<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to _________.
Commission file number: 0-26680
NICHOLAS FINANCIAL, INC.
(Exact name of registrant as specified in its Charter)
British Columbia, Canada 8736-3354
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2454 McMullen Booth Road, Building C
Clearwater, Florida 33759
(Address of Principal Executive Offices) (Zip Code)
(727) 726-0763
(Registrant's telephone number, Including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____.
As of October 31st, 1998 there were 2,357,013 shares of common
stock outstanding
This Form 10-QSB consists of 20 pages.
<PAGE> 2
Nicholas Financial, Inc.
Form 10-QSB
Index
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet
as of September 30,1998...............................3
Condensed Consolidated Statements of
Income for the three and six months
ended September 30, 1998 and 1997.....................4
Condensed Consolidated Statements of
Cash Flows for the six months ended
September 30, 1998 and 1997...........................5
Notes to the Condensed Consolidated
Financial Statements..................................6
Item 2. Management's Discussion and Analysis
of the Financial Condition and Results
of Operations........................................10
Part II. Other Information
Item 1. Legal Proceedings....................................18
Item 2. Changes in Securities................................18
Item 3. Defaults upon Senior Securities......................18
Item 4. Submission of Matters to a Vote of
Security Holders.....................................18
Item 5. Other Information....................................18
Item 6. Exhibits and Reports on Form 8-K.....................18
Signatures...........................................19
Index of Exhibits....................................20
<PAGE> 3
Nicholas Financial, Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
<TABLE>
<CAPTION>
September 30
1998
---------------
<S> <C>
Assets
Cash $ 163,677
Finance receivables, net 35,442,748
Accounts receivable 16,733
Prepaid expenses and other assets 400,773
Property and equipment, net 228,902
Deferred income taxes 1,140,778
--------------
Total assets $37,393,611
==============
Liabilities
Line of credit $26,264,549
Notes payable - related party 1,632,595
Accounts payable 1,448,166
Income taxes payable 96,963
Deferred revenues 334,111
Other liabilities 21,812
--------------
29,798,196
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 shares issued and
outstanding 3,740,069
Retained earnings 3,855,346
--------------
7,595,415
--------------
Total liabilities and shareholders' equity $37,393,611
==============
See accompanying notes.
</TABLE>
<PAGE> 4
Nicholas Financial, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
September 30 September 30
1998 1997 1998 1997
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Interest income on
finance receivables $2,382,605 $1,847,121 $4,460,692 $3,538,929
Sales 107,536 112,259 217,329 221,740
-----------------------------------------------
2,490,141 1,959,380 4,678,021 3,760,669
Expenses:
Cost of sales 22,976 23,259 45,677 44,636
Marketing 90,036 91,786 163,528 159,406
Administrative 951,463 759,029 1,806,692 1,458,214
Provision for credit losses 175,812 148,103 360,269 280,425
Depreciation and amortization 28,951 28,500 54,402 54,000
Interest expense 635,580 500,954 1,238,643 1,000,188
-----------------------------------------------
1,904,818 1,551,631 3,669,211 2,996,869
-----------------------------------------------
Operating income before
income taxes 585,323 407,749 1,008,810 763,800
Income tax expense (benefit):
Current 375,959 169,087 579,222 370,592
Deferred (150,000) (11,461) (190,000) (73,461)
-----------------------------------------------
225,959 157,626 389,222 297,131
-----------------------------------------------
Net Income $359,364 $250,123 $619,588 $466,669
===============================================
Earnings per share - Basic $0.15 $0.11 $0.26 $0.20
===============================================
Earnings per share - Diluted $0.15 $0.11 $0.26 $0.20
===============================================
See accompanying notes.
</TABLE>
<PAGE> 5
Nicholas Financial, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended September 30
1998 1997
---------------------------------
<S> <C> <C>
Operating activities
Net income $ 619,588 $ 466,669
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation of property and equipment 54,402 54,000
Provision for credit losses 360,269 280,425
Deferred income taxes (190,000) (73,461)
Changes in operating assets and liabilities:
Accounts receivable 6,672 17,931
Prepaid expenses and other assets (153,928) (96,244)
Deferred revenues 92,982 (27,881)
Accounts payable (294,292) (20,777)
Other liabilities 412 (1,228)
Income taxes payable (72,919) 35,754
-----------------------------
Net cash provided by operating activities 423,186 635,188
Investing activities
Increase in finance receivables, net of
principal collected (3,378,606) (2,854,534)
Purchase of property and equipment (59,818) (63,974)
-----------------------------
Net cash used by investing activities (3,438,424) (2,918,508)
Financing activities
Net proceeds from line of credit
borrowings and notes payable
- related party 2,874,955 2,235,500
Proceeds from sale of the Company's
common stock - 33,784
-----------------------------
Net cash provided by financing activities 2,874,955 2,269,284
-----------------------------
Net decrease in cash (140,283) (14,036)
Cash, beginning of period 303,960 108,148
-----------------------------
Cash, end of period $163,677 $94,112
=============================
See accompanying notes.
</TABLE>
<PAGE> 6
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements of Nicholas Financial Inc (the "Company") have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB pursuant to the Securities and
Exchange Act of 1934, as amended in Article 10 of Regulation SB,
as amended. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six months ended
September 30, 1998 are not necessarily indicative of the results
that may be expected for the year ended March 31, 1999. For
further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended March 31, 1998.
2. 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 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 have been presented, and where necessary, restated to
conform to the Statement 128 requirements.
<PAGE> 7
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
The following table sets forth the computation of Basic
and Fully Diluted Earnings per Share:
<TABLE>
<CAPTION>
Three months Six months
ended ended
September 30, September 30,
1998 1997 1998 1997
------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Numerator for basic earnings per
share - Net income available to
common stockholders $359,364 $250,123 $619,588 $466,669
Effect of dilutive securities:
Convertible debt 24,909 - 49,818 -
----------------------------------------
Numerator for dilutive earnings
per share - income available to
common stockholders after assumed
conversions $384,273 $250,123 $669,406 $466,669
========================================
Denominator:
Denominator for basic earnings per
share - weighted average shares 2,357,013 2,335,133 2,357,013 2,332,644
Effect of dilutive securities: (A)
Employee stock options - 21,496 - 21,945
Convertible debt 264,798 - 264,798 -
----------------------------------------
Dilutive potential common shares 264,798 21,496 264,798 21,945
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 2,621,811 2,356,629 2,621,811 2,354,589
========================================
Earnings per share - basic $0.15 $0.11 $0.26 $0.20
========================================
Earnings per share - diluted $0.15 $0.11 $0.26 $0.20
========================================
Footnote A:
The following options and warrants
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.
Options 230,700 85,499 230,700 85,499
Warrants 333,333 333,333 333,333 333,333
</TABLE>
<PAGE> 8
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
3. Finance Receivables
<TABLE>
<CAPTION>
Finance receivables consist of consumer automobile finance installment
contracts and are detailed as follows:
<S> <C>
Finance receivables, gross contract $56,090,365
Less:
Unearned interest (13,097,471)
------------
42,992,894
Nonrefundable dealer reserves (5,945,259)
Allowance for credit losses (1,604,887)
------------
Finance receivables, net $35,442,748
============
</TABLE>
The terms of the receivables range from 6 to 60 months and bear a
weighted average effective interest rate of 24%.
4. Line of Credit
The Company has a $35,000,000 line of credit facility (the Line)
with BA Business Credit, Inc. which expires on June 30, 2001.
Borrowings under the Line bear interest at the Bank of America
prime rate. The Company also has several LIBOR pricing options
available. If the outstanding balance falls below $10,000,000
the Line bears interest at the Bank of America prime rate plus
1.75%. Pledged as collateral for this credit facility are all of
the assets of Nicholas Financial, Inc. and its subsidiaries.
<PAGE> 9
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 30, 1998
5. Notes Payable - Related Party
Notes payable consisted of the following:
Notes payable, unsecured, with interest at varying
rates up to 12%, quarterly and semiannual interest
payments due through June 2001, at which time the
entire principal balance and unpaid interest is due, $1,150,000
subordinated to the Line. The notes are convertible
at the option of the holder, into 240,555 common
shares at prices from $5.00 to $6.00 per share.
Note 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 200,000
at the option of the holder, into 24,242 common
shares at $8.25 per share.
Notes payable, unsecured, interest at 12%, principal
and interest due through May 1999. 265,041
Note payable, unsecured, interest at 12%, quarterly
interest due through August 1999, at which time the 17,554
entire principal balance is due.
------------
$1,632,595
============
6. Comprehensive Income
As of April 1, 1998, the Company adopted Statement 130, Reporting
Comprehensive Income, issued by the Financial Accounting
Standards Board. Statement 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this Statement has no material impact on
the Company's net income or stockholders' equity.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Consolidated net income increased for the three month period
ended September 30, 1998 to $359,364 from $250,123 for the three
month period ended September 30, 1997. Earnings were favorably
impacted by an increase in the outstanding loan portfolio, a
reduction in loan losses compared with last year and a marginal
improvement in the cost of funds. The Company's NDS subsidiary
did not contribute significantly to consolidated operations in
the three month periods ended September 30, 1998 or 1997.
Consolidated net income increased for the six month period
ended September 30, 1998 to $619,588 from $466,669 for the six
month period ended September 30, 1997. Earnings were favorably
impacted by an increase in the outstanding loan portfolio, a
reduction in loan losses compared with last year and a marginal
improvement in the cost of funds. The Company's NDS subsidiary
did not contribute significantly to consolidated operations in
the six month periods ended September 30, 1998 or 1997.
<TABLE>
Three Months Ended Six Months Ended
September 30 September 30
1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Average Net Finance
Receivables(1) $42,353,786 $32,879,182 $41,568,105 $32,299,376
Average Indebtedness(2) 27,299,143 21,122,189 26,660,699 20,700,022
Total Revenues 2,382,605 1,847,121 4,460,692 3,538,929
Interest Expense 635,580 500,954 1,238,643 1,000,188
--------------------------------------------------
Net Interest Income 1,747,025 1,346,167 3,222,049 2,538,741
Gross Portfolio Yield(3) 22.50% 22.47% 21.46% 21.91%
Average Cost of
Borrowed Funds(2) 9.31% 9.49% 9.29% 9.66%
--------------------------------------------------
Net Interest Spread(4) 13.19% 12.98% 12.17% 12.25%
Net Portfolio Yield(3) 16.50% 16.38% 15.50% 15.72%
Write-off to Liquidation(5) 6.91% 10.98% 6.97% 10.30%
Net Charge-Off Percentage(6) 5.78% 10.13% 5.87% 9.36%
</TABLE>
(1) Average net finance receivables represents the average of
net finance receivables throughout the period. Net
finance receivables represents gross finance receivables
less any unearned finance charges related to those
receivables.
(2) Average indebtedness represents the average outstanding
borrowings under the Line of Credit and notes payable-
related party. Average cost of borrowed funds represents
interest expense as a percentage of average indebtedness.
(3) Gross portfolio yield represents total revenues as a
percentage of average finance receivables. Net portfolio
yield represents net interest income as a percentage of
average finance receivables.
(4) Net interest spread represents the gross portfolio yield
less the average cost of borrowed funds.
(5) Liquidation is defined as beginning receivable balance plus
current period purchases minus voids and refinances minus
ending receivable balance.
(6) Net charge-off percentage represents net charge-offs divided
by average net finance receivables outstanding during the
period.
<PAGE> 11
Three months ended September 30, 1998 compared to three months
ended September 30, 1997
Interest Income and Loan Portfolio
Interest revenue increased 29% to $2.4 million for the
period ended September 30, 1998, from $1.8 million for the period
ended September 30, 1997. The net finance receivable balance
totaled $35.4 million at September 30, 1998, an increase of 25%
from the $28.5 million at September 30, 1997. The gross finance
receivable balance increased 30% to $56.1 million at September
30, 1998 from $43.0 million at September 30, 1997. The primary
reason interest revenue increased was the increase in the
outstanding loan portfolio. The gross portfolio yield increased
from 22.47% for the period ended September 30, 1997 to 22.50% for
the period ended September 30, 1998. The primary reason that net
finance receivables increased was the opening of two additional
offices.
Computer Software Business
Sales for the period ended September 30, 1998 were $107,536
compared to $112,259 for the period ended September 30, 1997, a
decrease of 5%. This decrease was primarily due to a decrease in
new installations during the period ended September 30, 1998.
Operating Expenses
Operating expenses, excluding provision for credit losses
and interest expense, increased to $1,093,426 for the period
ended September 30, 1998 from $902,574 for the period ended
September 30, 1997. This increase of 21% was primarily
attributable to the opening of additional branches which
included additional staffing costs, depreciation and related
expenses.
Interest Expense
Interest expense increased to $635,580 for the period ended
September 30, 1998 as compared to $500,954 for the period ended
September 30, 1997. This increase was due to an increase in
average outstanding borrowings from $21.1 million to $27.3
million during the comparable periods. The impact of this
increase was offset, in part by a decrease in the average cost of
funds borrowed from 9.49% for the period ended September 30, 1997
to 9.31% for the period ended September 30, 1998 .
<PAGE> 12
Six months ended September 30, 1998 compared to six months ended
September 30, 1997
Interest Income and Loan Portfolio
Interest revenue increased 26% to $4.5 million for the
period ended September 30, 1998, from $3.5 million for the period
ended September 30, 1997. The net finance receivable balance
totaled $35.4 million at September 30, 1998, an increase of 25%
from the $28.5 million at September 30, 1997. The gross finance
receivable balance increased 30% to $56.1 million at September
30, 1998 from $43.0 million at September 30, 1997. The primary
reason interest revenue increased was the increase in the
outstanding loan portfolio. The gross portfolio yield decreased
from 21.91% for the period ended September 30, 1997 to 21.46% for
the period ended September 30, 1998. The Company has purchased
contracts secured by relatively newer used vehicles and such
contracts command a lower stated APR than the historical average
of contracts purchased by the Company. The primary reason that
net finance receivables increased was the opening of two
additional offices.
Computer Software Business
Sales for the period ended September 30, 1998 were $217,329
compared to $221,740 for the period ended September 30, 1997, a
decrease of 2%. This decrease was primarily due to a decrease in
new installations during the period ended September 30, 1998.
Operating Expenses
Operating expenses, excluding provision for credit losses
and interest expense, increased to $2,070,299 for the period
ended September 30, 1998 from $1,716,256 for the period ended
September 30, 1997. This increase of 21% was primarily
attributable to the opening of additional branches which included
additional staffing costs, depreciation and related expenses.
.
Interest Expense
Interest expense increased to $1,238,643 for the period
ended September 30, 1998 as compared to $1,000,188 for the period
ended September 30, 1997. This increase was due to an increase in
average outstanding borrowings from $20.7 million to $26.7
million during the comparable periods. The impact of this
increase was offset, in part by a decrease in the average cost
of funds borrowed from 9.66% for the period ended September 30,
1997 to 9.29% for the period ended September 30, 1998 .
<PAGE> 13
Analysis of Credit Losses
Because of the nature of the borrowers under the Contracts and
its direct consumer loan program, the Company considers the
establishment of adequate reserves for credit losses to be
imperative. The Company batches its Contracts into pools for
purposes of establishing reserves for losses. Each such pool
consists of the loans processed by a Company branch office during
a fiscal quarter. The average pool consists of 67 Contracts with
an aggregate initial principal amount of approximately $536,000.
As of September 30, 1998, the Company had 181 active pools.
The Company pools Contracts according to branch locations,
which are located in the States of Florida and Georgia. Pooling
by branch and quarter allows the Company to evaluate the
different markets where the branches operate. The pools allow
the Company to evaluate the performance of the branch personnel,
who are given the responsibility at the branch level to
underwrite and service their loan portfolio.
A pool retains an amount equal to 100% of the discount as 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 established
at inception is exhausted for a pool which is not fully
liquidated, then a charge to income will be used to reestablish
the reserves. If a pool is fully liquidated and has any
remaining reserves, the excess reserves are recognized as income.
In analyzing a pool, the Company considers the performance of
prior pools originated by the branch office, the performance of
prior Contracts purchased from the dealers whose Contracts are
included in the current pool, the credit rating of the borrowers
under the Contracts in the pool, and current market and economic
conditions. Each pool is analyzed monthly to determine if the
loss reserves are adequate, and adjustments are made if they are
determined to be necessary. As of September 30, 1998, the
Company had established reserves for losses on Contracts of
$7,490,674 or 17.89% of net outstanding receivables.
Because of the small number of direct consumer loans currently
outstanding, a reserve for losses is established at the time the
loan is made. As of September 30, 1998, the Company had
established reserves for losses on direct loans of $59,472 or 5%
of net outstanding receivables. When the volume of such loans
increases, the Company intends to utilize a pooling arrangement
similar to that used in connection with Contracts in establishing
reserves. As of September 30, 1998, the Company had not
experienced material losses under its direct consumer loan
program.
The provision for credit losses was $175,812 for the three
month period ended September 30, 1998 and $360,269 for the six
month period ended September 30, 1998 as compared to $148,103 for
the three month period ended September 30, 1997 and $280,425 for
the six month period ended September 30, 1997. This increase was
due primarily to the 25% increase in the net finance receivable
balance as of September 30, 1998 compared to September 30, 1997.
<PAGE> 14
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>
Six Months Ended Six Months Ended
September 30, 1998 September 30, 1997
-------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Contracts
Gross Balance Outstanding $54,773,697 $42,020,250
Dollar Dollar
Delinquencies Amount Percent* Amount Percent*
---------- ---------- --------- ---------
30 to 59 days $2,015,260 3.68% $2,004,205 4.77%
60 to 89 days 480,941 0.88% 460,944 1.10%
90 + days 346,103 0.63% 133,926 0.32%
---------- ------- ---------- -------
Total Delinquencies $2,842,304 $2,599,075
*Total Delinquencies as
percent of outstanding balance 5.19% 6.19%
Direct Loans
Net Balance Outstanding $1,142,054 $839,689
Delinquencies
30 to 59 days $5,515 0.48% $3,542 0.42%
60 to 89 days 2,770 0.24% 3,691 0.44%
90 + days 1,940 0.17% 1,903 0.23%
--------- ------ ------- ------
Total Delinquencies $10,225 $9,136
*Total Delinquencies as a
percent of outstanding balance 0.89% 1.09%
</TABLE>
Income Taxes
The Company's effective tax rate remained relatively consistent
at 38.60% and 38.58% for the three and six months ended September
30, 1998, as compared to 38.66% and 38.90% for the three and six
months ended September 30, 1997, respectively.
<PAGE> 15
Liquidity and Capital Resources
The Company's cash flows for the six months ended September 30,
1998 and September 30, 1997 are summarized as follows:
Six months ended Six months ended
September 30, September 30,
1998 1997
---------------- ----------------
Cash provided by (used in):
Operating Activities - $ 423,186 $ 635,188
Investing Activities -
(primarily purchase
of Contracts) (3,438,424) (2,918,508)
Financing Activities 2,874,955 2,269,284
------------ -----------
Net (decrease) in cash (140,283) (14,036)
The Company's primary use of working capital during the six
months ended September 30, 1998 was the funding of the purchase
of Contracts. The Contracts were financed substantially through
borrowings on the Company's Line of credit. The line of credit is
secured primarily by Contracts, and available borrowings are
based on a percentage of qualifying Contracts. On September 18,
1998 the Company increased its line of credit to $35 million and
also extended the maturity date to June 3, 2001. As of September
30, 1998 the Company had approximately $8.8 million available
under the line of credit. Since inception, the Company has also
funded a portion of its working capital needs through cash flows
from operating activities.
The self-liquidating nature of installment Contracts and
other loans enables the Company to assume a higher debt-to-equity
ratio than in most businesses. The amount of debt the Company
incurs from time to time under these financing mechanisms depends
on the Company's need for cash and it's ability to borrow under
the terms of its line of credit. The Company believes that
borrowings available under the line of credit as well as cash
flow from operations and, if necessary, the issuance of
additional subordinated debt and, or the sale of additional
securities in the capital markets or both.
Future Expansion
The Company currently operates fourteen branch locations,
twelve in the State of Florida and two in the State of Georgia.
Each Florida Branch office is licensed with the State to acquire
indirect installment sales finance contracts and to originate
direct consumer loans. To date the Georgia branch offices do not
purchase direct consumer loans. Each office is budgeted {size of
branch, number of employees and location} to handle up to 1,000
accounts and up to $7,500,000 in outstanding receivables. To date
none of our branches have reached this capacity.
The Company intends to continue its expansion through the
purchase of additional Contracts and the expansion of its direct
consumer loan program. As the branches continue to add customers,
the size of the loan portfolio will continue to grow. With the
added volume in each branch and as the company adds new branches,
it will be necessary for the Company to increase the size of its
Line of Credit, either with BankAmerica or another lender.
The Company believes that opportunity for growth continues to
exist in the States of Florida and Georgia and for the
foreseeable future intends generally to concentrate its expansion
activities in these States. The Company has identified Pensacola,
and Macon, Georgia as areas where it may open additional branch
offices during fiscal 1999.
<PAGE> 16
Impact of Year 2000
The year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the
applicable year. Any of the Company's computer programs or
hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year
2000. This could result in 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 business activities.
The Company's plan to resolve the Year 2000 Issue involves the
following four phases: assessment, remediation, testing, and
implementation. To date, the Company has fully completed its
assessment of all systems that could be significantly affected by
the Year 2000. The completed assessment indicated that some of
the Company's significant information technology systems could be
affected including the Company's internally developed proprietary
accounting application software which is the integral component
of the Financial subsidiary's data processing systems and the
Company's commercial application software which is sold through
the Company's software subsidiary "NDS". In addition the Company
has identified Year 2000 deficiencies within its report-writer
which the Company utilizes to produce most of its internal
accounting and operational reports.
Based on recent assessments the Company determined that it will
be required to modify or replace significant portions of its
software and certain hardware so that those systems will properly
utilize dates beyond December 31, 1999. The Company presently
believes that with modifications or replacements of existing
software and certain hardware, the Year 2000 Issue can be
mitigated. However, if such modifications and replacements are
not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
For its information technology exposures, to date the Company
is 75% complete on the remediation phase and expects to complete
software reprogramming and replacement no later than December 31,
1998. Once software is reprogrammed or replaced for a system, the
Company begins testing and implementation. To date the Company
has completed 50% of its testing and has implemented 25% of its
remediated systems. Completion of the testing phase for all
significant systems is expected by March 31, 1999, with all
remediated systems fully tested and implemented by June 30, 1999,
with 100% completion targeted for September 30, 1999.
The remediation of operating equipment is not a Year 2000 issue
with the Company because it has no operating equipment that would
be affected, therefore no testing is required.
The Company has queried its significant suppliers and vendors
that do not share information systems with the Company. To date,
the Company is not aware of any external agent with a Year 2000
issue that would materially impact the Company's results of
operations, liquidity, or capital resources. However, the Company
has no means of ensuring that external agents will be Year 2000
ready. The inability of external agents to complete their Year
2000 resolution process in a timely fashion could materially
impact the Company. The effect of non-compliance by external
agents is not determinable.
The Company will utilize both internal and external resources
to reprogram, or replace, test, and implement the software and
operating equipment for Year 2000 modifications. The total cost
of the Year 2000 project is estimated at $100,000 and is being
funded through operating cash flows. To date, the Company has
incurred approximately $60,000 related to all phases of the Year
2000 project. Of the total remaining project costs, approximately
$15,000 is attributable to the purchase of new software and
operating equipment, which will be capitalized. The remaining
$25,000 relates to repair of hardware and software and will be
expensed as incurred.
Management of the Company believes it has an effective program
in place to resolve the Year 2000 issue in a timely manner. As
noted above, the Company has not yet completed all necessary
phases of the Year 2000 program. In the event that the Company
does not complete any additional phases, the Company might be
unable to invoice customers, collect payments or produce all the
necessary reports to operate effectively. In addition,
disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the Company. The
Company could be subject to litigation for computer systems
record failure. The amount of potential liability and lost
revenue cannot be reasonably estimated at this time.
The Company currently has no contingency plan in place in the
event it does not complete all phases of the Year 2000 program.
The Company plans to evaluate the status of completion in March
1999 and determine whether such a plan is necessary.
<PAGE> 17
Forward-Looking Information
This 10-QSB contains various forward-looking statements and
information that are based on management's beliefs and
assumptions, as well as information currently available to
management. When used in this document, the words "anticipate",
"estimate", "expect", and similar expressions are intended to
identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may
vary materially from those anticipated, estimated or expected.
Among the key factors that may have a direct bearing on the
Company's operating results are fluctuations in the economy, the
degree and nature of competition, demand for consumer financing
in the markets served by the Company, the Company's products and
services, increases in the default rates experienced on
Contracts, adverse regulatory changes in the Company's existing
and future markets, the Company's ability to expand its business,
including its ability to complete acquisitions and integrate the
operations of acquired businesses, to recruit and retain
qualified employees, to expand into new markets and to maintain
profit margins in the face of increased pricing competition.
<PAGE> 18
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security
Holders - None
Item 5. Other Information - None
Item 6. (a) Exhibits - See exhibit index following the
signature page.
(b) Reports on Form 8-K - On September 23,1998
the Company filed Form 8-K in connection
with the signing of amendment #8 dated
September 18, 1998 to it's Security and
Loan Agreement dated March 31, 1993.
<PAGE> 19
SIGNATURES
In accordance with the requirements of the Securities Act of
1934, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
10-QSB and authorized this Report to be signed on its behalf by
the undersigned, in the City of Clearwater, State of Florida, on
November 13, 1998.
NICHOLAS FINANCIAL, INC.
(Registrant)
Date: November 13, 1998 /s/ Peter L. Vosotas
-----------------------------
Peter L. Vosotas
Chairman, President,
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 1998 /s/ Ralph T. Finkenbrink
----------------------------
Ralph T. Finkenbrink
(Principal Financial Officer
and Accounting Officer)
<PAGE> 20
EXHIBIT INDEX
Exhibit Document
none
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary information extracted from the condensed
consolidated balance sheet at September 30, 1998, and the condensed
consolidated statements of income for the 3 and 6 months ended
September 30, 1998 and 1997. Both are qualified in their entirety by
reference to such.
</LEGEND>
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998 MAR-31-1999 MAR-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1997 SEP-30-1998 SEP-30-1997
<CASH> 163,677 0 0 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 35,442,748 0 0 0
<ALLOWANCES> 7,550,146 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 0 0 0 0
<PP&E> 676,101 0 0 0
<DEPRECIATION> 447,199 0 0 0
<TOTAL-ASSETS> 37,393,611 0 0 0
<CURRENT-LIABILITIES> 29,798,196 0 0 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 3,740,069 0 0 0
<OTHER-SE> 3,855,346 0 0 0
<TOTAL-LIABILITY-AND-EQUITY>37,393,611 0 0 0
<SALES> 107,536 112,259 217,329 221,740
<TOTAL-REVENUES> 2,490,141 1,959,380 4,678,021 3,760,669
<CGS> 22,976 23,259 45,677 44,636
<TOTAL-COSTS> 1,064,475 874,074 2,015,897 1,662,256
<OTHER-EXPENSES> 28,951 28,500 54,402 54,000
<LOSS-PROVISION> 175,812 148,103 360,269 280,425
<INTEREST-EXPENSE> 635,580 500,954 1,238,643 1,000,188
<INCOME-PRETAX> 585,323 407,749 1,008,810 763,800
<INCOME-TAX> 225,959 157,626 389,222 297,131
<INCOME-CONTINUING> 359,364 250,123 619,588 466,669
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 359,364 250,123 619,588 466,669
<EPS-PRIMARY> .15 .11 .26 .20
<EPS-DILUTED> .15 .11 .26 .20
<FN>
<F1> Receivables are presented net of unearned finance charges, non-refundable
dealer reserve and allowance for doubtful accounts.
<F2> Allowances are presented and total reserves for credit losses, comprised
of non-refundable dealer reserve and allowances for doubtful accounts.
</TABLE>
