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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934
For the fiscal year ended March 31, 1997
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)
Issuer's Telephone Number, Including Area Code: (813) 726-0763
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, No par value
(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 38 pages. Exhibits are indexed at
page 21.
____________________________________________________________________________
<PAGE> 1
Check if disclosure of delinquent filers pursuant to Item 405 of
regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $6,209,129
As of March 31, 1997, 6,990,544 shares of the Registrant's common
stock were outstanding, and the aggregate market value of the shares
held by non-affiliates was approximately $6,365,045
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format (check one):Yes[ ] No [ X ]
Forward-Looking Information
This 10-K contains various forward-looking statements and
information that are based on management's beliefs and assumptions, as
well as information currently available to management. When used in
this document, the words "anticipate," "estimate," "expect," and
similar expressions are intended to identify forward-looking
statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it can
give no assurance that such expectations will prove to be correct.
Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, estimated or
expected. Among the key factors that may have a direct bearing on the
Company's operating results are fluctuations in the economy, the
degree and nature of competition, demand for consumer financing in the
markets served by the Company, the Company's products and services,
increases in the default rates experienced on Contracts, adverse
regulatory changes in the Company's existing and future markets, the
Company's ability to expand its business, including its ability to
complete acquisitions and integrate the operations of acquired
businesses, to recruit and retain qualified employees, to expand into
new markets and to maintain profit margins in the face of increased
pricing competition
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 ("Contracts") for
purchases of used automobiles and light trucks. To a lesser extent,
the Company also makes direct consumer loans and sells consumer-
finance related products ("Insurance Products"). 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 92.6% of consolidated revenues
for the fiscal year ended March 31, 1997 and NDS's activities
accounted for approximately 7.4% 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.
<PAGE> 2
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
in Florida and Georgia only under the name Nicholas Financial, Inc.
The Company currently operates ten branch offices in Florida and two
branch offices in Georgia. As of March 31, 1997 the Company had non-
exclusive agreements with approximately 500 dealers 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, 1997, the Company had purchased
over 11,174 Contracts with an initial principal amount aggregating
approximately $72,354,454. The average initial principal amount of
Contracts purchased by the Company was approximately $6,475, and had
an average initial term of 32 months. The Contracts were purchased by
the Company from automobile dealers at an average discount of
approximately 12% from their initial principal amount.
The obligors under the Contracts typically make down payments, in
the form of cash or trade-in, ranging from 5% 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, 1997, the average APR on Contracts
purchased and currently outstanding is 24% and the average discount
from the initial principal amount is 10%.
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. In addition to the
discount, the Company charges the dealer a processing fee of $75 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, 1997, 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 insurance naming the Company as loss payee,
that the installment salescontract 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.
<PAGE> 3
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. If the purchaser so desires, the cost of these
products may be included in the amount financed under the Contract.
As of March 31, 1997, less than 4% of the borrowers under Contracts in
the Company's loan portfolio had elected to purchase insurance
products offered by the Company.
Direct Consumer Loans
Although the Company is licensed to make small direct consumer
loans up to $25,000, the average loan made to date by the Company had
an initial principal balance of $2,327. 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 the maximum size
permitted under its license. The Company offers loans primarily to
borrowers under the Contracts previously 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 previously
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, 1997 loans made by the Company pursuant to its direct
consumer loan program constituted approximately 2% of the aggregate
principal amount of the Company's loan portfolio. As of March 31,
1997, the average APR for direct consumer loans made by the Company
was 24%, 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 80% of the 432
loan transactions currently outstanding as of March 31, 1997 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, 1997, approximately 98% of the aggregate
outstanding principal balance of loans in the Company's loan portfolio
was comprised of Contracts purchased from automobile dealers and 2%
consisted of loans made pursuant to the Company's direct loan program.
The Company currently typically purchases between 200 and 400 indirect
contracts each month and originates between 50 and 100 direct consumer
loans each month. The Company currently operates ten branch offices in
Florida and two branch offices in Georgia.
Financing Sources
The Company finances the acquisition of Contracts with its
retained earnings, cash flow from the operations, loans from
investors, insiders and a line of credit with a lending institution.
In May of 1996 the Company expanded its line of credit to $25 million
and is currently negotiating another increase in the size of the
line, an extended maturity date, and other various components of its
contract with BA Business Credit.
As of March 31, 1997, The Company owed approximately $1.8 million
to 11 investors who purchased notes issued by the Company. These notes
bear interest at rates from 10.5 % to 12%. In most cases, the
Company's obligation to repay the note is subordinated to payment of
its payment obligations under the BA Business Credit line of credit.
The BA Business Credit 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 BA Business Credit equal to .25% of the
amount available under the line of credit that has not been drawn
down. As of March 31, 1997, the Company had drawn down approximately
$17.7 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.
<PAGE> 4
Underwriting Guidelines
The Company's typical customer is 30 years old, has a monthly
gross income of $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.
Prior to its approval of the purchase of a Contract, the Company
is provided with a standardized credit application completed by the
consumer which contains information relating to the consumer's
background, employment, and credit history. The Company also obtains a
credit report from an independent reporting service and verifies the
consumer's employment and residence. In most cases consumers are
interviewed by telephone by a Company application processor.
The Company utilizes internally prepared buying guidelines
that branch managers purchase Contracts under. Any contract that does
not meet these guidelines must be approved by the management of the
Company. The Company currently has two regional managers whose
responsibility it is to manage the specific branches in a defined
geographic area. Regional mangers are responsible to monitor their
branches in respect to Contracts that are being purchased by the
Company.
The Company continues to utilize the Special Operations
Department, ("SOD") to perform on-site audits of branch compliance
with Company buying guidelines. SOD will audit Company branches on a
schedule that is variable depending on the size of the branch, length
of time a branch has been open, current tenure of branch manager,
previous branch audit score, historical and current branch
profitability, and other intangible factors. SOD is an independent
department that reports to the Accounting and Administrative
Management of the Company. The Company believes that an independent
review and audit of its branches that is not tied to the sales arm of
the Company is imperative as it results in information that is
impartial.
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.
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. 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 5% for
borrowers rated in the "A" category, 7.5% for those in the "B", 10%
for those in the "C" categories and 15% or more for those in the "D"
category. Purchases of Contracts at discounts that do not fall within
the guidelines require 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.
<PAGE> 5
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.
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 and applicable finance charges 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
with each dealer and the terms on which it purchased Contracts from
the dealer.
<PAGE> 6
The Company's policy is to aggressively pursue legal remedies to
collect deficiencies from customers. 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 $300 for each vehicle repossessed. As required by Florida and
Georgia 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 to $1,500
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's Contract marketing efforts are directed at
automobile dealers. The Company attempts to meet dealers' needs by
offering highly-responsive, cost-competitive and service-oriented
financing programs. 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.
The Industry
The non-prime automobile finance market is highly fragmented and
historically has been serviced by a variety of financial entities,
including captive finance subsidiaries of major automobile
manufactures, banks, independent finance companies, and small loan
companies. Many of these financial entities do not consistently
provide financing to this market. Although prime borrowers represent
the largest segment of the automobile financing market, there are many
potential purchasers of automobiles who do not qualify as prime
borrowers. Purchasers considered by the Company to be non-prime
borrowers are generally unable to obtain credit from traditional
sources of automobile financing. The Company believes that, because
these potential purchasers represent a substantial market, there is a
demand by automobile dealers with respect to financing for non-prime
borrowers that has not been effectively served by traditional
automobile financing sources. According to the Federal Reserve Board,
as of December 31, 1996, there was approximately $377.3 billion in
automobile related installment credit outstanding. The Company is
unaware of any authoritative estimates of the non-prime portion of
this market.
In the past year the Company has seen several of its competitors
report unexpected losses due to, but not limited to, inadequate
Reserves and accounting irregularities. The Company believes the
circumstances causing the industry turmoil are the result of poor
reserve analysis, overall lack of responsible financial management and
insufficient internal controls. The Company is confident that its
static pool reserve analysis, excellent internal controls and
experienced management team will continue its history of accurate and
reliable financial reporting.
<PAGE> 7
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's business strategy is to continue its growth and to
increase its profitability through greater penetration in its current
markets, controlled geographic expansion into new markets and
selective portfolio acquisitions. As of the date of this report, the
Company has no commitments or agreements in principle with respect to
any portfolio acquisitions. The Company also intends to continue its
expansion through the increased origination of additional direct
consumer loans. The Company believes that opportunity for growth
continues to exist in the State of Florida as well as Georgia and for
the foreseeable future intends to concentrate its expansion activities
there.
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. 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. However, the Company will not sacrifice credit quality or
prudent business practices in order to maintain annual growth that is
expected from finance companies typical in size to the Company . 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 $5,000,000.
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 500 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 and
the State of Georgia. To date, the Company's operations have been
conducted exclusively in the States of Florida and Georgia,
accordingly, the laws of the State of Florida and Georgia 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.
<PAGE> 8
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 and the Georgia Secretary of State (Business
Services & Regulation). 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 and the
State of Georgia, maximum interest rates that may be charged on loans
to finance used vehicles, and proper disclosure to customers regarding
financing terms.
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, 1997 the Company employed a total of 52
persons, five of whom work for NDS and 47 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 current 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> 9
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" since
1996.
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, 1997 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.
<TABLE>
<CAPTION>
Price Range of Common Stock*
High Low
<S> <C> <C> <C> <C>
Year ended March 31, 1997 Cdn U.S. Cdn U.S.
First Quarter ........... $3.55 $2.59 $2.37 $1.73
Second Quarter........... $4.04 $2.95 $3.01 $2.20
Third Quarter............ $3.29 $2.40 $1.71 $1.25
Fourth Quarter........... $2.85 $2.05 $1.81 $1.30
High Low
Year ended March 31, 1996 Cdn U.S. Cdn U.S.
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>
1 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.
2 As of March 31, 1997 there were approximately 500 stockholders of
record of the Company's Common Stock.
<PAGE> 10
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Consolidated net income increased in fiscal year ending March 31,
1997 to $792,254 or $0.12 per share from $662,151 or $0.11 per share
in fiscal year ending March 31, 1996. Earnings for the year were
favorably impacted by a significant increase in the outstanding loan
portfolio coupled with a marginal improvement in the cost of funds.
The Company's NDS subsidiary did not contribute significantly to
consolidated operations in fiscal 1997 or 1996.
The following table sets forth certain financial data:
<TABLE>
<CAPTION>
Years Ended March 31 1997 1996
<S> <C> <C>
Average Net Finance Receivables (1) $24,932,075 $20,004,986
Average Indebtedness (2) 16,566,604 14,185,584
Interest Income 5,749,410 5,267,530
Interest Expense 1,656,402 1,517,181
Net Interest Income 4,093,008 3,750,349
____________________________________________________________________
Gross Portfolio Yield (3) 23.06% 26.33%
Average Cost of Borrowed Funds (2) 10.00% 10.70%
Net Interest Spread (4) 13.06% 15.63%
Net Portfolio Yield (3) 16.42% 18.75%
</TABLE>
(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 its senior credit line with BA Business Credit, 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.
<PAGE> 11
Fiscal 1997 compared to Fiscal 1996
Interest Income and Loan Portfolio
Interest revenue, predominantly finance charge income, increased
9% to $5.7 million in fiscal 1997 from $5.3 million in fiscal 1996.
The net finance receivable balance totaled $25.9 million at March 31,
1997, an increase of 41% from the $18.3 million at March 31, 1996.
The gross finance receivable balance increased 39% to $38.7 million
at March 31, 1997 from $27.8 million at March 31, 1996. The primary
reason interest revenue increased was the increase in the outstanding
loan portfolio offset in part by a 3% point decrease in the gross
portfolio yield. The primary reason the gross portfolio yield
decreased is the result of a lower effective "APR" amortizing to
finance income (see discussion on pg. 13 below delinquency table). The
primary reason that net finance receivables increased was the opening
of two additional branch offices.
Computer Software Business
In fiscal 1997, the revenues of NDS were $460,019 compared with
fiscal 1996 revenues of $565,645, a decrease of 19%. This decrease
was primarily due to a decrease in new computer installations during
fiscal 1997. The operating loss for fiscal 1997 was $11,665 compared
with an operating loss of $20,298 for fiscal 1996. The Company
expects both operating revenues and income of NDS to remain flat.
Operating Expenses
Operating expenses excluding provision for credit losses, interest
expense and deferred compensation expense, increased to $2.8 million
in fiscal 1997 from $2.5 million in fiscal 1996. This increase of 13%
was primarily attributable to the opening of the two new branch
offices which included additional staffing costs, capital equipment
costs and related expenses. The Company has increased its work force
over the last 3 years from 12 to 52 full time employees.
Interest Expense
Interest expense increased to $1.6 million in fiscal 1997 as
compared to $1.5 million in fiscal 1996. This increase was due to an
increase in average outstanding borrowings from $14.2 million to $16.6
million. The effect of this increase was offset in part by a decrease
in the Company's effective average cost of borrowing from 10.70% for
fiscal 1996 to 10.00% for fiscal 1997. The Company receives a more
favorable interest rate as average outstanding borrowings increase.
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 purchased by a
Company branch office during a three month period. The average pool
consists of 72 Contracts with an aggregate initial principal amount of
approximately $533,000. As of March 31, 1997, the Company had 120
active pools. The Company analyzes loan pools 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 and Georgia. 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.
<PAGE> 12
A pool, retains an amount equal to 100% of the discount into a
reserve for credit losses. In situations where the discount is
determined to be insufficient to absorb all potential losses
associated with the pool, a portion of future unearned income
associated with that specific pool will be added to the reserves for
credit losses until total reserves have reached the appropriate level.
If the reserve for credit losses is 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 any remaining
reserves, the excess reserves are recognized as 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, 1997, the Company had established reserves
for losses on Contracts of $4,429,231, or 11.45% 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.
Because of the small number of direct consumer loans currently
outstanding, a reserve for losses is established at the time the loan
is made. 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, 1997, the
Company had not experienced material losses under its direct consumer
loan program.
<PAGE> 13
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, 1997 March 31, 1996
________________ ________________
<S> <C> <C> <C> <C>
Contracts
Gross Balance Outstanding $37,813,944 $27,250,451
Dollar Dollar
Delinquencies Amount Percent* Amount Percent*
30 to 59 days $1,398,101 3.70% $1,346,150 4.94%
60 to 89 days 251,663 0.67% 326,542 1.20%
90 + days 118,680 0.31% 44,746 0.16%
___________ ___________
Total Delinquencies $1,768,444 $1,717,438
*Total Delinquencies as a
percent of outstanding balance 4.68% 6.30%
Direct Loans
Net Balance Outstanding $736,115 $459,147
Delinquencies
30 to 59 days 5,555 0.75% 321 0.07%
60 to 89 days 2,549 0.35% 3,197 0.70%
90 + days 4,029 0.55% 0 0.00%
_______ _______
Total Delinquencies $12,133 $3,518
Total Delinquencies as a
% of outstanding Balance 1.65% 0.77%
</TABLE>
The provision for credit losses was $438,510 in fiscal 1997 as
compared to $486,440 in fiscal 1996 in spite of an approximately 40%
increase in gross finance receivables. This was due to the following;
the Company has increased the amount of initial reserves set up at the
time the Contracts are purchased by utilizing the entire amount of the
discount associated with a pool of Contracts and then subsidizing
that reserve by reclassifying a portion of the unearned finance
charges related to that particular pool. Management believes this
method more accurately estimates the overall reserve it believes will
be necessary to meet the expected losses associated with that pool. As
a result of estimating losses more accurately fewer pools required
additional reserves that would have to be increased through the
provision for credit losses. During fiscal 1997, a larger portion of
unearned finance charges (at the time the contract was purchased) was
reclassified to reserve for credit losses. This caused the gross
portfolio yield to decrease, while the provision for credit losses was
favorably impacted.
<PAGE> 14
Income Taxes
The provision for income taxes in fiscal 1997 increased 25% to
$497,276 from $396,750 in fiscal 1996 as a result of higher pretax
income. The Company's effective tax rate increased from 37.5% in
fiscal 1996 to 38.6% in fiscal 1997.
Deferred Compensation
Deferred compensation decreased from $266,754 in fiscal 1996 to
none in fiscal 1997 primarily because compensatory stock options and
warrants became fully vested in fiscal 1996.
Net Income
As a result of the above factors, net income increased from
$662,151 in fiscal 1996 to $792,254 in fiscal 1997.
Liquidity And Capital Resources
The Company's cash flows for fiscal 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal Fiscal
1997 1996
__________ ___________
<S> <C> <C>
Cash provided by (used in):
Operations $1,668,044 $1,234,592
Investing Activities -
(primarily purchase of installment
contracts) (8,119,637) (6,128,516)
Financing activities 6,068,950 5,101,373
Net increase (decrease) in cash (382,643) 207,449
</TABLE>
The Company's primary use of working capital during fiscal year
1997 was the funding of the purchase of Contracts. The Contracts were
financed substantially through borrowings on the Company's $25 million
line of credit. The line of credit, which expires in June 1998, is
secured primarily by Contracts, and available borrowings are based on
a percentage of qualifying Contracts. As of March 31, 1997 the Company
had approximately $7.3 million available under the line of credit.
Since inception, the Company has also funded a portion of its working
capital needs from cash flows from operating activities.
Net cash provided by operating activities totalled $1.7 million
and $1.2 million during fiscal 1997 and 1996, respectively.
In October 1996, the Company successfully completed a secondary
common stock offering.The net proceeds from the offering of $1,969,520
were used to repay certain outstanding debt and for general corporate
purposes, including future branch expansion.
The self-liquidating nature of installment Contracts and other
loans enables the Company to assume a higher debt-to-equity ratio
than in most businesses. The amount of debt the Company incurs from
time to time under these financing mechanisms depends on the Company's
need for cash and it's ability to borrow under the terms of its line
of credit. The Company believes that borrowings available under the
line of credit as well as cash flow from operations and, if necessary,
the issuance of additional subordinated debt and or additional
securities in the capital markets,will be sufficient to meet its short
and long-term funding needs.
The Company is also in the process of negotiating an increase and
extension in its current credit line.
<PAGE> 15
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. Management believes that the Company's strong
balance sheet has enabled it to negotiate favorable interest rates
which minimized the impact of prime rate increases.
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.
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
Business Credit 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
line of credit will make it possible for the Company to continue to
meet or exceed its covenants under the loan agreement with, 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 the State of Georgia and for the foreseeable
future intends to concentrate its expansion activities there.
<PAGE> 16
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 - 4
Notes to the Consolidated Financial Statements..............F - 5
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
<PAGE> 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
Name Age Position
______ ___ ________
Peter L. Vosotas 55 Chairman, Chief Executive Officer and
President of Nicholas Financial-Canada,
Nicholas Financial and NDS
Raymond Cottrell 50 Director of Nicholas Financial-Canada
Joseph G. Bowes 42 Director of Nicholas Financial-Canada
Keith A. Bertholf 41 Director of Nicholas Financial and NDS
and Secretary and Vice President-Operations
of Nicholas Financial-Canada,
Nicholas Financial and NDS
Ralph T. Finkenbrink 36 Vice President-Finance of Nicholas
Financial-Canada, Nicholas Financial
and NDS
Ellis P. Hyman 58 Director of Nicholas Financial and NDS
Stephen Bragin 65 Director of Nicholas Financial and NDS
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> 18
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)
<S> <C> <C> <C> <C>
Securities
Underlying
Name and Position Year Salary Bonus Options
___________________ ____ _______ _____ _______
Peter L. Vosotas 1997 $98,000 $12,500 100,000
Chief Executive Officer 1996 $98,000 $21,864 100,000
and Director 1995 $88,000 $23,900 100,000
</TABLE>
Option Grants During The Most Recently Completed Fiscal Year
<TABLE>
<S> <C> <C> <C> <C> <C>
% Of Total Market Price
Options Of Securities
Options Granted To Exercise Or Expiration
Name of Executive Granted To All Employees Underlying Options On Date Expire
Granted Officer (#) In Fiscal Year ($/SHARE) Of Grant($/SHARE) Date
_________________ ______________ ______________ ___________ _________________ ______
none
</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 and in
addition directors are awarded annually, options to purchase 2,000
shares of common stock at the current market price. The options have a
term of two years. Directors are reimbursed for related out-of-pocket
expenses of attending meetings.
<PAGE> 19
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, 1997, 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.
Name and Address Shares Owned Percentage
Peter L. Vosotas
2454 McMullen Booth Road
Clearwater, FL 34619 3,333,500 (1) 40.14%
Keith A. Bertholf
2454 McMullen Booth Road
Clearwater, FL 34619 160,800 (2) 1.94%
Ralph T. Finkenbrink
2454 McMullen Booth
Clearwater, Fl. 34619 23,400 (3) *
Joseph Bowes
1826 W. 63rd. Avenue
Vancouver, B.C. V6P-2J1 5,000 (4) *
Raymond Cottrell
2250-650 W. Georgia St.
Vancouver, B.C., V6B-4N7 5,000 (5) *
Dr. Ellis Hyman
2454 McMullen Booth Road
Clearwater, FL 34619 252,977 (6) 3.05%
Stephen Bragin
2454 McMullen Booth Road
Clearwater, FL 34619 157,708 (7) 1.90%
William G. Taylor
104 E. Springs St.
Lancaster, S.C 29721 194,118 2.42%
All directors and officers
as a group (6 persons) 4,132,503 (8) 51.45%
* 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, 1997.
(2) Includes 56,000 shares issuable upon exercise of certain options
exercisable within 60 days of March 31, 1997.
(3) Includes 23,400 shares issuable upon exercise of certain options
exercisable within 60 days of March 31, 1997.
(4)Includes 5,000 shares issuable upon exercise of certain options
exercisable within 60 days of March 31, 1997.
(5) Includes 5,000 shares issuable upon
exercise of certain options exercisable within 60 days of March 31,
1997.
(6) Includes 72,727 shares issuable upon
conversion of Notes exercisable within 60 days of March 31, 1997.
<PAGE> 20
(7) Includes 75,400 shares issuable upon
exercise of certain options and conversion of Notes exercisable
within 60 days of March 31, 1997.
(8) Includes 1,314,127 shares issuable
upon exercise of certain options, warrants and compensation
arrangements exercisable within 60 days of March 31, 1997.
Item 12. Certain Relationships and Related Transactions
In April 1996, Dr. Ellis Hyman agreed to subordinate $200,000 of
debt at 12% interest with quarterly interest payments only. The entire
principal balance plus accrued interest is due on April 20, 2000.
<PAGE> 21
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
Incorporated by reference to the Company's Form 10-KSB
10.1.8 Sixth Loan Modification Agreement dated May 13, 1996
Incorporated by reference to the Company's Form 10-QSB
11. Statement re: Computation of per share earnings
16.1 Letter on Change in Certifying Accountants
Incorporated by reference to the Company's Form 10-SB. File No. 0-
26680
21.1Registrant's Subsidiaries
(b) The Company filed a Form 8K dated January 29, 1997 in
connection with the announcement of a
portfolio acquisition . The form 8K disclosed information pursuant to
Item 5 of Form 8K.
27 Financial Data Schedule
<PAGE> 22
Nicholas Financial,Inc.
Exhibit 11
Schedule for Computation of Earnings Per Share
<TABLE>
<CAPTION>
Fiscal Year Ended
March 31
1997 1996
---------------------
<S> <C> <C>
Net Income $792,254 $662,151
=====================
Weighted average number of common
shares outstanding during the period 6,404,764 5,813,438
Add: Primary common equivalent shares
determined using the "treasury stock"
method representing shares issuable upon
exercise of stock options and warrants 198,062 224,282
-----------------------
Weighted average number fo shares used
in Primary EPS calculation 6,602,826 6,037,720
=======================
Add: Fully Diluted common equivalent
shares determined using the "treasury
stock" method representing shares
issuable upon exercise of stock options
and warrants 247,167 490,177
-----------------------
Weighted average number of shares used
in Fully Diluted EPS calculation 6,651,931 6,303,615
=======================
Primary Earnings Per Share $0.12 $0.11
=======================
Fully Diluted Earnings Per Share $0.12 $0.11
=======================
</TABLE>
<PAGE> 23
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.
NICHOLAS FINANCIAL, INC.
Dated: June 26, 1997
/s/ Peter L. Vosotas
----------------------------
Peter L. Vosotas
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.
Signature Title Date
/s/ Peter L. Vosotas President and June 26,1997
- -----------------------
Peter L. Vosotas Director
/s/ Ralph T. Finkenbrink Principal June 26,1997
- -------------------------
Ralph T. Finkenbrink Financial Officer
/s/ Raymond Cottrell Director June 26,1997
- ------------------------
Raymond Cottrell
/s/ Joseph G. Bowes Director June 26,1997
- ------------------------
Joseph G. Bowes
<PAGE>
Nicholas Financial, Inc.
Consolidated Financial Statements
Years ended March 31, 1997 and 1996
Contents
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-4
Notes to the Consolidated Financial Statements................F-5
<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, 1997 and 1996, 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, 1997
and 1996, and the consolidated results of its operations and its
cash flows for the years then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG, LLP
May 7, 1997
<PAGE> F-2
<TABLE>
<CAPTION>
Nicholas Financial, Inc.
Consolidated Balance Sheets
March 31
1997 1996
_______________ _____________
<S> <C> <C>
Assets
Cash $ 108,148 $ 490,791
Finance receivables, net 25,923,091 18,326,784
Accounts receivable 32,224 25,154
Prepaid expenses and other assets 363,571 292,857
Property and equipment, net 182,341 180,417
Deferred income taxes 411,367 485,798
----------- -----------
Total assets $27,020,742 $19,801,801
=========== ===========
Liabilities
Line of credit $17,680,594 $13,130,365
Notes payable-related party 1,756,095 2,226,533
Accounts payable 1,274,024 851,258
Deferred revenues 174,014 188,894
Income taxes payable 72,927 122,082
Other liabilities 27,810 28,804
----------- -----------
20,985,464 16,547,936
Shareholders' equity
Preferred stock, no par: 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, no par: 20,000,000 shares
authorized; 6,990,544 and 5,838,339 shares
issued and outstanding, respectively 3,713,210 1,724,051
Retained earnings 2,322,068 1,529,814
----------- -----------
6,035,278 3,253,865
----------- -----------
Total liabilities and shareholders' equity $27,020,742 $19,801,801
=========== ===========
</TABLE>
See accompanying notes.
<PAGE> F-3
<TABLE>
<CAPTION>
Nicholas Financial, Inc.
Consolidated Statements of Income and Retained Earnings
Year ended March 31
1997 1996
------------- -------------
<S> <C> <C>
Revenue:
Interest income on finance receivables $5,749,410 $5,267,530
Sales 459,719 565,645
---------- ----------
6,209,129 5,833,175
Expenses:
Cost of sales 98,833 140,786
Marketing 248,482 216,198
Administrative 2,391,945 2,060,251
Provision for credit losses 438,510 486,440
Deferred compensation expense 266,754
Depreciation and amortization 85,427 86,664
Interest expense 1,656,402 1,517,181
---------- ----------
4,919,599 4,774,274
---------- ----------
Operating income before income taxes 1,289,530 1,058,901
Income tax expense (benefit):
Current 422,845 550,346
Deferred 74,431 (153,596)
---------- ----------
497,276 396,750
---------- ----------
Net income 792,254 662,151
Retained earnings, beginning of year 1,529,814 867,663
---------- ----------
Retained earnings, end of year $2,322,068 $1,529,814
========== ==========
Net income per common and common equivalent
share $0.12 $0.11
========== ==========
Weighted average number of common and common
equivalent shares 6,602,826 6,037,720
========== ==========
</TABLE>
See accompanying notes.
<PAGE> F-4
<TABLE>
<CAPTION>
Nicholas Financial, Inc.
Consolidated Statements of Cash Flows
Year ended March 31
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 792,254 $ 662,151
Adjustments to reconcile net income to net
cash flows provided
by operating activities:
Depreciation of property and equipment 82,897 73,562
Provision for credit losses 438,510 486,440
Amortization of intangible assets and 22,157 42,502
deferred loan costs
Deferred compensation expense - 266,754
Deferred income taxes 74,431 (153,196)
Changes in operating assets and
liabilities:
Accounts receivable (7,070) 2,838
Prepaid expenses and other assets (92,871) (67,208)
Deferred revenues (14,880) 48,356
Accounts payable 422,765 9,986
Other liabilities (994) (147,367)
Income taxes payable (49,155) 9,774
---------- ---------
Net cash provided by operating activities 1,668,044 1,234,592
Investing activities
Increase in finance receivables, net of
principal collected (8,034,817) (6,033,139)
Purchase of property and equipment (84,820) (67,377)
Increase in deferred loan costs - (28,000)
--------- ---------
Net cash used by investing activities (8,119,637) (6,128,516)
Financing activities
Repayment of notes payable-related party and
line of credit borrowings (470,438) (5,670,031)
Proceeds from notes payable-related party and
line of credit borrowings 4,550,229 10,700,000
Proceeds from sale of the Company's common
stock 1,989,159 71,404
--------- ---------
Net cash provided by financing activities 6,068,950 5,101,373
--------- ---------
Net increase (decrease) in cash (382,643) 207,449
Cash, beginning of year 490,791 283,242
--------- ---------
Cash, end of year $108,148 $490,791
========= =========
</TABLE>
See accompanying notes.
<PAGE> F-5
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
March 31, 1997
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:
Automotive 3 years
Equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Lease term
<PAGE> F-6
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 these 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 its own financing .
Such costs are charged to operations as an adjustment of interest
expense over the life of the related financing.
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."
<PAGE> F-7
2. Accounting Policies (continued)
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.
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. Supplementary earnings
per share data described in Accounting Principles Board NO. 15
(Computing Earnings Per Share) is not materially different from
the earnings per share which is presented.
Stock Option Accounting
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (FAS 123) , effective for
accounting years beginning after December 10, 1995. FAS 123
provides alternatives for the methods used by entities to record
compensation expense associated with its stock-based compensation
plans. Additionally, FAS 123 provides further guidance on the
disclosure requirements relating to stock-based compensation
plans. The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
(APB 25) , and related interpretations in accounting for its
stock option grants.
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.
The Company's financial instruments that are exposed to
concentrations of credit risk are primarily finance receivables,
which are concentrated in the States of Florida and Georgia. The
Company provides credit during the normal course of business and
performs ongoing credit evaluations of it 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.
<PAGE> F-8
2. Accounting Policies (continued)
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, 1997 and
1996 was $472,000 and $540,167, respectively. Cash paid for
interest for the years ended March 31, 1997 and 1996 was
$1,641,060 and $1,447,437, respectively.
3. Finance Receivables
Finance receivables consist of consumer automobile finance
installment contracts and are detailed as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Finance receivables, gross $38,687,652 $27,814,597
contract
Less:
Unearned interest (8,335,330) (6,412,953)
----------- -----------
30,352,322 21,401,644
Nonrefundable dealer reserve (3,253,513) (2,229,571)
Allowance for credit losses (1,175,718) (845,289)
----------- -----------
Finance receivables, net $25,923,091 $18,326,784
=========== ===========
</TABLE>
The terms of the receivables range from 6 to 60 months and bear a
weighted average effective interest rate of 25% for both 1997
and 1996, respectively.
<PAGE> F-9
<TABLE>
<CAPTION>
4. Property and Equipment
Accumulated Net Book
Cost Depreciation Value
-------------------------------------------
<S> <C> <C> <C>
1997
Automotive $119,159 $90,515 $28,644
Equipment 255,079 151,710 103,369
Furniture and fixtures 87,290 51,386 35,904
Leasehold improvements 59,392 44,968 14,424
-------------------------------------------
$520,920 $338,579 $182,341
===========================================
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
===========================================
</TABLE>
5. Line of Credit
The Company has a $25,000,000 line of credit facility (the Line)
with BA Business Credit, Inc. which expires on June 3, 1998.
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 (9.25% at
March 31, 1997). Pledged as collateral for this credit facility
are all of the assets of NFI and the unconditional guarantee of
NDSI, NFI, Canada, and Peter L. Vosotas, a shareholder.
<PAGE> F-10
<TABLE>
<CAPTION>
6. Notes Payable-Related Party
Notes payable to shareholders, directors and individuals related
thereto at March 31:
1997 1996
-------------- -------------
<S> <C> <C>
Notes payable, unsecured, with interest
at varying rates up to 12%, quarterly
and semiannual interest payments and
various principal payments due through
June 2000, subordinated to the Line. The
notes are convertible at the option of
the holder, into common shares at prices
from $2.00 to $2.75 per share. $1,500,000 $1,800,000
Note payable, unsecured, interest at
12%, quarterly principal and interest
payments due through March 1997. - 150,000
Notes payable, unsecured interest at
12%, quarterly interest due through May
1998, at which time the entire balance
and unpaid interest is due, subordinated
to the Line. 233,341 233,341
Note payable, unsecured, interest at
12%, quarterly principal and interest
payments due through March 1997. - 18,495
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. 22,754 24,697
------------ -------------
$1,756,095 $2,226,533
============ =============
</TABLE>
Maturities of notes payable are summarized as follows:
Year ending March 31
1998 $1,356,095
1999 200,000
2000 200,000
--------------
$1,756,095
==============
The company incurred interest expense on the above notes of
$250,859 and $260,547 for the years ended March 31, 1997 and
1996, respectively.
<PAGE> F-11
7. Income Taxes
<TABLE>
<CAPTION>
The provision for income taxes reflects an effective tax rate
which differs from the corporate tax rate for the following
reasons:
1997 1996
--------------------------
<S> <C> <C>
Combined basic Canadian federal and
provincial income tax rate 45.34% 45.34%
========================
Income before income taxes $1,289,530 $1,058,901
========================
Provision for income taxes based on above
rate $ 584,673 $ 480,106
Increase (decrease) resulting from:
NDSI's income taxed at lower (U.S.) rates (94,431) (88,718)
Other 7,034 5,362
------------------------
$ 497,276 $ 396,750
========================
</TABLE>
The Company's deferred tax assets consist of the following as of:
<TABLE>
<CAPTION>
March 31
1997 1996
-----------------------
<S> <C> <C>
Allowance for credit losses not $227,000 $309,000
deductible for tax purposes
Deferred compensation related to stock
options and warrants 157,000 157,000
Other items 27,367 19,798
-----------------------
$411,367 $485,798
=======================
</TABLE>
NFI, Canada has income tax loss carryforward balances of
approximately Cdn$242,000 (1996-Cdn$251,000) which are available
to reduce future taxable income and which expire as follows:
1998 Cdn$24,000
1999 32,000
2000 82,000
2001 51,000
2002 21,000
2003 13,000
2004 19,000
-------------
Cdn$242,000
=============
<PAGE> F-12
7. Income Taxes (continued)
For the years ended March 31, 1997 and 1996, the Company would
have recorded deferred tax assets of approximately $66,000 and
$71,000, respectively, due primarily to these Canadian 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.
8. 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, 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
Changes in 1997:
Issued for cash on exercise of options 50,000 19,639
Issued in connection with secondary
offering 1,102,205 1,969,520
------------ ------------
Balance at March 31, 1997 6,990,544 $3,713,210
============ ============
</TABLE>
The Company has a warrant outstanding entitling a director to
purchase 1,000,000 common shares at Cdn$2.55 until June 3, 1999.
At March 31, 1997, the warrant was fully exercisable.
The Company has an employee stock incentive plan (the SIP) for
officers, directors and key employees under which 442,000 shares
of common stock were reserved for issuance as of March 31, 1997.
Options currently granted by the Company generally vest over a
five year period.
<PAGE> F-13
8. Shareholders' Equity (continued)
The Company has elected to follow APB 25 , and related
Interpretations in accounting for its employee stock options
because , as discussed below, the alternative fair value
accounting provided for under FAS 123, requires use of option
valuation models that were not developed for use in valuing
employee stock options. Under APB 25, if the exercise price of
the Company's employee stock options equals the market price of
the underlying stock on the date of grant, no compensation
expense is recognized.
Certain previously granted options and warrants had exercise
prices that were less than the market price of the underlying
stock and the Company has recorded compensation expense for these
options and warrants. Compensation related to stock options and
warrants is measured at the grant date. The difference between
market value of the options and warrants, at time of issuance,
and their exercise price is charged to compensation expense over
the options and warrants vesting periods. The Company has
recognized $266,754 as compensation expense in 1996, (none in
1997), relating to compensatory options and warrants.
The Company accounts for stock option and warrant cancellations
by reversing, in the year canceled, amounts recognized as expense
in previous years and reducing capital in excess of par value.
The Company also reduces deferred compensation expense and
capital in excess of par value by the amount of the remaining
unamortized deferred compensation expense which relate to the
canceled stock options and warrants. As a result of cancellations
in 1996, the Company recorded a reduction in previously expensed
compensation of $89,116, which is included within the $266,754
expense above.
Pro forma information regarding net income and earnings per share
as required by FAS 123 has been determined as if the Company has
accounted for its employee stock options and warrants granted
subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options and warrants
was estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
1997 and 1996, respectively; risk-free interest rates of 6.63%
and 6.25; no dividends; volatility factors of the expected market
price of the Company's common stock of 0.443 and 0.398 and a
weighted-average expected life of the option of five years for
both periods.
<PAGE> F-14
8. Shareholders' Equity (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuations models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options and warrants have
characteristics significantly different from those of traded
options and warrants, and because changes in the subjective input
assumptions can materially effect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options and warrants.
For purposes of pro forma disclosures, the estimated fair value
of the options and warrants is amortized to expense over the
option and warrant's vesting period. The Company's pro forma
information follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Pro forma net income $777,288 $34,826
Pro forma net income
per share $0.12 $0.01
</TABLE>
The following table reflects activity within the SIP for the
years noted:
<TABLE>
<CAPTION>
1997 1996
---- ----
Weighted Weighted
Options Average Options Average
and Exercise and Exercise
Warrants Price Warrants Price
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Outstanding-beginning
of year 1,438,071 $1.68 396,700 $0.93
Granted 144,000 $1.93 1,101,571 $1.89
Exercised (50,000) $0.56 (39,800) $0.88
Canceled/expired (90,071) $1.91 (20,400) $1.21
Outstanding- end of
year 1,442,000 $1.71 1,438,071 $1.68
Exercisable at end
of year 1,242,200 $1.72 1,348,382 $1.71
Weighted-average
fair value of
options granted
during the year $0.89 $1.18
</TABLE>
<PAGE> F-15
11. Commitments
The Company leases its corporate office and sales offices under
operating lease agreements expiring prior to March 31, 2000 which
provide for annual minimum rental payments as follows:
Year ending March 31
1998 $134,566
1999 103,225
2000 37,323
----------
$275,114
==========
Rent expense for the years ended March 31, 1997 and 1996 was
$131,934 and $106,575, respectively.
12. 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
Financing and Support Corporate Total
-------------------------------------------------------
<S> <C> <C> <C> <C>
1997
Revenue $5,749,110 $460,019 $ - $6,209,129
Operating (loss)
profit 1,314,943 (11,665) (13,748) 1,289,530
Identifiable assets 26,846,877 171,588 2,277 27,020,742
Capital expenditures 84,820 - - 84,820
Depreciation and
amortization 55,975 29,452 - 85,427
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
amortization 42,456 44,208 - 86,664
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the condensed
consolidated balance sheet at March 31, 1997 and March 31, 1996 the
condensed consolidated statements of income for the twelve months ended
March 31, 1997 and March 31, 1996 and is qualified in its entirety by
reference to such.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 108,148 490,791
<SECURITIES> 0 0
<RECEIVABLES> 25,923,091 18,326,784
<ALLOWANCES> 4,392,034 3,074,860
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 520,920 438,767
<DEPRECIATION> 338,580 258,350
<TOTAL-ASSETS> 27,020,742 19,801,801
<CURRENT-LIABILITIES> 20,985,464 16,547,936
<BONDS> 0 0
0 0
0 0
<COMMON> 3,713,210 1,724,051
<OTHER-SE> 2,322,068 1,529,814
<TOTAL-LIABILITY-AND-EQUITY> 27,020,742 19,801,801
<SALES> 459,719 565,645
<TOTAL-REVENUES> 6,209,129 5,833,175
<CGS> 98,833 140,786
<TOTAL-COSTS> 2,640,427 2,276,449
<OTHER-EXPENSES> 85,427 353,418
<LOSS-PROVISION> 438,510 486,440
<INTEREST-EXPENSE> 1,656,402 1,517,181
<INCOME-PRETAX> 1,289,530 1,058,901
<INCOME-TAX> 497,276 396,750
<INCOME-CONTINUING> 792,254 662,151
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 792,254 662,151
<EPS-PRIMARY> .12 .11
<EPS-DILUTED> .12 .11
<F1> [RECEIVABLES] ARE PRESENTED NET OF UNEARNED FINANCE CHARGES, NON-
REFUNDABLE DEALER RESERVE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2> [ALLOWANCES] ARE PRESENTED AS TOTAL RESERVES, COMPRISED OF NON-
REFUNDABLE DEALER RESERVE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
</TABLE>
