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, 2002
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, 2002 there were 5,002,021 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, 2002....3
Condensed Consolidated Statements of Income for
the three and six months ended
September 30, 2002 and 2001............................4
Condensed Consolidated Statements of Cash Flows
for the six months ended
September 30, 2002 and 2001............................5
Notes to the Condensed Consolidated
Financial Statements...................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................11
Item 3. Disclosures and Controls..............................18
Part II. Other Information
Item 1. Legal Proceedings.....................................19
Item 2. Changes in Securities.................................19
Item 3. Defaults upon Senior Securities.......................19
Item 4. Submission of Matters to a Vote of Security Holders...19
Item 5. Other Information.....................................19
Item 6. Exhibits and Reports on Form 8-K......................19
Signatures............................................20
Exhibit Index.........................................21
3
Part I. Item 1
Nicholas Financial, Inc.
Condensed Consolidated Balance Sheet
(Unaudited)
September 30, 2002
----------------------
Assets
Cash $ 598,203
Finance receivables, net 81,518,449
Accounts receivable 19,048
Prepaid expenses and other assets 839,708
Property and equipment, net 410,000
Deferred income taxes 327,338
-------------
Total assets $ 83,712,746
Liabilities
Line of credit $ 57,533,426
Drafts payable 297,796
Notes payable - related party 649,376
Accounts payable 3,088,984
Derivatives 2,175,431
Deferred revenues 911,337
-------------
Total liabilities 64,656,350
Shareholders' equity
Preferred stock, no par: 5,000,000 shares
authorized;none issued and outstanding -
Common stock, no par: 50,000,000 shares
authorized; 5,010,521 shares issued
and outstanding 4,437,090
Other comprehensive loss (2,208,714)
Retained earnings 16,828,020
-------------
19,056,396
-------------
Total liabilities and shareholders' equity $ 83,712,746
=============
See accompanying notes.
4
Nicholas Financial, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
Three months ended Six months ended
September 30, September 30,
2002 2001 2002 2001
------------------------------------------------
Revenue:
Interest income on
finance receivables $5,492,139 $4,857,907 $10,725,488 $9,389,658
Sales 92,939 89,922 175,315 189,042
------------------------------------------------
5,585,078 4,947,829 10,900,803 9,578,700
Expenses:
Cost of sales 25,652 19,873 42,820 43,562
Marketing 155,860 138,014 309,341 248,471
Administrative 2,114,689 1,798,052 4,096,548 3,482,578
Provision for credit losses 582,138 427,776 1,129,204 780,425
Depreciation and amortization 42,000 60,000 79,000 105,000
Interest expense 967,632 1,010,581 1,931,695 2,006,413
------------------------------------------------
3,887,971 3,454,296 7,588,608 6,666,449
------------------------------------------------
Operating income
before income taxes 1,697,107 1,493,533 3,312,195 2,912,251
Income tax expense:
Current 508,509 468,024 1,081,758 1,011,146
Deferred 132,442 95,000 161,117 89,583
------------------------------------------------
640,951 563,024 1,242,875 1,100,729
------------------------------------------------
Net Income $1,056,156 $ 930,509 $ 2,069,320 $ 1,811,522
================================================
Earnings per share - basic $0.21 $0.19 $0.41 $0.38
================================================
Earnings per share - diluted $0.20 $0.18 $0.39 $0.35
================================================
See accompanying notes.
5
Nicholas Financial, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six months ended September 30,
2002 2001
---------------------------------
Operating activities
Net income $ 2,069,320 $ 1,811,522
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation 79,000 105,000
Provision for credit losses 1,129,204 780,425
Deferred income taxes 161,117 89,385
Changes in operating assets and
liabilities:
Accounts receivable (4,604) (2,976)
Prepaid expenses and other assets (323,055) (147,312)
Accounts payable (291,170) (30,583)
Drafts payable (121,320) -
Income taxes payable (110,116) (93,819)
Deferred revenues 255,781 64,690
------------------------
Net cash provided by operating
activities 2,844,157 2,576,332
Investing activities
Increase in finance receivables,
net of principal collected (6,580,266) (4,924,823)
Purchase of property and equipment,
net of disposals (118,151) (109,625)
------------------------
Net cash used in investing activities (6,698,417) (5,034,448)
Financing activities
Issuance of notes payable -
related party 107,094 -
Net proceeds from line of credit 4,260,000 2,200,000
Sale of common stock 34,130 64,488
------------------------
Net cash provided by
financing activities 4,401,224 2,264,488
------------------------
Net increase(decrease) in cash 546,964 (193,628)
Cash, beginning of period 51,239 233,167
------------------------
Cash, end of period $ 598,203 $ 39,539
========================
See accompanying notes.
6
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
September 30, 2002
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, 2002 are not necessarily
indicative of the results that may be expected for the year
ending March 31, 2003. 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, 2002.
2. 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)
Three months ended Six months ended
September 30, September 30,
2002 2001 2002 2001
-----------------------------------------------
Numerator:
Numerator for basic earnings per
share - Net income available
to common stockholders $1,056,156 $930,509 $2,069,320 $1,811,522
Effect of dilutive securities:
Convertible debt - 4,068 - 13,423
----------------------------------------------
Numerator for dilutive earnings
per share - income available
to common stockholders after
assumed conversions $1,056,156 $934,577 $2,069,320 $1,824,945
==============================================
Denominator:
Denominator for basic earnings
per share - weighted
average shares 5,010,351 4,875,683 5,004,909 4,756,949
Effect of dilutive securities:
Employee stock options 305,659 307,967 324,398 264,676
Convertible debt - 96,618 - 203,865
---------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted-
average shares and
assumed conversions 5,316,010 5,280,268 5,329,307 5,225,490
=============================================
Earnings per share - basic $0.21 $0.19 $0.41 $0.38
=============================================
Earnings per share - diluted $0.20 $0.18 $0.39 $0.35
=============================================
8
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
3. Finance Receivables
Finance receivables consist of automobile finance installment
contracts and direct consumer loans and are detailed as follows:
Finance receivables, gross contract $129,557,491
Less:
Unearned interest (31,005,238)
-------------
98,552,253
Nonrefundable dealer reserves (11,952,122)
Allowance for credit losses (5,081,682)
-------------
Finance receivables, net $ 81,518,449
=============
The terms of the receivables range from 12 to 60 months and bear
a weighted average effective interest rate of 24%.
4. 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 .25%. 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. and
its subsidiaries.
5. Notes Payable - Related Party
The Company's notes payable consist of unsecured notes bearing
interest at 9.5% with principal and interest due within 30-days
upon demand. The notes totaled $649,376 at September 30, 2002.
9
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
6. Derivatives and Hedging
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). This statement establishes requirements
for accounting and reporting of derivative instruments and
hedging activities. SFAS 133 was updated by the issuance of SFAS
No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" and
SFAS No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities - amendment of FASB Statement No.
133." As amended, SFAS 133 establishes accounting and reporting
standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives), and for hedging activities.
The Company adopted the provisions of SFAS 133, as amended by
SFAS 137 and SFAS 138, on April 1, 2001, which requires that all
derivative instruments be recorded on the balance sheet at fair
value. The estimated fair value of derivative financial
instruments represents the amount required to enter into similar
offsetting contracts with similar remaining maturities based on
quoted market prices.
The Company utilizes 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. When entering into contracts intended by the
Company to receive hedge accounting treatment, the Company
formally designates and documents the financial instrument as a
hedge of a specific underlying exposure, as well as the risk
management objectives and strategies for undertaking the hedge
transaction.
The Company has entered into the following cash-flow hedges:
Fixed
Date Notional Rate Of
Entered Amount Interest Maturity Date
--------------------------------------------------------
August 19, 1999 $10,000,000 5.80% August 1, 2003
May 17, 2000 10,000,000 6.87% May 17, 2004
March 30,2001 10,000,000 4.89% March 30, 2003
October 5, 2001 10,000,000 3.85% October 5, 2004
June 28, 2002 10,000,000 3.83% July 2, 2005
10
Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
The Company has also entered into various interest rate option
agreements with maturities through May 17, 2004.
For cash-flow hedge transactions, changes in the fair value of
the derivative instrument are recorded as a component of other
comprehensive income, and reclassified into earnings in the same
period or periods during which earnings are affected by the
variability of the cash flows of the hedged item. Any ineffective
portion of a derivative instrument's change in fair value is
immediately recognized in earnings.
Critical Accounting Policy
The Company's critical accounting policy relates to the allowance
for losses on loans. It is based on management's opinion of an
amount that is adequate to absorb losses in the existing
portfolio. The allowance for credit losses is established through
a provision for loss based on management's evaluation of the risk
inherent in the loan portfolio, the composition of the portfolio,
specific impaired loans and current economic conditions. Such
evaluation, which includes a review of all loans on which full
collectibility may not be reasonably assured, considers among
other matters, the estimated net realizable value or the fair
value of the underlying collateral, economic conditions,
historical loan loss experience, management's estimate of
probable credit losses and other factors that warrant recognition
in providing for an adequate credit loss allowance.
11
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, 2002 to $1,056,156 from $930,509 for the
three month period ended September 30, 2001. Earnings were
favorably impacted by an increase in the outstanding loan
portfolio. The Company's Nicholas Data Services subsidiary did
not contribute significantly to consolidated operations in the
three or six month periods ended September 30, 2002 or 2001.
Portfolio Summary
--------------------
Three months ended Six months ended
September 30, September 30,
2002 2001 2002 2001
-----------------------------------------------------
Average Net Finance
Receivables (1) $97,378,535 $83,284,788 $95,579,869 $81,937,694
Average Indebtedness(2) 57,165,923 50,374,767 56,373,558 50,158,101
Total Finance Revenue(3) 5,492,139 4,857,907 10,725,488 9,389,658
Interest Expense 967,632 1,010,581 1,931,695 2,006,413
--------------------------------------------------
Net Finance Revenue 4,524,507 3,847,326 8,793,793 7,383,245
Gross Portfolio Yield(4) 22.56% 23.33% 22.44% 22.92%
Average Cost of
Borrowed Funds(2) 6.77% 8.02% 6.85% 8.00%
--------------------------------------------------
Net Interest Spread(5) 15.79% 15.31% 15.59% 14.92%
Provision for Credit
Losses as a Percentage
of Average Net Finance
Receivables 2.39% 2.05% 2.36% 1.90%
Net Portfolio Yield(4) 16.19% 16.42% 16.04% 16.12%
Operating Expenses as
a Percentage of
Average Net Finance
Receivables (6) 9.21% 9.17% 9.07% 8.97%
Pre-tax Yield as a
Percentage of Average
Net Finance Receivables(7) 6.98% 7.25% 6.97% 7.15%
Write-off to
Liquidation(8) 9.29% 9.37% 8.60% 8.38%
Net Charge-Off
Percentage(9) 7.97% 8.24% 7.47% 7.30%
See accompanying notes.
12
(1) Average net finance receivables represents the average of
net finance receivables throughout the period. Net
finance receivables represents gross finance receivables
less any unearned finance charges related to those
receivables.
(2) Average indebtedness represents the average outstanding
borrowings under the Line of Credit and notes payable-
related party. Average cost of borrowed funds represents
interest expense as a percentage of average indebtedness.
(3) Does not include revenue generated by the Company's software
subsidiary "NDS". See page 13 for detail on NDS revenue for
the three months ended September 30, 2002 and 2001,
respectively. See page 14 for detail on NDS revenue for the
six months ended September 30, 2002 and 2001, 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) Net interest spread represents the gross portfolio yield
less the average cost of borrowed funds.
(6) Does not include operating expenses associated with the
Company's software subsidiary "NDS". See page 13 for detail
on NDS cost of sales and operating expenses for the three
months ended September 30, 2002 and 2001, respectively. See
page 14 for detail on NDS cost of sales and operating
expenses for the six months ended September 30, 2002 and
2001, 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.
13
Three months ended September 30, 2002 compared to three months
ended September 30, 2001
Interest Income and Loan Portfolio
Interest revenue increased 13% to $5.5 million for the
period ended September 30, 2002, from $4.9 million for the period
ended September 30, 2001. The net finance receivable balance
totaled $81.5 million at September 30, 2002, an increase of 18%
from the $69.2 million at September 30, 2001. 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 18% to $129.6 million at September 30, 2002
from $109.8 million at September 30, 2001. The primary reason
interest revenue increased was the increase in the outstanding
loan portfolio. The gross portfolio yield decreased from 23.33%
for the period ended September 30, 2001 to 22.56% for the period
ended September 30, 2002. The net portfolio yield decreased from
16.42% for the period ended September 30, 2001 to 16.19% for the
period ended September 30, 2002. The primary reason for the
decrease in the net portfolio yield was an increase in the
provision for credit losses for the period ended September 30,
2002 of 2.39% of interest earning assets from 2.05% for the
period ended September 30, 2001.
Computer Software Business
Sales for the period ended September 30, 2002 were $92,939
compared to $89,922 for the period ended September 30, 2001, an
increase of 3%. This increase was primarily due to higher revenue
from the existing customer base. Cost of sales and operating
expenses decreased from $105,682 for the period ended September
30, 2001 to $96,460 for the period ended September 30, 2002.
Operating Expenses
Operating expenses, excluding provision for credit losses
and interest expense, increased to $2.3 million for the period
ended September 30, 2002 from $2.0 million for the period ended
September 30, 2001. This increase of 16% 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 9.17% for
the period ended September 30, 2001 to 9.21% for the period ended
September 30, 2002.
Interest Expense
Interest expense decreased to $967,632 for the period ended
September 30, 2002 as compared to $1,010,581 for the period ended
September 30, 2001. The average indebtedness for the period ended
September 30, 2002 increased to $57.2 million compared to $50.4
million for the period ended September 30, 2001. This increase
was offset by a decrease in the average cost of outstanding
borrowings from 8.02% during the three months ended September 30,
2001 to 6.77% during the three months ended September 30, 2002.
14
Six months ended September 30, 2002 compared to six months ended
September 30, 2001
Interest Income and Loan Portfolio
Interest revenue increased 14% to $10.7 million for the
period ended September 30, 2002, from $9.4 million for the period
ended September 30, 2001. The net finance receivable balance
totaled $81.5 million at September 30, 2002, an increase of 18%
from the $69.2 million at September 30, 2001. 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 18% to $129.6 million at September 30, 2002
from $109.8 million at September 30, 2001. The primary reason
interest revenue increased was the increase in the outstanding
loan portfolio. The gross portfolio yield decreased from 22.92%
for the period ended September 30, 2001 to 22.44% for the period
ended September 30, 2002. The net portfolio yield decreased from
16.12% for the period ended September 30, 2001 to 16.04% for the
period ended September 30, 2002. The primary reason for the
decrease in the net portfolio yield was an increase in the
provision for credit losses for the period ended September 30,
2002 of 2.36% of interest earning assets from 1.90% for the
period ended September 30, 2001.
Computer Software Business
Sales for the period ended September 30, 2002 were $175,315
compared to $189,042 for the period ended September 30, 2001, a
decrease of 7%. This decrease was primarily due to lower revenue
from the existing customer base during the first quarter of the
fiscal year. Cost of sales and operating expenses decreased from
$204,049 for the period ended September 30, 2001 to $193,166 for
the period ended September 30, 2002.
Operating Expenses
Operating expenses, excluding provision for credit losses
and interest expense, increased to $4.5 million for the period
ended September 30, 2002 from $3.9 million for the period ended
September 30, 2001. This increase of 17% was primarily
attributable to the additional staffing of several existing
branches, increased general operating expenses and the opening of
3 additional branch offices. Operating expenses as a percentage
of interest earning assets increased from 8.97% for the period
ended September 30, 2001 to 9.07% for the period ended September
30, 2002.
Interest Expense
Interest expense decreased to $1.9 million for the period
ended September 30, 2002 as compared to $2.0 million for the
period ended September 30, 2001. The average indebtedness for the
period ended September 30, 2002 increased to $56.4 million
compared to $50.2 million for the period ended September 30,
2001. This increase was offset by a decrease in the average cost
of outstanding borrowings from 8.00% during the six months ended
September 30, 2001 to 6.85% during the six months ended September
30, 2002.
15
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 72 Contracts
with an aggregate initial principal amount of approximately
$588,726. As of September 30, 2002, the Company had 395 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 and
Ohio. All Contracts purchased by a branch during a fiscal quarter
comprise a pool. This method of pooling by branch and quarter
allows the Company to evaluate the different markets where the
branches operate. The pools also allow the Company to evaluate
the different levels of customer income, stability, credit
history, and the types of vehicles purchased in each market.
A pool retains an amount equal to 100% of the discount into a
reserve for credit losses. In situations where, 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 is
used to reestablish adequate reserves. If a pool is fully
liquidated and has any remaining 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 September 30, 2002, the Company
had established reserves for losses on Contracts of $16,831,493
or 13.49% of gross outstanding receivables under the Contracts.
16
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, 2002 September 30, 2001
------------------------------------------------
Contracts
Gross Balance Outstanding $124,728,292 $105,378,020
Dollar Dollar
Delinquencies Amount Percent* Amount Percent*
-------------- ------- --------- --------- --------
30 to 59 days $2,538,101 2.03% $2,472,836 2.35%
60 to 89 days 733,604 0.59% 733,846 0.70%
90 + days 325,314 0.26% 242,889 0.23%
---------- ----- ---------- -----
Total Delinquencies $3,597,019 $3,449,571
*Total Delinquencies
as percent of
outstanding balance 2.88% 3.28%
Direct Loans
Gross Balance Outstanding $4,829,199 $4,399,201
Delinquencies
-------------
30 to 59 days $72,985 1.51% $76,561 1.74%
60 to 89 days 14,414 0.30% 5,414 0.12%
90 + days 13,150 0.27% 6,187 0.14%
------- ----- ------- -----
Total Delinquencies $100,549 $88,162
*Total Delinquencies
as a percent of
outstanding balance 2.08% 2.00%
The provision for credit losses was $582,138 for the three
month period ended September 30, 2002 and 1,129,204 for the six
month period ended September 30, 2002 as compared to $427,776 for
the three month period ended September 30, 2001 and 780,425 for
the six month period ended September 30, 2001. The Company's
total reserve percentage increased from 12.92% for the period
ended March 31, 2002 to 13.15% for the period ended September 30,
2002. Management believes that the reserve adjustments made
during the three and six month period ended September 30, 2002
are consistent with its reserve methodology.
Income Taxes
The Company's effective tax rate remained relatively consistent
at 37.77% and 37.52% for the three and six month periods ended
September 30, 2002 compared to 37.70% and 37.80% for the three
and six months ended September 30, 2001.
17
Liquidity and Capital Resources
The Company's cash flows for the six months ended September 30,
2002 and September 30, 2001 are summarized as follows:
Six months ended Six months ended
September 30, September 30,
2002 2001
-------------------------------------
Cash provided by (used in):
Operating Activities - $ 2,844,157 $ 2,576,332
Investing Activities -
(primarily purchase of
Contracts) (6,698,417) (5,034,448)
Financing Activities 4,401,224 2,264,488
-------------------------------
Net increase(decrease)in cash 546,964 (193,628)
The Company's primary use of working capital during the
three months ended September 30, 2002 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, 2002 the Company had approximately $17.5 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.
Future Expansion
The Company currently operates twenty-five branch locations,
sixteen 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 and two in the state of Ohio. Each office is budgeted
(size of branch, number of employees and location) to handle up
to 1,000 accounts and up to $7,500,000 in outstanding
receivables. To date two of our branches have reached this
capacity.
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 also intends to continue its policy of not paying
dividends and using earnings from operations to purchase
Contracts or make direct consumer loans. The Company believes
that opportunity for growth continues to exist in Florida,
Georgia, North Carolina, South Carolina and Ohio and intends to
continue its expansion activities in those states. The Company
is currently expanding its automobile financing program in the
State of Ohio. The Company has targeted certain geographic
locations within the State of Ohio where it believes there is a
sufficient market for its automobile financing program. The
Company is currently purchasing Contracts in the State of Ohio
utilizing employees who reside in the State of Ohio. These
employees are developing their respective markets in Ohio 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.
18
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.
19
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 - None
20
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, 2002.
NICHOLAS FINANCIAL, INC.
(Registrant)
Date: November 13, 2002 /s/Peter L. Vosotas
---------------------------
Peter L. Vosotas
Chairman, President,
Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2002 /s/Ralph T. Finkenbrink
---------------------------
Ralph T. Finkenbrink
(Principal Financial Officer
and Accounting Officer)
21
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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the
registrant and have:
a)designed such disclosure controls and procedures 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
quarterly report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c)presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; 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;
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date or our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/ Peter L. Vosotas
------------------- -------------------------
Peter L. Vosotas
President & CEO
22
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 quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures 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
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, 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 in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; 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;
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date or our most
recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/Ralph T. Finkenbrink
----------------- ----------------------------
Ralph T. Finkenbrink
Senior Vice President
23
EXHIBIT INDEX
Item 6. 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
24
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
25
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, 2002 (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, 2002
26
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, 2002 (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 T. Finkenbrink
Chief Executive Officer
November 13, 2002