UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ________ to _________.
Commission file number: 0-26680
NICHOLAS FINANCIAL, INC.
(Exact name of registrant as specified in its Charter)
British Columbia, Canada 8736-3354
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2454 McMullen Booth Road, Building C
Clearwater, Florida 33759
(Address of Principal Executive Offices) (Zip Code)
(727) 726-0763
(Registrant's telephone number, Including area code)
Not applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter periods that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____.
As of October 31st, 2003 there were 5,061,088 shares of common
stock outstanding.
2
Nicholas Financial, Inc.
Form 10-QSB
Index
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet
as of September 30, 2003...............................3
Condensed Consolidated Statements of
Income for the three and six months
ended September 30, 2003 and 2002......................4
Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2003 and 2002...5
Notes to the Condensed Consolidated Financial
Statements.............................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................12
Item 3. Disclosures and Controls..............................23
Part II. Other Information
Item 1. Legal Proceedings....................................24
Item 2. Changes in Securities................................24
Item 3. Defaults upon Senior Securities......................24
Item 4. Submission of Matters to a Vote of
Security Holders.....................................24
Item 5. Other Information....................................24
Item 6. Exhibits and Reports on Form 8-K.....................24
Signatures...........................................25
Certification........................................26
Certification........................................27
Exhibit Index........................................28
3
Part I. Item 1
Nicholas Financial, Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
September 30,
2003
----------------
Assets
Cash $ 1,984,453
Finance receivables, net 92,122,665
Accounts receivable 13,526
Prepaid expenses and other assets 864,339
Property and equipment, net 511,989
Deferred income taxes 3,005,123
------------
Total assets $98,502,095
============
Liabilities
Line of credit $65,010,238
Drafts payable 521,974
Notes payable - related party 991,530
Accounts payable 3,742,609
Dividends payable 253,354
Derivatives 1,932,077
Income taxes payable 735,007
Deferred revenues 999,732
------------
Total liabilities 74,186,521
Shareholders' equity
Preferred stock, no par: 5,000,000 shares
authorized;none issued and outstanding -
Common stock, no par: 50,000,000 shares
authorized; 5,061,088 shares issued and
outstanding 4,570,041
Other comprehensive loss (1,202,718)
Retained earnings 20,948,251
------------
24,315,574
------------
Total liabilities and shareholders' equity $98,502,095
============
See accompanying notes.
4
Nicholas Financial, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
--------------------------------------------------
Revenue:
Interest income on
finance receivables $6,074,327 $5,492,139 $12,062,800 $10,725,488
Sales 70,750 92,939 142,308 175,315
-----------------------------------------------------
6,145,077 5,585,078 12,205,108 10,900,803
Expenses:
Cost of sales 11,615 25,652 28,689 42,820
Marketing 220,591 155,860 431,823 309,341
Administrative 2,481,856 2,114,689 4,797,733 4,096,548
Provision for credit losses 404,156 582,138 984,155 1,129,204
Depreciation 62,500 42,000 132,218 79,000
Interest expense 968,310 967,632 1,955,638 1,931,695
----------------------------------------------------
4,149,028 3,887,971 8,330,256 7,588,608
Operating income before
income taxes 1,996,049 1,697,107 3,874,852 3,312,195
Income tax expense:
Current 616,493 508,509 2,208,600 1,081,758
Deferred 130,664 132,442 (748,615) 161,117
----------------------------------------------------
747,157 640,951 1,459,985 1,242,875
----------------------------------------------------
Net Income $1,248,892 $1,056,156 $2,414,867 $2,069,320
=====================================================
Earnings per share - basic $0.25 $0.21 $0.48 $0.41
=====================================================
Earnings per share - diluted $0.23 $0.20 $0.45 $0.39
=====================================================
See accompanying notes.
5
Nicholas Financial, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended September 30,
2003 2002
----------------------------------
Operating activities
Net income $ 2,414,867 $ 2,069,320
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation 132,218 79,000
Provision for credit losses 984,155 1,129,204
Deferred income taxes (836,391) 161,117
Changes in operating assets
and liabilities:
Accounts receivable 2,702 (4,604)
Prepaid expenses and other assets (227,066) (323,055)
Accounts payable 671,733 (291,170)
Drafts payable (142,546) (121,320)
Income taxes payable 629,132 (110,116)
Deferred revenues 82,843 255,781
---------------------------------
Net cash provided by operating
activities 3,711,647 2,844,157
Investing activities
Purchase and origination of
finance contracts (34,313,256) (31,145,587)
Principal payments received 27,384,548 24,565,321
Purchase of property and
equipment, net of disposals (176,611) (118,151)
--------------------------------
Net cash used in investing
activities (7,105,319) (6,698,417)
Financing activities
Issuance of notes payable -
related party 182,920 107,094
Net proceeds from line of credit 4,850,000 4,260,000
Payment of dividend (253,354) -
Sale of common stock 117,348 34,130
-------------------------------
Net cash provided by
financing activities 4,896,914 4,401,224
-------------------------------
Net increase in cash 1,503,242 546,964
Cash, beginning of period 481,211 51,239
--------------------------------
Cash, end of period $ 1,984,453 $ 598,203
================================
See accompanying notes.
6
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2003
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements of Nicholas Financial, Inc. (the "Company") have been
prepared in accordance with accounting principles generally
accepted in the United States for interim financial information
and with the instructions to Form 10-QSB pursuant to the
Securities and Exchange Act of 1934, as amended in Article 10 of
Regulation SB. Accordingly, they do not include all of the
information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for
the six months ended September 30, 2003 are not necessarily
indicative of the results that may be expected for the year
ending March 31, 2004. For further information, refer to the
condensed consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year
ended March 31, 2003.
2. Revenue Recognition
Interest income on finance receivables is recognized using the
interest 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.
The Company attributes all of its dealer discount and a portion
of unearned income to a reserve for credit losses. Such amounts
reduce the interest recognized over the life of the contract. The
Company receives a commission for selling add-on services to
consumer borrowers and amortizes the commission, net of the
related costs, over the term of the loan using the interest
method. The Company's net fees charged for processing a loan are
recognized as an adjustment to the yield and are amortized over
the life of the loan using the interest method.
The amount of future unearned income represents the amount of
finance charges the Company expects to fully earn over the life
of the current portfolio, and is computed as the product of the
contract rate, the contract term, and the contract amount. The
Company aggregates the contracts purchased during a three-month
period for all of its branch locations, after the analysis of
purchase date accounting is complete, any uncollectable amounts
would be contemplated in the allowance for credit losses.
3. Earnings Per Share
Basic earnings per share excludes any dilutive effects of common
stock equivalents such as options, warrants, and convertible
securities. Diluted earnings per share includes the effects of
dilutive options, warrants, and convertible securities. Basic and
diluted earnings per share have been computed as follows:
7
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
3. Earnings Per Share (continued)
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
------------------------------------------------
Numerator:
Numerator for basic
earnings per share -
Net income available
to common stockholders $1,248,892 $1,056,156 $2,414,867 $2,069,320
Denominator:
Denominator for basic
earnings per share -
weighted average shares 5,038,318 5,010,351 5,022,622 5,004,909
Effect of dilutive securities:
Employee stock options 366,858 305,659 330,195 324,398
----------------------------------------------
Denominator for diluted
earnings per share - adjusted
weighted-average shares and
assumed conversions 5,405,176 5,316,010 5,352,817 5,329,307
==============================================
Earnings per share - basic $0.25 $0.21 $0.48 $0.41
==============================================
Earnings per share - diluted $0.23 $0.20 $0.45 $0.39
==============================================
8
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
4. Finance Receivables
The Company charges-off receivables when an individual account
has become more than 120 days contractually delinquent. In the
event of a repossession the charge-off will occur in the month in
which the vehicle was repossessed.
Costs associated with repossession, transport and auction
preparation expenses are charges reported under operating
expenses in the period in which they were incurred. The Company
maintains full responsibility for repossessions. There is no
relationship between the Company and the dealer with respect to a
given contract once the assignment of that contract is complete.
The dealer has no vested interest in the performance of any
installment contract the Company purchases.
Finance receivables consist of automobile finance installment
contracts and direct consumer loans and are detailed as follows:
Finance receivables, gross contract $146,989,453
Less:
Unearned interest (35,197,359)
--------------
111,792,094
Dealer discounts (13,693,961)
Allowance for credit losses (5,975,468)
--------------
Finance receivables, net $ 92,122,665
==============
The terms of the receivables range from 12 to 60 months and bear
a weighted average effective interest rate of 24%.
5. Line of Credit
The Company has a $75 million Line of Credit facility (the Line)
which expires on November 30, 2004. Borrowings under the Line
bear interest at the prime rate plus twenty-five basis points.
The Company also has several LIBOR pricing options available. If
the outstanding balance falls below $10 million the Line bears
interest at the prime rate plus 2.00%. Pledged as collateral for
this credit facility are all of the assets of Nicholas Financial,
Inc. As of September 30, 2003 the outstanding amount of the
credit facility was $65,010,238, the amount available under the
line of credit was $9,989,762. As of September 30, 2003 the
Company was in full compliance with all debt covenants.
6. Notes Payable - Related Party
The Company's notes payable consist of unsecured notes bearing
interest at 6.60% with principal and interest due within 30-days
upon demand. The notes totaled $991,530 at September 30, 2003.
9
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
7. Derivatives and Hedging
The Company is party to interest rate swap agreements which are
derivative instruments. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that is
attributable to a particular risk, such as interest rate risk),
the effective portion of the gain or loss on the derivative
instrument is reported as a component of comprehensive income and
reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. The remaining gain
or loss on the derivative instrument in excess of the cumulative
change in the present value of the future cash flows of the
hedged item, if any, is recognized in current earnings during the
period of change.
The Company has entered into interest rate swap agreements that
effectively convert a portion of its floating-rate debt to a
fixed-rate basis, thus reducing the impact of interest rate
changes on future interest expense. At September 30, 2003,
approximately $50,000,000 of the Company's borrowings have been
designated as the hedged items to interest rate swap agreements.
Under the swap agreements, the Company received an average
variable rate of 3.46% and 3.78% and paid an average fixed rate
of 6.04% and 6.77% during the three months ended September 30,
2003, 2002, respectively. Under the swap agreements, the Company
received an average variable rate of 3.49% and 3.99% and paid an
average fixed rate of 6.19% and 6.85% during the six months ended
September 30, 2003, 2002, respectively. A loss of $1,932,077
related to the fair value of the swaps at September 30, 2003 has
been recorded in the caption derivatives on the balance sheet.
Amounts of net losses on derivative instruments expected to be
reclassified from comprehensive income to earnings in the next 12
months are not expected to be material. The Company has also
entered into one forward locking swap disclosed in the table
below.
The Company has entered into the following cash-flow hedges:
Notional Fixed Rate
Date Entered Effective Date Amount Of Interest Maturity Date
--------------------------------------------------------------------------------
August 19, 1999 August 19, 1999 $10,000,000 5.80% August 1, 2003
May 17, 2000 May 17, 2000 10,000,000 6.87% May 17, 2004
October 5, 2001 October 5, 2001 10,000,000 3.85% October 5, 2004
June 28, 2002 June 28, 2002 10,000,000 3.83% July 2, 2005
January 6, 2003 April 2, 2003 10,000,000 3.35% April 2, 2007
January 31, 2003 August 1, 2003 10,000,000 3.20% August 2, 2006
February 26, 2003 May 17, 2004 10,000,000 3.91% May 19, 2008
The Company has also entered into various interest rate option
agreements with maturities through May 17, 2004.
The Company utilizes the above noted interest rate swaps to
manage its interest rate exposure. The swaps effectively convert
a portion of the Company's floating rate debt to a fixed rate,
more closely matching the interest rate characteristics of the
Company's finance receivables. There has historically been no
ineffectiveness associated with the Company's hedges.
10
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
8. Stock Options
In December 2002, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
(SFAS) No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure" which amends FASB
Statement No. 123. SFAS 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based-employee compensation. SFAS 148
also amends the disclosure requirements of SFAS 123 to require
more prominent and more frequent disclosures in financial
statements concerning the effects of stock-based compensation.
The effective date of SFAS 148 is for fiscal years ending after
December 15, 2002.
The Company has an employee stock incentive plan (the SIP) for
officers, directors and key employees under which 557,866 shares
of common stock were reserved for issuance as of September 30,
2003. Options currently granted by the Company generally vest
over a five-year period.
Previous to SFAS 148 the Company had elected to follow APB 25,
"Accounting For Stock Based Compensation" and related
Interpretations in accounting for its employee stock options
because the alternative, fair value method, provided for under
SFAS 123 requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB
25, if the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The following table contains the pro forma net income and basic
and fully diluted earnings per share under the fair value method.
The fair value method uses the Black-Scholes option-pricing model
to determine compensation expense associated with the Company's
options.
Three months ended Six months ended
September 30 September 30
2003 2002 2003 2002
---------------------------------------
Net Income $1,248,892 $1,056,156 $2,414,867 $2,069,320
Basic earnings per share $.25 $.21 $.48 $.41
Fully diluted earnings
per share $.23 $.20 $.45 $.39
Stock based employee
compensation cost under
the Fair Value Method $9,021 $20,103 $21,033 $44,312
Pro forma net income $1,239,871 $1,036,053 $2,393,834 $2,025,008
Pro forma basic earnings
per share $.25 $.21 $.48 $.40
Pro forma diluted earnings
per share $.23 $.19 $.45 $.38
11
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
9. Comprehensive Income
The Company is party to interest rate swap agreements which are
derivative instruments. For derivative instruments that are
designated and qualify as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that is
attributable to a particular risk, such as interest rate risk),
the effective portion of the gain or loss on the derivative
instrument is reported as a component of comprehensive income and
reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings.
The following table reconciles net income with comprehensive
income for the three and six months ended September 30, 2003 and
2002, respectively.
Three months ended Six months ended
September 30 September 30
2003 2002 2003 2002
------------------------------------------------
Net Income $1,248,892 $1,056,156 $2,414,867 $2,069,320
Mark to market
interest rate swaps 463,896 (407,715) 199,627 (654,587)
------------------------------------------------
Comprehensive income $1,712,788 $648,441 $2,614,494 $1,414,713
================================================
12
Part I. Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
Consolidated net income increased for the three month period
ended September 30, 2003 to $1,248,892 from $1,056,156 for the
three month period ended September 30, 2002. Consolidated net
income increased for the six month period ended September 30,
2003 to $2,414,867 from $2,069,320 for the six month period ended
September 30, 2002. Earnings were favorably impacted by an
increase in the outstanding loan portfolio. The Company's
Nicholas Data Services (NDS) subsidiary did not contribute
significantly to consolidated operations in the three or six
month periods ended September 30, 2003 or 2002.
Portfolio Summary
Three months ended Six months ended
September 30 September 30
2003 2002 2003 2002
--------------------------------------------------------------
Average Net
Finance Receivables(1) 111,195,574 97,378,535 109,204,020 95,579,869
Average Indebtedness(2) 64,162,081 57,165,923 63,200,691 56,373,558
Total Finance Revenue(3) 6,074,326 5,492,139 12,062,800 10,725,488
Interest Expense 968,310 967,632 1,955,638 1,931,695
Net Finance Revenue 5,106,016 4,524,507 10,107,162 8,793,793
Weighted average
Contractual rate(5) 23.55% 23.84% 23.55% 23.84%
Gross Portfolio Yield(4) 21.85% 22.56% 22.09% 22.44%
Average Cost of
Borrowed Funds 6.04% 6.77% 6.19% 6.85%
Provision for Credit
Losses as a
Percentage of Average
Net Finance Receivables 1.45% 2.39% 1.80% 2.36%
Net Portfolio Yield (4) 16.91% 16.19% 16.71% 16.04%
Operating Expenses as a
Percentage of Average Net
Finance Receivables (6) 9.71% 9.21% 9.57% 9.07%
Pre-tax Yield as a
Percentage of Average
Net Finance Receivables(7) 7.21% 6.98% 7.14% 6.97%
Write-off to Liquidation(8) 9.89% 9.29% 8.85% 8.60%
Net Charge-Off Percentage(9) 8.58% 7.97% 7.63% 7.47%
See accompanying notes.
13
(1) Average net finance receivables represent the average of net
finance receivables throughout the period. Net finance
receivables represents gross finance receivables less any
unearned finance charges related to those receivables.
(2) Average indebtedness represents the average outstanding
borrowings under the Line of Credit and notes payable-
related party. Average cost of borrowed funds represents
interest expense as a percentage of average indebtedness.
(3) Does not include revenue of $70,750 and $92,939 associated
with the Company's software subsidiary NDS for the three
months ended September 30, 2003 and 2002, respectively. Does
not include revenue of $142,308 and $175,315 associated with
the Company's software subsidiary NDS for the six months
ended September 30, 2003 and 2002, respectively.
(4)
Gross portfolio yield represents total finance revenues as a
percentage of average net finance receivables. Net portfolio
yield represents net finance revenue income minus the provision
for credit losses as a percentage of average net finance
receivables.
(5) Weighted average contractual rate represents the weighted
average annual percentage rate (APR) of all contracts in the
portfolio during the period.
(6)
Does not include operating expenses of $66,585 and $96,460
associated with the Company's software subsidiary NDS for
the three months ended September 30, 2003 and 2002,
respectively. Does not include operating expenses of
$136,066 and $193,166 associated with the Company's software
subsidiary NDS for the six months ended September 30, 2003
and 2002, respectively.
(7) Pre-tax yield represents net portfolio yield minus operating
expenses as a percentage of interest earning assets
(8) Liquidation is defined as beginning receivable balance
plus current period purchases minus voids and
refinances minus ending receivable balance.
(9) Net charge-off percentage represents net charge-offs divided
by average net finance receivables outstanding during the
period.
14
Three months ended September 30, 2003 compared to three months
ended September 30, 2002
Interest Income and Loan Portfolio
Interest revenue increased 11% to $6.1 million for the
period ended September 30, 2003, from $5.5 million for the period
ended September 30, 2002. The net finance receivable balance
totaled $92.1 million at September 30, 2003, an increase of 13%
from the $81.5 million at September 30, 2002. The primary reason
net finance receivables increased was the increase in the
receivable base of several existing branches and the opening of
three additional branch locations. The gross finance receivable
balance increased 13% to $147.0 million at September 30, 2003
from $129.6 million at September 30, 2002. The primary reason
interest revenue increased was the increase in the outstanding
loan portfolio. The gross portfolio yield decreased from 22.56%
for the period ended September 30, 2002 to 21.85% for the period
ended September 30, 2003. The net portfolio yield increased from
16.19% for the period ended September 30, 2002 to 16.91% for the
period ended September 30, 2003. The primary reason for the
increase in the net portfolio yield was an decrease in the
provision for credit losses for the period ended September 30,
2003.
Computer Software Business
Sales for the period ended September 30, 2003 were $70,750
compared to $92,939 for the period ended September 30, 2002, a
decrease of 24%. This decrease was primarily due to attrition in
the customer base. The Cmpany expects this trend to continue as
it continues to focus on its core business of consumer finance.
Cost of sales and operating expenses decreased from $105,682 for
the period ended September 30, 2002 to $78,200 for the period
ended September 30, 2003.
Operating Expenses
Operating expenses, excluding provision for credit losses and
interest expense, increased to $2.8 million for the period ended
September 30, 2003 from $2.3 million for the period ended
September 30, 2002. This increase of 19% was primarily
attributable to the additional staffing of several existing
branches, increased general operating expenses and the opening of
three additional branch offices. Operating expenses as a
percentage of interest earning assets increased from 9.21% for
the period ended September 30, 2002 to 9.71% for the period ended
September 30, 2003.
Interest Expense
Interest expense increased to $968,310 for the period ended
September 30, 2003 as compared to $967,632 for the period ended
September 30, 2002. The average indebtedness for the period ended
September 30, 2003 increased to $64.2 million compared to $57.2
million for the period ended September 30, 2002. This increase
was offset by a decrease in the average cost of outstanding
borrowings from 6.77% during the three months ended September 30,
2002 to 6.04% during the three months ended September 30, 2003.
15
Six months ended September 30, 2003 compared to six months ended
September 30, 2002
Interest Income and Loan Portfolio
Interest revenue increased 12% to $12.1 million for the
period ended September 30, 2003, from $10.7 million for the
period ended September 30, 2002. The net finance receivable
balance totaled $92.1 million at September 30, 2003, an increase
of 13% from the $81.5 million at September 30, 2002. The primary
reason net finance receivables increased was the increase in the
receivable base of several existing branches and the opening of
three additional branch locations. The gross finance receivable
balance increased 13% to $147.0 million at September 30, 2003
from $129.6 million at September 30, 2002. The primary reason
interest revenue increased was the increase in the outstanding
loan portfolio. The gross portfolio yield decreased from 22.44%
for the period ended September 30, 2002 to 22.09% for the period
ended September 30, 2003. The net portfolio yield increased from
16.04% for the period ended September 30, 2002 to 16.71% for the
period ended September 30, 2003. The primary reason for the
increase in the net portfolio yield was a decrease in the
provision for credit losses for the period ended September 30,
2003.
Computer Software Business
Sales for the period ended September 30, 2003 were $142,308
compared to $175,315 for the period ended September 30, 2002, a
decrease of 19%. This decrease was primarily due to attrition in
the customer base. The Company expects this trend to continue as
it continues to focus on its core business of consumer finance.
Cost of sales and operating expenses decreased from $193,166 for
the period ended September 30, 2002 to $164,755 for the period
ended September 30, 2003.
Operating Expenses
Operating expenses, excluding provision for credit losses
and interest expense, increased to $5.4 million for the period
ended September 30, 2003 from $4.5 million for the period ended
September 30, 2002. This increase of 19% was primarily
attributable to the additional staffing of several existing
branches, increased general operating expenses and the opening of
three additional branch offices. Operating expenses as a
percentage of interest earning assets increased from 9.07% for
the period ended September 30, 2002 to 9.57% for the period ended
September 30, 2003.
Interest Expense
Interest expense increased to $2.0 million for the period
ended September 30, 2003 as compared to $1.9 million for the
period ended September 30, 2002. The average indebtedness for the
period ended September 30, 2003 increased to $63.2 million
compared to $56.4 million for the period ended September 30,
2002. This increase was offset by a decrease in the average cost
of outstanding borrowings from 6.85% during the six months ended
September 30, 2002 to 6.19% during the six months ended September
30, 2003.
16
Contract Procurement
The Company purchases contracts in the states listed below. The
amounts shown in the table below represent the total face value
of contracts acquired. The decrease in purchases for the State of
Florida is primarily due to increased competition and the lack of
expansion in that state during the current year. The Company has
sixteen branch locations in Florida and does not have any
immediate plans for additional expansion in Florida. The Company
has been expanding its contract procurement in North Carolina,
South Carolina, Ohio, Virginia and Michigan. Please see Future
Expansion.
The Contracts purchased by the Company are predominately for used
vehicles, less than 3% were new. The average model year
collateralizing the portfolio is a 1999 vehicle. Contracts
purchased and originated are shown at face value.
Maximum
allowable
Interest 3 Months Ended 6 Months Ended
State rate (1) 9/30/03 9/30/02 9/30/03 9/30/02
------------------------------------------------------------------
FL 30% $9,077,354 $9,760,594 $19,125,752 $19,259,893
OH 25% 3,109,399 2,131,955 6,214,025 3,678,333
GA 29% 2,263,364 2,092,776 4,570,548 3,866,887
NC 29% 1,998,984 1,957,783 3,969,578 3,955,127
SC 29% 743,924 586,870 1,479,639 1,098,633
MI 25% 612,723 - 1,068,257 -
VA 29% 184,573 8,400 201,613 55,042
----------------------------------------------------
$17,990,321 $16,538,378 $36,629,412 $31,913,915
=====================================================
(1)The allowable maximum interest rates by State is subject
to change and are governed by the individual states the
Company conducts business in.
Indirect Contracts Purchased
3 Months Ended 6 Months Ended
9/30/03 9/30/02 9/30/03 9/30/02
-----------------------------------------------------------------------
Purchases $17,990,321 $16,538,378 $36,629,412 $31,913,915
Weighted APR 24.00% 24.03% 23.96% 24.32%
Average Discount 8.95% 8.81% 8.95% 8.82%
Average Term(mths) 43 41 44 41
Average Loan $8,082 $8,273 $8,138 $8,194
Number of Contracts 2,226 1,999 4,501 3,895
Direct Loans Originated
3 Months Ended 6 Months Ended
9/30/03 9/30/02 9/30/03 9/30/02
--------------------------------------------------------------------------
Originations $961,073 $935,539 $1,893,856 $2,046,435
Weighted APR 26.29% 26.08% 26.46% 25.82%
Average Term(mths) 28 21 27 22
Average Loan $2,930 $3,057 $2,896 $3,134
Number of Loans 328 306 654 653
17
Analysis of Credit Losses
Because of the nature of the borrowers under the Contracts and
its direct consumer loan program, the Company considers the
establishment of adequate reserves for credit losses to be
imperative. The Company segregates its Contracts into pools for
purposes of establishing reserves for losses. Each such pool
consists of the loans purchased by a Company branch office during
a three month period. The average pool consists of 71 Contracts
with an aggregate initial principal amount of approximately
$574,735. As of September 30, 2003, the Company had 446 active
pools.
The Company pools Contracts according to branch location
because the branches purchase contracts in different markets
located in Florida, Georgia, North Carolina, South Carolina,
Ohio, Michigan and Virginia. All Contracts purchased by a branch
during a fiscal quarter comprise a pool. This method of pooling
by branch and quarter allows the Company to evaluate the
different markets where the branches operate. The pools also
allow the Company to evaluate the different levels of customer
income, stability, credit history, and the types of vehicles
purchased in each market.
Contracts are purchased from many different dealers and are all
purchased on an individual contract by contract basis. Individual
contract pricing is determined by the automobile dealerships and
is generally the lesser of State maximum interest rates or the
maximum interest rate at which the customer will accept. In
certain markets, competitive forces will drive down contract
rates from the maximum rate to a level where an individual
competitor is willing to buy an individual contract. The Company
only buys contracts on an individual basis and never purchases
contracts in batches.
Dealer discount represents the difference between the face
value of an installment contract and the amount of money the
Company actually pays for the contract. The discount negotiated
by the Company is a function of the credit quality of the
customer and the wholesale value of the vehicle. The automotive
dealer accepts these terms by executing a dealer agreement with
the Company. The entire amount of discount relates to credit
quality, and is therefore considered to be part of the credit
loss reserve. The Company utilizes a static pool approach to
track portfolio performance. A static pool retains an amount
equal to 100% of the discount into a reserve for credit losses.
In situations where, at the date of purchase, the discount is
determined to be insufficient to absorb all potential losses
associated with the pool, a portion of future unearned income
associated with that specific pool will be added to the reserves
for credit losses until total reserves have reached the
appropriate level. Subsequent to the purchase, if the reserve for
credit losses is determined to be inadequate for a pool which is
not fully liquidated, then a charge to income through the
provision is used to reestablish adequate reserves. If a pool is
fully liquidated and has any remaining reserves, the excess
reserves are immediately recognized into income. For pools not
fully liquidated, that are determined to have excess reserves,
such excess amounts are accreted into income over the remaining
life of the pool. Reserves accreted into income for the three
months ended September 30, 2003 were $496,826 compared to
$566,869 for the three months ended September 30, 2002. Reserves
accreted into income for the six months ended September 30, 2003
were $1,020,951 compared to $1,147,920 for the six months ended
September 30, 2002.
The Company has definitive underwriting guidelines it utilizes
to determine which contracts to purchase. These guidelines are
very specific and result in all loan purchases having common risk
characteristics. The Company utilizes its District Managers to
evaluate their respective branch locations for adherence to these
underwriting guidelines. The Company also utilizes an internal
audit department to assure adherence to its underwriting
guidelines. The Company utilizes the branch model which allows
for contract purchasing to be done on the branch level. Each
Branch Manager will interpret the guidelines differently and as a
result the common risk characteristics will be the same on an
individual branch level but not necessarily compared to another
branch.
In analyzing a pool, the Company considers the performance of
prior pools originated by the branch office, the performance of
prior Contracts purchased from the dealers whose Contracts are
included in the current pool, the credit rating of the borrowers
under the Contracts in the pool, and current market and economic
conditions. Each pool is analyzed monthly to determine if the
loss reserves are adequate, and adjustments are made if they are
determined to be necessary. As of September 30, 2003, the Company
had established reserves for losses on Contracts of $19,468,081
or 13.65% of gross outstanding receivables under the Contracts.
18
The following table sets forth a reconciliation of the changes in
dealer discount on Contracts.
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
------------------------------------------------------------
Balance at
beginning of period $13,358,345 $11,686,394 $12,394,089 $11,259,898
Discounts acquired
on new volume 2,896,626 2,675,639 5,964,475 5,218,073
Losses absorbed (2,391,406) (2,148,048) (4,247,938) (3,937,298)
Recoveries 303,148 276,746 580,212 525,774
Reserves accreted (472,752) (538,609) (996,877) (1,114,325)
--------------------------------------------------------
Balance at
end of period $13,693,961 $11,952,122 $13,693,961 $11,952,122
========================================================
Reserves as a
percent of gross
Finance receivables 9.60% 9.58% 9.60% 9.58%
========================================================
The following table sets forth a reconciliation of the changes in
the allowance for credit losses on Contracts.
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
------------------------------------------------
Balance at
beginning of period $5,736,120 $4,452,746 $5,428,681 $4,105,174
Current period provision 344,655 518,525 864,108 1,009,989
Losses absorbed (306,656) (91,898) (518,670) (235,791)
-------------------------------------------------
Balance at
end of period $5,774,119 $4,879,373 $5,774,119 $4,879,372
==================================================
Reserves as a
percent of gross
Finance receivables 4.05% 3.91% 4.05% 3.91%
==================================================
The following table sets forth a reconciliation of the changes in
the allowance for credit losses on Direct loans.
Three months ended Six months ended
September 30, September 30,
2003 2002 2003 2002
------------------------------------------------
Balance at
beginning of period $201,017 $226,747 $176,126 $200,612
Current period
provision 59,501 63,613 120,047 119,215
Losses absorbed (42,488) (67,851) (83,739) (98,448)
Recoveries 7,393 8,060 12,989 14,525
Reserves accreted (24,074) (28,260) (24,074) (33,595)
--------------------------------------------
Balance at end of
period $201,349 $202,309 $201,349 $202,309
===========================================
Reserves as a
percent of gross
Finance receivables 4.59% 4.19% 4.59% 4.19%
===========================================
Total reserves
at end of period $19,669,429 $17,033,804 $19,669,429 $17,033,804
Reserves as a
percent of gross
Finance receivables 13.38% 13.15% 13.38% 13.15%
19
The average dealer discount associated with new volume increased
for the three and six months ended September 30, 2003 to 8.95%
and 8.95% respectively, from 8.81% and 8.82% for the three and
six months ended September 30, 2002, respectively. The Company
does not consider these changes to be material and such changes
are not the result of any change in buying philosophy or
competition.
The provision for credit losses decreased for the three and six-
month periods ended September 30, 2003 to $404,156 and $984,155
respectively, as compared to $582,138 and $1,129,204 for the
three and six-month periods ended September 30, 2002. This
reduction is primarily attributed to an increase in the
collections of ancillary charges from existing customers. To a
lesser extent, the provision for credit losses decreased as a
result of static pool performance meeting or exceeding Company
expectations.
The Company's losses as a percentage of liquidation increased
during the three and six months periods ended September 30, 2003
as compared to last year. The three and six-month periods ended
September 30, 2003 were 9.89% and 8.85% compared to 9.29% and
8.60% for the three and six-month periods ended September 30,
2002. The Company anticipates portfolio performance will
deteriorate in the near term, but will stabilize in the long
term, unless the overall economic conditions and current
unemployment rates continue to decline. In response to current
conditions the Company has raised its initial target reserve
percentage on new static pools to 12.2% from 11.8%. The Company
does not believe there have been any significant changes in loan
concentrations, terms or quality of contracts purchased during
the current fiscal year that would have contributed to the rise
in losses. The delinquency percentage for contracts more than
thirty days past due for the period ended September 30, 2003
decreased to 2.63% from 2.88% for the period ended September 30,
2002. The delinquency percentage for direct loans more than
thirty days past due for the period ended September 30, 2003
increased to 2.99% from 2.08% for the period ended September 30,
2002. The Company does not give significant consideration to
short-term trends in delinquency when evaluating reserve levels.
Delinquency percentages tend to be very volatile and often are
not necessarily an indication of future losses. The Company
utilizes a static pool approach to analyzing portfolio
performance and looks at specific pool performance and recent
trends as leading indicators to future performance of the
portfolio.
Recoveries as a percentage of current period losses were 11.33%
and 12.23% for the three and six-month periods ended September
30, 2003 as compared to 12.34% and 12.65% for the three and six-
month periods ended September 30, 2002. The Company expects
recoveries as a percent of losses to decline in the future, as
the Company continues to expand, it will become more difficult to
implement the loss recovery model in geographic areas further
away from the Company's origin.
Reserves accreted into income for the three and six-month periods
ended September 30, 2003 were $496,826 and $1,020,951
respectively as compared to $566,869 and $1,147,920 for the three
and six-month periods ended September 30, 2002. The amount and
timing of reserves accreted into income is a function of
individual static pool performance. The Company has seen
deterioration in the performance of the portfolio, more
specifically; static pools more than fifty percent liquidated
have seen an increase in the default rate when compared to prior
year pool performance during their same liquidation cycle. The
Company attributes this increase to overall general economic
conditions and more specifically to the increased unemployment
rate in the Company's markets.
20
The current unemployment rate compared to last year has
risen. The Company believes there is a correlation between the
unemployment rate and future portfolio performance. The Company
does not anticipate the unemployment level to rise significantly
in the future nor does it expect it to drop significantly in the
future, therefore the Company does not plan on increasing or
decreasing reserves based on the current unemployment rate. The
number of voluntary repossessions has remained steady for the six
months ended September 30, 2003 as compared to the six months
ended September 30, 2002. As a result of this stability the
Company believes the current reserve levels are adequate in this
regard. The number of bankruptcy filings has increased during the
six months ended September 30, 2003 as compared to the six months
ended September 30, 2002.
The amount of future unearned income represents the amount of
finance charges the Company expects to fully earn over the life
of the current portfolio, and is computed as the product of the
contract rate, the contract term, and the contract amount. The
Company aggregates the contracts purchased during a three-month
period for all of its branch locations, after the analysis of
purchase date accounting is complete, any uncollectable amounts
would be contemplated in the allowance for credit losses.
21
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:
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002
--------------------- --------------------
Contracts
Gross Balance
Outstanding $142,611,322 $124,728,292
Dollar Dollar
Delinquencies Amount Percent* Amount Percent*
--------------- ------------ ------- --------- ---------
30 to 59 days $ 2,554,310 1.79% $ 2,538,101 2.03%
60 to 89 days 921,969 0.65% 733,604 0.59%
90 + days 269,734 0.19% 325,314 0.26%
----------- ----- ------------ ------
Total Delinquencies $ 3,746,013 $ 3,597,019
*Total Delinquencies
as percent of
outstanding balance 2.63% 2.88%
Direct Loans
Gross Balance
Outstanding $ 4,378,131 $ 4,829,199
Delinquencies
30 to 59 days $ 67,549 1.54% $ 72,985 1.51%
60 to 89 days 15,716 0.36% 14,414 0.30%
90 + days 47,737 1.09% 13,150 0.27%
--------- ----- --------- -----
Total Delinquencies $131,002 $100,549
*Total Delinquencies
as a percent of
outstanding balance 2.99% 2.08%
The delinquency percentage for contracts more than thirty days
past due for the three months ended September 30, 2003 was 2.63%
compared to 2.88% for the three months ended September 30, 2002.
The delinquency percentage for direct loans more than thirty days
past due for the three months ended September 30, 2003 was 2.99%
compared to 2.08% for the three months ended September 30, 2002.
The Company does not give much consideration to short-term
trends in delinquency percentages when evaluating reserve levels.
Delinquency percentages tend to be very volatile and often are
not necessarily an indication of future losses. The Company
estimates future portfolio performance by considering several
factors. The most significant factors are described as follows.
The Company analyzes historical static pool performance for each
branch location when determining appropriate reserve levels. The
Company utilizes internal branch audits as an indication to
future static pool performance. (See pg.7 of the Company's March
31, 2003 10-KSB "Underwriting Guidelines" for more information on
branch location audits) The Company also considers such things as
the current unemployment rate in markets the Company operates in,
the percentage of voluntary repossessions as compared to prior
periods, the percentage of bankruptcy filings as compared to
prior periods and other leading economic indicators.
22
Income Taxes
The Company's effective tax rate remained relatively consistent
at 37.43% and 37.68% for the three and six month periods ended
September 30, 2003 compared to 37.77% and 37.52% for the three
and six months ended September 30, 2002.
Liquidity and Capital Resources
The Company's cash flows for the six months ended September 30,
2003 and September 30, 2002 are summarized as follows:
Six months ended Six months ended
September 30, September 30,
2003 2002
---------------------------------------
Cash provided by:
Operating Activities - $ 3,711,647 $ 2,844,157
Investing Activities -
(primarily purchase of
Contracts) (7,105,319) (6,698,417)
Financing Activities 4,896,914 4,401,224
Net increase in cash 1,503,242 546,964
The Company's primary use of working capital during the
three months ended September 30, 2003 was the funding of the
purchase of Contracts. The Contracts were financed substantially
through borrowings on the Company's Line of Credit. The Line of
Credit is secured primarily by Contracts, and available
borrowings are based on a percentage of qualifying Contracts. As
of September 30, 2003 the Company had approximately $10.0 million
available under the Line of Credit. Since inception, the Company
has also funded a portion of its working capital needs through
cash flows from operating activities.
The self-liquidating nature of installment Contracts and
other loans enables the Company to assume a higher debt-to-equity
ratio than in most businesses. The amount of debt the Company
incurs from time to time under these financing mechanisms depends
on the Company's need for cash and it's ability to borrow under
the terms of its Line of Credit. The Company believes that
borrowings available under the Line of Credit as well as cash
flow from operations and, if necessary, the issuance of
additional subordinated debt and, or the sale of additional
securities in the capital markets, will be sufficient to meet its
short term funding needs.
The Company renewed its credit facility on June 28, 2002. The
new loan agreement expires November 30, 2004 and bears interest
at the prime rate plus .25% and offers several LIBOR pricing
options. The new loan agreement released Bank One as a
participating bank and added First Tennessee Bank. The Company is
pleased with its new banking relationship and believes it will be
beneficial for future expansion.
On August 11, 2003 the Company announced a $.10 per share semi-
annual cash dividend. The Company intends to continue the cash
dividend program, provided that future earnings meet
expectations. The Company must also receive waivers from its
current lenders in order to pay cash dividends. The ability for
the Company to receive the necessary waivers is largely dependent
upon portfolio performance. No assurance can be given that these
waivers will be granted.
23
Future Expansion
The Company currently operates twenty-eight branch
locations, fifteen in the State of Florida, three in the State of
Georgia, three in the State of North Carolina, one in the state
of South Carolina, five in the state of Ohio and one in the state
of Michigan.
The Company currently 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
the Company's 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
its current lender or another lender. The Company, from time to
time, has and will meet with private investors and financial
institutions that specialize in investing in subordinated debt.
The Company believes that opportunity for growth continues to
exist in Florida, Georgia, North Carolina, South Carolina, Ohio,
and Michigan and intends to continue its expansion activities in
those states. The Company is currently expanding its automobile
financing program in the State of Virginia. The Company has
targeted certain geographic locations within the State of
Virginia where it believes there is a sufficient market for its
automobile financing program. The Company is currently
purchasing Contracts in the State of Virginia utilizing
employees who reside in the State of Virginia. These employees
are developing their respective markets in Virginia and the
Company has created a Central Buying Office in its Corporate
Headquarters in Clearwater Florida to purchase, process and
service these Contracts. The Company's strategy is to monitor
these new markets and ultimately decide where and when to open
actual branch locations. No assurances can be given, however,
that any further such expansion will occur. The Company is also
analyzing other markets in States the Company does not currently
operate in, however no assurance can be given that any expansion
will occur in these new markets.
Forward-Looking Information
This 10-QSB contains various forward-looking statements and
information that are based on management's beliefs and
assumptions, as well as information currently available to
management. When used in this document, the words "anticipate",
"estimate", "expect", and similar expressions are intended to
identify forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking
statements are reasonable, it can give no assurance that such
expectations will prove to be correct. Such statements are
subject to certain risks, uncertainties and assumptions. Should
one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may
vary materially from those anticipated, estimated or expected.
Among the key factors that may have a direct bearing on the
Company's operating results are fluctuations in the economy, the
degree and nature of competition, demand for consumer financing
in the markets served by the Company, the Company's products and
services, increases in the default rates experienced on
Contracts, adverse regulatory changes in the Company's existing
and future markets, the Company's ability to expand its business,
including its ability to complete acquisitions and integrate the
operations of acquired businesses, to recruit and retain
qualified employees, to expand into new markets and to maintain
profit margins in the face of increased pricing competition.
Part I. Item 3
DISCLOSURES AND CONTROLS
(a) Evaluation of disclosure controls and procedures. The
Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities
and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing
date of this report, the chief executive officer and the chief
financial officer of the Company concluded that the Company's
disclosure controls and procedures were adequate.
(b) Changes in internal controls. The Company made no
significant changes in its internal controls or in other factors
that could significantly affect these controls subsequent to the
date of the evaluation of those controls by the chief executive
officer and chief financial officer.
24
Part II - Other Information
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults upon Senior Securities - None
Item 4. Submission of Matters to a Vote of
Security Holders - None
Item 5. Other Information - None
Item 6. (a) Exhibits - See exhibit index following
the signature page.
(b) Reports on Form 8-K -
On August 11, 2003, Nicholas Financial, Inc. (the "Company")
filed an 8-K announcing a cash dividend of $.10 payable semi-
annual to shareholders of record as of September 30, 2003.
On September 30, 2003, the Company filed an 8-K announcing
Ernst & Young LLP had advised the Company's audit committee that,
following completion of its review of the Company's financial
statements as of, and for the quarter ended September 30, 2003,
it would resign as the Company's independent auditors.
Ernst & Young's reports on Nicholas' financial statements for
the years ended March 31, 2003 and 2002 did not contain an
adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or
accounting principles.
During the fiscal years ended March 31, 2003 and 2002, and the
subsequent interim period ended September 30, 2003, there have
not been any disagreements between Nicholas and Ernst & Young on
any matter of accounting principles or practices, financial
statement disclosures, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Ernst &
Young, would have caused it to make reference to the subject
matter of the disagreements in connection with its reports.
Nicholas has commenced the process of retaining new independent
auditors. That process is not yet complete.
25
SIGNATURES
In accordance with the requirements of the Securities Act of
1934, the Registrant certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form
10-QSB and authorized this Report to be signed on its behalf by
the undersigned, in the City of Clearwater, State of Florida, on
November 13, 2003.
NICHOLAS FINANCIAL, INC.
(Registrant)
Date: November 13, 2003 /s/Peter L Vosotas
------------------------
Peter L. Vosotas
Chairman, President, Chief
Executive Officer
(Principal Executive Officer)
Date: November 13, 2003 /s/Ralph T Finkenbrink
--------------------------
Ralph T. Finkenbrink
(Principal Financial Officer
and Accounting Officer)
26
CERTIFICATION
I, Peter L. Vosotas, certify that:
1.I have reviewed this Quarterly Report on Form 10-QSB of
Nicholas Financial, Inc.;
2.Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this report;
3.Based on my knowledge, the financial statements, and other
financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a)Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this report
is being prepared;
b)Designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under our
supervision, to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles;
c)Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the
end of the period covered by this report based on
such evaluation; and
d)Disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5.The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors(or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses
in the design or operation of internal controls over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b)Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls over
financial reporting.
Date: November 13, 2003 /s/Peter L Vosotas
-------------------------
Peter L. Vosotas
President &
Chief Executive Officer
27
CERTIFICATION
I, Ralph T. Finkenbrink, certify that:
1.I have reviewed this Quarterly Report on Form 10-QSB of
Nicholas Financial, Inc.;
2.Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in
light of the circumstances under which such statements
were made, not misleading with respect to the period
covered by this report;
3.Based on my knowledge, the financial statements, and other
financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4.The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) and internal control over
financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f) for the registrant and have:
a)Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be
designed under our supervision, to ensure that
material information relating to the registrant,
including its consolidated subsidiaries, is made
known to us by others within those entities,
particularly during the period in which this report
is being prepared;
b)Designed such internal control over financial
reporting, or caused such internal control over
financial reporting to be designed under our
supervision, to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles;
c)Evaluated the effectiveness of the registrant's
disclosure controls and procedures and presented in
this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the
end of the period covered by this report based on
such evaluation; and
d)Disclosed in this report any change in the
registrant's internal control over financial
reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the
registrant's internal control over financial
reporting; and
5.The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's
auditors and the audit committee of registrant's board of
directors(or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses
in the design or operation of internal controls over
financial reporting which are reasonably likely to
adversely affect the registrant's ability to record,
process, summarize and report financial information;
and
b)Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls over
financial reporting.
Dated: November 13, 2003 /s/Ralph T Finkenbrink
-------------------------------
Ralph T. Finkenbrink
Senior Vice President
28
EXHIBIT INDEX
Item 13. Exhibits and Reports on Form 8-K
3.1 Articles of Incorporation and By-Laws of Nicholas Financial,
Inc.
Incorporated by reference to the Company's Form 10-SB (File
No. 0-26680) filed on March 13, 1996
4.1 Stock Certificate
Incorporated by reference to Exhibit 4.1 to the Company's
Form 10-SB (File No. 0-26680) filed on March 13, 1996
10.1.1 Loan and Security Agreement dated March 31, 1993 between
BA Business Credit, Inc. and Nicholas Financial, Inc.
Incorporated by reference to Exhibit 10.1.1 to the
Company's Form 10-SB (File No. 0-26680) filed on
March 13, 1996
10.1.2 Amendment No. 1 to Loan Agreement dated January 14, 1994
Incorporated by reference to Exhibit 10.1.2 to the
Company's Form 10-SB (File No. 0-26680) filed on
March 13, 1996
10.1.3 Temporary Line Increase Agreement dated Mach 28, 1994
Incorporated by reference to Exhibit 10.1.3 to the
Company's Form 10-SB (File No. 0-26680) filed on
March 13, 1996
10.1.4 Amendment No. 2 to Loan Agreement dated June 3, 1994
Incorporated by reference to Exhibit 10.1.4 to the
Company's Form 10-SB (File No. 0-26680) filed on
March 13, 1996
10.1.5 Amendment No. 3 to Loan Agreement dated July 5, 1994
Incorporated by reference to Exhibit 10.1.5 to the
Company's Form 10-SB (File No. 0-26680) filed on
March 13, 1996
10.1.6 Amendment No. 4 to Loan Agreement dated March 31, 1995
Incorporated by reference to Exhibit 10.1.6 to the
Company's Form 10-SB (File No. 0-26680) filed on
March 13, 1996
10.1.7 Amendment No. 5 to Loan Agreement dated July 13, 1995
Incorporated by reference to Exhibit 10.1.7 to the
Company's Form 10-KSB for the fiscal year ended March
31, 1996
10.1.8 Amendment No. 6 to Loan Agreement dated May 13, 1996
Incorporated by reference to Exhibit 10.1.8 to the
Company's Form 10-QSB for the three months ended
June 30, 1996
10.1.9 Amendment No. 7 to Loan Agreement dated July 5, 1997
Incorporated by reference to Exhibit 10.1.9 to the
Company's Form 10-QSB for the three months ended
September 30, 1997
29
10.1.10 Amendment No. 8 to Loan Agreement dated September 18,
1998
Incorporated by reference to Exhibit 10.2.0 to the
Company's Form 10-QSB for the three months ended
September 30, 1998
10.1.11 Amendment No. 9 to Loan Agreement dated November 25,
1998
Incorporated by reference to Exhibit 10.2.1 to the
Company's Form 10-QSB for the three months ended
December 31, 1998
10.1.12 Amendment No. 10 to Loan Agreement dated November 24,
1999
Incorporated by reference to Exhibit 10.2.2 to the
Company's Form 10-QSB for the three months ended
December 31, 1999
10.1.13 Amendment No. 11 to Loan Agreement dated
August 1, 2000
Incorporated by reference to Exhibit 10.1.13 to the
Company's Form 10-KSB for the year ended
March 31, 2001
10.1.14 Amendment No. 12 to Loan Agreement dated March 16, 2001
Incorporated by reference to Exhibit 10.1.14 to the
Company's Form 10-KSB for the year ended March 31, 2001
10.3.1 Employee Stock Option Plan
Incorporated by reference to the Company's 1999
Annual proxy statement dated June 29, 1999
10.3.2 Non-Employee Stock Option Plan
Incorporated by reference to the Company's 1999
Annual proxy statement dated June 29, 1999
10.4.1 Employment Contract, dated November 22, 1999, between
Nicholas Financial, Inc. and Ralph Finkenbrink, Senior
Vice President of Finance.
Incorporated by reference to Exhibit 10.2.1 to the
Company's Form 10-QSB for the three months ended
December 31, 1999
10.4.2 Employment Contract, dated March 16, 2001, between
Nicholas Financial, Inc. and Peter L. Vosotas President
& Chief Executive Officer.
Incorporated by reference to the Company's 2001 Annual proxy
statement dated July 2, 2001
21 Subsidiaries of Nicholas Financial, Inc.
Incorporated by reference to the Company's Form 10-SB (File
No. 0-26680) filed on March 13, 1996
24 Powers of Attorney (included on signature page hereto)
99.1 Written Statement of the Chief Executive Officer Pursuant to 18
U.S.C. 1350
99.2 Written Statement of the Chief Financial Officer Pursuant to 18
U.S.C. 1350
30
Exhibit 99.1
Written Statement of the Chief Executive Officer
Pursuant to 18 U.S.C. 1350
Solely for the purposes of complying with 18 U.S.C. 1350, I ,
the undersigned Chief Executive Officer of Nicholas Financial,
Inc. (the "Company"), hereby certify, based on my knowledge, that
the Quarterly Report on Form 10-QSB of the Company for the
quarter ended September 30, 2003 (the "Report") fully complies
with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
/s/Peter L Vosotas
------------------------
Peter L. Vosotas
Chief Executive Officer
November 13, 2003
31
Exhibit 99.2
Written Statement of the Chief Financial Officer
Pursuant to 18 U.S.C. 1350
Solely for the purposes of complying with 19 U.S.C. 1350, I ,
the undersigned Chief Financial Officer of Nicholas Financial,
Inc. (the "Company"), hereby certify, based on my knowledge, that
the Quarterly Report on Form 10-QSB of the Company for the
quarter ended September 30, 2003 (the "Report") fully complies
with the requirements of Section 13(a) of the Securities Exchange
Act of 1934 and that information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
/s/Ralph T Finkenbrink
---------------------------
Ralph Finkenbrink
Chief Financial Officer
November 13, 2003