<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 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.
(Exact name of registrant as specified in its Charter)
British Columbia, Canada 8736-3354
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2454 McMullen Booth Road, Building C
Clearwater, Florida 34619
(Address of Principal Executive Offices) (Zip Code)
(813) 726-0763
(Registrant's telephone number, Including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports to be filed by Section 13 and 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter periods 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____
As of August 8th, 1997 there were 6,990,544 shares of common
stock outstanding
This Form 10-QSB consists of 16 pages. Exhibits are indexed at
page 15.
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Nicholas Financial, Inc.
Form 10-QSB
Index
Part I. Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of June 30, 1997.......3
Condensed Consolidated Statements of Income for the three
months ended June 30, 1997 and 1996.......................4
Condensed Consolidated Statements of Cash Flows for the three
months ended June 30, 1997 and 1996.......................5
Notes to the Condensed Consolidated Financial Statements.......6
Item 2. Management's Discussion and Analysis of the Financial
Condition and Results of Operations...................8
Part II. Other Information
Item 1. Legal Proceedings.....................................13
Item 2. Changes in Securities.................................13
Item 3. Defaults upon Senior Securities.......................13
Item 4. Submission of Matters to a Vote of Security Holders...13
Item 5. Other Information.....................................13
Item 6. Exhibits and Reports on Form 8-K......................13
Signatures............................................14
Index of Exhibits.....................................15
Exhibit 11.1- Statement Re:
Computation of Per Share Earnings................16
<PAGE> 3
Nicholas Financial, Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
June 30
1997
-------------
<S> <C>
Assets
Cash $ 80,805
Finance receivables, net 27,060,962
Accounts receivable 14,524
Prepaid expenses and other assets 348,786
Property and equipment, net 187,901
Deferred income taxes 473,367
------------
Total assets $28,166,345
============
Liabilities
Line of credit $18,630,594
Notes payable - related party 1,741,595
Accounts payable 1,137,993
Income taxes payable 219,594
Deferred revenues 157,635
Other liabilities 27,110
------------
21,914,521
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 shares issued and
outstanding 3,713,210
Retained earnings 2,538,614
------------
6,251,824
------------
Total liabilities and shareholders' equity $28,166,345
============
See accompanying notes.
</TABLE>
<PAGE> 4
Nicholas Financial, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30
1997 1996
------------------------
<S> <C> <C>
Revenue:
Interest income on finance receivables $1,691,808 $1,348,064
Sales 109,481 113,711
------------------------
1,801,289 1,461,775
Expenses:
Cost of sales 21,377 22,465
Marketing 67,620 59,587
Administrative 699,185 547,747
Provision for credit losses 132,322 54,313
Deferred compensation expense - 29,947
Depreciation and amortization 25,500 20,765
Interest expense 499,234 394,630
------------------------
1,445,238 1,129,454
------------------------
Operating income before income taxes 356,051 332,321
Income tax expense :
Current 201,505 139,784
Deferred (62,000) (13,919)
------------------------
139,505 125,865
------------------------
Net Income $216,546 $206,456
========================
Net Income per common and common
equivalent share $0.03 $0.03
========================
Weighted average number of common and
common equivalent shares 6,990,544 6,175,542
========================
See accompanying notes.
</TABLE>
<PAGE> 5
Nicholas Financial, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
June 30
1997 1996
-----------------------
<S> <C> <C>
Operating activities
Net income $216,546 $206,456
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation of property and equipment 25,500 19,500
Provision for credit losses 132,322 54,313
Amortization of intangible assets and
deferred loan costs - 6,215
Deferred compensation expense - 29,947
Deferred income taxes (62,000) (13,919)
Changes in operating assets and liabilities:
Accounts receivable 17,700 1,041
Prepaid expenses and other assets 14,785 (149,120)
Accounts payable (136,031) (163,395)
Deferred revenues (16,379) 13,389
Income taxes payable 146,667 6,784
Other liabilities (700) 398,576
-----------------------
Net cash provided by operating activities 338,410 409,787
Investing activities
Increase in finance receivables, net of
principal collected (1,270,193) (1,285,213)
Purchase of property and equipment (31,060) (26,118)
-----------------------
Net cash used by investing activities (1,301,253) (1,311,331)
Financing activities
Net proceeds from notes payable-related
party and line of credit borrowings 935,500 728,919
Proceeds from sale of the Company's
common stock - 1,767
-----------------------
Net cash provided by financing activities 935,500 730,686
-----------------------
Net decrease in cash (27,343) (170,858)
Cash, beginning of period 108,148 490,791
-----------------------
Cash, end of period $80,805 $319,933
=======================
See accompanying notes.
</TABLE>
<PAGE> 6
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
June 30, 1997
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended
June 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended March 31, 1998. For further
information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
for the year ended March 31, 1997.
2. Earnings Per Share
Net Income per share is based upon the weighted average number of
shares outstanding, adjusted for the dilutive effect of stock options
and warrants.
3. Finance Receivables
Finance receivables consist of consumer automobile finance installment
contracts and are detailed as follows:
<TABLE>
<S> <C>
Finance receivables, gross contract $40,772,750
Less: Unearned interest (8,909,306)
-------------
31,863,444
Nonrefundable dealer reserves (3,516,869)
Allowance for credit losses (1,285,613)
-------------
Finance receivables, net $27,060,962
=============
</TABLE>
The terms of the receivables range from 6 to 60 months and bear a
weighted average effective interest rate of 25%.
<PAGE> 7
4. Line of Credit
Effective July 1, 1997 the Company successfully renegotiated its
credit facility (the Line) with BA Business Credit. Maximum available
borrowings under the Line were increased from $25 million to
$30 million and the expiration date was extended to June 30, 2000.
Borrowings under the Line bear interest at the Bank of America prime
rate plus 0.50%. The Company also has several LIBOR pricing options
as alternatives to the prime rate pricing option. Borrowings under
the Line are collateralized by all of the assets of Nicholas
Financial, Inc. and the unconditional guarantee of it's subsidiaries,
Canadian parent and Peter L. Vosotas the majority shareholder.
5. Notes Payable - Related Party
Notes payable - related party are summarized as follows at June 30:
<TABLE>
<S> <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
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. 218,841
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
------------
$1,741,595
</TABLE>
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Consolidated net income increased for the three month period
ended June 30, 1997 to $216,546 from $206,456 for the three month
period ended June 30, 1996. Earnings were favorably impacted by
an increase in the outstanding loan portfolio coupled with a
marginal improvement in the cost of funds. However, increased
operating expenses and an increase in the provision for credit
losses as compared to the period ended June 30, 1996, primarily
offset the items that favorably impacted earnings. The Company's
NDS subsidiary did not contribute significantly to consolidated
operations in the three month periods ended June 30, 1997, 1996,
respectively.
<TABLE>
<CAPTION>
Three Months Ended June 30,
1997 1996
-------------- -------------
<S> <C> <C>
Average Net Finance Receivables (1) $31,719,569 $22,332,463
Average Indebtedness (2) 20,277,855 15,479,596
Total Interest Revenues 1,691,808 1,348,064
Interest Expense 499,234 394,630
Net Interest Income 1,192,574 953,434
Gross Portfolio Yield (3) 21.33% 24.15%
Average Cost of Borrowed Funds (2) 9.85% 10.20%
Net Interest Spread (4) 11.48% 13.95%
Net Portfolio Yield (3) 15.04% 17.08%
Net Charge-Off Percentage (5) 8.46% 10.81%
</TABLE>
(1) Average net finance receivables represents the average of
net finance receivables throughout the period. Net finance
receivables represents gross finance receivables less any
unearned finance charges related to those receivables.
(2) Average indebtedness represents the average outstanding
borrowings under the Line of Credit and notes payable-
related party. Average cost of borrowed funds represents
interest expense as a 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.
(5) Net charge-off percentage represents net charge-offs divided
by average net finance receivables outstanding during the
period.
<PAGE> 9
Three months ended June 30, 1997 compared to three months ended
June 30, 1996
Interest Income and Loan Portfolio
Interest revenue increased 25% to $1.7 million for the
period ended June 30, 1997, from $1.3 million for the period
ended June 30, 1996. The net finance receivable balance totaled
$27.1 million at June 30, 1997, an increase of 38% from the $19.6
million at June 30, 1996. The gross finance receivable balance
increased 38% to $40.8 million at June 30, 1997 from $29.6
million at June 30, 1996. The primary reason interest revenue
increased was the increase in the outstanding loan portfolio
offset in part by a decrease in the gross portfolio yield. The
gross portfolio yield decreased from 24.15% for the period ended
June 30, 1996 to 21.33% for the period ended June 30, 1997. This
decrease was caused by the fact that for contracts purchased
during the last two quarters, the Company, has chosen to
reclassify a larger portion of future unearned finance charges
(at the time the contract was purchased) to the reserve for
credit losses as compared to previous quarters. The primary
reason that net finance receivables increased was the opening of
two additional offices.
Computer Software Business
Sales for the period ended June 30, 1997 were $109,481 compared
to $113,711 for the period ended June 30, 1996, a decrease of 4%.
This decrease was primarily due to a decrease in new
installations during the three month period ended June 30, 1997.
Operating Expenses
Operating expenses, excluding provision for credit losses,
stock compensation expense and interest expense, increased to
$813,682 for the period ended June 30, 1997 from $650,564 for the
period ended June 30, 1996. This increase of 25% was primarily
attributable to the opening of two additional branches which
included additional staffing costs, depreciation and related
expenses.
Interest Expense
Interest expense increased to $499,234 for the period ended
June 30, 1997 as compared to $394,630 for the period ended June
30, 1996. This increase was due to an increase in average
outstanding borrowings from $15.5 million to $20.3 million during
the comparable periods. The impact of this increase was offset,
in part by a decrease in the average cost of funds borrowed from
10.20% for the period ended June 30, 1996 as compared to 9.85%
for the period ended June 30, 1997.
Analysis of Credit Losses
Because of the nature of the borrowers under the Contracts and
its direct consumer loan program, the Company considers the
establishment of adequate reserves for credit losses to be
imperative. The Company batches its Contracts into pools for
purposes of establishing reserves for losses. Each such pool
consists of the loans processed by a Company branch office during
a fiscal quarter. The average pool consists of 71 Contracts with
an aggregate initial principal amount of approximately $513,000.
As of June 30, 1997, the Company had 120 active pools.
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.
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.
<PAGE> 10
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 June 30, 1997, the Company had
established reserves for losses on Contracts of $4,751,769, or
15% of net outstanding receivables.
Because of the small number of direct consumer loans currently
outstanding, a reserve for losses is established at the time the
loan is made. As of June 30, 1997, the Company had established
reserves for losses on direct loans of $50,713 or 7% of net
outstanding receivables. 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 June 30, 1997, the Company had not experienced material
losses under its direct consumer loan program.
The provision for credit losses was $132,322 for the period
ended June 30, 1997 as compared to $54,313 for the period ended
June 30, 1996. This increase was due primarily to management's
decision to increase the initial reserve levels on contracts
purchased during the period ended June 30, 1997.
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>
Three Months Ended Three Months Ended
June 30, 1997 June 30, 1996
--------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Contracts
Gross Balance Outstanding $39,870,229 $28,889,689
Dollar Dollar
Delinquencies Amount Percent Amount Percent
30 to 59 days $1,485,071 3.72% $1,244,020 4.94%
60 to 89 days 303,133 0.76% 261,739 1.20%
90 + days 62,144 0.16% 62,354 0.16%
----------- -----------
Total Delinquencies $1,850,348 $1,568,113
Total Delinquencies as a
percent of outstanding balance 4.64% 6.30%
Direct Loans
Net Balance Outstanding $764,032 $558,400
Delinquencies
30 to 59 days 1,728 0.23% 18,596 3.33%
60 to 89 days 971 0.13% 0 0.00%
90 + days 800 0.10% 0 0.00%
---------- ---------
Total Delinquencies $3,499 $18,596
Total Delinquencies as a
percent of outstanding balance 0.46% 3.33%
</TABLE>
<PAGE> 11
Income Taxes
The provision for income taxes for the period ended June 30,
1997 increased to $139,505 from $125,865 for the period ended
June 30, 1996. The Company's effective tax rate increased from
37.87% for the period ended June 30, 1996 to 39.18% for the
period ended June 30, 1997. This increase was due to a greater
amount of Canadian related expenses that are not deductible for
U.S income taxes as compared to the period ended June 30, 1996.
Liquidity and Capital Resources
The Company's cash flows for the three months ended June 30,
1997 and June 30, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Three months ended Three months ended
June 30, 1997 June 30, 1996
---------------------------------------
<S> <C> <C>
Cash provided by (used in):
Operating Activities - $ 338,410 $ 409,787
Investing Activities -
(primarily purchase of Contracts) (1,301,253) (1,311,331)
Financing Activities 935,500 730,686
Net decrease in cash (27,343) (170,858)
</TABLE>
The Company's primary use of working capital during the
three months ended June 30, 1997 was the funding of the purchase
of Contracts. The Contracts were financed substantially through
borrowings on the Company's Line of credit. The line of credit is
secured primarily by Contracts, and available borrowings are
based on a percentage of qualifying Contracts. As of June 30,
1997 the Company had approximately $6.4 million available under
the line of credit. Since inception, the Company has also funded
a portion of its working capital needs through cash flows from
operating activities. Net cash provided by operating activities
totalled $338,410 and $409,787 during the period ended June 30,
1997 and 1996, respectively.
On July 11, 1997 the Company entered into a new
agreement with BA Business Credit Inc. to expand its credit line
to $30 million, increase the percentage of contracts that qualify
for funding, and reduce the interest rate payable under the line.
The new agreement expires on June 30, 2000.
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 the sale of additional securities in the
capital markets, will be sufficient to meet its short and long-
term funding needs.
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 loan
portfolio of Contracts, it will be necessary for the Company to
open additional branch offices and increase the size of its Line
of Credit, either with BankAmerica or another lender.
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 generally to concentrate its
expansion activities primarily there. The Company has identified
Jacksonville and Atlanta as areas in which it may open
additional branch offices during fiscal 1998. In addition, the
Company is in the process of evaluating several markets in the
states of North Carolina and South Carolina for possible
expansion in the future.
<PAGE> 12
Forward-Looking Information
This 10-QSB 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.
<PAGE> 13
Part II - Other Information
Item 1. Legal Proceedings - Not Applicable
Item 2. Changes in Securities - Not Applicable
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders -None
Item 5. Other Information - Not Applicable
Item 6. (a) Exhibits - See exhibit index following the signature page.
(b) Reports on Form 8-K - No reports on From 8-K were filed
during the fiscal quarter ending June 30, 1997
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Securities Act of
1934, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
10-QSB and authorized this Report to be signed on its behalf by
the undersigned, in the City of Clearwater, State of Florida, on
August 8, 1997.
NICHOLAS FINANCIAL, INC.
(Registrant)
Date: August 8, 1997 /s/ Peter L. Vosotas
-------------------------
Peter L. Vosotas
Chairman, President, Chief Executive Officer
(Principal Executive Officer)
Date: August 8, 1997 /s/ Ralph T. Finkenbrink
--------------------------
Ralph T. Finkenbrink
(Principal Financial Officer and
Accounting Officer)
<PAGE> 15
EXHIBIT INDEX
Exhibit Document
11.1 Schedule for Computation of Per Share
Earnings
<PAGE> 16
Nicholas Financial, Inc.
Exhibit 11.1
Statement re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three months ended June 30,
1997 1996
----------------------------
<S> <C> <C>
Net income $ 216,546 $ 206,456
Weighted average number of common shares
outstanding during the period 6,990,544 5,858,119
Add: common equivalent shares determined
using the "treasury stock" method
representing shares issuable upon
exercise of stock options and warrants - 317,423
-----------------------------
Weighted average number of shares used
in calculation 6,990,544 6,175,542
=============================
Earnings Per Share $0.03 $0.03
=============================
</TABLE>
