-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RiuDoATJZJrZ59+9bQjXVmwFdi94nRpdrDupsCbcOL5Tpp6v42ewuqRNWiApYL0a /bHJUutIV4UOAoMT6V+cIQ== 0001000045-96-000003.txt : 19980318 0001000045-96-000003.hdr.sgml : 19980318 ACCESSION NUMBER: 0001000045-96-000003 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960626 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NICHOLAS FINANCIAL INC CENTRAL INDEX KEY: 0001000045 STANDARD INDUSTRIAL CLASSIFICATION: 6153 IRS NUMBER: 87363354 STATE OF INCORPORATION: FL FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-26680 FILM NUMBER: 96585887 BUSINESS ADDRESS: STREET 1: 2454 MCMILLEN BOOTH RD STREET 2: BLDG C CITY: CLEARWATER STATE: FL ZIP: 34619 BUSINESS PHONE: 8137260763 MAIL ADDRESS: STREET 1: 2454 MCMULLEN BOOTH ROAD STREET 2: BLDG C SUITE 501B CITY: CLEARWATER STATE: FL ZIP: 34619 10KSB 1 NICHOLAS FINANCIAL INC. FORM 10-KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB (MARK ONE) /X/ Annual report under Section 13 or 15(d) of the Securities Act of 1934 (Fee required) For the fiscal year ended March 31, 1996 / / Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required) For the transition period from ________ to _________. Commission file number: 0-26680 Nicholas Financial, Inc. (Name of Small Business Issuer in its Charter) British Columbia, Canada 8736-3354 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization Identification No.) 2454 McMullen Booth Road, Building C Clearwater, Florida 34619 (Address of Principal Executive Offices) (Zip Code) (813) 726-0763 (Issuer's Telephone Number, Including Area Code) Securities registered under Section 12(b) of the Exchange Act: Name of Each Exchange Title of Each Class on Which Registered - - - - -------------------------- --------------------- - - - - -------------------------- --------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock (Title of Class) Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 'X' No This Form 10-KSB consists of XX pages. Exhibits are indexed at page XX. 2 PART I Item 1. Business General Nicholas Financial, Inc. ("Nicholas Financial-Canada") is a Canadian holding company incorporated under the laws of British Columbia. The business activities of Nicholas Financial-Canada are conducted through its wholly-owned subsidiaries formed pursuant to the laws of the State of Florida, Nicholas Financial, Inc. ("Nicholas Financial") and Nicholas Data Services, Inc., ("NDS"). Nicholas Financial is a specialized consumer finance company engaged primarily in acquiring and servicing installment contracts for purchases of used automobiles and light trucks. NDS is engaged in designing, developing, marketing and support of industry specific computer application software for small businesses located primarily in the Southeast United States. Nicholas Financial's financing activities accounted for approximately 90.3% of consolidated revenues for the fiscal year ended March 31, 1996 and NDS's activities accounted for approximately 9.7% of such revenues. Nicholas Financial-Canada, Nicholas Financial and NDS are hereafter collectively referred to as the "Company". Unless otherwise specified, all financial information herein is designated in United States currency. The Company's principal executive offices are located at 2454 McMullen Booth Road, Building C, Clearwater Florida 34619, and its telephone number is (813) 726-0763. Background NDS was formed pursuant to the laws of the State of Florida on March 18, 1985 to engage in the design, development and marketing of computer software programs. On July 28, 1986 Nicholas Data Services, Ltd. was incorporated as a Limited Company pursuant to the laws of British Columbia, Canada. Concurrent with the formation of Nicholas Data Services, Ltd. the shareholders of NDS exchanged all their stock in NDS for shares of stock in Nicholas Data Services, Ltd. and NDS became a wholly-owned subsidiary of Nicholas Data Services, Ltd. On July 20, 1993, Nicholas Data Services, Ltd. changed its name to Nicholas Financial, Inc. in order to reflect the shift in primary focus of its business operations from a software company to a financial services company. On July 23, 1990 Nicholas Financial was formed pursuant to the laws of the State of Florida. From inception through July 1990, the Company was engaged exclusively in designing, developing and marketing computer software programs. Since July 1990, the primary focus of the Company's business has been the purchasing and servicing of installment sales contracts for used automobiles and light trucks. The decision to change the focus of the Company's business was based upon management's belief that the consumer finance industry offered greater potential to the Company for growth than the computer software industry because of the intense price competition that then existed in the computer industry. Additional factors considered by management in deciding to redirect the business activities of the Company were the availability of financing sources to enable it to enter that business, the availability of personnel with experience in the finance business, and the expertise of its personnel in developing computer software applications, which enabled it to develop the accounting and other systems necessary to manage a portfolio of installment sale contracts. Since changing the focus of its business actives, revenues realized by the Company from the operations of the software business have decreased slightly. During that period, revenues from the finance business have increased from $88,546 in fiscal 1991, its first full year of operations, to $5,267,530 in the fiscal year ended March 31, 1996. 3 Automobile Finance Business The Company is engaged in the business of providing financing programs, primarily on behalf of purchasers of used cars and light trucks who meet the Company's credit standards, but who do not meet the credit standards of traditional lenders, such as banks and credit unions, because of the age of the vehicle being financed, the customer's job instability or credit history. Unlike traditional lenders who look primarily to the credit history of the borrower in making lending decisions and typically finance new automobiles, the Company is willing to purchase installment sales contracts for purchases made by borrowers who do not have a good credit history and for older model and high mileage automobiles. In making decisions regarding the purchase of a particular installment sales contract the Company considers the following factors related to the borrower, current and prior job status, history in making installment payments for automobiles, current income, general credit history, prior experience with Contracts purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the purchase price of the installment sales contract. The Company's automobile finance programs are currently conducted only in the state of Florida under the name Nicholas Financial, Inc. As of March 31, 1996 the Company had non-exclusive agreements with approximately 400 dealers in the State of Florida for the purchase of retail installment sales contracts (the "Contracts") that meet the Company's financing criteria. The dealer agreements require the dealer to originate Contracts in accordance with the Company's guidelines. From July 1990 through March 31, 1996, the Company had purchased over 7,685 Contracts with an initial principal amount aggregating approximately $48,794,000. The average initial principal amount of Contracts purchased by the Company was approximately $8,000, with an initial term of 36 months. The Contracts were purchased by the Company from automobile dealers at an average discount of approximately 12% from their initial principal amount. The obligers under the Contracts typically make down payments, in the form of cash or trade-in, ranging from 10% to 20% of the sale price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums for accident and health insurance and/or credit life insurance, is generally financed over a period of 12 to 60 months. Accident and health insurance coverage enables the borrower to make required payments under the Contract in the event the borrower becomes unable to work because of illness or accident and credit life insurance pays the borrower's obligations under the Contract upon his or her death. The annual percentage rate ("APR") is the actual cost of borrowing money, expressed in form of the annual interest rate payable by the borrower. The APR for Contracts purchased by the Company range from 18% to 30%. As of March 31, 1996, the average APR on Contracts owned by the Company was 24.83% and the average discount from the initial principal amount on Contracts purchased by the Company was 12%. The Company purchases Contracts from the automobile dealer at a negotiated price that is less than the original principal amount being financed by the purchaser of the automobile. The amount of the discount depends upon factors such as the age and value of the automobile, the credit worthiness of the purchaser and competitive conditions in the industry. Historically, the Contracts purchased by the Company have been purchased at discounts that range from 5% to 30% of the original principal amount of the Contract, with the average discount being approximately 12%. In addition to the discount, the Company charges the dealer a processing fee of $75.00 per Contract purchased. Because of competitive conditions in the industry, all Contracts purchased by the Company since April 1, 1992 have been purchased from dealers without recourse against the dealer, meaning that the Company, not the dealer, bears the risk of nonpayment by the borrower under the Contract. Prior to then, some Contracts were acquired with full recourse against the dealer for nonpayment by the borrower. As of March 31, 1996, substantially all of the Company's loan portfolio consisted of Contracts that were purchased without recourse against the dealer. Although substantially all the Contracts in the Company's loan portfolio were acquired without recourse, the dealer remains liable to the Company for liabilities arising from certain representations and warranties made by the dealer with respect to compliance with applicable federal and state laws and valid title to the vehicle. The Company purchases a Contract only after the Company and the automobile dealer arrive at a negotiated price for the Contract and the dealer has provided the Company with the requisite proof that the vehicle is properly titled, that the Company has a perfected first priority lien on the financed vehicle, that the customer has obtained the required collision insurance naming the Company as loss payee, that the installment sales contract has been fully and accurately completed and validly executed. Once the Company has received and approved all required documents, it pays the dealer for the Contract and commences servicing the Contract through maturity. The Company requires the owner of the vehicle to obtain and maintain collision insurance, naming the Company as a loss payee, in an amount not less than the value of the vehicle, with a deductible of not more than $500. The Company does not offer collision insurance. The Company offers purchasers of vehicles certain other insurance products. These products are offered on behalf of the Company by the automobile dealer, typically at the time of sale, and consist of a roadside assistance plan, mechanical breakdown protection plan, credit life insurance, credit accident and health insurance and credit property insurance. Insurance products are offered by the Company as agent for Voyager Property & Casualty Insurance Company. If the purchaser so desires, the cost of these products may be included in the amount financed under the Contract. As of March 31, 1996, less than 1% of the borrowers under Contracts in the Company's loan portfolio had elected to purchase insurance products offered by the Company. The Company is also licensed to make small direct consumer loans. Although the Company is licensed to make loans of up to $25,000, the average loan made to date by the Company has an initial principal balance of approximately $2,795. The Company does not expect the average loan size to increase significantly within the foreseeable future and does not presently intend to make loans at or near the maximum size permitted under its license. The Company offers loans primarily to borrowers under the Contracts purchased by the Company. In deciding whether or not to make a loan the Company considers the individual's credit history, job stability and income and impressions created during a personal interview with a Company loan officer. Additionally, because approximately 90% of the direct consumer loans made to date have been made to borrowers under Contracts purchased by the Company, the payment history of the borrower under the Contract is a significant factor in making the loan decision. The direct consumer loan program was implemented in April 1995 and is not currently a significant source of revenue for the Company. As of March 31, 1996 loans made by the Company pursuant to its direct consumer loan program constituted approximately 3% of the aggregate principal amount of the Company's loan portfolio. As of March 31, 1996, the average APR for direct consumer loans made by the Company was 25.29%, with the range being from 20% to 30%. In connection with its direct consumer loan program the Company also offers health and accident insurance coverage and credit life insurance to borrowers. Borrowers in approximately 95% of the 246 loan transactions closed by the Company as of March 31, 1996 had elected to purchase insurance coverage offered by the Company. The cost of this insurance is included in the amount financed by the borrower. As of March 31, 1996, approximately 97% of the aggregate outstanding principal balance of loans in the Company's loan portfolio was comprised of Contracts purchased from automobile dealers and 3% consisted of loans made pursuant to the Company's direct loan program. The Company currently typically purchases between 150 and 350 indirect contracts each month and originates between 30 and 50 direct consumer loans each month. The Company currently operates ten branch offices in Florida. These offices are located in Clearwater, Pinellas Park, Tampa, Lakeland, Orlando, Ocala, Tallahassee, Melbourne, Ft. Myers, and Ft. Lauderdale Florida. Contract purchases are approved or rejected by the branch manager at the branch location based upon criteria established by the Company. If a particular transaction does not meet the criteria established by the Company, a branch manager does not have the authority to purchase the Contract without the prior approval of home office management. Financing Sources The Company financed the acquisition of contracts with its retained earnings, cash flow from the operations, loans from investors and insiders and a line of credit with a lending institution. In March 1993, the Company expanded its financing sources by securing a $4,000,000 revolving line of credit with BA Business Credit, Inc. ("BankAmerica"). The line of credit was increased to $6 million in March 1994, $20 million in June 1994 and $25 million in May 1996. As of March 31, 1996, the Company owed approximately $2.23 Million to 12 investors who purchased notes issued by the Company. These notes bear interest at rates from 10 1/2% to 12%. In most cases, the Company's obligation to repay the note is subordinated to payment of its payment obligations under the BankAmerica line of credit. 5 Interest Rates and Revolving Line of Credit The BankAmerica line of credit is secured by finance receivables and other assets of the Company. The interest rate payable by the Company on funds drawn down under the line of credit decreases as the amount drawn down increases. For the first $10 million drawn down the interest rate is 1.75% over the base prime rate as announced and published from time to time by BankAmerica. After the amount drawn down exceeds $10 million, the interest rate on the entire amount decreases to 1.25% over the base prime rate until the amount drawn down exceeds $15 million, when the rate decreases to 1.00% over such base prime rate. In addition to interest, the Company also pays a monthly fee to BankAmerica equal to .25% of the amount available under the line of credit that has not been drawn down. As of March 31, 1996, the Company had drawn down approximately $13.1 million under the line of credit. As of that date the interest rate payable by the Company under the line of credit was 9.5%. The revolving line expires in May 1998. Private Note Offerings From April 2, 1992 through June 30, 1995, the Company has from time to time issued promissory notes in private offerings to investors (the "Notes"). The Company used the proceeds from sale of the Notes to purchase Contracts. As of March 31, 1996, the Company had issued 14 Notes to 12 investors. As of March 31, 1996, the outstanding principal balance of the Notes outstanding as of that date was $2.26 million. Six investors, who purchased Notes aggregating $821,730, were either directors of Nicholas Financial or their immediate family members. One Note for $500,000 was purchased by an individual who owns more than 5% of the outstanding shares of Common Stock. The Notes bear interest at rates ranging from 10.5% to 12%. Two of the notes are payable in quarterly installments of principal and interest. The remaining twelve notes are payable interest only in quarterly or semi-annual intervals. The entire principal balance of these notes will be due upon maturity. The Notes mature at various time from April 1996 through June 1998. In seven of the fourteen notes, the Company granted the holder the right to exchange the Note for Common Stock at prices that range from $1.75 to $2.00 per share. Underwriting Guidelines The Company's typical customer is approximately 30 years old, has a monthly gross income of approximately $1,500 and a credit history that fails to meet the lending standards of banks and credit unions. Among the credit problems experienced by the Company's customers that resulted in a poor credit history are: unpaid revolving credit card obligations; unpaid medical bills; unpaid student loans; prior bankruptcy; and evictions for nonpayment of rent. The Company believes that its customer profile is similar to that of its direct competitors. The Company uses essentially the same criteria in analyzing the purchase of a Contract as it does in analyzing a direct consumer loan. Lending decisions regarding direct consumer loans are made based upon a review of the customer's loan application, credit history, job stability, income, in-person interviews with a Company loan officer and the value of the collateral offered by the borrower to secure the loan. To date, since approximately 90% of the Company's direct loans have been made to individuals whose automobiles have been financed by the Company, the customer's payment history under the automobile installment sale agreement is a significant factor in the lending decision. The decision process with respect to the purchase of Contracts is similar, however, the customer's prior payment history with automobile loans is weighted more heavily in the decision making process and the collateral value of the automobile being financed is taken into account. After reviewing the information included in the loan application and taking the other factors into account, Company representatives categorize the borrower using traditional credit classifications of "A", indicating high credit-worthiness, through "D", indicating lower credit-worthiness. 6 In the absence of other factors, such as a favorable payment history on a Contract held by the Company, the Company generally makes direct consumer loans only to individuals rated in categories "B" or higher. Contracts are financed for individuals who fall within all four acceptable rating categories utilized, "A" through "D". Usually borrowers who fall within the two highest categories are purchasing a two to four year old, low mileage used automobile from the inventory of a new car dealer, while borrowers in the two lowest categories are purchasing an older, high mileage automobile from an independent used automobile dealer. Approximately 5% of the loans financed by the Company are with customers rated in the "A" category, 10% are rated "B", 65% are rated "C" and 20% are rated "D". Upon credit approval and the receipt of all required title and insurance documentation, the Company pays the dealer for the Contract. The Company typically purchases the Contract for a price that approximates the wholesale value of the automobile being financed. The amount the Company is willing to pay a dealer for a particular Contract depends upon the credit rating of the customer. The Company will pay more (e.g. purchase the Contract at a smaller discount from the original principal amount) for Contracts as the credit risk of the customer improves, but the amount paid to the dealer rarely exceeds the wholesale value of the vehicle. The discounts from the initial principal amount of Contracts purchased by the Company range from 5% to 30%. The Company's current established guidelines for discounts are 7.5% for borrowers rated in the "A" category, 10% for those in the "B" and the "C" categories and 20% for those in the "D" category. Purchases of Contracts at discounts that do not fall within the guidelines requires the prior approval of the Company's senior management. Approximately 25% of the Contracts that have been purchased by the Company were purchased with discounts that do not fall within the guidelines. Servicing and Monitoring of Contracts The Company requires all customers to obtain and maintain collision insurance covering damage to the vehicle. Failure to maintain insurance constitutes a default under the Contract and the Company may at its discretion, repossess the vehicle. To reduce potential loss due to insurance lapse, the Company has the legal and contractual right to force place its own collateral protection insurance policy which covers loss due to physical damage to vehicles not covered by collision insurance. The Company's Management Information Services personnel maintain a number of reports to monitor compliance by borrowers with their obligations under Contracts and direct loans made by the Company. These reports may be accessed on a real-time basis by management personnel, including branch office managers, at computer terminals located in the main office and each branch office. The reports include: delinquency aging reports, insurance due reports, customer promises reports, vehicle information reports, purchase reports, dealer analysis reports, static pool reports, and repossession reports. The delinquency report is an aging report that provides basic information regarding each account and reports accounts that are past due. The report includes information such as the account number, address of the borrower, home and work phone numbers of the borrower, original term of the Contract, number of remaining payments, outstanding balance, due dates, date of last payment, number of days past due, scheduled payment amount, amount of last payment, total past due, and special payment arrangements or agreements. Accounts that are less than 120 days matured are reported one day past due after their due date. After an account has matured more than 120 days, it does not show up on the delinquency report until it is 11 days past due, at which time a late charge is assessed. Once an account become 30 days past due, repossession proceedings are implemented unless the borrower provides the Company with an acceptable explanation for the delinquency and displays a willingness and ability to make the payment, and there is an agreed upon plan to return the account to current status. When an account is 60 days past due, the Company ceases amortization of the Contract and repossession proceedings are initiated. At 120 days delinquent, if the vehicle has not yet been repossessed, the account is written off. Once a vehicle has been repossessed, it no longer appears on the delinquency report. It then appears on the Company's repossession report and is sold, either at auction or to an automobile dealer. When an account becomes delinquent, the Company immediately contacts the borrower to determine the reason for the delinquency and to determine if arrangements for payment can appropriately be made. Once payment arrangements acceptable to the Company have been made, the information is entered in its data base and generated on a "Promises Report" which is utilized by the collection staff for account follow up. 7 The Company also generates an insurance report to monitor compliance with the insurance obligations imposed upon borrowers. This report includes the account number, name and address of the borrower, information regarding the insurance carrier, summarizes the insurance coverage, identifies the expiration date of the policy, and basic information regarding payment dates and term of the Contract. This report helps the Company in identifying borrowers whose insurance policy is up for renewal or in jeopardy of being canceled. The Company sends written notices to, and makes direct contact with, borrowers whose insurance policies are about to lapse or be canceled. If the borrower fails to provide proof of coverage within 30 days of notice, the Company has the option of purchasing insurance and adding the cost to the balance of the Contract. The Company prepares a repossession report that provides information regarding repossessed vehicles and aids the Company in disposing of repossessed vehicles. In addition to information regarding the borrower, this report provides information regarding the date of repossession, date the vehicle was sold, number of days it was held in inventory prior to sale, year and make and model of the vehicle, mileage, payoff amount on the Contract, NADA book value, black book value, suggested sale price, location of the vehicle, original dealer, and notes other information that may be helpful to the Company such as the condition of the vehicle. The Company also prepares a dealer analysis report that provides information regarding each dealer from which it purchases Contracts. This report allows the Company to analyze the volume of business done which each dealer and the terms on which it purchased Contracts from the dealer. The Company's policy is to aggressively pursue legal remedies to collect deficiencies from customers. The Company has repossessed approximately 15% of the vehicles financed under the Contracts. Delinquency notices are sent to customers and verbal requests for payment are made beginning when an account becomes 11 days delinquent. When an account becomes 30 days delinquent and the borrower has not made payment arrangements acceptable to the Company or has failed to respond to the requests for payment, a repossession request form is prepared by the responsible branch office employee for approval by the branch manager for the vicinity in which the borrower lives. Once the repossession request has been approved by the branch manager, the repossessor delivers the vehicle to an automobile dealer specified by the Company which holds it for the Company. The Company maintains relationships with several repossession firms which repossess vehicles for a fee that ranges from $100 to $250 for each vehicle repossessed. As required by Florida law, the customer is notified by certified letter that the vehicle has been repossessed and that to retain the vehicle he must make arrangements satisfactory to the Company and pay the amount owed under the Contract within ten days after delivery of the letter. The minimum requirement for return of the vehicle is payment of all past due amounts under the Contract and all expenses of repossession incurred by the Company. If satisfactory arrangements for return of the vehicle are not made within the statutory period, the Company then sends title to the vehicle to the state title transfer department which then registers the vehicle in the name of the Company. The Company then either sells the vehicle to a dealer or has it transported to an automobile auction for sale. On average, approximately 30 days lapse between the time the Company takes possession of a vehicle and the time it is sold by a dealer or at auction. During its most recent fiscal year, repossessed vehicles have been sold at prices that average approximately $1,000 less than the price paid by the Company for the Contract. When the Company determines that there is a reasonable likelihood of recovering part or all of any deficiency against the borrower under the Contract, it pursues legal remedies available to it including law suits, judgement liens and wage garnishments. Historically, the Company has recovered approximately 15% of deficiencies from such borrowers. Marketing and Advertising The Company relies on its branch managers to solicit agreements for the purchase of Contracts with automobile dealers located within a radius of 25 miles of the branch office as its sole marketing activity. The branch manager provides dealers with information regarding the Company and the general terms upon which the Company is willing to purchase Contracts. The Company presently has no plans to implement any other forms of advertising for the purchase of Contracts such as radio or newspaper advertisements. Currently, the primary method utilized by the Company in soliciting borrowers under its direct consumer loan program is direct mailings to individuals who have a good credit history under Contracts purchased by the Company. The Company intends to expand its solicitation of such loans when management believes its staff is adequately trained to evaluate credit risks associated with such loans. 8 The Used Car Industry The used car industry in the United States can be characterized as a mature but growing market. According to statistics from the National Automobile Dealers Association, in 1992 aggregate used car retail purchases by consumers totalled 22 million vehicles. These sales resulted in an aggregate in excess of $110 billion in sales, both by franchised dealers and independent used car dealers. The United States Department of Commerce reported the overall growth of used car retail purchases by consumers between the years March 1979 and 1992 to be in excess of 10% annually. The Company targets customers who earn between $15,000 - $35,000 per year. Typically, individuals with a gross annual income of less than $24,000 cannot meet the requirements of traditional lenders to finance an automobile costing over $10,000. According to information complied by the University of Florida and published in the 1994 Florida Statistical Abstract, the average per capita income of the total Florida work force was $20,857 and there were approximately 5,567,000 persons in the Florida work force. Computerized Information System The Company's operations utilize integrated computer systems developed by NDS to enhance its ability to respond to customer inquiries, to monitor the performance of its investment portfolio and the performance of individual borrowers under Contracts. All personnel are provided with instant, simultaneous access to information from a single shared database. The Company has created specialized programs to automate the tracking of loans from the point of inception. The capacity of the networking system has been expanded to include the Company's branch office locations. See the discussion under Servicing and Monitoring of Contracts for a summary of the different reports prepared by the Company. Strategy The Company intends to continue its expansion through the purchase of additional Contracts and the expansion of its direct consumer loan program. In order to increase the size of its investment portfolio of Contracts, it will be necessary for the Company to open additional branch offices and increase the size of its revolving line of credit arrangement, either with Bank of America or another lender. The Company believes that opportunity for growth continues to exist in the State of Florida and for the foreseeable future intends to concentrate its expansion activities there. The Company has identified Pensacola, Jacksonville and Boca Raton as areas in Florida in which it plans to open additional branch offices during 1996. In order to increase the size of its Gross Receivables the Company is currently negotiating with several private investors and financial institutions that specialize in equity funding. The Company believes that the addition of more equity will make it possible for the Company to continue to meet or exceed its covenants under the loan agreement with Bank of America, increase the amount of funds drawn down under its line of credit and to draw down funds under the line at a faster rate. See Interest Rates and Revolving Line of Credit for a summary of some of the financial covenants undertaken by the Company in connection with the Bank of America line of credit. The Company also intends to continue its policy of not paying dividends and using any earnings from operations to purchase Contracts or make direct consumer loans. The Company's recently implemented direct consumer loan program is directed by a manager located in its home office. The direct loan manager is responsible for training personnel located in the branch offices to solicit and close loan transactions. Currently, the Company solicits consumer loans primarily from borrowers under Contracts purchased by the Company. The Company's current direct consumer loan portfolio consists almost exclusively of loans made to either current or previous borrowers under Contracts purchased by the Company. The Company has a $2,000,000 credit facility from BankAmerica to initially fund its direct loan activities. As of March 31, 1996, $276,458 had been drawn down under that credit line. Subject to its ability to expand the size of the credit line, the Company intends to expand its solicitation of such loans when management believes its staff is adequately trained to evaluate credit risks associated with such loans. The Company contemplates that such solicitations will include advertising in local newspapers, direct mailings and telemarketing. 9 Competition The consumer finance industry is fragmented and highly competitive. There are numerous financial service companies that provide consumer credit in the markets served by the Company including banks, other consumer finance companies, and captive finance companies owned by automobile manufacturers and retailers. Many of these companies have significantly greater resources than the Company. As other lenders enter into this market, competition for the Company's target customer is expected to increase. The Company does not believe that increased competition for the purchase of Contracts will cause a reduction in the interest rate payable by the purchaser of the automobile. However, increased competition for the purchase of Contracts will enable automobile dealers to shop for the best price, thereby causing a reduction in the discount from the initial principal amount at which the Company will be able to purchase Contracts. The Company's target market consists of persons who are generally unable to obtain traditional used car financing because of their credit history, the vehicle's mileage or age. The Company has been able to expand its automobile finance business in the non-prime credit market by offering to purchase Contracts on terms that are competitive with those of other companies which purchase automobile receivables in that market segment. Because of the daily contact that many of its employees have with automobile dealers located throughout the market areas served by it, the Company is generally aware of the terms upon which its competitors are offering to purchase Contracts. The Company's policy is to modify its terms if necessary to remain competitive. The Company continues to analyze new lending programs and marketing methods which may be implemented with the objective of increasing its market share, including the possibility of offering to purchase portfolios of seasoned Contracts from dealers in bulk transactions from $50,000 to $750,000. The Company's ability to compete effectively with other companies offering similar financing arrangements depends upon maintaining close business relationships with dealers of used motor vehicles. No single dealer out of the approximately 400 dealers that the Company has contractual relationships with accounted for over 5% of its business volume in the past year. Regulation The Company's financing and insurance operations are subject to regulation, supervision and licensing under various federal, state and local statutes and ordinances. Additionally, the procedures that must be followed by the Company in connection with the repossession of vehicles securing Contracts are regulated by the State of Florida. To date, the Company's operations have been conducted exclusively in the State of Florida, accordingly, the laws of the State of Florida as well as applicable federal laws, govern the Company's operations. Compliance with existing laws and regulations applicable to the Company has not had a material adverse effect on the Company's operations. Management believes that it maintains all requisite licenses and permits and is in substantial compliance with all applicable local, state and federal regulations. The Company has been issued a Retail Installment Seller's License and a Sales Finance Company License by the Florida Department of Banking and Finance. Pursuant to regulations of the State of Florida governing the Company's financing business activities, the Department of Banking and Finance conducts a review of the Company's activities, at least annually, to monitor compliance with the applicable regulations. The regulations govern, among other matters, licensure requirements, requirements for maintenance of proper records, payment of required fees to the State of Florida, maximum interest rates that may be charged on loans to finance used vehicles, and proper disclosure to customers regarding financing terms. Computer Software Business Since it's formation in 1985 Nicholas Data Services, Inc. ("NDS") has been engaged in the design, development and marketing of industry specific accounting software and technical services to small businesses, primarily in the Southeast United States. Its principal product is ROUTEMAN, a receivables account tracking and scheduling 10 software program that is currently installed in over 600 pest control and service related companies. The software packages that have been developed by NDS are available in Unix, Xenix, Novell and DOS versions. The Company has not sought patent or trademark protection for its products. The Company decided to redirect its business activities to consumer finance in July 1990 and no longer actively markets any computer software products and does not seek to expand this line of business, although the Company continues to service existing NDS customers. As of March 31, 1996, the operations of NDS accounted for 9.7% of the combined revenues of the Company. Because the Company does not intend to expand its software operations, it does not monitor competition; however, the Company is aware of a number of competitors that offer competitive products and services as their primary business. Management believes that NDS and its software and hardware design expertise is integral to the financing activities of the Company. All of the financial application software used in the Company's consumer finance business is designed and maintained by NDS. All of the computer systems and telecommunication systems linking the branch offices were designed, configured, installed and are maintained by the NDS staff engineers. NDS will continue to support its customer base while servicing the requirements of the Company's financing activities. Employees The Company's executive management and various support functions are centralized at the Company's corporate headquarters in Clearwater, Florida. As of March 31, 1996 the Company employed a total of 41 persons, five of whom work for NDS and 36 of whom work in the finance activities. The Company provides health and life insurance, long-term disability insurance, dental insurance, employee stock options and a 401(k) plan for all employees. No employees are covered by a collective bargaining agreement and the Company believes it has good relations with its employees. Item 2. Properties The Company rents its home office and branch office facilities. Its home office, located at 2454 McMullen Booth Road, Building C in Clearwater, Florida, consists of approximately 4,500 square feet. The Company occupies the space pursuant to a lease that commenced on July 1, 1995 and expires on June 30, 1999. The lease provides for certain rent abatements during the first year. During the first year rent is payable at a rate of $2,182 per month. In the second year, the monthly rate is $4,251, with annual increases of approximately 2.25% in each subsequent year of the lease. In the opinion of management, the current home office space is adequate to meet the needs of the Company for the foreseeable future. The Company's branch offices all consist of approximately 1,000 square feet and are located in shopping centers or strip malls. These offices are occupied pursuant to leases with an initial term of from one to three years at annual rates ranging from $6 to $11 per square foot. Item 3. Legal Proceedings The Company is not a party to any material pending legal proceedings other than ordinary routine litigation incidental to its business none of which, in the opinion of management, will have a material effect on the Company's financial position or results of operations. Item 4. Submission of Matters to a Vote of Security Holders None 11 PART II Item 5. Market for Common Equity and Related Stockholder Matters The Company's common stock has been listed for trading on the Vancouver Stock Exchange since 1987 under the symbol "NFC.U" it is also traded on the OTC Bulletin Board under the symbol "NCFNF". The Company is authorized to issue 20,000,000 shares of Common Stock, no par value, and 5,000,000 shares of Preferred Stock. Each share of Common Stock is entitled to one vote at all meetings of shareholders. All shares of Common Stock are equal to each other with respect to liquidation rights and dividend rights. In the event of liquidation, dissolution or winding up of the Company, holders of the Common Stock will be entitled to receive on a pro rata basis all assets of the Company remaining after satisfaction of all liabilities. There are no preemptive rights to purchase additional shares of Common Stock. Holders of Common Stock are entitled to receive dividends if and when declared by the Board of Directors out of funds legally available therefor. It has been the Company's policy to retain earnings to finance the growth of its business. Accordingly, the Company has not issued a cash dividend and has no plans to do so in the near future. As of March 31, 1996 the Company had not issued, and had no plans to issue, any shares of its Preferred Stock. The Preferred Stock may be issued in series with each series having such rights as to dividends and liquidation as determined by the Company's Board of Directors. The following table reflects the high and low prices for the Company's common stock during the periods indicated as reported on the Vancouver Stock Exchange. Price Range of Common Stock*
High Low Year ended March 31, 1996 Cdn U.S. Cdn U.S. First Quarter ........... $2.25 $1.65 $2.06 $1.50 Second Quarter........... $3.36 $2.50 $2.69 $2.00 Third Quarter............ $3.55 $2.60 $2.93 $2.15 Fourth Quarter........... $3.30 $2.42 $2.39 $1.75
High Low Year ended March 31, 1995 Cdn U.S. Cdn U.S. First Quarter ........... $2.20 $1.57 $1.80 $1.28 Second Quarter........... $3.05 $2.17 $1.81 $1.28 Third Quarter............ $2.80 $1.99 $2.15 $1.53 Fourth Quarter........... $2.20 $1.57 $1.65 $1.17 - - - - ----------------- * As reported on the Vancouver Stock Exchange. These prices have been converted from Canadian to U.S. Dollars at an exchange rate in effect on the date that the price disclosed was reported on the Vancouver Stock Exchange. Presently the U.S. market dominates the trading activity in the Company's shares.
As of March 31, 1996 there were approximately 438 stockholders of record of the Company's Common Stock. The Company's stock became publicly traded in September 1987 when it issued shares listed on the Vancouver Stock Exchange to the public. At that time, virtually all of the 3,208,335 issued and outstanding shares were owned by US shareholders who exchanged their shares in 12 Nicholas Data Services, Inc. (Florida) for shares in NDS Limited (Canada). The Company issued 850,000 shares to the public at that time and sold them to several hundred Canadian citizens as well as less than 100 US citizens. Today there are approximately 5,800,000 shares outstanding, of which employees, directors, and officers of the Company own in excess of 3,000,000. There are currently approximately 400 US shareholders who own an aggregate of approximately 5,000,000 shares. It has been the Company's policy to retain earnings to finance the growth of its business. Accordingly, the Company has not issued a cash dividend and has no plans to do so in the near future. The Company will reassess its cash dividend policy from time to time and may issue cash dividends in the future if circumstances warrant. No cash dividends were declared for the fiscal years ended March 31, 1996 and 1995. Outstanding Options and Warrants and Conversion Rights As of March 31, 1996, the Company had granted options to purchase an aggregate of 384,500 shares of Common Stock to 34 employees, officers, and directors. These options are exercisable at prices ranging from Cdn. $.48 per share to Cdn.$3.23 per share. The options expire at various times from April 1996 through September 2000. The Company currently has two warrants outstanding. Mr. Vosotas holds a warrant pursuant to which he has the right to purchase 1,000,000 shares of Common Stock at a price of Cdn $2.55. per share at any time prior to June 3, 1999. The other warrant issued May 12, 1995 for 53,571 shares of Common Stock, is held by Stephen G. Blume. Pursuant to that warrant, Mr. Blume may purchase Common Stock at a price of Cdn. $2.27 per share prior to May 12, 1997. As of March 31, 1996, neither Mr. Vosotas nor Mr. Blume had purchased any shares pursuant to their warrants. Six individuals have the right to convert their Notes into Common Stock at a price of $2.00 per share and one individual has the right to convert his note into Common stock at $1.75 per share. These rights expire upon the maturity date of the respective Notes, from November 1997 through June 1998. Item 6. Management's Discussion and Analysis of Condition and Results of Operations Overview Consolidated Net income increased in fiscal year ending March 31, 1996 to $662,151 or $.11 per share from $623,595 or $.10 per share in fiscal year ending March 31, 1995. Earnings for the year were favorably impacted by the strong contribution of Nicholas Financial Inc. which accounted for over 90% of the consolidated revenues and 100% of the profits. In fiscal year 1995 the Company adopted a change in accounting principle that resulted in a cumulative effect of $71,218, or $.01 per share. This change was made following a determination by the Company that a more appropriate method of accounting for the discount at which the Company purchases Contracts from automobile dealers is to record all or a portion of the discount as an allowance for losses against the unpaid balance of the Contract. Utilization of this method reports Contracts at their estimated net realizable value at the date of purchase by the Company and charges losses against the discount. If, at the time of purchase of a Contract, the Company determines that the amount of the discount does not provide a sufficient allowance for anticipated losses, a portion of unearned finance charges will also be added to the allowance for losses. It actual losses exceed the amount of the reserve, such losses are charged against income as incurred. If actual losses are less than the amount of the reserve, the excess amount is amortized into income as an adjustment of the interest yield. The Company believes that the change in accounting for losses more accurately reports the economic event which takes place at the time of purchase of Contracts, more accurately reflects the Company's assets and liabilities, and better matches its costs and revenues. 13 The following table sets forth certain financial data:
- - - - ---------------------------------------------------------------------- Years Ended March 31 1996 1995 - - - - ---------------------------------------------------------------------- Average Net Finance Receivables (1) 20,004,986 12,013,883 Average Indebtedness (2) 14,185,584 8,228,276 Total Revenues 5,267,530 3,514,246 Interest Expense 1,517,181 897,553 Net Interest Income 3,745,349 2,616,693 - - - - ---------------------------------------------------------------------- Gross Portfolio Yield (3) 26.33% 29.25% Average Cost of Borrowed Funds (2) 10.70% 10.91% Net Interest Spread (4) 15.63% 18.34% - - - - ---------------------------------------------------------------------- Net Portfolio Yield (3) 18.75% 21.78% - - - - ---------------------------------------------------------------------- (1) Average net finance receivables represent the average of net finance receivables throughout the year. Net finance receivables represents gross finance receivables less any unearned finance charges related to those receivables. (2) Average Indebtedness represents the average outstanding borrowings under the senior credit line, subordinated debt and notes payable. Average cost of borrowed funds represents interest expense as percentage of average indebtedness. (3) Gross portfolio yield represents total revenues as a percentage of average finance receivables. Net portfolio yield represents net interest income as a percentage of average finance receivables. (4) Net interest spread represents the gross portfolio yield less the average cost of borrowed funds.
Financial Services Nicholas Financial, Inc. is the Company's Financial Services subsidiary which operates ten branch locations and serviced a network of 400 dealers as of March 31, 1996. Nicholas Financial Inc. provides retail used car buyers a financing source where traditional sources are not readily available. Nicholas Financial Inc.'s revenue, predominantly finance charge income, increased 50% to $5,267,530, million in fiscal 1996 from $3,514,246 in fiscal 1995. The Net Finance Receivable value of Automobile Installment Notes totalled $18.3 million, an increase of 43% from $12.8 million at March 31, 1995. The Gross Finance Receivable value rose 41% to $27.8 million at March 31, 1996 from $19.7 million at March 31, 1995. Net Finance Receivables are calculated by subtracting Unearned Interest, Non- refundable Reserve and Allowance for Credit Losses from Gross Finance Receivables. Computer Software Business Nicholas Data Services, Inc. ("NDS") is engaged in the design, development and marketing of industry specific accounting software and technical services. The Company decided to redirect its business activities to consumer finance in July 1990 and no longer develops or actively markets any computer software products and does not seek to expand this line of business, although the Company continues to service existing NDS customers. In fiscal 1996, the revenues of NDS were $565,465 compared with fiscal 1995 revenues of $603,261, a decrease of 6%. Operating loss for fiscal 1996 was $20,298 compared with a loss of $13,585 for fiscal 1995. Because of its decision to redirect its activities to the finance business, the Company expects both operating revenues and income of NDS to continue to decline. 14 Operating Expenses Operating expenses excluding provision for credit losses and interest expense, increased to $2.8 million in fiscal 1996 from 2.0 million in fiscal 1995. This increase of 39% was directly attributable to the costs associated with the opening of the two new branch offices in West Central Florida along with staffing, capital equipment and related expenses. The Company has increased its work force over the last 3 years from 12 to 41 full time employees. At March 31, 1996, the company operated nine branches in Florida. In May of 1996 the Company opened it's 10th branch in Fort Lauderdale, Florida. Interest Expense Interest expense increased to $1,517,181 in fiscal 1996 as compared to $897,553 in the prior year due to an increase in average outstanding debt of $8.23 million to $14.19 million. The Company's effective average cost of borrowing decreased from 10.91% for the year ended March 31, 1995 to 10.70% for the year ended March 31, 1996. In June 1994 the Company successfully renegotiated the fixed rate portion of interest that its principal lender, BankAmerica, charges from 3% above the stated prime rate to 1.75% above such rate with the rate further reducing to 1.25% above prime when the total amount of borrowings exceeds $10 million and further decreasing to 1% above prime when the total amount borrowed under the BankAmerica revolving line of credit exceeds $15 million. The Company has met the $10 million threshold; consequently, the current interest rate being paid by the Company under that credit line is the prime rate plus 1.25%. Analysis of Credit Losses Because of the nature of the borrowers under the Contracts and its direct consumer loan program, the Company considers the establishment of adequate reserves for credit losses to be imperative. The Company batches its Contracts into pools for purposes of establishing reserves for losses. Each such pool consists of the loans processed by a Company branch office during a fiscal quarter. The average pool consists of 118 Contracts with an aggregate initial principal amount of approximately $1,120,000. As of March 31, 1996, the Company had 82 active pools. The effective APR for these pools ranges from 20% to 30% and the discount averages between 10% and 12%. Loan pools are analyzed monthly and recomputes the effective return for each pool based upon changes during the month. The company pools contracts according to branch location because the branches purchase contracts in different markets located in the State of Florida. All contracts purchased by a branch during a fiscal quarter comprise a pool. This method of pooling by branch and quarter allows the company to evaluate the different markets where the branches operate. The pools also allow the company to evaluate the different levels of customer income, stability, credit history, and the types of automobiles purchased in each market. The average pool is approximately 1,120,000 and contains an average of 118 contracts. The weighted average yield is 22.5% and the weighted average APR is 24%. The average discount on contracts purchased is between 10% - 12%. A pool, which is comprised of all Contracts purchased by a branch during each three-month period, retains an amount equal to 100% of the discount into a nonrefundable dealer reserve. In situations where the discount is determined to be insufficient to absorb all of the potential losses associated with the pool, unearned income will be added to reserves until total reserves have reached the appropriate level. If the nonrefundable reserve and the unearned revenue reserve are exhausted for a pool which is not fully liquidated , then a charge to income will be used to reestablish the reserves. If a pool is fully liquidated and has excess reserves, the excess reserves are accreted into income. In analyzing a pool, the Company considers the performance of prior pools originated by the branch office, the performance of prior Contracts purchased from the dealers whose Contracts are included in the current pool, the credit rating of the borrowers under the Contracts in the pool, and current market and economic conditions. Each pool is analyzed monthly to determine if the loss reserves are adequate and adjustments are made if they are determined to be necessary. As of March 31, 1996, the Company had established reserves for losses on Contracts of $3,074,860, or 11.05% of gross outstanding receivables under the Contracts. The historical default rate for Contracts purchased by the Company has been approximately 15% percent, i.e., 15% of the Contracts are never fully paid. The experience of the Company is that the longer the period of time during which the borrower has made payments under his Contract, the less likelihood there is of a default. Historically, approximately 60% percent of the losses experienced by the Company have occurred during the first third of the Contract terms. 15 Because of the small number of loans currently outstanding, loans made by the Company's in its direct consumer loan program are currently analyzed as made and a reserve for losses established at that time. When the volume of such loans increases, the Company intends to utilize a pooling arrangement similar to that used in connection with Contracts in establishing reserves. As of March 31, 1996, the Company had experienced immaterial losses under its direct consumer loan program; however, the program was implemented in April 1995 and these results cannot be considered representative of results that will be experienced in the future. As of March 31, 1996, the Company had established reserves for losses on direct consumer loans of $10,836, or 1.92% of gross outstanding receivables under the loans. The Company defines any account that is more than ten days past due as "delinquent." The following tables present certain information regarding the delinquency rates experienced by the Company with respect to Contracts and under its direct consumer loan program:
Year Ended Year Ended March 31, 1996 March 31, 1995 -------------------- -------------------- Contracts Net Amount Outstanding $27,250,451 $19,713,879
30 to 59 days $1,346,150 4.94% $777,623 3.94% 60 to 89 days 326,542 1.20% 60,331 0.31% 90 + days 44,746 0.16% 6,865 0.03% Total Delinquencies $1,717,438 $844,819 *Total Delinquencies as percent of outstanding balance 6.30% 4.29% Direct Loans Net Amount Outstanding $459,147 Delinquencies 30 to 59 days 321 0.07% 60 to 89 days 3,197 0.70% 90 + days 0 0.00% -------- ------- Total Delinquencies $3,519 Total Delinquencies as a % of Installment Cont. 0.77%
Income Taxes The provision for income taxes in fiscal 1996 increased 16% to $396,750 from $341,831 in fiscal 1995 as a result of higher pretax income. 16 Liquidity And Capital Resources The Company's cash flows for the years ended March 31 1996 and 1995 are summarized as follows:
March 31, March 31, 1996 1995 ------------- ------------- Cash provided by (used in): Operations $1,234,592 $1,544,685 Investing Activities - (primarily purchase of installment contracts) (6,128,516) (5,912,641) Financing activities 5,101,373 4,374,474 Net increase (decrease) 207,449 6,518
The Company's primary use of working capital during fiscal year 1996 was the funding of the purchase of Contracts. The Contracts were financed partially through borrowings on the BankAmerica line of credit. This credit line is secured primarily by Contracts and provides the Company with financing to increase the number of Contracts for its loan portfolio. Since inception, the Company has funded operations from the following sources: borrowing under the line of credit agreement with Bank of America, proceeds from the issuance of subordinated debt, funds provided from payments received under Contracts, and cash flows from operating activities. The increase in net cash flows used in investing activities during fiscal 1996 was primarily attributable to the growth in the size of the Contract portfolio owned by the Company. In May of 1996, through a series of negotiations, the Company increased its line of credit to $25,000,000 from $20,000,000. The Company was also able to increase the percentage of contracts that qualify for funding and reduce the amount of subordinated debt required by BankAmerica. The Company intends to continue opening additional branches and increase its portfolio of Contracts. In order to meet its fiscal 1997 funding needs, the Company will require additional capital resources to supplement its expected cash flows from operations. The Company is exploring several alternative financing sources in order to satisfy its ongoing needs for additional capital resources. The Company will make additional capital expenditures as it opens new branches and increases the number of employees. The capital needs of such expansion is not expected to be material. Impact of Inflation The Company is affected by inflation primarily by increased operating costs and expenses. Inflationary pressures on operating costs and expenses have been offset by the Company's continued emphasis on tight operating and cost controls and to a lesser extent by modest increases in support rates from its software subsidiary, Nicholas Data Services. The Company's strong balance sheet enabled it to negotiate favorable interest rates which minimized the impact of prime rate increases. The Company is dependent upon the line of credit arrangement with BankAmerica for the significant source of funds with which to purchase Contracts. Any increase in the interest rate payable by the Company under that line, or any replacement credit facility, would increase the costs of such borrowings with a corresponding decrease in net income. For example, if the interest rate payable on amounts outstanding under the BankAmerica line of credit on March 31, 1996 were increased by 1%, the annual interest cost to the Company would increase by approximately $130,000, before the effect of income taxes. 17 The Company believes that a downturn in the economy would increase the number of purchasers of automobiles financed with Contracts. During a modest downturn in economic activity more people will experience a reduction in income because of downsizing, fewer and smaller raises and the necessity of accepting lower paying jobs. In addition, it may be difficult for individuals who have over-extended themselves to meet their debt obligations and they may find it necessary to purchase used automobiles rather than new ones. Although the number of potential customers can be expected to increase during periods of slow economic activity, the number of defaults in payment obligations can also be expected to increase with a resulting increase in repossessions of vehicles securing Contracts. The Company is not able to predict whether or not the net effect of such a downturn would be favorable or unfavorable to the operating results of the Company, although the Company believes that a severe downturn in economic activities would have an adverse effect on its business. The maximum finance charges that may be charged the borrower in connection with the financing of a used automobile is determined by the Florida legislature and is set forth in the Florida statutes. Generally, the older the automobile, the higher the interest rate that may be charged. If the Florida legislature were to reduce the statutory interest rates that can be charged, the return realized by the Company on Contracts would be reduced unless it could offset the reduction with a corresponding reduction in funding costs (such as through the infusion of equity or a lower interest rate on its line of credit) or an increase in the discount at which it purchases Contracts. Future Expansion The Company intends to continue its expansion through the purchase of additional Contracts and the expansion of its direct consumer loan program. In order to increase the size of its investment portfolio of Contracts, it will be necessary for the Company to open additional branch offices and increase the size of its revolving line of credit arrangement, either with Bank of America or another lender. The Company is currently negotiating with several private investors and financial institutions that specialize in investing in subordinated debt. The Company believes that the addition of more debt that is subordinate to the Bank of America line of credit will make it possible for the Company to continue to meet or exceed its covenants under the loan agreement with Bank of America, increase the amount of funds drawn down under its line of credit and to draw down funds under the line at a faster rate. The Company also intends to continue its policy of not paying dividends and using any earnings from operations to purchase Contracts or make direct consumer loans. The Company believes that opportunity for growth continues to exist in the State of Florida and for the foreseeable future intends to concentrate its expansion activities there. The Company has identified Pensacola, Jacksonville and Boca Raton as areas in Florida in which it plans to open additional branch offices during 1996. Item 7. Financial Statements The following financial statements are filed as part of this report; Report of Independent Auditors . . . . . . . . . . . . . . . . F - 1 Audited Consolidated Financial Statements Consolidated Balance Sheets . . . . . . . . . . . . . . . . . F - 2 Consolidated Statements of Income and Retained Earnings . . . F - 3 Consolidated Statements of Cash Flows . . . . . . . . . . . . F - 5 Notes to the Consolidated Financial Statements . . . . . . . . F - 6 Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None. 18 PART III Item 9. Directors, Executive Officers, Promotors and Control Persons
Name Age Position Peter L. Vosotas 54 Chairman, Chief Executive Officer and President of Nicholas Financial-Canada, Nicholas Financial and NDS Raymond Cottrell 49 Director of Nicholas Financial-Canada Joseph G. Bowes 41 Director of Nicholas Financial-Canada Keith A. Bertholf 40 Director of Nicholas Financial and NDS and Secretary and Vice President-Operations of Nicholas Financial-Canada, Nicholas Financial and NDS Ralph T. Finkenbrink 35 Vice President-Finance of Nicholas Financial-Canada, Nicholas Financial and NDS Ellis P. Hyman 57 Director of Nicholas Financial and NDS Stephen Bragin 64 Director of Nicholas Financial and NDS
All directors hold office until the next annual meeting of the shareholders of the Company or until their successors have been elected and qualified. Officers serve at the discretion of the board of Directors. Additional information regarding the directors and officers is set forth below. Peter L. Vosotas is the founder of the Company and majority stockholder of Nicholas Financial-Canada. He has served as Chairman, Chief Executive Officer and President of Nicholas Financial-Canada and each subsidiary since formation. Prior to forming the Company, Mr. Vosotas held a variety of Sales and Marketing positions with Ford Motor Company, GTE and AT&T Paradyne Corporation. Mr Vosotas attended the United States Naval Academy and earned a Bachelor of Science Degree in Electrical Engineering from the University of New Hampshire. Raymond Cottrell has served as a Director of Nicholas Financial- Canada since November 1990. Since 1987, he has been a Director and President of Grey Point Capital, Inc., ERI Ventures Inc.and ICM Ventures, Inc., all located in Vancouver, British Columbia. Mr. Cottrell has been Executive Vice President of Biocoll Medical Corp.since September, 1994. He is a member of the Board of Directors of Golden Knight Resources, Inc., and Annex Ventures Inc. Joseph G. Bowes has served as a director of Nicholas Financial- Canada since June 1991. He has been a self-employed Financial Consultant in Vancouver, British Columbia since 1990. Prior to starting his consulting firm, Mr. Bowes was Vice President, Finance and Administration and Director of Achievers International, Vancouver, B.C. Mr. Bowes is a Chartered Public Accountant and received a Masters Degree in Business Administration from the University of Western Ontario. Ellis P. Hyman has served as a Director of Nicholas Financial and NDS since September 1986. Dr. Hyman has been a practicing dentist in Clearwater, Florida for over fifteen years. Stephen Bragin has served as a Director of Nicholas Financial and NDS since May 1989. Since 1993, Mr. Bragin has been Development Director, University of South Florida, Tampa, Florida. Prior to his involvement with the University, Mr Bragin was, for 36 years, a principal in a commercial citrus business based in Clearwater, Florida. He is also a director of Curlew Gardens, Clearwater Florida, and The First National Bank of Commerce, Clearwater, Florida. 19 Keith A. Bertholf has been an employee of the Company since March 1985 and held a variety of sales and marketing positions with the Company prior to his appointment as Vice President-Operations of Nicholas Financial and NDS in 1991. He has been a Director and Secretary of Nicholas Financial and NDS since 1992. Mr. Bertholf received a Bachelors Degree in Accounting from the University of Kansas. Ralph T. Finkenbrink has been employed by the Company since August 1988. Mr. Finkenbrink held the position of Controller prior to assuming his present duties in 1992. Prior to joining the Company, he was a staff accountant for MBI, Inc. from January 1984 to March 1985 and Inventory Control Manager for The Dress Barn, Inc. from March 1985 to December 1987. Mr. Finkenbrink received his Bachelor of Science Degree in Accounting from Mount St. Mary's University in Emmitsburg, Maryland. Item 10. Executive Compensation Executive Officers The following table sets forth a summary of compensation paid by the Company to its Chief Executive Officer. There are no other officers who received compensation exceeding in the aggregate $100,000.
Summary Compensation Table (stated in U.S. dollars) Securities Underlying Name and Position Year Salary Bonus Options - - - - ----------------------- ---- ------- ------- --------- Peter L. Vosotas 1996 $98,000 $21,864 100,000 Chief Executive Officer 1995 $88,000 $23,900 100,000 and Director 1994 $88,000 $25,800 100,000
Option Grants During The Most Recently Completed Fiscal Year % Of Total Market Price Options Of Securities Options Granted To Exercise Or Expiration Name of Executive Granted To All Employees Underlying Options On Date Expire Granted Officer (#) In Fiscal Year ($/SHARE) Of Grant($/SHARE) Date - - - - ----------------- ---------- -------------- ----------- ----------------- ------ Ralph Finkenbrink 20,000 41.67 $2.40 $2.40 September 8, 2000
There are no other plans in effect pursuant to which cash or non- cash compensation was paid or distributed to the executive officers during the most recent fiscal year or pursuant to which compensation is proposed to be paid or distributed in a subsequent year. The only other benefit plans offered at the present time are health and life insurance, long-term disability insurance, dental insurance, and a 401(k) plan. All of these plans are available to all full-time employees on a non-discriminatory basis. The current policy of the Company is to compensate directors who are not officers $400 for attending each director's meeting. Directors are reimbursed for related out-of-pocket expenses of attending meetings. 20 Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth certain information regarding the Common Stock owned on March 31, 1996, by (1) any person (including any "group") who is known by the Company to own beneficially more than 5% of its outstanding Common Stock, (2) each director and officer, and (3) all officers and directors as a group.
Name and Address Shares Owned Percentage - - - - ------------------------ -------------- ------------ Peter L. Vosotas 2454 McMullen Booth Road Clearwater, FL 34619 3,333,500 (1) 46.09% Keith A. Bertholf 2454 McMullen Booth Road Clearwater, FL 34619 158,800 (2) 2.20% Stephen Bragin 2454 McMullen Booth Road Clearwater, FL 34619 157,708 (3) 2.19% Dr. Ellis Hyman 2454 McMullen Booth Road Clearwater, FL 34619 255,250 (4) 4.35% Raymond Cottrell 2250-650 W. Georgia St. Vancouver, B.C., V6B-4N7 16,000 (5) * Joseph Bowes 1826 W. 63rd. Avenue Vancouver, B.C. V6P-2J1 11,000 (6) * Stephen G. Blume 6350 118th Avenue North Largo, Florida 366,984 (7) 5.07% All directors and officers as a group (6 persons) 3,932,258 (8) 54.33% * Represents less than 1% of the outstanding Common Stock. (1) Includes 100,000 shares issuable upon exercise of certain options and 1,000,000 shares issuable upon exercise of warrants exercisable within 60 days of March 31, 1996. (2) Includes 54,000 shares issuable upon exercise of certain options exercisable within 60 days of March 31, 1996. (3) Includes 90,000 shares issuable upon exercise of certain options and conversion of Notes exercisable within 60 days of March 31, 1996. (4) Includes 75,000 shares issuable upon conversion of Notes exercisable within 60 days of March 31, 1996. (5) Includes 16,000 shares issuable upon exercise of certain options exercisable within 60 days of March 31, 1996. (6) Includes 11,000 shares issuable upon exercise of certain options exercisable within 60 days of March, 1996. (7) Includes 53,571 shares issuable upon exercise of a warrant exercisable within 60 days of March 31, 1996. (8) Includes 1,346,000 shares issuable upon exercise of certain options, warrants and compensation arrangements exercisable within 60 days of March 31, 1996.
21 Item 12. Certain Relationships and Related Transactions The Company has granted Peter L. Vosotas a warrant to purchase up to 1,000,000 shares of its Common Stock in consideration for certain personal guarantees given by him in connection with the $25 million BankAmerica line of credit. Concurrent with the granting of the warrant, a previously outstanding warrant for the purchase of up to 550,000 shares of Common Stock that was granted to Mr. Vosotas in connection with the initial $4,000,000 line of credit was amended. Mr. Vosotas has the right to purchase shares of Common Stock at a price of $2.55 Cd. at any time prior to June 3, 1999. As of March 31, 1996, Mr. Vosotas had not exercised rights to purchase shares under the warrant. A family trust and several members of Mr. Vosotas's family have purchased Notes from the Company. In April 1992, the Paula J. Vosotas Family Trust purchased a $30,000 Note. The Note was replaced in September 1992 by a $50,000 Note in connection with an additional investment. This Note accrues interest at 12% per annum with all principal and accrued interest due and payable at maturity, April 2, 1996. In connection with this Note, the Company issued 3,000 shares of Common Stock to the holder. In May 1994 Paula J. Vosotas, wife of Peter L. Vosotas, loaned $150,000 to the Company. This Note bears interest at 12% per annum. Principal and interest on this Note is payable upon demand. ennifer L. Vosotas, daughter of Peter L. Vosotas, has loaned the ompany an aggregate of $20,000 beginning in December 1993. Interest n this loan accrues at the rate of 12% per annum. Principal and any accrued interest on this loan are payable upon demand. On April 16, 1992 and February 28, 1994, Stephen Bragin made two loans to the Company for $150,000 each. Both of these Notes bear interest at 12% per annum. Principal and interest on the first Note is payable in quarterly installments. Under the second Note, the Company makes semi-annual payments of interest only. Payment of the second Note is subordinated to payment of the BankAmerica line of credit. The Notes mature on April 17, 1996 and February 28, 1998, respectively. Mr. Bragin has the option of converting the second Note into Common Stock at a price of $2.00 per share. On April 20, 1992 and January 26, 1994, Dr. Ellis Hyman made two loans to the Company for $150,000 each. These Notes bear interest at 12% per annum. The Company makes payments of interest only under both of these Notes. The first Note requires interest to be paid quarterly and the second Note requires semi-annual payments. Payment of both Notes is subordinated to payment of the BankAmerica line of credit. The Notes mature on April 20, 1996 and January 26, 1998, respectively. Dr. Hyman has the option of converting the second Note into Common Stock at a price of $2.00 per share. On April 19th Dr. Hyman requested to extend the maturity date on his 1st note to April 20, 2000 and also increase the size of the note to $200,000. The Company agreed to the extension. 22 Item 13. Exhibits and Reports on Form 8-K Insert # 1 (a) Exhibits 3.1 Articles of Incorporation and By-Laws Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 4.1 Stock Certificate Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 10.1.1 Loan and Security Agreement dated March 31, 1993 between BA Business Credit, Inc. and Nicholas Financial, Inc. Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 10.1.2 Loan Modification Agreement dated January 14, 1994 Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 10.1.3 Temporary Line Increase Agreement dated Mach 28, 1994 Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 10.1.4 Second Loan Modification Agreement dated June 3, 1994 Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 10.1.5 Amendment No. 3 to Loan Agreement dated July 5, 1994 Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 10.1.6 Amendment No. 4 to Loan Agreement and Security Agreement Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 10.1.7 Fifth Loan Modification Agreement dated July 13, 1995 10.1.8 Sixth Loan Modification Agreement dated May 13, 1996 16.1 Letter on Change in Certifying Accountants Incorporated by reference to the Company's Form 10-SB. File No. 0-26680. 21.1 Registrant's Subsidiaries (b) Reports on FORM 8-K None F - 1 Report of Independent Auditors To the Board of Directors of Nicholas Financial, Inc. We have audited the accompanying consolidated balance sheets of Nicholas Financial, Inc. as of March 31, 1996 and 1995, and the related consolidated statements of income and retained earnings and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nicholas Financial, Inc. at March 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. May 13, 1996 F - 2 Nicholas Financial, Inc. Consolidated Balance Sheets
March 31 1996 1995 -------------------------- Assets Cash $490,791 $283,342 Accounts receivable 25,154 27,992 Prepaid expenses and other assets 270,700 203,492 Finance receivables, net 18,326,784 12,780,085 Property and equipment, net 180,417 186,602 Intangible assets 2,530 15,632 Deferred loan costs 19,627 21,027 Deferred income taxes 485,798 332,602 -------------------------- Total assets $19,801,801 $13,850,774 ========================== Liabilities Line of credit $13,130,365 $8,750,840 Notes payable-related party 2,226,533 1,576,089 Deferred revenues 188,894 140,538 Accounts payable 851,258 841,272 Other liabilities 28,804 176,171 Income taxes payable 122,082 112,308 -------------------------- 16,547,936 11,597,218 Shareholders' equity Preferred stock, no par: 5,000,000 shares authorized; - - none issued and outstanding Common stock, no par: 20,000,000 shares authorized; 5,838,339 and 5,774,539 shares 1,724,051 1,385,893 issued and outstanding, respectively Retained earnings 1,529,814 867,663 -------------------------- 3,253,865 2,253,556 -------------------------- Total liabilities and shareholders'equity $19,801,801 $13,850,774 ==========================
See accompanying notes. F - 3 Nicholas Financial, Inc. Consolidated Statements of Income and Retained Earnings
Year ended March 31 1996 1995 --------------------------- Revenue: Interest income on finance receivables $5,264,080 $3,514,246 Sales 565,645 601,925 Interest income on term deposits and lease receivables 3,450 2,861 --------------------------- 5,833,175 4,119,032 Expenses: Cost of sales 140,786 138,879 Marketing 216,198 245,397 Administrative 2,060,251 1,529,338 Provision for credit losses 486,440 337,732 Deferred compensation expense (recovery) 266,754 (49,361) Depreciation and amortization 86,664 125,286 Interest expense 1,517,181 897,553 --------------------------- 4,774,274 3,224,824 --------------------------- Operating income before income taxes 1,058,901 894,208 Income tax expense (benefit): Current 550,346 392,603 Deferred (153,596) (50,772) --------------------------- 396,750 341,831 --------------------------- Income before cumulative effect of a change in accounting principle 662,151 552,377 Cumulative effect of a change in accounting principle - 71,218 --------------------------- Net income 662,151 623,595 Retained earnings, beginning of year 867,663 244,068 --------------------------- Retained earnings, end of year $1,529,814 $ 867,663 ===========================
F - 4 Nicholas Financial, Inc. Consolidated Statements of Income and Retained Earnings (continued)
Year ended March 31 1996 1995 --------------------------- Earnings per common and common equivalent share: Income before cumulative effect of a change in accounting principle $.11 $.09 Cumulative effect of a change in accounting principle - .01 --------------------------- Net income $.11 $.10 =========================== Weighted average number of common and common equivalent shares 6,037,720 6,153,236 ===========================
See accompanying notes. F - 5 Nicholas Financial, Inc. Consolidated Statements of Cash Flows
Year ended March 31 1996 1995 ------------------------- Cash flows from operating activities Net income $ 662,151 $ 623,595 Adjustments to reconcile net income to net cash flows provide by operating activities: Cumulative effect of a change in accounting principle - 71,218 Depreciation of property and equipment 73,562 87,022 Provision for credit losses 486,440 337,732 Amortization of intangible assets and deferred loan costs 42,502 99,064 Deferred compensation expense (recovery) 266,754 (49,361) Deferred income taxes (153,196) (50,772) Changes in operating assets and liabilities: Accounts receivable 2,838 15,421 Prepaid expenses and other assets (67,208) (43,089) Deferred revenues 48,356 35,643 Accounts payable 9,986 428,301 Other liabilities (147,367) 74,444 Income taxes payable 9,774 (84,533) --------------------------- Net cash provided by operating activities 1,234,592 1,544,685 Investing activities Increase in finance receivables, net of principal collected (6,033,139) (5,816,538) Purchase of property and equipment (67,377) (96,103) Increase in deferred loan costs (28,000) - --------------------------- Net cash used by investing activities (6,128,516) (5,912,641) Financing activities Repayment of notes payable-related party and line of credit borrowings (5,670,031) (301,965) Proceeds from notes payable-related party and line of credit borrowings 10,700,000 4,540,000 Proceeds from sale of the Company's common stock 71,404 136,439 --------------------------- Net cash provided by financing activities 5,101,373 4,374,474 --------------------------- Net increase in cash 207,449 6,518 Cash, beginning of year 283,242 276,824 --------------------------- Cash, end of year $490,791 $283,342 ===========================
See accompanying notes. F - 6 Nicholas Financial, Inc. Notes to the Consolidated Financial Statements March 31, 1996 1. Organization Nicholas Financial, Inc. (NFI, Canada) is a Canadian holding company incorporated under the laws of British Columbia with two wholly-owned United States subsidiaries, Nicholas Data Services, Inc. (NDSI) and Nicholas Financial, Inc. (NFI). NDSI is engaged principally in the development, marketing and support of computer application software. NFI is engaged principally in providing installment sales financing. Both NDSI and NFI are based in Florida, U.S.A. 2. Accounting Policies Consolidation The consolidated financial statements include the accounts of NFI, Canada and its wholly-owned subsidiaries, NDSI and NFI, collectively referred to as the Company. All intercompany transactions and balances have been eliminated. Property and Equipment Property and equipment are recorded at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of property and equipment is computed using the straight-line method (accelerated method for assets acquired prior to April 1, 1994) over the estimated useful lives of the assets as follows:
Automotive 3 years Equipment 5 years Furniture and fixtures 7 years Leasehold improvements Lease term
Intangible Assets Intangible assets consist principally of rights and privileges of certain computer software and customer lists acquired. Such amounts are being amortized over their estimated useful lives of five years using the straight-line method. Costs incurred to develop new software and to enhance existing software for internal use are charged to operations as incurred. Costs to develop new software for resale are capitalized and amortized over the expected useful life of the related product, generally five years. The amount capitalized is included in the caption "intangible assets." F - 7 2. Accounting Policies (continued) Allowance for Loan Losses The allowance for loan losses is increased by charges against earnings and decreased by charge-offs (net of recoveries). In addition to the allowance for loan losses, a nonrefundable dealer reserve has been established using unearned interest and dealer discounts to absorb future credit losses. To the extent actual credit losses exceed the reserves, a bad debt provision is recorded and to the extent credit losses are less than the reserve, the reserve is accreted into income as an adjustment to the interest yield over the term of the underlying finance receivables. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Deferred Loan Costs The Company defers costs related to obtaining loans. Such costs are charged to operations as an adjustment of interest expense over the life of the related loan. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires the use of an asset and liability approach for financial accounting and reporting. Revenue Recognition Revenues resulting from the sale of hardware and software are recognized upon delivery of the goods. Revenues from software support maintenance and lease agreements are recognized pro rata over the life of the agreements. The unamortized amounts are included in the caption "deferred revenues." Interest income on finance receivables is recognized using the interest (actuarial) method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 60 days or more or the collateral is repossessed, whichever is earlier. F - 8 2. Accounting Policies (continued) Earnings Per Share Earnings per share is calculated using the weighted average number of common shares outstanding during the year, adjusted for the dilutive effect of stock options and warrants and is the same on both a primary and fully-diluted basis. Financial Instruments The Company's financial instruments consist of accounts receivable, finance receivables, line of credit, notes payable-related party and accounts payable. For each of these financial instruments, the carrying value approximates its fair value except as noted below:
Carrying Estimated Value Fair Value ------------------------------ Finance receivables $18,326,784 $18,504,899
The fair value of finance receivables was estimated by adding the unpaid principal (net of allowances) to the present value of the portion of the nonrefundable dealer discount which will not be utilized to offset future credit losses. The Company's financial instruments that are exposed to concentrations of credit risk are primarily finance receivables, which are concentrated in the State of Florida. The Company provides credit during the normal course of business and performs ongoing credit evaluations of its customers. The Company maintains allowances for potential credit losses which, when realized, have been within the range of management's expectations. The Company perfects a primary interest in all vehicles financed as a form of collateral. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Statement of Cash Flows Cash paid for income taxes for the years ended March 31, 1996 and 1995 was $540,167 and $520,150, respectively. Cash paid for interest for the years ended March 31, 1996 and 1995 was $1,447,437 and $787,207, respectively. F - 9 3. Change in Accounting Method On April 1, 1994, the Company changed its method of accounting for unearned interest and dealer discounts as well as reserves for future credit losses. Historically, dealer holdbacks were recorded as deferred revenue and amortized to income over the life of the loans and an allowance for uncollectible accounts was established by charges against income. The Company concluded that a more appropriate method of accounting for dealer holdback was to record some or all of the holdback as an allowance against the unpaid balance of the loans to state such loans at their estimated net realizable value at date of purchase and to charge credit losses against this account to the extent of its availability. If the dealer holdback is insufficient at the date of purchase, unearned income is also deferred as necessary. Future additions to the allowance for uncollectible amounts are made by a charge against income. If holdback amounts credited to the allowance become unnecessary, the unnecessary amounts are amortized to income as an adjustment of the interest yield. The Company believed that the change was to a preferable method because it more appropriately records the economic event which takes place at the time a loan is purchased, and it provides a more accurate reflection of the Company's assets and liabilities and better matching of its costs and revenues. The cumulative effect as of April 1, 1994 of the change in method increased fiscal 1995 net income by approximately $71,000 after reduction for income taxes of approximately $43,000. 4. Finance Receivables Finance receivables consist of consumer automobile finance installment contracts and are detailed as follows:
1996 1995 ---------------------------- Finance receivables, gross contract $27,814,597 $19,716,821 Less: Unearned interest (6,401,336) (4,696,000) Nonrefundable dealer reserves (2,229,571) (1,519,852) Unearned dealer discount (11,617) (124,210) ---------------------------- 19,172,073 13,376,759 Allowance for credit losses (845,289) (596,674) ---------------------------- Finance receivables, net $18,326,784 $12,780,085 ============================
The terms of the receivables range from 6 to 60 months and bear a weighted average effective interest rate of 25% and 26% for 1996 and 1995, respectively. F - 10 5. Property and Equipment
Accumulated Net Book Cost Depreciation Value -------------------------------------- 1996 Automotive $118,246 $ 64,740 $ 53,506 Equipment 203,586 117,114 86,473 Furniture and fixtures 76,708 42,676 34,032 Leasehold improvements 40,227 33,820 6,406 -------------------------------------- $438,767 $258,350 $180,417 ====================================== 1995 Automotive $ 93,725 $ 32,091 $ 61,634 Equipment 176,992 94,913 82,079 Furniture and fixtures 64,772 34,072 30,700 Leasehold improvements 36,710 24,521 12,189 -------------------------------------- $372,199 $185,597 $186,602 ======================================
6. Intangible Assets
Accumulated Net Book Cost Depreciation Value -------------------------------------- 1996 Computer software rights $406,312 $406,312 $ - Internally developed computer software 471,661 469,131 2,530 -------------------------------------- $877,973 $875,443 $ 2,530 ====================================== 1995 Computer software rights $406,312 $406,312 $ - Internally developed computer software 471,661 456,029 15,632 -------------------------------------- $877,973 $862,341 $15,632 ======================================
F - 11 7. Line of Credit The Company has a $20,000,000 line of credit facility (the Line) with BA Business Credit, Inc. which expires on June 3, 1996. Borrowings under the Line bear interest at the Bank of America prime rate plus 1.25% and 1.00%, when the outstanding balance exceeds $10,000,000 and $15,000,000, respectively (9.5% at March 31, 1996). Pledged as collateral for this credit facility are all of the assets of Nicholas Financial, Inc. and the unconditional guarantee of NDSI, NFI, Canada, and Peter L. Vosotas, a shareholder. On May 13, 1996, the Company negotiated a new line of credit facility with BA Business Credit, Inc. The new agreement, which expires on June 3, 1998, allows for borrowings of up to $25,000,000 under similar terms as the previous credit facility. 8. Notes Payable-Related Party Notes payable are as follows at March 31:
1996 1995 ------------------------- Notes payable, unsecured, with interest at varying rates up to 12%, quarterly and semiannual interest payments due through June 1998, at which time entire principal balances and unpaid interest is due, subordinated to the Line. The notes are convertible at the option of the holder, into common shares at prices from $1.75 to $2.00 per share. $1,800,000 $1,100,000 Note payable, unsecured, interest at 12%, quarterly interest due through April 1996, at which time entire balance and unpaid interest is due, subordinated to the Line. 150,000 150,000 Notes payable, unsecured interest at 12%, principal and interest due through May 1998. 233,341 218,846 Note payable, unsecured, interest at 12%, quarterly principal and interest payments due through April 1996. 18,495 87,243 Note payable, unsecured, interest at 12%, quarterly interest payments due through August 1997, at which time the entire principal balance and unpaid interest is due. 24,697 20,000 ------------------------- $2,226,533 $1,576,089 =========================
F - 12 8. Notes Payable-Related Party (continued) Maturities of notes payable are summarized as follows:
Year ending March 31 -------------------- 1997 $ 168,495 1998 1,400,000 1999 658,038 ------------- $2,226,533 =============
9. Income Taxes The provision for income taxes reflects an effective tax rate which differs from the corporate tax rate for the following reasons:
1996 1995 ------------------------ Combined basic Canadian federal and provincial income tax rate 45.34% 45.34% ======================== Income before income taxes $1,058,901 $894,208 901 8 ======================== Provision for income taxes based on above rate $ 480,106 $405,434 Increase (decrease) resulting from: NDSI's income taxed at lower (U.S.) rates (88,718) (74,621) Other 5,362 11,018 ------------------------ $ 396,750 $341,831 ========================
The Company's deferred tax assets consist of the following as of:
March 31 1996 1995 ------------------------ Allowance for credit losses not deductible for tax purposes $ 309,000 $254,000 Deferred compensation related to stock options and warrants 157,000 66,000 Other items 20,000 13,000 ------------------------ $486,000 $333,000 ========================
F - 13 9. Income Taxes (continued) NFI, Canada has income tax loss carryforward balances of approximately $180,000 (1995-$187,000) which are available to reduce future taxable income and which expire as follows:
1997 $ 20,000 1998 17,000 1999 23,000 2000 59,000 2001 36,000 2002 16,000 2003 9,000 ---------- $180,000 ==========
For the years ended March 31, 1996 and 1995, the Company would have recorded deferred tax assets of approximately $68,000 and $71,000, respectively, due primarily to income tax loss carryforwards. The assets, however, are offset entirely by a valuation allowance due to the relative uncertainty surrounding the realization of the assets. 10. Shareholders' Equity Changes in the outstanding common stock during the years are as follows:
Number Common of Shares Stock -------------------------- Balance at March 31, 1994 $5,511,739 $1,298,815 Changes in 1995: Issued for cash on exercise of options 182,800 36,439 Issued on exercise of convertible notes payable 80,000 100,000 Deferred compensation recovery - (49,361) ------------------------- Balance at March 31, 1995 5,774,539 1,385,893 Changes in 1996: Issued for cash on exercise of options 39,800 35,004 Issued in connection with note payable 20,000 28,000 Issued for services rendered 4,000 8,400 Deferred compensation expense - 266,754 ------------------------- Balance at March 31, 1996 5,838,339 $1,724,051 =========================
F - 14 10. Shareholders' Equity (continued) The Company has warrants outstanding at March 31, 1996 entitling a director to purchase 1,000,000 common shares at Cdn$2.55 until June 3, 1999. The Company also has warrants outstanding at March 31, 1996 entitling an investor to purchase 53,571 shares at Cdn$2.27 which expire May 12, 1997. At March 31, 1996, all warrants were fully exercisable. As of March 31, 1996, stock options outstanding to directors, officers and employees are as follows:
Number of Shares Exercise Price Expiration Date 20,000 $.48 April 5, 1996 27,000 .75 August 28, 1996 52,000 .90 September 4, 1997 21,500 1.20 November 30, 1997 31,500 1.40 November 20, 1998 180,000 1.70 February 28, 2000 4,500 2.15 June 10, 1999 48,000 3.23 September 8, 2000 ------------ 384,500 ============
During 1996 and 1995, 20,400 options and -0- warrants and 7,000 options and 62,500 warrants were canceled, respectively. During 1996, 48,000 options were granted to directors, officers and employees. As of March 31, 1996, 294,811 of the above options were exercisable. During 1996, the weighted average price of options exercised was $.88. 11. Related Party Transactions At March 31, 1996 and 1995, all notes payable were owing to shareholders, directors and individuals related to directors of the Company, with terms described in Note 8 of these consolidated financial statements. During fiscal 1996, the Company incurred interest expense of $260,547 (1995-$200,077) on the notes described above. F - 15 12. Commitments The Company leases its corporate office and sales offices under operating lease agreements which provide for annual minimum rental payments as follows:
Year ending March 31 1997 $ 84,189 1998 61,921 1999 52,995 2000 13,319 ---------- $212,424 ==========
Rent expense for the years ended March 31, 1996 and 1995 was $66,819 and $50,650, respectively. 13. Segmented Information Substantially all of the Company's operations are in the United States. The industry segments are as follows:
Computer Application General Software and Corporate Total Financing Support 1996 Revenue $5,267,530 $ $565,465 $ - $5,833,175 Operating (loss) profit 1,088,188 (20,298) (8,989) 1,058,901 Identifiable assets 19,626,132 174,645 1,024 19,801,801 Capital expenditures 67,377 - - 67,377 Depreciation and 42,456 44,208 - 86,664 amortization 1995 Revenue $3,516,834 $602,198 $ - $4,119,032 Operating (loss) profit 901,860 5,933 (13,585) 894,208 Identifiable assets 13,719,414 130,485 875 13,850,774 Capital expenditures 86,411 9,692 - 96,103 Depreciation and 41,067 84,219 - 125,286 amortization
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
NICHOLAS FINANCIAL, INC. Dated: June __, 1996 /s/ Peter L. Vosotas -------------------------- Peter L. Vosotas
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date /s/ Peter L. Vosotas - - - - ------------------------- President and June __, 1996 Peter L. Vosotas Director /s/ Ralph T. Finkenbrink - - - - ------------------------- Principal June __, 1996 Ralph T. Finkenbrink Financial Officer /s/ Raymond Cottrell - - - - ------------------------- Director June __, 1996 Raymond Cottrell /s/ Joseph G. Bowes - - - - ------------------------- Director June __, 1996 Joseph G. Bowes
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