7 Fifth Loan Modification Agreement dated July 13, 1995
10.1.8 Sixth Loan Modification Agreement dated May 13, 1996
16.1 Letter on Change in Certifying Accountants
Incorporated by reference to the Company's Form 10-SB. File No. 0-26680.
21.1 Registrant's Subsidiaries
(b) Reports on FORM 8-K
None
<PAGE> F - 1
Report of Independent Auditors
To the Board of Directors of
Nicholas Financial, Inc.
We have audited the accompanying consolidated balance sheets of
Nicholas Financial, Inc. as of March 31, 1996 and 1995, and the
related consolidated statements of income and retained earnings and
cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Nicholas Financial, Inc. at March 31, 1996 and 1995, and the
consolidated results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting
principles.
May 13, 1996
<PAGE> F - 2
Nicholas Financial, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31
1996 1995
--------------------------
<S> <C> <C>
Assets
Cash $490,791 $283,342
Accounts receivable 25,154 27,992
Prepaid expenses and other assets 270,700 203,492
Finance receivables, net 18,326,784 12,780,085
Property and equipment, net 180,417 186,602
Intangible assets 2,530 15,632
Deferred loan costs 19,627 21,027
Deferred income taxes 485,798 332,602
--------------------------
Total assets $19,801,801 $13,850,774
==========================
Liabilities
Line of credit $13,130,365 $8,750,840
Notes payable-related party 2,226,533 1,576,089
Deferred revenues 188,894 140,538
Accounts payable 851,258 841,272
Other liabilities 28,804 176,171
Income taxes payable 122,082 112,308
--------------------------
16,547,936 11,597,218
Shareholders' equity
Preferred stock, no par: 5,000,000 shares
authorized; - -
none issued and outstanding
Common stock, no par: 20,000,000 shares
authorized; 5,838,339 and 5,774,539 shares 1,724,051 1,385,893
issued and outstanding, respectively
Retained earnings 1,529,814 867,663
--------------------------
3,253,865 2,253,556
--------------------------
Total liabilities and shareholders'equity $19,801,801 $13,850,774
==========================
</TABLE>
See accompanying notes.
<PAGE> F - 3
Nicholas Financial, Inc.
Consolidated Statements of Income and Retained Earnings
<TABLE>
<CAPTION>
Year ended March 31
1996 1995
---------------------------
<S> <C> <C>
Revenue:
Interest income on finance receivables $5,264,080 $3,514,246
Sales 565,645 601,925
Interest income on term deposits and lease
receivables 3,450 2,861
---------------------------
5,833,175 4,119,032
Expenses:
Cost of sales 140,786 138,879
Marketing 216,198 245,397
Administrative 2,060,251 1,529,338
Provision for credit losses 486,440 337,732
Deferred compensation expense (recovery) 266,754 (49,361)
Depreciation and amortization 86,664 125,286
Interest expense 1,517,181 897,553
---------------------------
4,774,274 3,224,824
---------------------------
Operating income before income taxes 1,058,901 894,208
Income tax expense (benefit):
Current 550,346 392,603
Deferred (153,596) (50,772)
---------------------------
396,750 341,831
---------------------------
Income before cumulative effect of a change
in accounting principle 662,151 552,377
Cumulative effect of a change in accounting
principle - 71,218
---------------------------
Net income 662,151 623,595
Retained earnings, beginning of year 867,663 244,068
---------------------------
Retained earnings, end of year $1,529,814 $ 867,663
===========================
</TABLE>
<PAGE> F - 4
Nicholas Financial, Inc.
Consolidated Statements of Income and Retained Earnings (continued)
<TABLE>
<CAPTION>
Year ended March 31
1996 1995
---------------------------
<S> <C> <C>
Earnings per common and common
equivalent share:
Income before cumulative effect of a
change in accounting principle $.11 $.09
Cumulative effect of a change in
accounting principle - .01
---------------------------
Net income $.11 $.10
===========================
Weighted average number of common and
common equivalent shares 6,037,720 6,153,236
===========================
</TABLE>
See accompanying notes.
<PAGE> F - 5
Nicholas Financial, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended March 31
1996 1995
-------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 662,151 $ 623,595
Adjustments to reconcile net income to net
cash flows provide by operating activities:
Cumulative effect of a change in accounting
principle - 71,218
Depreciation of property and equipment 73,562 87,022
Provision for credit losses 486,440 337,732
Amortization of intangible assets and
deferred loan costs 42,502 99,064
Deferred compensation expense (recovery) 266,754 (49,361)
Deferred income taxes (153,196) (50,772)
Changes in operating assets and liabilities:
Accounts receivable 2,838 15,421
Prepaid expenses and other assets (67,208) (43,089)
Deferred revenues 48,356 35,643
Accounts payable 9,986 428,301
Other liabilities (147,367) 74,444
Income taxes payable 9,774 (84,533)
---------------------------
Net cash provided by operating activities 1,234,592 1,544,685
Investing activities
Increase in finance receivables, net of
principal collected (6,033,139) (5,816,538)
Purchase of property and equipment (67,377) (96,103)
Increase in deferred loan costs (28,000) -
---------------------------
Net cash used by investing activities (6,128,516) (5,912,641)
Financing activities
Repayment of notes payable-related party
and line of credit borrowings (5,670,031) (301,965)
Proceeds from notes payable-related party
and line of credit borrowings 10,700,000 4,540,000
Proceeds from sale of the Company's common
stock 71,404 136,439
---------------------------
Net cash provided by financing activities 5,101,373 4,374,474
---------------------------
Net increase in cash 207,449 6,518
Cash, beginning of year 283,242 276,824
---------------------------
Cash, end of year $490,791 $283,342
===========================
</TABLE>
See accompanying notes.
<PAGE> F - 6
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
March 31, 1996
1. Organization
Nicholas Financial, Inc. (NFI, Canada) is a Canadian holding company
incorporated under the laws of British Columbia with two wholly-owned
United States subsidiaries, Nicholas Data Services, Inc. (NDSI) and
Nicholas Financial, Inc. (NFI). NDSI is engaged principally in the
development, marketing and support of computer application software.
NFI is engaged principally in providing installment sales financing.
Both NDSI and NFI are based in Florida, U.S.A.
2. Accounting Policies
Consolidation
The consolidated financial statements include the accounts of NFI,
Canada and its wholly-owned subsidiaries, NDSI and NFI, collectively
referred to as the Company. All intercompany transactions and balances
have been eliminated.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for repairs
and maintenance are charged to expense as incurred. Depreciation of
property and equipment is computed using the straight-line method
(accelerated method for assets acquired prior to April 1, 1994) over
the estimated useful lives of the assets as follows:
<TABLE>
<CAPTION>
<S> <C>
Automotive 3 years
Equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Lease term
</TABLE>
Intangible Assets
Intangible assets consist principally of rights and privileges of
certain computer software and customer lists acquired. Such amounts
are being amortized over their estimated useful lives of five years
using the straight-line method.
Costs incurred to develop new software and to enhance existing
software for internal use are charged to operations as incurred. Costs
to develop new software for resale are capitalized and amortized over
the expected useful life of the related product, generally five years.
The amount capitalized is included in the caption "intangible assets."
<PAGE> F - 7
2. Accounting Policies (continued)
Allowance for Loan Losses
The allowance for loan losses is increased by charges against earnings
and decreased by charge-offs (net of recoveries). In addition to the
allowance for loan losses, a nonrefundable dealer reserve has been
established using unearned interest and dealer discounts to absorb
future credit losses. To the extent actual credit losses exceed the
reserves, a bad debt provision is recorded and to the extent credit
losses are less than the reserve, the reserve is accreted into income
as an adjustment to the interest yield over the term of the underlying
finance receivables.
Management's periodic evaluation of the adequacy of the allowance is
based on the Company's past loan experience, known and inherent risks
in the portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Deferred Loan Costs
The Company defers costs related to obtaining loans. Such costs are
charged to operations as an adjustment of interest expense over the
life of the related loan.
Income Taxes
The Company accounts for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes," which requires the use of an asset and liability
approach for financial accounting and reporting.
Revenue Recognition
Revenues resulting from the sale of hardware and software are
recognized upon delivery of the goods. Revenues from software support
maintenance and lease agreements are recognized pro rata over the life
of the agreements. The unamortized amounts are included in the caption
"deferred revenues."
Interest income on finance receivables is recognized using the
interest (actuarial) method. Accrual of interest income on finance
receivables is suspended when a loan is contractually delinquent for
60 days or more or the collateral is repossessed, whichever is
earlier.
<PAGE> F - 8
2. Accounting Policies (continued)
Earnings Per Share
Earnings per share is calculated using the weighted average number of
common shares outstanding during the year, adjusted for the dilutive
effect of stock options and warrants and is the same on both a primary
and fully-diluted basis.
Financial Instruments
The Company's financial instruments consist of accounts receivable,
finance receivables, line of credit, notes payable-related party and
accounts payable. For each of these financial instruments, the
carrying value approximates its fair value except as noted below:
<TABLE>
<CAPTION>
Carrying Estimated
Value Fair Value
------------------------------
<S> <C> <C>
Finance receivables $18,326,784 $18,504,899
</TABLE>
The fair value of finance receivables was estimated by adding the
unpaid principal (net of allowances) to the present value of the
portion of the nonrefundable dealer discount which will not be
utilized to offset future credit losses.
The Company's financial instruments that are exposed to concentrations
of credit risk are primarily finance receivables, which are
concentrated in the State of Florida. The Company provides credit
during the normal course of business and performs ongoing credit
evaluations of its customers. The Company maintains allowances for
potential credit losses which, when realized, have been within the
range of management's expectations. The Company perfects a primary
interest in all vehicles financed as a form of collateral.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
Statement of Cash Flows
Cash paid for income taxes for the years ended March 31, 1996 and 1995
was $540,167 and $520,150, respectively. Cash paid for interest for
the years ended March 31, 1996 and 1995 was $1,447,437 and $787,207,
respectively.
<PAGE> F - 9
3. Change in Accounting Method
On April 1, 1994, the Company changed its method of accounting for
unearned interest and dealer discounts as well as reserves for future
credit losses. Historically, dealer holdbacks were recorded as
deferred revenue and amortized to income over the life of the loans
and an allowance for uncollectible accounts was established by charges
against income.
The Company concluded that a more appropriate method of accounting for
dealer holdback was to record some or all of the holdback as an
allowance against the unpaid balance of the loans to state such loans
at their estimated net realizable value at date of purchase and to
charge credit losses against this account to the extent of its
availability. If the dealer holdback is insufficient at the date of
purchase, unearned income is also deferred as necessary. Future
additions to the allowance for uncollectible amounts are made by a
charge against income. If holdback amounts credited to the allowance
become unnecessary, the unnecessary amounts are amortized to income as
an adjustment of the interest yield. The Company believed that the
change was to a preferable method because it more appropriately
records the economic event which takes place at the time a loan is
purchased, and it provides a more accurate reflection of the Company's
assets and liabilities and better matching of its costs and revenues.
The cumulative effect as of April 1, 1994 of the change in method
increased fiscal 1995 net income by approximately $71,000 after
reduction for income taxes of approximately $43,000.
4. Finance Receivables
Finance receivables consist of consumer automobile finance installment
contracts and are detailed as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------
<S> <C> <C>
Finance receivables, gross contract $27,814,597 $19,716,821
Less:
Unearned interest (6,401,336) (4,696,000)
Nonrefundable dealer reserves (2,229,571) (1,519,852)
Unearned dealer discount (11,617) (124,210)
----------------------------
19,172,073 13,376,759
Allowance for credit losses (845,289) (596,674)
----------------------------
Finance receivables, net $18,326,784 $12,780,085
============================
</TABLE>
The terms of the receivables range from 6 to 60 months and bear a
weighted average effective interest rate of 25% and 26% for 1996 and
1995, respectively.
<PAGE> F - 10
5. Property and Equipment
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Depreciation Value
--------------------------------------
<S> <C> <C> <C>
1996
Automotive $118,246 $ 64,740 $ 53,506
Equipment 203,586 117,114 86,473
Furniture and fixtures 76,708 42,676 34,032
Leasehold improvements 40,227 33,820 6,406
--------------------------------------
$438,767 $258,350 $180,417
======================================
1995
Automotive $ 93,725 $ 32,091 $ 61,634
Equipment 176,992 94,913 82,079
Furniture and fixtures 64,772 34,072 30,700
Leasehold improvements 36,710 24,521 12,189
--------------------------------------
$372,199 $185,597 $186,602
======================================
</TABLE>
6. Intangible Assets
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Depreciation Value
--------------------------------------
<S> <C> <C> <C>
1996
Computer software rights $406,312 $406,312 $ -
Internally developed
computer software 471,661 469,131 2,530
--------------------------------------
$877,973 $875,443 $ 2,530
======================================
1995
Computer software rights $406,312 $406,312 $ -
Internally developed
computer software 471,661 456,029 15,632
--------------------------------------
$877,973 $862,341 $15,632
======================================
</TABLE>
<PAGE> F - 11
7. Line of Credit
The Company has a $20,000,000 line of credit facility (the Line) with
BA Business Credit, Inc. which expires on June 3, 1996. Borrowings
under the Line bear interest at the Bank of America prime rate plus
1.25% and 1.00%, when the outstanding balance exceeds $10,000,000 and
$15,000,000, respectively (9.5% at March 31, 1996). Pledged as
collateral for this credit facility are all of the assets of Nicholas
Financial, Inc. and the unconditional guarantee of NDSI, NFI, Canada,
and Peter L. Vosotas, a shareholder.
On May 13, 1996, the Company negotiated a new line of credit facility
with BA Business Credit, Inc. The new agreement, which expires on
June 3, 1998, allows for borrowings of up to $25,000,000 under similar
terms as the previous credit facility.
8. Notes Payable-Related Party
Notes payable are as follows at March 31:
<TABLE>
<CAPTION>
1996 1995
-------------------------
<S> <C> <C>
Notes payable, unsecured, with interest at
varying rates up to 12%, quarterly and
semiannual interest payments due through
June 1998, at which time entire principal
balances and unpaid interest is due,
subordinated to the Line. The notes are
convertible at the option of the holder,
into common shares at prices from $1.75 to
$2.00 per share. $1,800,000 $1,100,000
Note payable, unsecured, interest at 12%,
quarterly interest due through April 1996,
at which time entire balance and unpaid
interest is due, subordinated to the Line. 150,000 150,000
Notes payable, unsecured interest at 12%,
principal and interest due through May 1998. 233,341 218,846
Note payable, unsecured, interest at 12%,
quarterly principal and interest payments
due through April 1996. 18,495 87,243
Note payable, unsecured, interest at 12%,
quarterly interest payments due through
August 1997, at which time the entire
principal balance and unpaid interest is due. 24,697 20,000
-------------------------
$2,226,533 $1,576,089
=========================
</TABLE>
<PAGE> F - 12
8. Notes Payable-Related Party (continued)
Maturities of notes payable are summarized as follows:
<TABLE>
<CAPTION>
Year ending March 31
--------------------
<S> <C>
1997 $ 168,495
1998 1,400,000
1999 658,038
-------------
$2,226,533
=============
</TABLE>
9. Income Taxes
The provision for income taxes reflects an effective tax rate
which differs from the corporate tax rate for the following
reasons:
<TABLE>
<CAPTION>
1996 1995
------------------------
<S> <C> <C>
Combined basic Canadian federal and
provincial income tax rate 45.34% 45.34%
========================
Income before income taxes $1,058,901 $894,208 901 8
========================
Provision for income taxes based on
above rate $ 480,106 $405,434
Increase (decrease) resulting from:
NDSI's income taxed at lower (U.S.)
rates (88,718) (74,621)
Other 5,362 11,018
------------------------
$ 396,750 $341,831
========================
</TABLE>
The Company's deferred tax assets consist of the following as of:
<TABLE>
<CAPTION>
March 31
1996 1995
------------------------
<S> <C> <C>
Allowance for credit losses not
deductible for tax purposes $ 309,000 $254,000
Deferred compensation related to stock
options and warrants 157,000 66,000
Other items 20,000 13,000
------------------------
$486,000 $333,000
========================
</TABLE>
<PAGE> F - 13
9. Income Taxes (continued)
NFI, Canada has income tax loss carryforward balances of
approximately $180,000 (1995-$187,000) which are available to
reduce future taxable income and which expire as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 20,000
1998 17,000
1999 23,000
2000 59,000
2001 36,000
2002 16,000
2003 9,000
----------
$180,000
==========
</TABLE>
For the years ended March 31, 1996 and 1995, the Company would
have recorded deferred tax assets of approximately $68,000 and
$71,000, respectively, due primarily to income tax loss
carryforwards. The assets, however, are offset entirely by a
valuation allowance due to the relative uncertainty surrounding
the realization of the assets.
10. Shareholders' Equity
Changes in the outstanding common stock during the years are as
follows:
<TABLE>
<CAPTION>
Number Common
of Shares Stock
--------------------------
<S> <C> <C>
Balance at March 31, 1994 $5,511,739 $1,298,815
Changes in 1995:
Issued for cash on exercise of options 182,800 36,439
Issued on exercise of convertible notes
payable 80,000 100,000
Deferred compensation recovery - (49,361)
-------------------------
Balance at March 31, 1995 5,774,539 1,385,893
Changes in 1996:
Issued for cash on exercise of options 39,800 35,004
Issued in connection with note payable 20,000 28,000
Issued for services rendered 4,000 8,400
Deferred compensation expense - 266,754
-------------------------
Balance at March 31, 1996 5,838,339 $1,724,051
=========================
</TABLE>
<PAGE> F - 14
10. Shareholders' Equity (continued)
The Company has warrants outstanding at March 31, 1996 entitling a
director to purchase 1,000,000 common shares at Cdn$2.55 until
June 3, 1999. The Company also has warrants outstanding at
March 31, 1996 entitling an investor to purchase 53,571 shares at
Cdn$2.27 which expire May 12, 1997. At March 31, 1996, all
warrants were fully exercisable.
As of March 31, 1996, stock options outstanding to directors,
officers and employees are as follows:
<TABLE>
<CAPTION>
Number of Shares Exercise Price Expiration Date
<S> <C> <C>
20,000 $.48 April 5, 1996
27,000 .75 August 28, 1996
52,000 .90 September 4, 1997
21,500 1.20 November 30, 1997
31,500 1.40 November 20, 1998
180,000 1.70 February 28, 2000
4,500 2.15 June 10, 1999
48,000 3.23 September 8, 2000
------------
384,500
============
</TABLE>
During 1996 and 1995, 20,400 options and -0- warrants and 7,000
options and 62,500 warrants were canceled, respectively. During
1996, 48,000 options were granted to directors, officers and
employees. As of March 31, 1996, 294,811 of the above options were
exercisable. During 1996, the weighted average price of options
exercised was $.88.
11. Related Party Transactions
At March 31, 1996 and 1995, all notes payable were owing to
shareholders, directors and individuals related to directors of
the Company, with terms described in Note 8 of these consolidated
financial statements.
During fiscal 1996, the Company incurred interest expense of
$260,547 (1995-$200,077) on the notes described above.
<PAGE> F - 15
12. Commitments
The Company leases its corporate office and sales offices under
operating lease agreements which provide for annual minimum rental
payments as follows:
<TABLE>
<CAPTION>
Year ending March 31
<S> <C>
1997 $ 84,189
1998 61,921
1999 52,995
2000 13,319
----------
$212,424
==========
</TABLE>
Rent expense for the years ended March 31, 1996 and 1995 was
$66,819 and $50,650, respectively.
13. Segmented Information
Substantially all of the Company's operations are in the United
States. The industry segments are as follows:
<TABLE>
<CAPTION>
Computer
Application
General Software and Corporate Total
Financing Support
<S> <C> <C> <C> <C>
1996
Revenue $5,267,530 $ $565,465 $ - $5,833,175
Operating (loss) profit 1,088,188 (20,298) (8,989) 1,058,901
Identifiable assets 19,626,132 174,645 1,024 19,801,801
Capital expenditures 67,377 - - 67,377
Depreciation and 42,456 44,208 - 86,664
amortization
1995
Revenue $3,516,834 $602,198 $ - $4,119,032
Operating (loss) profit 901,860 5,933 (13,585) 894,208
Identifiable assets 13,719,414 130,485 875 13,850,774
Capital expenditures 86,411 9,692 - 96,103
Depreciation and 41,067 84,219 - 125,286
amortization
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<CAPTION>
NICHOLAS FINANCIAL, INC.
<S> <C>
Dated: June __, 1996 /s/ Peter L. Vosotas
--------------------------
Peter L. Vosotas
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Peter L. Vosotas
- - - - ------------------------- President and June __, 1996
Peter L. Vosotas Director
/s/ Ralph T. Finkenbrink
- - - - ------------------------- Principal June __, 1996
Ralph T. Finkenbrink Financial Officer
/s/ Raymond Cottrell
- - - - ------------------------- Director June __, 1996
Raymond Cottrell
/s/ Joseph G. Bowes
- - - - ------------------------- Director June __, 1996
Joseph G. Bowes
</TABLE>
