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, 1998
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 33759
(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
--------------------- -----------------------
None
__________________ __________________
__________________ __________________
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 [ ]
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
$7,937,022 As of May 31 , 1998, 2,357,013 shares of the
Registrant's common stock were outstanding, and the aggregate
market value of the shares held by non-affiliates was
approximately $8,249,546
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement, dated July 01, 1998.
Form 10-KSB Reference: Part III, Items 9 and 10
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
<PAGE> 1
NICHOLAS FINANCIAL, INC.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Page No.
Item 1. Description of Business........................2
Item 2. Description of Properties.....................10
Item 3. Legal Proceedings.............................10
Item 4. Submission of Matters to a Vote of
Security Holders.............................10
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters..........................11
Item 6. Management's Discussion and Analysis of
Financial Condition and Results
of Operations................................12
Item 7. Financial Statements..........................18
Item 8. Changes In and Disagreements With
Accountants on Accounting
and Financial Disclosure.....................18
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16 (a) of the Exchange Act.......... 19
Item 10. Executive Compensation........................19
Item 11. Security Ownership of Certain Beneficial
Owners and Management........................20
Item 12. Certain Relationships and Related
Transactions.................................20
Item 13. Exhibits and Reports on Form 8-K..............21
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.
<PAGE> 2
PART I
Item 1. Description of 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 sales
contracts ("Contracts") for purchases of new and 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 94.4% of consolidated revenues for the fiscal
year ended March 31, 1998 and NDS's activities accounted for
approximately 5.6% of such revenues during the same period.
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 33759,
and its telephone number is (813) 726-0763.
Automobile Finance Business
The Company is engaged in the business of providing
financing programs, primarily on behalf of purchasers of new and
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 which 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:
place and length of residence, current and prior job status,
history in making installment payments for automobiles, current
income and credit history. In addition, the Company examines its
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 and the term 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 eleven branch
offices in Florida and three branch offices in Georgia. As of
March 31, 1998 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, 1998, the Company had
purchased 14,714 Contracts with an initial principal amount
aggregating approximately $98,959,342. The average initial
principal amount of Contracts purchased by the Company was $6,726
and the contracts had an average initial term of 34 months. The
Contracts were purchased from automobile dealers at an average
discount of approximately 11% from their initial principal amount.
<PAGE> 3
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 extended service contracts, accident
and health insurance and/or credit life insurance, are 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, 1998, 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 and the credit worthiness of the
purchaser. In certain markets, competition determines the discount
that the company can charge. 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. Virtually all
Contracts purchased by the Company since April 1, 1992 have been
purchased from dealers without recourse, meaning that the Company,
not the dealer, bears the risk of nonpayment by the borrower
under the Contract. Prior to April 1, 1992 some Contracts were
acquired with full recourse against the dealer for nonpayment
by the borrower. As of March 31, 1998, 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 Dealer
(seller) and the Company 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
sales contract has been fully and accurately completed and
validly executed. Once the Company has received and approved all
required documents, it pays the dealer for the Contract and
commences servicing the Contract through maturity.
The Company requires the owner of the vehicle to obtain
and maintain collision insurance, naming the Company as a loss
payee, with a deductible of not more than $500. The Company does
not offer collision insurance. Both the Company and its Dealers
offer purchasers of vehicles certain other "add on products".
These products are offered by the Dealer on behalf of the
Company or by the automobile Dealer of behalf of the Dealership
at the time of sale. They consist of a roadside assistance plan,
extended warranty protection, 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, 1998, approximately 25% of the borrowers under Contracts
in the Company's loan portfolio had elected to purchase "add on
products".
<PAGE> 4
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 $2,259. 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, 1998 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, 1998, the average
APR for direct consumer loans made by the Company was 26%, with
a range of 18 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 66%
of the 530 loan transactions outstanding as of March 31, 1998
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, 1998, 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 250 and 400 indirect contracts each month and originates
between 50 and 100 direct consumer loans each month.
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 July of 1997 the Company expanded its line of
credit capacity to $ 30 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
BankAmerica. No assurance can be given that the size of such line
will be increased or that the maturity date will be extended.
As of March 31, 1998, The Company owed approximately $1.6
million to 7 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 BankAmerica line
of credit.
The BankAmerica line of credit is secured by finance
receivables and other assets of the Company. The interest rate
payable by the Company on funds drawn down under the line of
credit decreases as the amount drawn down increases. For the first
$10 million drawn down the interest rate is 1.75% over the base
prime rate as announced and published from time to time by
BankAmerica. After the amount drawn down exceeds $10 million,
the interest rate on the entire amount decreases to 1.25% over
the base prime rate until the amount drawn down exceeds $15
million, at which time the rate decreases to 0.50% over such base
prime rate. In addition to interest, the Company also pays a
monthly fee to BankAmerica equal to .25% of the amount available
under the line of credit that has not been drawn down. As of March
31, 1998, the Company had drawn down approximately $23.4 million
under the line of credit. As of that date the interest rate
payable by the Company under the line of credit was 9.0%. The
revolving line expires in June 2000.
<PAGE> 5
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 most banks and most 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 reports from Equifax, TRW and
TransUnion which are independent reporting services. The Company
verifies the consumer's employment history, income and residence.
In most cases consumers are interviewed by telephone by a Company
application processor.
The Company utilizes internally prepared buying guidelines
used by its Branch Managers and underwriters when purchasing
Contracts. Any contract that does not meet these guidelines must
be approved by the senior management of the Company. The Company
currently has three regional managers whose responsibility it is
to manage the specific branches in a defined geographic area. In
addition to a variety of administrative duties, the Regional
Mangers are responsible to monitor their assigned branches in
compliance with the Company's underwriting standards.
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. 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 function 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 considered.
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 (franchise 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, 15% are
rated "B", 70% are rated "C" and 10% are rated "D".
<PAGE> 6
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.
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
throughout the Company by management personnel, including branch
office managers and staff, 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 becomes 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 is used
to generate a "Promises Report", which is utilized by the
collection staff for account follow up.
<PAGE> 7
The Company 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 provides 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.
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,
first by the Branch Manager and secondly by his Regional Manager,
it must then be approved by a corporate officer. The repossessor
delivers the vehicle to a secure location specified by the Company
where it is held. The Company maintains relationships with several
licensed repossession firms which repossess vehicles for fees that
range 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 associated with the 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.
<PAGE> 8
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
Regional and Branch Managers to solicit agreements for the
purchase of Contracts with automobile dealers located within a
25 mile radius of each branch office. 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
through direct mailings followed by telephone calls to individuals
who have a good credit history with the Company with 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 a large 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. The Company is unaware of any authoritative estimates
of the non-prime portion of this market , however there are
unsubstantiated estimates of between $80 billion and $150 billion
in non or sub-prime auto and light truck annual financing.
In the past three years the Company has seen several of its
most aggressive 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 believes that its static pool reserve
analysis, internal controls and experienced management team will
continue its history of accurate and reliable financial reporting,
although no assurances can be given in this regard.
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
inception. The capacity of the networking system includes 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.
<PAGE> 9
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 expansion into new geographic
markets or 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
giving rise to an erosion in the discount from the initial
principal amount at which the Company would be willing to purchase
Contracts.
The Company's target market consists of persons who are
generally unable to obtain traditional used car financing because
of their credit history, the vehicle's mileage or age. The Company
has been able to expand its automobile finance business in the
non-prime credit market by offering to purchase Contracts on terms
that are competitive with those of other companies which purchase
automobile receivables in that market segment. Because of the
daily contact that many of its employees have with automobile
dealers located throughout the market areas served by it, the
Company is generally aware of the terms upon which its competitors
are offering to purchase Contracts. The Company's policy is
to modify its terms if necessary to remain competitive. The
Company has no intention and will not sacrifice credit quality,
its purchasing criteria or prudent business practices in order to
meet the competition or be driven by unrealizable growth
expectations. The Company will always analyze new lending programs
and marketing methods which may be implemented with the objective
of increasing profits and or 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 new and
used 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
material compliance with all applicable Local, State and Federal
regulations.
<PAGE> 10
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 an on
site audit of each of the Company's branches 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, 1998 the Company employed
a total of 63 persons, five of whom work for NDS and 58 of whom
work for Nicholas Financial. The Company provides paid holidays,
vacation, sick time , jury time , health and life insurance,
long-term disability insurance, dental insurance, 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. Description of Properties
The Company leases its Headquarters and branch office
facilities. Its Headquarters, 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 rent is $4,251, with annual increases of
approximately 2.25% in each subsequent year of the lease.
Management believes this office space is adequate to meet its
needs for the foreseeable future.
Each of the Company's 14 branch offices consists of
approximately 1,000 square feet. These offices are located in
office parks, shopping centers or strip malls and are occupied
pursuant to leases with an initial term of from two to five years
at annual rates ranging from $6 to $15 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 business, financial
position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None
<PAGE> 11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's common stock has been listed for trading on
the Vancouver Stock Exchange since 1987 under the symbol "NFC.U".
On August 21, 1997, the Board of Directors passed a resolution
to implement a one-for-three reverse split of the Company's common
stock. Effective September 5, 1997, the Company's shareholders of
record own one share of common stock for every three shares of
common stock owned prior to September 5, 1997. The purpose of the
reverse split was to qualify for the minimum share price
required by the National Association of Security Dealers, ("NASD")
for inclusion under the SmallCap system. In September 1997,
the Company applied to the NASD for approval to list its common
stock on the NASDAQ SmallCap System. On December 23, 1997 the
Company's NASDAQ application was approved and trading of the
Company's common stock commenced December 29, 1997, under the
symbol " NICKF ". On February 17 , 1998, the Board of Directors
passed a Resolution removing the Company's common stock from
listing on the Vancouver Stock Exchange. Effective March 11, 1998,
the Company's common stock listing was removed from the Vancouver
Stock Exchange.
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, 1998, there were approximately
500 stockholders of record of the Company's Common Stock.
The following table reflects the high and low sale prices for the
Company's common stock on the Vancouver Stock Exchange for all of
fiscal 1997, and for the period April 1, 1997, through March 11,
1998.
<TABLE>
<CAPTION>
Price Range of Common Stock
Year ended March 31, 1998 High Low
<S> <C> <C>
First Quarter ........... $4.86 $3.60
Second Quarter........... $5.10 $3.70
Third Quarter............ $4.50 $4.00
Fourth Quarter.(through March 11, 1998) $4.50 $2.75
Year ended March 31, 1997 High Low
First Quarter ........... $7.77 $5.19
Second Quarter........... $8.85 $6.60
Third Quarter............ $7.20 $3.75
Fourth Quarter........... $6.15 $3.90
</TABLE>
The following table reflects the high and low sale prices for the
Company's common stock on the NASDAQ SmallCap system which
commenced trading on December 29, 1997.
<TABLE>
<CAPTION>
Year ended March 31, 1998 High Low
<S> <C> <C>
Third Quarter......... $4.20 $4.20
Fourth Quarter........... $4.50 $2.75
</TABLE>
<PAGE> 12
Item 6. Management's Discussion and Analysis
Overview
Consolidated net income increased in the fiscal year ended
March 31, 1998 to $913,690 or $0.39 per share from $792,254 or
$0.36 per share in the fiscal year ended March 31 , 1997.
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 following table sets forth certain financial data:
<TABLE>
<CAPTION>
_________________________________________________________________________
Years Ended March 31
1998 1997
_________________________________________________________________________
<S> <C> <C>
Average Net Finance Receivables (1) $34,024,030 $24,932,075
Average Indebtedness (2) 21,898,605 16,566,604
Interest Income 7,493,630 5,749,410
Interest Expense 2,080,337 1,656,402
Net Interest Income 5,413,293 4,093,008
_________________________________________________________________________
Gross Portfolio Yield (3) 22.02% 23.06%
Average Cost of Borrowed Funds (2) 9.50% 10.00%
Net Interest Spread (4) 12.52% 13.06%
_________________________________________________________________________
Net Portfolio Yield (3) 15.91% 16.42%
_________________________________________________________________________
<FOOTNOTE>
(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 BankAmerica, subordinated debt and
notes payable. Average cost of borrowed funds represents interest
expense as percentage of average indebtedness.
(3) Gross portfolio yield represents interest income as a percentage of
average finance receivables. Net portfolio yield represents net
interest income as a percentage of average finance receivables.
(4) Net interest spread represents the gross portfolio yield less the
average cost of borrowed funds.
</TABLE>
<PAGE> 13
Fiscal 1998 compared to Fiscal 1997
Interest Income and Loan Portfolio
Interest income on finance receivables, predominantly finance
charge income, increased 30% to $7.5 million in fiscal 1998 from $5.7
million in fiscal 1997. The net finance receivable balance totaled
$32.4 million at March 31, 1998, an increase of 25% from the $25.9
million at March 31, 1997. The gross finance receivable balance
increased 30% to $50.1 million at March 31, 1998 from $38.7 million at
March 31, 1997. The primary reason interest revenue increased was the
increase in the outstanding loan portfolio offset in part by a 1 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 interest income on finance receivables. The primary
reason net finance receivables increased was the opening of three
additional branch offices.
Computer Software Business
In fiscal 1998, the revenues of NDS were $443,392 compared with
fiscal 1997 revenues of $459,719, a decrease of 4%. This decrease was
primarily due to a decrease in new computer installations during
fiscal 1998. Operating income for fiscal 1998 was $18,118 compared
with an operating loss of $11,665 for fiscal 1997. The Company expects
both operating revenues and income of NDS to remain stable.
Operating Expenses
Operating expenses excluding provision for credit losses and
interest expense increased to $3.5 million in fiscal 1998 from $2.8
million in fiscal 1997. This increase of 24% was primarily attributable
to the opening of three new branch offices which included additional
staffing costs, equipment costs and related expenses. The Company has
increased its work force from 52 employees at the end of fiscal 1997 to
63 employees at the end of fiscal 1998.
Interest Expense
Interest expense increased to $2.1 million in fiscal 1998 as
compared to $1.7 million in fiscal 1997. This was due to an increase
in average outstanding borrowings from $16.6 million to $21.9 million.
The effect of this increase was offset in part by a decrease in the
Company's effective average cost of borrowing from 10.00% for fiscal
1997 to 9.50% for fiscal 1998.
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
segregates 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 65 Contracts with an aggregate initial principal amount
of approximately $478,000. As of March 31, 1998, the Company had 154
active pools. The Company analyzes loan pools monthly and recomputes
the effective return for each pool based upon changes during the month.
<PAGE> 14
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 vehicles 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 is used to reestablish adequate 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, 1998, the Company had established reserves for losses on
Contracts of $6,137,140, or 12.27% of gross outstanding receivables
under the Contracts.
<PAGE> 15
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, 1998 March 31, 1997
------------------- --------------------
Contracts
Gross Balance Outstanding $48,960,601 $37,813,944
<S> <C> <C> <C> <C>
Dollar Dollar
Delinquencies Amount Percent* Amount Percent*
--------------------- ---------------------
30 to 59 days $1,785,309 3.65% $1,398,101 3.70%
60 to 89 days 331,027 0.68% 251,663 0.67%
90 + days 84,751 0.17% 118,680 0.31%
----------- ------ ----------- ------
Total Delinquencies $2,201,087 $1,768,444
*Total Delinquencies as a
percent of outstanding balance 4.50% 4.68%
Direct Loans
Net Balance Outstanding $870,237 $736,115
Delinquencies
30 to 59 days 3,950 0.45% 5,555 0.75%
60 to 89 days 6,168 0.71% 2,549 0.35%
90 + days 9,440 1.08% 4,029 0.55%
----------- ------ ----------- ------
Total Delinquencies $19,558 $12,133
Total Delinquencies as a
% of outstanding Balance 2.24% 1.65%
</TABLE>
The provision for credit losses was $848,641 in fiscal 1998 as compared
to $438,510 in fiscal 1997. This was due to the following: the size
of the portfolio increased 30% from last year; the Company increased the
amount of reserves associated with the bulk purchase of receivables it
acquired in January of 1997; and the Company also increased the amount
of reserves from various branch pools originated in fiscal 1997. The
Company increased its total reserve percentage from 11.45% of gross
finance receivables for fiscal year ended March 31, 1997 to 12.25%
for the fiscal year ended March 31, 1998. Management believes that
the reserve adjustments made during fiscal 1998 are consistent with its
conservative reserve methodology.
<PAGE> 16
Income Taxes
The provision for income taxes in fiscal 1998 increased 17% to
$583,957 from $497,276 in fiscal 1997 as a result of higher pretax
income. The Company's effective tax rate increased from 38.56% in
fiscal 1997 to 38.99% in fiscal 1998.
Net Income
As a result of the above factors , Net income increased from
$792,254 in fiscal 1997 to $913,690 in fiscal 1998.
Liquidity and Capital Resources
The Company's cash flows for fiscal 1998 and 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Fiscal Fiscal
1998 1997
----------------------------
<S> <C> <C>
Cash provided by (used in):
Operations $2,057,317 $1,668,044
Investing Activities -
(primarily purchase of
installment contracts) (7,473,864) (8,119,637)
Financing activities 5,612,359 6,068,950
Net increase (decrease) in cash 195,812 (382,643)
</TABLE>
The Company's primary use of working capital during fiscal year
1998 was the funding of the purchase of Contracts. The Contracts were
financed substantially through borrowings on the Company's $30 million
line of credit. The line of credit, which expires in June 2000, is
secured primarily by Contracts, and available borrowings are based on a
percentage of qualifying Contracts. As of March 31, 1998 the Company had
approximately $6.6 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 totaled $2.1 million
and $1.7 million during fiscal 1998 and 1997, respectively.
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 term funding needs.
<PAGE> 17
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 balance sheet has
enabled it to negotiate favorable interest rates which minimized the
impact of prime interest 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 rather than new automobiles. 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, financial condition and results
of operations.
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, from time to time, has and will meet with 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 , increase the amount of funds drawn down under its line of
credit, and draw down funds under the line at a faster rate. The Company
also intends to continue its policy of not paying dividends and using
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.
Year 2000
Some of the Company's older computer programs were written using
two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a
date using "00" as the year 1900 rather than the year 2000. This could
cause a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar normal
business activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost is estimated to be
immaterial and will be expensed. The Company's NDS software subsidiary
and its in-house programmers have designed, implemented and maintained
all in-house computer systems. To date, the Company has not incurred any
material expenses related to the Year 2000 Issue and does not expect to
incur any material costs.
<PAGE> 18
The project is estimated to be completed not later than December
31, 1998, which is prior to any anticipated impact on its operating
systems. The Company believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not
pose significant operational problems for its computer systems. However,
if such modifications and conversations are not made, or are not
completed timely, the Year 2000 Issue could have a material impact on
the operations of the Company.
The costs of the project and the date on which the Company
believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of
certain resources and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ
materially from those anticipated. Specific factors that might cause
such material differences include , but are not limited to, the
availability and cost of personnel trained in this area, the ability
to locate and correct all relevant computer codes, and similar
uncertainties.
Item 7. Financial Statements
The following financial statements are filed as part of this report
(see pages 25-42)
Report of Independent Auditors..............................25
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................26
Consolidated Statements of Income and Retained Earnings.....27
Consolidated Statements of Cash Flows.......................28
Notes to the Consolidated Financial Statements..............29
Item 8. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure
None.
<PAGE> 19
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons
The information set forth under the caption "Proposals 1 and 2:
Number and Election of Directors" in the Proxy Statement and Information
Statement, dated on or about July 1,1998, for the Annual General Meeting
of Members of Nicholas Financial - Canada to be held August 5, 1998 (the
"Proxy Statement"), the information set forth under the caption
"Executive Officers and Compensation" in the Proxy Statement, and the
information set forth under the caption "Section 16 (a) Beneficial
Ownership Reporting Compliance" are incorporated by reference.
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 of
the Board, Chief Executive Officer and President of Nicholas
Financial-Canada and each of its subsidiaries 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 n Business Administration from the University of Western Ontario.
As of March 31, 1998 there was one executive officer who was not
also a director of Nicholas Financial-Canada. Ralph T. Finkenbrink, age
37, has served as Vice-President-Finance of Nicholas Financial Canada
since July 1997. He joined the Company in 1988 and served as Controller
of Nicholas Financial and NDS until 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
The information set forth under the caption "Executive Officers
and Compensation" in the Proxy Statement is incorporated herein by
reference.
<PAGE> 20
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Voting Shares and
Ownership of Management and Principal Holder's" in the Proxy Statement
is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
In January 1998, Dr. Ellis Hyman, a Director of NDS, 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. Dr. Hyman has the option of converting the note into
common shares of the Company at a price of $5.00 per share.
In February 1998, Stephen Bragin, a Director of NDS, agreed to
subordinate $150,000 of debt at 12% interest with quarterly interest
payments only. The entire principal balance plus accrued interest is due
on February 28, 2000. Mr. Bragin has the option of converting the note
into common shares of the Company at a price of $5.00 per share.
<PAGE> 21
Item 13. Exhibits and Reports on Form 8-K
(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. 026680
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. 026680
10.1.2 Loan Modification Agreement dated January 14, 1994
Incorporated by reference to the Company's Form 10-SB.
File No. 026680
10.1.3 Temporary Line Increase Agreement dated Mach 28, 1994
Incorporated by reference to the Company's Form 10-SB.
File No. 026680
10.1.4 Second Loan Modification Agreement dated June 3,1994
Incorporated by reference to the Company's Form 10-SB.
File No. 026680
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. 026680
10.1.6 Amendment No. 4 to Loan Agreement and Security Agreement
Incorporated by reference to the Company's Form 10-SB.
File No. 026680
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
10.1.9 Amendment No.7 to Loan and Security Agreement dated
July 5, 1997
<PAGE> 22
16.1 Letter on Change in Certifying Accountants
Incorporated by reference to the Company's Form 10-SB.
File No. 026680
27 Financial Data Schedule
(b) Reports on Form 8-K A current Report on Form 8-K, dated
March 11, 1998, was filed on March 17, 1998, reporting
that, Effective March 11, 1998 the Common shares of
Nicholas Financial - Canada were no longer listed on the
Vancouver Stock Exchange.
<PAGE> 23
SIGNATURES
In accordance with 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 29, 1998
By:/s/Peter L Vosotas
-------------------------
Peter L. Vosotas
Chairman, Chief
Executive Officer and
President
In accordance with the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
Executive Officer, President
/s/ Peter L Vosotas and Director June 29, 1998
- -----------------------
Peter L. Vosotas
/s/ Ralph T Finkenbrink Vice President - Finance June 29, 1998
- ------------------------
Ralph T. Finkenbrink
/s/ Raymond Cottrell Director June 29, 1998
- ------------------------
Raymond Cottrell
/s/ Joseph G Bowes Director June 29, 1998
- ------------------------
Joseph G. Bowes
<PAGE> 25
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, 1998 and 1997, 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, 1998 and 1997 , and the consolidated results of its
operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
Earnst & Young, LLP
May 12, 1998
Tampa, Florida
<PAGE> 26
<TABLE>
<CAPTION>
Nicholas Financial, Inc.
Consolidated Balance Sheets
March 31
1998 1997
-----------------------------
<S> <C> <C>
Assets
Cash $ 303,960 $ 108,148
Finance receivables, net 32,424,411 25,923,091
Accounts receivable 23,405 32,224
Prepaid expenses and other assets 246,845 363,571
Property and equipment, net 182,341 223,486
Deferred income taxes 950,778 411,367
----------------------------
Total assets $34,172,885 $27,020,742
============================
Liabilities
Line of credit $23,430,594 $17,680,594
Notes payable-related party 1,591,595 1,756,095
Accounts payable 1,742,458 1,274,024
Income taxes payable 169,882 72,927
Deferred revenues 241,129 174,014
Other liabilities 21,400 27,810
----------------------------
27,197,058 20,985,464
Shareholders' equity
Preferred stock, no par: 5,000,000 shares
authorized; none issued and outstanding - -
Common stock, no par: 50,000,000 shares
authorized; 2,357,013 and 2,330,182 shares
issued and outstanding, respectively 3,740,069 3,713,210
Retained earnings 3,235,758 2,322,068
----------------------------
6,975,827 6,035,278
----------------------------
Total liabilities and shareholders' equity $34,172,885 $27,020,742
============================
See accompanying notes.
</TABLE>
<PAGE> 27
<TABLE>
<CAPTION>
Nicholas Financial, Inc.
Consolidated Statements of Income and Retained Earnings
Year ended March 31
1998 1997
--------------------------
<S> <C> <C>
Revenue:
Interest income on finance receivables $7,493,630 $5,749,410
Sales 443,392 459,719
--------------------------
7,937,022 6,209,129
Expenses:
Cost of sales 105,924 98,833
Marketing 319,757 248,482
Administrative 3,001,958 2,391,945
Provision for credit losses 848,641 438,510
Depreciation and amortization 82,758 85,427
Interest expense 2,080,337 1,656,402
--------------------------
6,439,375 4,919,599
--------------------------
Operating income before income taxes 1,497,647 1,289,530
Income tax expense (benefit):
Current 1,123,368 422,845
Deferred (539,411) 74,431
--------------------------
583,957 497,276
--------------------------
Net income 913,690 792,254
Retained earnings, beginning of year 2,322,068 1,529,814
--------------------------
Retained earnings, end of year $3,235,758 $2,322,068
==========================
Earnings per share:
Basic $.39 $.37
==========================
Diluted $.39 $.36
==========================
Weighted average shares - basic 2,343,898 2,134,921
==========================
Weighted average shares - diluted 2,417,868 2,218,390
==========================
See accompanying notes.
</TABLE>
<PAGE> 28
<TABLE>
<CAPTION>
Nicholas Financial, Inc.
Consolidated Statements of Cash Flows
Year ended March 31
1998 1997
--------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $913,690 $792,254
Adjustments to reconcile net income to net
cash flows provided by operating activities:
Depreciation of property and equipment 82,758 82,897
Provision for credit losses 848,641 438,510
Amortization of intangible assets and
deferred loan costs - 22,157
Deferred income taxes (539,411) 74,431
Changes in operating assets and
liabilities:
Accounts receivable 8,819 (7,070)
Prepaid expenses and other assets 116,726 (92,871)
Deferred revenues 67,115 (14,880)
Accounts payable 468,434 422,765
Other liabilities (6,410) (994)
Income taxes payable 96,955 (49,155)
---------------------------
Net cash provided by operating activities 2,057,317 1,668,044
Investing activities
Increase in finance receivables, net of
principal collected (7,349,961) (8,034,817)
Purchase of property and equipment (123,903) (84,820)
---------------------------
Net cash used by investing activities (7,473,864) (8,119,637)
Financing activities
Repayment of notes payable-related party (164,500) (470,438)
Net proceeds from line of credit 5,750,000 4,550,229
Proceeds from sale of the Company's
common stock 26,859 1,989,159
---------------------------
Net cash provided by financing activities 5,612,359 6,068,950
---------------------------
Net increase (decrease) in cash 195,812 (382,643)
Cash, beginning of year 108,148 490,791
---------------------------
Cash, end of year $303,960 $108,148
===========================
See accompanying notes.
</TABLE>
<PAGE> 29
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
March 31, 1998
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 over
the estimated useful lives of the assets as follows:
Automotive 3years
Equipment 5years
Furniture and fixtures 7years
Leasehold improvements Lease term
<PAGE> 30
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
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
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rate is
recognized in income in the period that includes the enactment date.
<PAGE> 31
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
2. Accounting Policies (continued)
Revenue Recognition
Revenues resulting from the sale of hardware and software are recognized
upon delivery of the products. Revenues from software support
maintenance and lease agreements are recognized pro rata over the life
of the agreements. The unamortized amounts are included in the caption
"deferred revenues."
Interest income on finance receivables is recognized using the interest
(actuarial) method. Accrual of interest income on finance receivables is
suspended when a loan is contractually delinquent for 60 days or more or
the collateral is repossessed, whichever is earlier.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement
128 replaced the previously reported primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive
effects of common stock equivalents such as options, warrants, and
convertible securities. Diluted earnings per share is very similar to
the previously reported fully diluted earnings per share. Effective
December 31, 1997 the Company adopted the provisions of Statement 128.
All earnings per share amounts for all periods presented have been
restated, where necessary, to conform to the Statement 128 requirements.
Effective September 5, 1997 the Company consolidated its common shares
through a one for three reverse stock split. All information contained
in this report has been restated to reflect the share consolidation
<PAGE> 32
<TABLE>
<CAPTION>
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
2. Accounting Policies (continued)
Schedule for Computation of Basic and Diluted Earnings Per Share:
Year ended March 31
1998 1997
--------------------------
<S> <C> <C>
Numerator:
Numerator for basic earnings per
share - Net income available
to common stockholders $913,690 $792,254
Effect of dilutive securities:
convertible debt $24,909 -
Numerator for dilutive earnings
per share - income available
to common stockholders after --------------------------
conversions assumed $ 938,599 $ 792,254
==========================
Denominator:
Denominator for basic earnings per
share - weighted average shares 2,343,898 2,134,921
Effect of dilutive securities: (A)
Employee stock options 13,326 83,469
Convertible debt 60,644 -
--------------------------
Dilutive potential common shares 73,970 83,469
Denominator for diluted earnings
per share- adjusted weighted-average
shares and assumed conversions 2,417,868 2,218,390
==========================
Earnings per share - basic $0.39 $0.37
==========================
Earnings per share - diluted $0.39 $0.36
==========================
<FOOTNOTE>
Footnote A:
Options 87,293 4,833
Warrants 333,333 333,333
The options and warrants above were outstanding but not
included in the computation of diluted earnings per
share because the exercise price was greater than the
average market price of the common shares and, therefore,
the effect would be antidilutive.
</TABLE>
<PAGE> 33
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
2. Accounting Policies (continued)
Stock Option Accounting
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 and to present
the disclosure requirements relating to stock-based compensation plans
required by Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123).
Financial Instruments
The Company's financial instruments consist of finance receivables,
accounts receivable, 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 security interest in all
vehicles financed as a form of collateral.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those
estimates.
Statement of Cash Flows
Cash paid for income taxes for the years ended March 31, 1998 and 1997
was $1,026,413 and $472,000, respectively. Cash paid for interest for
the years ended March 31, 1998 and 1997 was $2,052,742 and $1,641,060,
respectively.
<PAGE> 34
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
3. Finance Receivables
Finance receivables consist of consumer automobile finance installment
contracts and are detailed as follows:
<TABLE>
<CAPTION>
1998 1997
-----------------------------
<S> <C> <C>
Finance receivables, gross contract $50,110,571 $38,687,652
Less:
Unearned interest (11,549,020) (8,335,330)
--------------------------
38,561,551 30,352,322
Nonrefundable dealer reserve (4,525,034) (3,253,513)
Allowance for credit losses (1,612,106) (1,175,718)
--------------------------
Finance receivables, net $32,424,411 $25,923,091
==========================
</TABLE>
The terms of the receivables range from 6 to 60 months and bear a
weighted average effective interest rate of 24% and 25% for 1998 and
1997, respectively.
The following table sets forth a reconciliation of the changes in
nonrefundable dealer reserves for the years ended March 31.
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Balance at beginning of year $3,253,513 $2,229,571
Discounts acquired on new volume 4,408,114 4,128,946
Recoveries 224,553 165,523
Accreted to income (505,665) (522,103)
Losses absorbed (2,855,481) (2,748,424)
----------------------------
Balance at end of year $4,525,034 $3,253,513
============================
Reserve as a percent of gross
finance receivables 9.05% 8.41%
============================
</TABLE>
<PAGE> 35
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
3. Finance Receivables (continued)
The following table sets forth a reconciliation of the changes in the
allowance for doubtful accounts for the years ended March 31.
<TABLE>
<CAPTION>
1998 1997
----------------------------
<S> <C> <C>
Balance at beginning of year $1,175,718 $845,289
Current year provision 848,641 438,510
Losses absorbed (412,253) (108,081)
----------------------------
Balance at end of year $1,612,106 $1,175,718
============================
Reserve as a percent of gross
finance receivables 3.22% 3.04%
============================
</TABLE>
4. Property and Equipment
<TABLE>
<CAPTION>
Accumulated Net Book
Cost Depreciation Value
------------------------------------
<S> <C> <C> <C>
1998
Automotive $114,912 $79,403 $35,509
Equipment 323,346 195,054 128,292
Furniture and
fixtures 108,023 61,296 46,727
Leasehold
improvements 70,002 57,044 12,958
------------------------------------
$616,283 $392,797 $223,486
====================================
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
====================================
</TABLE>
<PAGE> 36
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
5. Line of Credit
The Company has a $30,000,000 line of credit facility (the Line) with BA
Business Credit, Inc. which expires on June 30, 2000. Borrowings under
the Line bear interest at the Bank of America prime rate plus 1.25% and
.50%, when the outstanding balance exceeds $10,000,000 and $15,000,000,
respectively (9.00% at March 31, 1998). Pledged as collateral for this
credit facility are all of the assets of Nicholas Financial Inc. and its
subsidiaries.
6. Notes Payable-Related Party
Notes payable to shareholders, directors and individuals related thereto
at March 31:
<TABLE>
<CAPTION>
1998 1997
--------------------------
<S> <C> <C>
Notes payable, unsecured, with interest
at varying rates up to 12%, quarterly
and semiannual interest payments due
through January 2002, at which time the
entire principal balance and unpaid
interest is due, subordinated to the
Line. The notes are convertible at the
option of the holder, into common
shares at prices from $5.00 to $6.00
per share. $1,150,000 $1,300,000
Notes payable, unsecured interest at
12%, quarterly interest due through
April 2000, at which time the entire
balance and unpaid interest is due,
subordinated to the Line. The note is
convertible at the option of the
holder, into common shares at $8.25
per share. 200,000 200,000
Note payable, unsecured, interest at
12%, principal and interest due
through March 1999. 218,841 233,341
Note payable, unsecured , interest at
12%, quarterly interest due through
August 1998 , at which time the entire
principal balance is due. 22,754 22,754
---------------------------
$1,591,595 $1,756,095
</TABLE>
<PAGE> 37
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
6. Notes Payable-Related Party (continued)
Maturities of notes payable are summarized as follows:
<TABLE>
<CAPTION>
Year ending March 31
---------------------
<S> <C>
1999 $441,595
2000 500,000
2001 -
2002 650,000
-----------
$1,591,595
===========
</TABLE>
The company incurred interest expense on the above notes of $210,784 and
$250,859 for the years ended March 31, 1998 and 1997, respectively.
7. Income Taxes
The provision for income taxes reflects an effective tax rate which
differs from the corporate tax rate for the following reasons:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Combined basic Canadian federal and --------------------------
provincial income tax rate 45.34% 45.34%
==========================
Income before income taxes $1,497,647 $1,289,530
==========================
Provision for income taxes based
on above rate $ 679,033 $ 584,673
Increase (decrease) resulting from:
NDSI's income taxed at
lower (U.S.) rates (107,264) (94,431)
Other 12,188 7,034
---------------------------
$ 583,957 $ 497,276
===========================
</TABLE>
<PAGE> 38
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
7. Income Taxes (continued)
The Company's deferred tax assets consist of the following as of:
<TABLE>
<CAPTION>
March 31
1998 1997
--------------------------
<S> <C> <C>
Allowance for credit losses not
deductible for tax purposes $760,307 $227,000
Deferred compensation related to stock
options and warrants 157,000 157,000
Other items 33,471 27,367
--------------------------
$950,778 $411,367
==========================
</TABLE>
NFI, Canada has income tax loss carryforward balances of approximately
Cdn$256,000 (1997-Cdn$242,000) which are available to reduce future
taxable income and which expire as follows:
1999 Cdn$32,000
2000 82,000
2001 51,000
2002 21,000
2003 13,000
2004 19,000
2005 38,000
------------
Cdn$256,000
============
For the years ended March 31, 1998 and 1997, the Company would have
recorded deferred tax assets of approximately $82,000 and $66,000,
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.
<PAGE> 39
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
8. Shareholders' Equity
Changes in the outstanding common stock during the
years are as follows:
<TABLE>
<CAPTION>
Number Of Common
Shares Stock
--------------------------
<S> <C> <C>
Balance at March 31, 1996 1,946,113 $1,724,051
Changes in 1997:
Issued for cash upon exercise of
options 16,666 19,639
Issued in connection with secondary
offering 367,403 1,969,520
--------------------------
Balance at March 31, 1997 2,330,182 $3,713,210
Changes in 1998:
Issued for cash upon exercise of
options 26,831 59,343
--------------------------
2,357,013 3,772,553
==========================
Less account receivable from
shareholders related To exercise
of options - (32,484)
--------------------------
Balance at March 31, 1998 2,357,013 $3,740,069
==========================
</TABLE>
The Company has a warrant outstanding entitling a director to purchase
333,333 common shares at $5.38 U.S until June 3, 1999. At March 31,
1998, the warrant was fully exercisable.
The Company has an employee stock incentive plan (the SIP) for officers,
directors and key employees under which 134,787 shares of common stock
were reserved for issuance as of March 31, 1998. Options currently
granted by the Company generally vest over a five year period.
<PAGE> 40
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
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.
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 1998 and 1997;
1998 1997
-------------------
Risk free rate of return 5.75% 6.63%
Volatility factor 0.400 0.443
Expected life 5 years 5 years
Expected dividends None None
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.
<PAGE> 41
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
8. Shareholders' Equity (continued)
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:
1998 1997
----------------------
Pro forma net income $878,092 $777,288
Pro forma earnings
per share:
Basic $.38 $.37
Diluted $.37 $.35
The following table reflects activity within the SIP for the years
noted:
<TABLE>
<CAPTION>
1998 1997
Options Weighted Options Weighted
& Average & Average
Warrants Exercise Price Warrants Exercise Price
--------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding-beginning
of year 480,667 $5.13 479,357 $5.04
Granted 102,294 $4.38 48,000 $5.79
Exercised (26,831) $2.21 (16,667) $1.68
Canceled/expired (88,010) $4.87 (30,023) $5.73
--------- ----------
Outstanding- end of year 468,120 $5.00 480,667 $5.13
========= ==========
Exercisable at end
of year 391,994 $5.15 414,000 $5.16
Weighted-average
fair value of
options granted
during the year $1.73 $2.67
</TABLE>
<PAGE> 42
Nicholas Financial, Inc.
Notes to the Consolidated Financial Statements
(continued)
8. Shareholders' Equity (continued)
<TABLE>
<CAPTION>
Weighted Currently Exercisable
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Shares Price Life Shares Price
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$2.95 to 3.99 47,494 $3.50 1.74years 41,129 $3.51
4.00 to 4.99 85,961 $4.34 4.27years 16,866 $4.59
5.00 to 5.38 334,665 $5.38 1.17years 333,999 $5.38
-----------------------------------------------------------
Total 468,120 $5.00 1.80years 391,994 $5.15
</TABLE>
9. Commitments
The Company leases its corporate office and sales offices under
operating lease agreements expiring prior to March 31, 2001 which
provide for annual minimum rental payments as follows:
Year ending March 31
--------------------
1999 $179,728
2000 92,518
2001 32,338
-----------
$304,584
Rent expense for the years ended March 31, 1998 and 1997 was $174,526
and $131,934, respectively.
<PAGE> 43
Exhibit 10.1.9
AMENDMENT NO.7 TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 7 TO LOAN AND SECURITY AGREEMENT ("Amendment")
is dated as of July 1, 1997 and is entered into by and between
BankAmerica Business Credit, Inc. ("Lender") and Nicholas Financial,
Inc. ("Borrower"). All capitalized terms used herein but not otherwise
defined shall have the meanings ascribed to them in the Agreement (as
hereinafter defined).
WITNESSETH
WHEREAS, the Borrower and the Lender, successor in interest to
BA Business Credit, Inc., have entered into that certain Loan and
Security Agreement dated as of March 31, 1993, as amended and
supplemented (the "Agreement") and the Borrower has executed in favor
of Lender a Secured Promissory Note dated as of March 31, 1993 in the
original principal sum of $4,000,000 ("Note"). (The Agreement, the Note,
and all other documents documenting the loan evidenced thereby and the
security therefor are hereinafter referred to collectively as "Loan
Documents".);and
WHEREAS, the Borrower desires to amend the Agreement and Note and
the Lender is willing to do so, subject to the terms and conditions
stated herein;
NOW, THEREFORE, in consideration of the premises herein contained
and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, the Borrower and Lender hereby agree
as follows:
Section 1. Amendment to the Agreement. The Lender and Borrower
agree that the Agreement and Note shall be amended
as follows:
A. Amendment to Section 1. Section 1 of the Agreement is
amended to add the following definitions:
1.55 Advance Rate means eighty-five percent (85%);
provided, however, that the Advance Rate shall be (a) eighty-
four percent (84%) when the Collateral Adjustment Percent
ending on the date of determination is equal to eighteen
percent (18%), but less than nineteen percent (19%),(b) eighty
three percent (83%) when the Collateral Adjustment Percent
ending on the date of determination is equal to nineteen
percent (19%), but less than twenty percent (20%); (c) eighty-
two percent(82%) when the Collateral Adjustment Percent is
equal to twenty percent (20%) but less than twenty-one percent
(21 %) and (d) eighty-one percent when the Collateral
Adjustment Percent is equal to or greater than twenty-one
percent (21 %); and, provided, further that the applicable
Advance Rate shall be reduced by the Repossession Adjustment
Percent.
<PAGE> 44
1.56 Applicable Margin means (i)with respect to
Reference Rate Revolving Loans, one-half percent (1/2 %) and
(ii) with respect to LIBOR Rate Revolving Loans, three and
one-quarter percent (3 1/4 %).
1.57 Bank of America means Bank of America National
Trust and Savings Association, a national banking association,
or any successor entity thereto.
1.58 Business Day means (a) any day that is not a
Saturday, Sunday, or a day on which banks in San Francisco,
California, are required or permitted to be closed, and (b)
with respect to all notices, determinations, fundings and
payments in connection with the LIBOR Rate or LIBOR Rate
Loans, any day that is a Business Day pursuant to clause (a)
above and that is also a day on which trading is carried on
by and between banks in the London interbank market.
1.59 Collateral Adjustment Percent means, calculated
as of the first day of each month, the sum (rounded to the
lowest whole percent ) of the Past Due Percent, the
Repossession Percent and the Net Charge-Off Percent.
1.60 Default Rate means a fluctuating per annum interest
rate at all times equal to the sum of (a) the otherwise
applicable interest rate plus (b) two percent (2%). Each
Default Rate shall be adjusted simultaneously with any
change in the applicable interest rate.
1.61 Governmental Authority means any nation or
government, any state or other political subdivision
thereof, any central bank (or similar monetary or regulatory
authority) thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions
of or pertaining to government, and any corporation or other
entity owned or controlled, through stock or capital
ownership or otherwise, by any of the foregoing.
1.62 Gross Contract Payments means, as of the date
of determination, (i) with respect to an interest bearing
Contract the outstanding principal balance owing by the
Contract Debtor and (ii) with respect to a precomputed
Contract the outstanding balance thereof including all
unearned interest, fees, and charges owing by the Contract
Debtor.
1.63 Interest Period means, as to any LIBOR Rate Loan,
the on the funding date of such Loan or on the
<PAGE> 45
Conversion/Continuation Date on which the Loan is converted
into or continued as a LIBOR Rate Loan, and ending on the date
one, three, or six months thereafter as selected by the
Borrower in its Notice of Borrowing or Notice of Conversion/
Continuation; provided that:
(a) if any Interest Period would otherwise end on a day
that is not a Business Day, that Interest Period shall be
extended to the following Business Day unless the result of
such extension would be to carry such Interest Period into
another calendar month, in which event such Interest Period
shall end on the preceding Business Day;
(b) any Interest Period pertaining to a LIBOR Rate Loan
that begins on the last Business Day of a calendar month (or
on a day for which there is no numerically corresponding day
in the calendar month at the end of such Interest Period)
shall end on the last Business Day of the calendar month at
the end of such Interest Period; and
(c) no Interest Period for any Revolving Loan shall
extend beyond the Stated Termination Date.
1.64 LIBOR Rate means, for any Interest Period with
respect to a LIBOR Rate Revolving Loan, the rate of interest
per annum (rounded upward to the next 1/1000th of 1.0%)
determined by the Lender as follows:
LIBOR Rate = LIBOR/(1.00-Eurodollar Reserve Percentage)
Where,
'Eurodollar Reserve Percentage' means for any day for
any Interest Period the maximum reserve percentage
(expressed as a decimal, rounded upward to the next 1/100th
of 1.0%) in effect on such day (whether or not applicable to
any Lender) under regulations issued from time to time by
the Board of Governors of the Federal Reserve for determining
the maximum reserve requirement (including any emergency,
supplemental or other marginal reserve requirement) with
respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities"); and
'LIBOR' means the rate of interest per annum (rounded
upward to the next 1/16th of 1.0%) notified to the Lender by
Bank of America as the rate of interest at which dollar
deposits in the approximate amount of the Loan to be made or
continued as, or converted into, a LIBOR Rate
<PAGE> 46
Revolving Loan and having a maturity comparable to such
Interest Period would be offered by the applicable office of
Bank of America to major banks in the London interbank market
at their request at approximately 11:00 a.m. (London time) two
Business Days prior to the commencement of such Interest
Period.
1.65 LIBOR Rate Revolving Loan means a Revolving
Loan during any period in which it bears interest at the
LIBOR Rate.
1.66 Net Balance means, as of the date of determination,
the Gross Contract Payments of a Contract less all unearned
interest, fees, charges, and insurance premiums owing by the
Contract Debtor.
1.67 Net Charge-Offs for any period means the aggregate
amount of all unpaid payments due under Contracts which have
been charged off by the Borrower during such period, as
reduced by the amount of all cash recoveries with respect
to Contracts which had been charged off during previous
periods or during such period. In computing the amount of the
charge-offs, all charges made to the dealer reserve or to the
dealer's discount shall be included.
1.68 Net Charge-Off Percent means the percent,
calculated as of the first day of each month, equal to (a)
the aggregate amount of all Net Charge-Offs during each of
the twelve (12) months immediately preceding the date of
calculation , divided by (b) the amount of the Net Balance
owing under all Contracts outstanding as of the last day of
each of the previous 12 months divided by twelve. For
example, if the Borrower charged off $10,000 each month for
12 months and if the aggregate Net Balance outstanding at
the end of the previous 12 months was $1,000,000 for 6 months
and $1,200,000 for 6 months, the Net Charge-Off Percent would
be 10.91%($120,000/$1,100,000).
1.69 Past Due Percent means the percent, calculated
as of the first day of each month, equal to (a) the Gross
Contract Payments owing under all Contracts (excluding
Contracts charged-off) as to which any portion of an
installment due thereunder is 30 days or more past due as
determined on a contractual basis as of the last day of each
of the six months immediately preceding the date of
calculation, divided ~ (b) the Gross Contract Payments
owing under all Contracts (excluding Contracts charged-off)
as of the last day of each of the six months immediately
preceding the date of calculation. For example, if, as of the
last day of the previous six months the Gross Contract
Payments were $1,500,000 and on the same date the amount of
Gross Contract Payments that were more than 30 days past due
was $100,000 and $150,000 for three months each, the
<PAGE> 47
Past Due Percent would be 8 1/3%($750,000/$9,000,000).
1.70 Reference Rate means the rate of interest publicly
announced from time to time by Bank of America as its
reference rate. It is a rate set by Bank of America based
upon various factors including Bank of America's costs and
desired return, general economic conditions, and other factors,
and is used as a reference point for pricing some loans.
However, Bank of America may price loans at, above, or below
such announced rate. Any changes in the Reference Rate shall
take effect on the day specified in the public announcement
of such change.
1.71 Reference Rate Revolving Loans means a Revolving
Loan during any period in which it bears interest based on the
Reference Rate.
1.72 Requirement of Law means, as to any Person,
any law (statutory or common), treaty, rule or regulation or
determination of an arbitrator or of a Governmental Authority,
in each case applicable to or binding upon the Person or any
of its Property or to which the Person or any of its Property
is subject.
1.73 Repossession Percent means the percent,
calculated as of the first day of each month, equal to (a) the
repossession value of all Vehicles which the Borrower has
repossessed and which, as of the last day of the preceding
month, was reflected as an asset on the Borrower's books
divided by (b) the Net Balance owing under all Vehicle
Contracts (excluding Vehicle Contracts charged-off)outstanding
as of the last day of each of those twelve (12) months
divided by twelve. For example, if 10 Vehicles having a total
repossession value of $50,000 had at any time been
repossessed by Borrower and were reflected as assets on the
books of Borrower at the end of a month and the Net
Balance was $1,000,000 for four (4) months, $1,500,000
for four (4) months and $2,000,000 for four (4) months at the
end of the preceding 12 months, the Repossession Percent would
be 3 1/3%($50,000/$1,500,000).
1.74 Stated Termination Date means June 30, 2000.
1.75 Termination Date means the earliest to occur of
(i) the Stated Termination Date and (ii) the date this
Agreement is terminated for any reason whatsoever."
B. Amendment to Section 1. Section 1.3 of the Agreement is amended
in its entirety to read as follows:
1.3 Adjusted Tangible Net Worth means the remainder
of (a) net
<PAGE> 48
book value (after deducting related depreciation, obsolescence,
amortization, valuation, and other proper reserves) at which
the Adjusted Tangible Assets of Borrower would be shown on
a balance sheet at such date, but excluding any amounts
arising from write-ups of assets, minus (b)(i) the amount at
which its liabilities (other than capital stock, surplus, and
retained earnings) would be shown on such balance sheet, and
including as liabilities all reserves for contingencies and
other potential liabilities and (ii) the General
Adjustment Reserve."
C. Amendment to Section 1. Section 1.13 of the Agreement is
amended by deleting subsection 1.13(l)(iii).
D. Amendment to Section 1. Section 1.13 of the Agreement is
amended by adding a new subsection (n) to read as follows:
n. The Vehicle Contract has a scheduled maturity date
sixty (60) months or less from the date of
execution."
E. Amendment to Section 1. Section 1.28 of the Agreement is
hereby amended in its entirety to read as follows:
1.28 Availability means , as of the date of
determination the amount determined by multiplying the Advance
Rate by the Net Contract Payments payable under all of the
Borrower's Eligible Contracts then outstanding , provided,
however, the Older Vehicle Contract Borrowing Base included
in calculating Availability shall not, at any time, exceed
thirty percent (30%)."
F. Amendment to Section 1. Section 1.29 of the Agreement is hereby
amended in its entirety to read as follows:
"1.29 Total Credit Facility shall mean Thirty Million
Dollars ($30,000,000)."
G. Amendment to Section 1. Section 1.35 of the Agreement is
amended by deleting the words "ninety-five percent (95%)" and inserting
in lieu thereof the words "one hundred percent (100%)".
H. Amendment to Section 1. Section 1. 50 of the Agreement is
hereby amended in its entirety to read as follows:
"1.50 Older Vehicle Contract Borrowing Base means, as
of any date of calculation, the amount of the Net Balance
payable under Eligible Vehicle Contracts which are secured by
a lien on a Vehicle which is eight or
<PAGE> 49
nine model years old at the time such Contract was originated
(excluding the model year in effect at the time the Contract
was originated)."
I. Amendment to Section 1. Section 1 of the Agreement is hereby
amended by deleting subsections 1.31,1.33,1.34,1.37,1.40,1.41,1.51,1.52,
and 1.53.
J. Amendment to Section 2. Section 2 of the Agreement is amended
in its entirety to read as follows:
"A. Revolving Loans. Subject to the terms and
conditions of this Agreement, the Lender agrees, upon the
request of the Borrower, made from time to time until the
Termination Date to make revolving loans ("Revolving Loans")
to the Borrower in an amount not to exceed the lesser of the
Total Credit Facility or the Availability; provided, however,
no Revolving Loans will be made to the Borrower if a Default
or an Event of Default exists and provided, further, the
maximum amount of Revolving Loans based on Direct Loan
Eligible Contracts shall not exceed $4,000,000 at any one time.
The Lender, in its sole and absolute discretion, may elect to
make Revolving Loans in excess of the Availability or the
Total Credit Facility on one or more occasions, but, if it
does so, the Lender shall not be deemed thereby to have
changed the limits of the Total Credit Facility or the
Availability. Immediately upon demand by the Lender for
repayment of such excess, the Borrower shall make such payment.
If the sum of the outstanding Revolving Loans exceeds the
Availability or the Total Credit Facility, the Lender may
refuse to make or otherwise restrict the making of Revolving
Loans as the Lender determines until such excess has been
eliminated. The Borrower may request Revolving Loans either
telephonically or in writing. Each oral request for a
Revolving Loan shall be conclusively presumed to be made
by a person authorized by the Borrower to do so and
the crediting of a Revolving Loan to the Borrower's deposit
account, or transmittal to such Person as the Borrower shall
direct, shall conclusively establish the obligation of the
Borrower to repay such Revolving Loan as provided herein.
B. (a) Borrowing Procedure. (i) Each Revolving Loan
shall be made upon the Borrower's irrevocable written notice
("Notice of Borrowing") delivered to the Lender which notice
must be received by the Lender not later than (1)11:00
a.m.(Cherry [1 ill, New Jersey time) three Business Days prior
to the requested Funding Date in the case of LIBOR Rate Loans
and (2) 11:00 a.m., (Cherry 11111, New Jersey time) on the
requested Funding Date in the case of Reference Rate Loans,
specifying:
<PAGE> 50
(A) the amount of the Borrowing;
(B) the requested funding date, which shall
be a Business Day;
(C) whether tile Revolving Loans requested
are to be Reference Rate Revolving Loans or LIBOR Rate
Revolving Loans; and
(D) the duration of the Interest Period if
the requested Revolving Loans are to be LIBOR Rate Revolving
Loans. If the Notice of Borrowing fails to specify the
duration of the Interest Period for any borrowing comprised
of LIBOR Rate Revolving Loans, such Interest Period shall be
one month.
(ii) there may not be more than four different
Interest Periods in effect at any one time.
(iii) With respect to any request for Reference Rate
Revolving Loans, in lieu of delivering the above-described
Notice of Borrowing, the Borrower may give the Lender
telephonic notice of such request by the required time, with
such telephonic notice to be confirmed in writing within
twenty-four (24) hours of the giving of such notice but Lender
shall be entitled to rely on the telephonic notice in making
such Revolving Loans.
(b) No Liability. The Lender shall not incur any
liability to the Borrower as a result of acting upon any
notice, which notice the Lender believes in good faith to have
been given by an officer duly authorized by the Borrower to
request Revolving Loans on its behalf or for otherwise acting
in good faith, and the crediting of Revolving Loans to the
Borrower's deposit account, or transmittal to such Person as
the Borrower shall direct, shall conclusively establish
the obligation of the Borrower to repay such Revolving Loans.
(c) Notice Irrevocable. Any Notice of Borrowing (or
telephonic notice in lieu thereof) made pursuant to this
Section 2 shall be irrevocable and the Borrower shall be bound
to borrow the funds requested therein in accordance therewith.
(d) Upon Lender's request, each time Borrower requests
an Advance, Borrower shall deliver to Lender a Collateral and
Loan Status Report and Monthly Report of Delinquent Accounts
in forms provided by
<PAGE> 51
Lender (or in such other form approved by Lender), in which
Borrower has computed its Availability, the amount of the
requested Advance, and has provided the other information
requested therein."
K. Amendment to Section 2. Section 2 of the Agreement is amended
by adding new subsections 2.4,2.5 and 2.6 to read as follows:
"2.4. INTEREST AND OTHER CHARGES.
2.4(A) Interest. (a) All outstanding Obligations
shall bear interest on the unpaid principal amount thereof
(including, to the extent permitted by law, on interest
thereon not paid when due) from the date made until paid in
full in cash at a rate determined by reference to the
Reference Rate or the LIBOR Rate and Section 2.4(A)(a)(i) or
(ii), as applicable. Subject to the provisions of Section
2.4(B), any of the Revolving Loans may be converted into,
or continued as, Reference Rate Revolving Loans or LIBOR Rate
Revolving Loans in the manner provided in Section 2.4(B). If
at any time Revolving Loans are outstanding with respect to
which notice has not been delivered to the Lender in
accordance with the terms of this Agreement specifying the
basis for determining the interest rate applicable thereto,
then those Revolving Leans shall be Reference Rate Revolving
Loans and shall bear interest at a rate determined by
reference to the Reference Rate until notice to the contrary
has been given to the Lender and such notice has become
effective. Except as otherwise provided herein , the
outstanding Obligations shall bear interest as follows:
(i) For all Reference Rate Revolving Loans and other
Obligations, which are not LIBOR Rate Revolving Loans,
then at a fluctuating per annum rate equal to the Reference
Rate plus the Applicable Margin; and
(ii) For all LIBOR Rate Revolving Loans, then at a per
annum rate equal to the LIBOR Rate plus the Applicable Margin
determined for the applicable Interest Period.
Each change in the Reference Rate shall be reflected in the
interest rate described in (i) above as of the effective date
of such change. All interest charges shall be computed on the
basis of a year of 360 days and actual days elapsed (which
results in more interest being paid than if computed on the
basis of a 365-day year). Interest accrued on all Revolving
Loans will be payable in arrears on the fifteenth (15th) day
of each month hereafter.
<PAGE> 52
(b) If any Default or Event of Default occurs and is
continuing and the Lender in its discretion so elects, then,
until such Default or Event of Default has been cured,
all of the Obligations shall bear interest at the Default Rate
applicable thereto.
2.4(B) Conversion and Continuation Elections (a) The
Borrower may, upon irrevocable written notice to the Lender in
accordance with Subsection 2.4(B):
(i) elect, as of any Business Day , in the case of
Reference Rate Revolving Loans to convert any such Revolving
Loans (or any part thereof in an amount not less than
$5,000,000, or that is in an integral multiple of $1,000,000
in excess thereof) into LIBOR Rate Revolving Loans; or
(ii) elect, as of the last day of the applicable
Interest Period, to continue any LIBOR Rate Revolving Loans
having Interest Periods expiring on such day (or any part
thereof in an amount not less than $5,000,000, or that is
in an integral multiple of $1,000,000 in excess thereof);
Provided, that if at any time the aggregate amount of LIBOR
Rate Revolving Loans is reduced, by payment, prepayment,
or conversion of part thereof to be less than $1,000,000,
such LIBOR Rate Revolving Loans shall automatically convert
into Reference Rate Revolving Loans, and on and after such
date the right of the Borrower to continue such Revolving
Loans as, and convert such Revolving Loans into, LIBOR Rate
Revolving Loans, as the case may be, shall terminate.
(b) The Borrower shall deliver a notice of conversion/
continuation ("Notice of Conversion/Continuation") to be
received by the Lender not later than 11:00 a.m. (Cherry Hill,
New Jersey time) at least 3 Business Days in advance of the
Conversion/Continuation Date, if the Revolving Loans are to be
converted into or continued as LIBOR Rate Revolving Loans and
specifying:
(i) the proposed Conversion/Continuation Date;
(ii) the aggregate amount of Revolving Loans to be
converted or renewed; and
(iii) the type of Revolving Loans resulting from the
proposed conversion or continuation.
<PAGE> 53
(c) If upon the expiration of any Interest Period
applicable to LIBOR Rate Revolving Loans, the Borrower
has failed to select timely a new Interest Period to be
applicable to LIBOR Rate Revolving Loans or if any Default
or Event of Default then exists, the Borrower shall be deemed
to have elected to convert such LIBOR Rate Revolving Loans
into Reference Rate Revolving Loans effective as of the
expiration date of such lnterest period.
(d) During the existence of a Default or Event of
Default, the Borrower may not elect to have a Revolving Loan
converted into or continued as a LIBOR Rate Revolving Loan.
(e) After giving effect to any conversion or
continuation of Revolving Loans, there may not be more than
four different Interest Periods in effect.
2.5 YIELD PROTECTION AND ILLEGALITY.
2.5(A) Illegality
(i) If the Lender determines that the introduction
of any Requirement of Law, or any change in any Requirement of
Law, or in the interpretation or administration of any
Requirement of Law, has made it unlawful, or that any central
bank or other Governmental Authority has asserted that it is
unlawful, for the Lender or its applicable lending office to
make LIBOR Rate Revolving Loans, then, on notice thereof by
the Lender to the Borrower, any obligation of that Lender to
make LIBOR Rate Revolving Loans shall be suspended until the
Lender notifies the Borrower that the circumstances giving
rise to such determination no longer exist.
(ii) If the Lender determines that it is unlawful to
maintain any LIBOR Rate Revolving Loan, the Borrower shall,
upon its receipt of notice of such fact and demand from the
Lender, prepay in full such LIBOR Rate Revolving Loans of that
Lender then outstanding, together with interest accrued
thereon and amounts required under Section 5 4 either on the
last day of the Interest Period thereof, if the Lender may
lawfully continue to maintain such LIBOR Rate Revolving Loans
to such day, or immediately, if the Lender may not lawfully
continue to maintain such LIBOR Rate Revolving Loan. If the
Borrower is required to so prepay any LIBOR Rate Revolving
Loan, then concurrently with such prepayment, the Borrower
shall borrow from the Lender, in the amount of such repayment,
a Reference Rate Revolving Loan.
<PAGE> 54
2.5(B) Funding Losses. The Borrower shall reimburse
the Lender and hold the Lender harmless from any loss or
expense which the Lender may sustain or incur as a consequence
of:
(i) the failure of the Borrower to make on a timely
basis any payment of principal of any LIBOR Rate Revolving
Loan;
(ii) the failure of the Borrower to borrow, continue or
convert a Loan after the Borrower has given (or is deemed to
have given) a Notice of Borrowing or a Notice of Conversion/
Continuation;
(iii) the prepayment or other payment (including after
acceleration thereof)of an LIBOR Rate Revolving Loan on a day
that is not the last day of the relevant Interest Period;
including any such loss or expense arising from the
liquidation or reemployment of funds obtained by it to
maintain its LIBOR Rate Revolving Loans or from fees payable
to terminate the deposits from which such funds were obtained.
2.5(C) Inability to Determine Rates . If the Lender
determines that for any reason adequate and reasonable means
do not exist for determining the LIBOR Rate for any requested
Interest Period with respect to a proposed LIBOR Rate
Revolving Loan, or that the LIBOR Rate for any requested
Interest Period with respect to a proposed LIBOR Rate
Revolving Loan does not adequately and fairly reflect the
cost to the Lender of funding such Loan, the Lender will
promptly so notify the Borrower. Thereafter, the obligation
of the Lender to make or maintain LIBOR Rate Revolving Loans
hereunder shall be suspended until the Lender revokes such
notice in writing. Upon receipt of such notice, the Borrower
may revoke any Notice of Borrowing or Notice of Conversion/
Continuation then submitted by it. If the Borrower does not
revoke such Notice, the Lender shall make, convert or continue
the Revolving Loans, as proposed by the Borrower, in the
amount specified in the applicable notice submitted by the
Borrower, but such Revolving Loans shall be made, converted or
continued as Reference Rate Revolving Loans instead of LIBOR
Rate Revolving Loans."
2.6 Unused Line Fee. During the term of this Agreement,
Borrower shall pay to Lender a fee ('Unused Line Fee')
in an amount equal to .25 percent per annum, multiplied by
the amount by which the Total Credit Facility exceeds the
average closing daily balance of the Loan during the month.
Such a fee, if any, shall be calculated on the basis of a year
of 360 days and actual days elapsed, and shall be payable to
Lender on the fifteenth day of each month with respect to the
prior month."
<PAGE> 55
L. Amendment to Section 3. Section 3 of the Agreement is hereby
amended in its entirety to read as follows:
"3. Term. This Agreement shall have a term commencing
on March 31, 1993, and ending on the Stated Termination Date.
On the Stated Termination Date the Loan shall be due and
payable in full without notice or demand. Notwithstanding the
foregoing, upon the occurrence of an Event of Default, the
Lender may immediately terminate this Agreement."
M. Amendment to Section 8. Section 8. 6 of the Agreement is
amended by deleting the ratio "1.5:1" and inserting in lieu thereof the
ratio "1.25:1".
N. Amendment to Section 8. Section 8.8 of the Agreement is
amended in its entirety to read as follows:
"8.8 Charge-Off Policy. Borrower shall establish and
implement, all in a manner satisfactory to Lender, a policy
for charging off the unpaid balance of any Contract upon the
occurrence of any default under the terms thereof. Without
limiting the generality of the foregoing, Borrower shall, on
the last business day of each month, charge off (i) the unpaid
balance of any Contract with respect to which any payment due
thereunder is 120 days or more past due as determined on a
contractual basis and (ii) the unpaid balance of any Contract
with respect to which the Contract Debtor is the subject of a
bankruptcy or solvency proceeding. In addition, the policy
shall provide that Borrower shall immediately charge off all
Contracts with a deficiency balance and shall charge off all
the value of any Vehicles which have been repossessed for more
than 120 days."
0. Amendment to Section 8. Section 8.22 of the Agreement is
amended in its entirety to read as follows:
"8.22 Limitation on Bulk Purchases. Borrower shall not,
without Lender's prior written consent (which Lender may
withhold in its sole and absolute discretion), acquire for a
purchase price greater than $500,000 any Contracts as part of
a Bulk Purchase Transaction . The phrase 'Bulk Purchase
Transaction shall mean the purchase, on a group or aggregate
basis, of Contracts originated by third parties, in one or a
series of related transactions, from a seller or affiliated
sellers, where Borrower's decision to purchase the Contracts
is based primarily on criteria other than the creditworthiness
of the individual Contract Debtors who are the Contract
obligors. Borrower may, without the consent of Lender, acquire
for a purchase price of $500,000 or less Contracts as part of
a Bulk Purchase Transaction provided the Borrower has Excess
Availability sufficient to consummate the Bulk Purchase
Transaction prior to, and without giving effect to, the Bulk
Purchase Transaction."
<PAGE> 56
P. Amendment to Section 9. Section 9 .1 of the Agreement is
amended by adding at the end of the Section a new sentence to read as
follows:
"All of the foregoing reports shall be delivered (i)
twice monthly on the first and fifteenth of each month
in the event the Advance Rate is reduced as a result of the
Collateral Adjustment Percent and (ii) at such times as Lender
requests upon the occurrence and continuation of an Event of
Default."
Q. Amendment to Section 10. Section 10(p) of the Agreement is
amended in its entirety to read as follows:
"p. The Borrower's Collateral Adjustment Percent is at
anytime equal to or greater than twenty-two percent (22%)."
R. Amendment to Section 10. Section 10 of the Agreement is
amended by adding a new subsection "r" to read as follows:
"(r) Peter L. Vosotas at any time fails to own at least
twenty-five percent (25%) of the voting stock of Nicholas
Financial, Inc. ("Parent") or that Parent at any time fails to
own all of the issued and outstanding stock of Borrower, or
that Peter L. Vosotas at any time fails to control the
Borrower."
S. Amendment to Note. The Note shall be amended and restated in
its entirety as set forth in Exhibit A ("Amended Note").
Section 2. Conditions. The effectiveness of this Amendment is
subject to the satisfaction of the following conditions precedent:
A. Amendment. Fully executed copies of this Amendment and the
Amended Note signed by the Borrower and ratification's signed by the
Guarantors shall be delivered to Lender.
B. Resolution. A certificate executed by the Secretary or
Assistant Secretary of Borrower certifying that the Borrower's Board of
Directors has adopted resolutions authorizing the execution, delivery
and performance by Borrower of the Amendment shall be delivered to
Lender.
C. Other Documents. Borrower shall have executed and delivered
to Lender such other documents and instruments as Lender may require.
Section 3. Termination of Guaranty. The Guaranty executed by Peter L.
Vosotas dated March 31, 1993 guaranteeing the Obligations is hereby
terminated and shall no longer have any force or effect.
<PAGE> 57
Section 4. Effective Date. This Amendment shall be effective as of
July 1, 1997.
Section 5. Miscellaneous.
A. Survival of Representations and Warranties. All representations
and warranties made in the Agreement or any other document or documents
relating thereto , including , without limitation, any Loan Document
furnished in connection with this Amendment, shall survive the execution
and delivery of this Amendment and the other Loan Documents, and no
investigation by Lender or any closing shall affect the representations
and warranties or the right of Lender to rely thereon.
B. Additional Representation and Warranty. In order to induce
Lender to enter into this Amendment, Borrower represents and warrants
to Lender that the audited financial statements of the Borrower for
the fiscal year ending March 31, 1997 shall be consistent with, and
contain no material adverse changes from, the preliminary financial
statements for the period delivered to the Lender prior to the
date hereof. Borrower agrees that this representation and warranty is
material to the Lender and that a breach thereof shall constitute an
Event of Default under the Agreement.
C. Reference to Agreement. The Agreement , each of the Loan
Documents, and any and all other agreements, documents or instruments
now or hereafter executed and delivered pursuant to the terms hereof,
or pursuant to the terms of the Agreement as amended hereby, are hereby
amended so that any reference therein to the Agreement shall mean a
reference to the Agreement as amended hereby.
D. Agreement Remains in Effect. The Agreement and the Loan
Documents remain in full force and effect and the Borrower ratifies and
confirms its agreements and covenants contained therein. The Borrower
hereby confirms that, after giving effect to this Amendment, no
Event of Default or Default exists as of such date.
E. Severability. Any provision of this Amendment held by a court
of competent jurisdiction to be invalid or unenforceable shall not
impair or invalidate the remainder of this Amendment and the effect
thereof shall be confined to the provision so held to be invalid or
unenforceable.
F. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE
PERFORMABLE IN THE STATE OF NEW JERSEY AND SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW JERSEY.
G. Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
<PAGE> 58
successors and assigns; provided, however, that Borrower may not assign
or transfer any of its rights or obligations hereunder without the prior
written consent of Lender.
H. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and
the same instrument.
I. Headings. The headings, captions and arrangements used in this
Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
J. NO ORAL AGREEMENTS. THIS AMENDMENT ,TOGETHER WITH THE OTHER
LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT BETWEEN LENDER
AND BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment under
seal on the date first written above.
NICHOLAS FINANCIAL, INC.
By:/s/Peter L Vosotas
-----------------------
Name: Peter L Vosotas
Title: President, CEO
BANKAMERICA BUSINESS CREDIT,INC.
By:/s/ Joseph La Cognata
-------------------------
Name: Joseph La Cognata
Title: Exec VP
<PAGE> 59
CONSENTS AND REAFIRMATIONS
The undersigned hereby consent to the terms and conditions of that
Amendment No.7 to Loan and Security Agreement dated as of July 1,
1997, between Nicholas Financial, Inc. and BankAmerica Business Credit,
Inc. ("Creditor1t) and reaffirm their obligations under Guarantees made
by the undersigned in favor of the Creditor and acknowledge and agree
that the Guarantees remains in full force and effect.
Dated as of July 1, 1997
"GUARANTORS"
Nicholas Data Services, Inc.
By: /s/Peter L Vosotas
-------------------------
Peter L Vosotas, President
By: /S/Keith A Bertholf
-------------------------
Keith A Bertholf, Secretary
Nicholas Financial, Inc.
By: /s/Peter L Vosotas
------------------------
Peter L Vosotas, President
By: /s/Keith A Bertholf
-----------------------
Keith A. Bertholf, Secretary
<PAGE> 60
Exhibit A
AMENDED AND RESTATED SECURED PROMISSORY NOTE
Total Credit Facility July 1, 1997
FOR VALUE RECEIVED, the undersigned , Nicholas Financial, Inc.,
a Florida corporation , ("Borrower") hereby promises to pay to the
order of BankAmerica Business Credit, Inc., a Delaware corporation,
("Lender") at the office of Lender located at 200 Lake Drive East,
Suite 201, Cherry Hill, New Jersey 08002, or at such other place as
Lender may designate in writing from time to time, the Total Credit
Facility ('Principal Sum') or so much thereof as shall have been from
time to time advanced and re-advanced to Borrower pursuant to a certain
Loan and Security Agreement dated March 31, 1993, as amended ('Loan
Agreement') together with interest on so much thereof as is, from time
to time, outstanding and unpaid at the rate of interest set forth in the
Loan Agreement.
Interest shall be computed at the end of each day by multiplying
the outstanding Principal Sum hereunder at the close of business on that
day by a daily interest factor, which daily interest factor shall be
calculated by dividing the aforesaid Interest Rate in effect on that day
by 360 (which results in more interest being charged than if 365 were
used). Interest so computed shall accrue for each and every day (365
days per year, 366 days per leap year) on which any part of the
Principal Sum remains outstanding hereunder, including the day on which
any Advance is made regardless of the time of day the Advance is made,
and including the day on which funds are repaid unless repayment is
credited by Lender to the Loan prior to the close of Lender's business
on the day of receipt. The Interest Rate shall be adjusted and such
adjustments shall become effective as described in the Loan Agreement.
All payments shall be applied first to the payment of any sums
owing by Borrower to Lender under the Loan Agreement (other than
principal or interest), second to all accrued and unpaid interest, and
third to the payment of the Principal Sum. Lender may, at its option,
add Lender's Expenses owing by Borrower to Lender to the unpaid
Principal Sum, which amounts shall thereupon accrue interest at the
Interest Rate from time to time in effect.
Interest shall be calculated, in the manner indicated above, on the
last calendar day of such month ("Calculation Date") (the amount of such
monthly interest being hereinafter referred to as the "Monthly Interest
Charge"). On the fifteenth day of each month immediately following a
Calculation Date ( hereinafter "Interest Payment Due Date"), the Monthly
Interest Charge shall be due and payable in full by wire transfer of
immediately available funds. In the event the fifteenth day of a
particular month is not a business day during which Bank is open for
business, then the Interest Payment Due Date shall be the first business
day immediately preceding the fifteenth day of a month on which Batik is
open for business. Failure to pay a Monthly Interest Charge on an
<PAGE> 61
Interest Payment Due Date shall constitute an Event of Default under the
Loan Agreement.
On the Stated Termination Date or the date of earlier termination
of the Loan Agreement, the entire Principal Sum, together with all
accrued and unpaid interest, shall become immediately due and payable in
full without notice or demand by Lender and shall be repaid to Lender by
a wire transfer of immediately available funds.
Should any payment required to be made under this Note not be paid
on the date the same becomes due and payable, Borrower recognizes that
Lender will incur extra expenses for handling delinquent payments, the
exact amount of such extra expenses being economically impracticable to
ascertain, but that a charge of six percent of the amount of the
delinquent payment would be a fair approximation of the expense so
incurred by Lender. Therefore, Borrower shall, in such event, without
further notice and without prejudice to any rights of Lender, including
without limitation, the right to collect any other amounts provided to
be paid hereunder or under any instrument securing this Note or to
declare a default hereunder, pay to Lender to cover such expenses
incurred in handling such delinquent payments, a "late charge" of six
percent of the amount of such delinquent payment.
Notwithstanding any provision of the Loan Agreement or this Note to
the contrary, Borrower may terminate the Loan Agreement and Note at any
time if (a) Borrower gives Lender at least ten (10) days prior notice of
its intent to terminate; (b) Borrower pays and performs all Obligations
in full on or prior to the effective date of termination; and (c)
Borrower pays to Lender an early termination fee equal to one percent
(1%) of the Total Credit Facility in the event that the effective date
of termination occurs on or before June 30,1998, one-half of one percent
(0.50%) of the Total Credit Facility in the event that the effective
date of termination occurs after June 30, 1998 but on or prior to
December 31, 1998, and one-quarter of one percent (0.25%) of the Total
Credit Facility in the event that the effective date of termination
occurs after December 31, 1998 but on or prior to June 30, 1999. No
early termination fee shall be payable if the Loan Agreement is
terminated after June 30, 1999.
Should an Event of Default occur under the Loan Agreement then the
entire Principal Sum and any other sums advanced by Lender under the
Loan Agreement, together with all unpaid interest accrued thereon, shall
at the option of Lender and without notice to Borrower, at once become
due and payable and may be collected forthwith, regardless of the Stated
Termination Date specified in the Loan Agreement. Upon the occurrence of
an Event of Default, Borrower shall pay, upon notice from the Lender,
interest on the Principal Sum at the Default Rate.
Time is of the essence of this Note. In the event this Note or any
obligation hereunder is collected by or through an attorney-at-law,
Borrower agrees to pay all costs of collection, including but not
limited to, reasonable attorney's and paralegal fees, whether or not
suit is filed, and all costs incurred on appeal.
<PAGE> 62
Except as expressly provided in the Loan Agreement, presentment for
payment, demand, protest, notice of demand, protest and nonpayment and
all other notices are hereby waived by Borrower. No failure to
accelerate the debt evidenced hereby by reason of an Event of Default,
acceptance of a past due installment, or indulgence granted from time to
time shall be construed (I) as a novation of the Note or as a
reinstatement of the indebtedness evidenced hereby or as a waiver
of such right of acceleration or of the right of Lender thereafter to
insist upon strict compliance with the terms of this Note, or (ii) to
prevent the exercise of such right of acceleration or any other right
granted hereunder or under applicable state law; and Borrower hereby
expressly waives the benefit of any statute or rule of law or equity now
provided, or which may hereafter be provided, which would produce a
result contrary to or in conflict with the foregoing. No extension of
time for the payment of this Note or any installment due hereunder, made
by agreement with any person now or hereafter liable for the payment of
this Note shall operate to release, discharge, modify, change or affect
the original liability of Borrower under this Note, either in whole or
in part, unless Lender agrees otherwise in writing. This Note may not be
changed orally, but only by an agreement in writing signed by the party
against whom enforcement of any waiver, change, modification , or
discharge is sought.
Lender shall have the right to sell, assign, or otherwise transfer
this Note and the Loan Agreement or any interest therein to one or more
institutional investors or their affiliates without Borrower's consent.
This Note, the Loan Agreement, and all of the covenants and agreements
contained therein shall be binding upon and inure to the benefit of the
respective legal and personal representatives, successors, and assigns
of Lender and Borrower.
If, from any circumstances whatsoever, fulfillment of any provision
of this Note or of the Loan Agreement, at the time performance of such
provision shall be due, shall involve transcending the limit of
validity presently prescribed by any applicable usury statute or any
other applicable law, with regard to obligations of like character and
amount, then, ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity, so that in no event shall any
exaction be possible under this Note or under the Loan Agreement that
is in excess of the current limit of such validity, but such
obligation shall be fulfilled to the limit of such validity. In the
event a court determines that Lender has received interest and other
charges in excess of the highest rate applicable hereto, Lender
shall apply such excess to the Principal Sum of this Note as of the
date of such determination.
As used herein, the terms "Lender" and "Borrower" shall be deemed
to include their respective successors, legal, representatives and
assigns, whether by voluntary action of the parties or by operation of
law. In the event that more than one person, firm, or entity is a
Borrower hereunder, then all references to "Borrower" shall be deemed
to refer equally to each of said persons, firms, or entities, all of
whom shall be jointly and severally liable for all of the obligations
of Borrower hereunder.
This Note has been issued pursuant to the Loan Agreement and all
the terms, covenants , and conditions of the Loan Agreement and all
other instruments evidencing and/or securing the indebtedness hereunder
are hereby made a part of this Note and are deemed incorporated herein
in full. The occurrence of any Event of Default under the Loan Agreement
or any other instruments securing and/or evidencing this indebtedness
<PAGE> 63
shall constitute a default under this Note. Unless otherwise defined
herein , all capitalized terms shall have the same definition as
contained in the Loan Agreement.
This Note and all transactions hereunder and/or evidenced herein
shall be governed by, construed, and enforced in accordance with the
laws of the state of New Jersey, without reference to its conflict of
law rules.
This Note amends and restates the Secured Promissory Note dated
March 31, 1993, as amended, and the obligations represented by such note
shall not be deemed repaid or discharged as of the date hereof, but
shall continue and remain in full force and effect.
IN WITNESS WHEREOF, Borrower has executed this Note on the day and year
first above written.
"BORROWER"
Nicholas Financial, Inc.,
a Florida Corporation
By: /s/Peter L Vosotas
------------------------
Peter L. Vosotas, President
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule Contains Summary Information Extracted From The Condensed
Consolidated Balance Sheet And The Condensed Consolidated Statements Of
Income For The Twelve Months Ended March 31, 199 8 And March 31, 1997,
And Is Qualified In Its Entirety By Reference To Such Financial
Statements.
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 303,960 108,148
<SECURITIES> 0 0
<RECEIVABLES> 32,424,411 25,923,091
<ALLOWANCES> 6,137,140 4,429,231
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 616,283 520,920
<DEPRECIATION> 392,797 338,580
<TOTAL-ASSETS> 34,172,885 27,020,742
<CURRENT-LIABILITIES> 27,197,058 20,985,464
<BONDS> 0 0
0 0
0 0
<COMMON> 3,740,069 3,713,210
<OTHER-SE> 3,235,758 2,322,068
<TOTAL-LIABILITY-AND-EQUITY> 34,172,885 27,020,742
<SALES> 443,392 459,719
<TOTAL-REVENUES> 7,937,022 6,209,129
<CGS> 105,924 98,833
<TOTAL-COSTS> 3,321,715 2,640,427
<OTHER-EXPENSES> 82,758 85,427
<LOSS-PROVISION> 848,641 438,510
<INTEREST-EXPENSE> 2,080,337 1,656,402
<INCOME-PRETAX> 1,497,647 1,289,530
<INCOME-TAX> 583,957 497,276
<INCOME-CONTINUING> 913,690 792,254
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 913,690 792,254
<EPS-PRIMARY> .39 .37
<EPS-DILUTED> .39 .36
<FN>
<F1> RECEIVABLES ARE PRESENTED NET OF UNEARNED FINANCE CHARGES,
NON-REFUNDABLE DEALER RESERVE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
<F2> RECEIVABLES ARE PRESENTED AS TOTAL RESERVES , COMPRISED OF
NON-REFUNDABLE DEALER RESERVE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS.
</TABLE>
