UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the fiscal year ended March 31, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________.
Commission file number: 0-26680
NICHOLAS FINANCIAL, INC.
(Name of Small Business Issuer in its Charter)
British Columbia, Canada 8736-3354
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
Nicholas Financial, Inc.
2454 McMullen Booth Road, Building C
Clearwater, Florida 33759
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code:
(727) 726-0763
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 Par Value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. The
issuer's revenues for its most recent fiscal year ended March 31, 2003
were $22,376,875.As of May 30, 2003, 5,006,021 shares of the
Registrant's Common Stock, $0.01 par value, were outstanding, and the
aggregate market value of the shares held by non-affiliates was
approximately $16,635,000.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's
definitive Proxy Statement for the Annual Meeting of Stockholders
currently scheduled to be held on August 6, 2003, expected to be filed
with the Commission pursuant to Regulation 14A on or about July 9,
2003, are incorporated by reference in Part III of this Annual Report
on Form 10-KSB.
Transitional Small Business Disclosure Format (check one) : Yes
No X
(This page intentionally left blank)
NICHOLAS FINANCIAL, INC.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I Page No.
Item 1. Description of Business.....................3
Item 2. Description of Properties..................13
Item 3. Legal Proceedings..........................13
Item 4. Submission of Matters to a Vote
of Security Holders.......................13
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters.......................14
Item 6. Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................15
Item 7. Financial Statements.......................27
Item 8. Changes In and Disagreements With
ccountants on Accounting and
Financial Disclosure......................49
PART III
Item 9. Directors, Executive Officers,
Promoters and Control Persons;
Compliance with Section 16 (a)
of the Exchange Act.......................49
Item 10. Executive Compensation.....................49
Item 11. Security Ownership of Certain Beneficial
Owners, Management and Related Stockholder
Matters...................................50
Item 12. Certain Relationships and Related
Transactions..............................50
Item 13. Exhibits and Reports on Form 8-K...........51
Item 14. Controls and Procedures....................54
Item 15. Principal Accountant Fees and Services.....54
2
Forward-Looking Information
This report on Form 10-KSB contains various forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934 and
information that is 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 Nicholas Financial, Inc., including its
subsidiaries ("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 cause actual results to
differ materially from those projected in forward-looking statements
include fluctuations in the economy, the degree and nature of
competition, fluctuations in interest rates, demand for consumer
financing in the markets served by the Company, the Company's products
and services, increases in the default rates experienced on retail
installment sales Contracts, regulatory changes in the Company's
existing and future markets, and the Company's ability to expand its
business, including its ability to identify and 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. All
forward-looking statements included in this report are based on
information available to the Company on the date hereof, and the
Company assumes no obligation to update any such forward-looking
statement. Prospective investors should also consult the risk factors
described from time to time in the Company's reports on Forms 10-QSB,
8-K and 10-KSB and annual reports to shareholders.
3
PART I
Item 1. Description of Business
General
Nicholas Financial, Inc. ("Nicholas Financial-Canada") is a
Canadian holding company incorporated under the laws of British
Columbia in 1986. The business activities of Nicholas Financial-
Canada are conducted through its two wholly-owned subsidiaries formed
pursuant to the laws of the State of Florida, Nicholas Financial, Inc.
("Nicholas Financial") and Nicholas Data Services, Inc., ("NDS").
Nicholas Financial is a specialized consumer finance company engaged
primarily in acquiring and servicing installment sales Contracts
("Contracts") for purchases of new and used automobiles and light
trucks. To a lesser extent, Nicholas Financial also makes direct
consumer loans and sells consumer-finance related products ("Insurance
Products"). NDS is engaged in designing, developing, marketing and
supporting industry specific computer application software for small
businesses located primarily in the Southeast United States. Nicholas
Financial's financing activities accounted for approximately 99% and
98% of consolidated revenues for each of the fiscal years ended March
31, 2003 and 2002. NDS's activities accounted for approximately 1% and
2% of such revenues during the same periods.
Nicholas Financial-Canada, Nicholas Financial and NDS are
hereafter collectively referred to as the "Company". Unless otherwise
specified, all financial information herein is designated in United
States currency.
The Company's principal executive offices are located at 2454
McMullen Booth Road, Building C, Clearwater Florida 33759, and its
telephone number is (727) 726-0763.
Automobile Finance Business - Indirect Loans
The Company is engaged in the business of providing financing
programs, primarily on behalf of purchasers of new and used cars and
light trucks who meet the Company's credit standards, but who do not
meet the credit standards of traditional lenders, such as banks and
credit unions, because of the age of the vehicle being financed and/or
the customer's job instability or credit history. Unlike traditional
lenders, which look primarily to the credit history of the borrower in
making lending decisions and typically finance new automobiles, the
Company is willing to purchase installment sales Contracts for
purchases made by borrowers who do not have a good credit history and
for older model and high mileage automobiles. In making decisions
regarding the purchase of a particular installment sales Contract the
Company considers the following factors related to the borrower: place
and length of residence, current and prior job status, history in
making installment payments for automobiles, current income and credit
history. In addition, the Company examines its prior experience with
Contracts purchased from the dealer from which the Company is
purchasing the Contract, and the value of the automobile in relation
to the purchase price and the term of the installment sales Contract.
The Company's automobile finance programs are currently conducted
in Florida, Georgia, North Carolina, South Carolina, Ohio and Michigan
only under the name Nicholas Financial, Inc. The Company currently
operates fifteen branch offices in Florida, three branch offices in
Georgia, three branch offices in North Carolina, one branch in South
Carolina, and five branches in Ohio. As of March 31, 2003 the Company
had non-exclusive agreements with approximately 750 dealers for the
purchase of individual retail installment sales Contracts that meet
the Company's financing criteria. The dealer agreements require the
dealer to originate Contracts in accordance with the Company's
guidelines. Once a Contract is purchased by the Company the dealer is
no longer involved in the relationship between the Company and the
borrower, other then through the existence of limited representation
and warranties of the dealer.
4
The obligors under the Contracts typically make down payments, in
the form of cash or trade-in, ranging from 5% to 20% of the sale price
of the vehicle financed. The balance of the purchase price of the
vehicle plus taxes, title fees and, if applicable, premiums for
extended service Contracts, accident and health insurance and/or
credit life insurance, are generally financed over a period of 12 to
66 months. Accident and health insurance coverage enables the borrower
to make required payments under the Contract in the event the borrower
becomes unable to work because of illness or accident and credit life
insurance pays the borrower's obligations under the Contract upon his
or her death.
The Company purchases Contracts from the automobile dealer at a
negotiated price that is less than the original principal amount being
financed (the discount) by the purchaser of the automobile. The
amount of the discount depends upon factors such as the age and value
of the automobile and the creditworthiness of the purchaser. In
certain markets, competition determines the discount that the Company
can charge. Historically, the Contracts purchased by the Company have
been purchased at discounts that range from 1% to 15% of the original
principal amount of the Contract. In addition to the discount, the
Company charges the dealer a processing fee of $75 per Contract
purchased. As of March 31, 2003, the Company's loan portfolio consists
exclusively of Contracts purchased without recourse to the dealer.
Although all the Contracts in the Company's loan portfolio were
acquired without recourse, the dealer remains liable to the Company
for liabilities arising from certain representations and warranties
made by the dealer with respect to compliance with applicable federal
and state laws and valid title to the vehicle.
The Company purchases a Contract only after the dealer and the
Company arrive at a negotiated price for the Contract and the dealer
has provided the Company with the requisite proof that the vehicle is
properly titled, that the Company has a perfected first priority lien
on the financed vehicle, that the customer has obtained the required
collision insurance naming the Company as loss payee and that the
installment sales Contract has been fully and accurately completed and
validly executed. Once the Company has received and approved all
required documents, it pays the dealer for the Contract and commences
servicing the Contract.
The Company requires the owner of the vehicle to obtain and
maintain collision insurance, naming the Company as the loss payee,
with a deductible of not more than $500. The Company does not offer
collision insurance. Both the Company and the dealers offer purchasers
of vehicles certain other "add on products". These products are
offered by the dealer on behalf of the Company or by the automobile
dealer on behalf of the dealership at the time of sale. They consist
of a roadside assistance plan, extended warranty protection, gap
insurance, credit life insurance, credit accident and health insurance
and credit property insurance. If the purchaser so desires, the cost
of these products may be included in the amount financed under the
Contract. As of March 31, 2003 and 2002, approximately 33% and 19%,
respectively, of the borrowers under Contracts in the Company's loan
portfolio had elected to purchase such "add on products".
5
The following table sets forth certain information for each of
the fiscal years ended March 31, 2003 and 2002 respectively, relating
to the Company's automobile finance business:
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 Company has fifteen branch locations in
Florida and does not have plans for significant additional expansion
in Florida. The Company has been expanding its Contract procurement in
North Carolina, South Carolina, Ohio 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 as of March 31, 2003 and 2002 was a 1999and 1998
vehicle, respectively. Contracts purchased and originated are shown at
face value.
Maximum allowable Fiscal years ended March 31,
State interest rate (1) 2003 2002
---------------------------------------------------------------------
FL 30% $37,230,822 $39,591,216
GA 29% 7,880,717 7,088,402
NC 29% 7,618,287 6,911,208
SC 29% 2,788,167 1,213,691
OH 25% 8,484,637 1,766,272
VA 29% 134,636 365,079
MI 25% 291, 994 -
---------------------------------------------------------------------
Total $64,429,260 $56,935,868
=====================================================================
(1)The allowable maximum interest rates by State i s subject to
change and are governed by the individual states the Company
conducts business in.
Fiscal year ended
March 31,
Contracts 2003 2002
----------------------------------------------------------------
Purchases $64,429,260 $56,935,868
Weighted APR 24.22% 24.57%
Average Discount 8.91% 8.66%
Average Term (months) 43 41
Average Loan $8,102 $8,230
Number of Contracts 7,952 6,918
6
Direct Loans
The Company is licensed to originate direct consumer loans in
Florida, Georgia and North Carolina. Direct loans are loans originated
directly between the Company and the consumer. These loans are
typically for amounts ranging from $1,000 - $6,000 and are generally
secured by a lien or by household goods. The majority of direct loans
are originated with current or former borrowers under the Company's
automobile financing program. The typical direct loan has
significantly better credit risk due to the historical payment history
with the Company. The Company does not have a direct consumer loan
license in Ohio, South Carolina or Michigan. Typically, the Company
allows for a seasoning process to occur in a new market prior to
determining whether to pursue a direct loan license there. The Company
expects to make a decision in the coming fiscal year on whether or not
to pursue a direct loan license for Ohio. The Company does not expect
to pursue a direct loan license in any other states during the next
fiscal year. The size of the loan and maximum interest rate that can
be charged varies from state to state in which the Company does
possess a direct loan license. The average loan made to date by the
Company had an initial principal balance of approximately $3,000. The
Company does not expect the average loan size to increase
significantly within the foreseeable future. The Company offers loans
primarily to borrowers under the Contracts previously purchased by the
Company. In deciding whether or not to make a loan, the Company
considers the individual's credit history, job stability, income and
impressions created during a personal interview with a Company loan
officer. Additionally, because approximately 90% of the direct
consumer loans made by the Company to date have been made to borrowers
under Contracts previously purchased by the Company, the payment
history of the borrower under the Contract is a significant factor in
making the loan decision. The direct consumer loan program was
implemented in April 1995 and currently accounts for less than 5% of
total annual revenue for the Company. As of March 31, 2003, loans
made by the Company pursuant to its direct consumer loan program
constituted approximately 3% of the aggregate principal amount of the
Company's loan portfolio.
In connection with its direct consumer loan program, the Company
also offers health and accident insurance coverage and credit life
insurance to borrowers. Borrowers in approximately 79% of the 1,424
direct consumer loan transactions outstanding as of March 31, 2003 had
elected to purchase insurance coverage offered by the Company. The
cost of this insurance is included in the amount financed by the
borrower.
The following table sets forth certain information for each of
the fiscal years ended March 31, 2003 and 2002 respectively, relating
to the Company's direct consumer loan business:
Fiscal year ended
March 31,
Direct loan originations 2003 2002
----------------------------------------------------
Originations $3,647,074 $4,100,181
Weighted APR 26.29% 26.00%
Average Term (months) 27 29
Average Loan $2,965 $3,203
Number of Contracts 1,230 1,280
Financing Sources
The Company finances the acquisition of Contracts with retained
earnings, cash flow from operations, loans from investors, insiders,
and a revolving line of credit with Bank of America. In June 2002, the
Company extended the maturity date with Bank of America until November
30, 2004.
7
The Bank of America line of credit is secured by all assets of
the Company. The interest rate payable by the Company on funds drawn
under the line of credit is based on either the current prime rate
plus 25 basis points as published by Bank of America or several Libor
pricing options. In addition to interest, the Company also pays a
monthly fee to Bank of America equal to .25% of the amount available
under the line of credit that has not been drawn upon. As of March 31,
2003, the Company had drawn approximately $60 million under the line
of credit.
Underwriting Guidelines
The Company's typical customer is 30 years old, has a monthly
gross income of $1,700 and a credit history that fails to meet the
lending standards of most banks and credit unions. Among the credit
problems experienced by the Company's customers that resulted in a
poor credit history are: unpaid revolving credit card obligations;
unpaid medical bills; unpaid student loans; prior bankruptcy; and
evictions for nonpayment of rent. The Company believes that its
customer profile is similar to that of its direct competitors.
Prior to its approval of the purchase of a Contract, the Company
is provided with a standardized credit application completed by the
consumer which contains information relating to the consumer's
background, employment, and credit history. The Company also obtains
credit reports from Equifax, TRW or TransUnion which are independent
reporting services. The Company verifies the consumer's employment
history, income and residence. In most cases, consumers are
interviewed by telephone by a Company application processor.
The Company has established internal buying guidelines to be used
by its Branch Managers and underwriters when purchasing Contracts. Any
Contract that does not meet these guidelines must be approved by the
senior management of the Company. The Company currently has District
Managers charged with managing the specific branches in a defined
geographic area. In addition to a variety of administrative duties,
the District Managers are responsible for monitoring their assigned
branch's compliance with the Company's underwriting standards.
The Company continues to utilize its Loss Recovery Department
("LRD") to perform on-site audits of branch compliance with Company
buying guidelines. LRD audits Company branches on a schedule that is
variable depending on the size of the branch, length of time a branch
has been open, current tenure of the branch manager, previous branch
audit score and current and historical branch profitability. LRD
reports directly to the Accounting and Administrative Management of
the Company. The Company believes that an independent review and audit
of its branches that is not tied to the sales function of the Company
is imperative in order to assure the information obtained is
impartial.
The Company uses essentially the same criteria in analyzing a
direct consumer loan as it does in analyzing the purchase of a
Contract. Lending decisions regarding direct consumer loans are made
based upon a review of the customer's loan application, credit
history, job stability, income, in-person interviews with a Company
loan officer and the value of the collateral offered by the borrower
to secure the loan. To date, since approximately 90% of the Company's
direct loans have been made to individuals whose automobiles have been
financed by the Company, the customer's payment history under the
automobile installment sale agreement is a significant factor in the
lending decision. The decision process with respect to the purchase
of Contracts is similar, although the customer's prior payment history
with automobile loans is weighted more heavily in the decision making
process and the collateral value of the automobile being financed is
considered.
After reviewing the information included in the loan application
and taking the other factors into account, Company representatives
categorize the borrower using internally developed credit
classifications of "A", indicating higher creditworthiness, through
"D", indicating lower creditworthiness. In the absence of other
factors, such as a favorable payment history on a Contract held by the
Company, the Company generally makes direct consumer loans only to
individuals rated in categories "B" or higher. Contracts are financed
for individuals who fall within all four acceptable rating categories
utilized, "A" through "D".
8
Usually borrowers who fall within the two highest categories are
purchasing a two to four year old, low mileage used automobile from
the inventory of a new car or franchise dealer while borrowers in the
two lowest categories are purchasing an older, high mileage automobile
from an independent used automobile dealer.
Upon credit approval of the customer and the receipt of all
required title and insurance documentation, the Company pays the
dealer for the Contract. The Company typically purchases the Contract
for a price that approximates the wholesale value of the automobile
being financed. The amount the Company is willing to pay a dealer for
a particular Contract depends upon the credit rating of the customer.
The Company will pay more (e.g. purchase the Contract at a smaller
discount from the original principal amount) for Contracts as the
credit risk of the customer improves. The discounts from the initial
principal amount of Contracts purchased by the Company range from 1%
to 15% and have averaged approximately 9% during the last two fiscal
years.
Servicing and Monitoring of Contracts
The Company requires all customers to obtain and maintain
collision insurance covering damage to the vehicle. Failure to
maintain insurance constitutes a default under the Contract and the
Company may at its discretion repossess the vehicle. To reduce
potential loss due to insurance lapse, the Company has the legal and
Contractual right to force place its own collateral protection
insurance policy which covers loss due to physical damage to vehicles
not covered by collision insurance.
The Company's Management Information Services personnel maintain
a number of reports to monitor compliance by borrowers with their
obligations under Contracts and direct loans made by the Company.
These reports may be accessed on a real-time basis throughout the
Company by management personnel, including Branch Managers and staff,
at computer terminals located in the main office and each branch
office. The reports include: delinquency aging reports, insurance due
reports, customer promises reports, vehicle information reports,
purchase reports, dealer analysis reports, static pool reports, and
repossession reports.
A delinquency report is an aging report that provides basic
information regarding each account and indicates accounts that are
past due. The report includes information such as the account number,
address of the borrower, home and work phone numbers of the borrower,
original term of the Contract, number of remaining payments,
outstanding balance, due dates, date of last payment, number of days
past due, scheduled payment amount, amount of last payment, total past
due, and special payment arrangements or agreements.
Accounts that are less than 120 days matured are included on the
delinquency report on the first day that the Contract is contractually
past due. After an account has matured more than 120 days, it is not
included on the delinquency report until it is 11 days past due. Once
an account becomes 30 days past due, repossession proceedings are
implemented unless the borrower provides the Company with an
acceptable explanation for the delinquency and displays a willingness,
an ability to make the payment, and an agreed upon plan to return the
account to current status. When an account is 60 days past due, the
Company ceases recognition of income on the Contract and repossession
proceedings are initiated. At 120 days delinquent, if the vehicle has
not yet been repossessed, the account is written off. Once a vehicle
has been repossessed, the related loan balance no longer appears on
the delinquency report. It instead appears on the Company's
repossession report and is sold, either at auction or to an automobile
dealer.
When an account becomes delinquent, the Company immediately
contacts the borrower to determine the reason for the delinquency and
to determine if arrangements for payment can appropriately be made.
Once payment arrangements acceptable to the Company have been made,
the information is entered in its database and is used to generate a
"Promises Report", which is utilized by the collection staff for
account follow up.
9
The Company generates an insurance report to monitor compliance
with the insurance obligations imposed upon borrowers. This report
includes the account number, name and address of the borrower,
information regarding the insurance carrier, summarizes the insurance
coverage, identifies the expiration date of the policy, and provides
basic information regarding payment dates and the term of the
Contract. This report assists the Company in identifying borrowers
whose insurance policy is up for renewal or in jeopardy of being
canceled. The Company sends written notices to, and makes direct
contact with, borrowers whose insurance policies are about to lapse or
be canceled. If the borrower fails to provide proof of coverage
within 30 days of notice, the Company has the option of purchasing
insurance and adding the cost and applicable finance charges to the
balance of the Contract.
The Company prepares a repossession report that provides
information regarding repossessed vehicles and aids the Company in
disposing of repossessed vehicles. In addition to information
regarding the borrower, this report provides information regarding the
date of repossession, date the vehicle was sold, number of days it was
held in inventory prior to sale, year and make and model of the
vehicle, mileage, payoff amount on the Contract, NADA book value,
Black Book value, suggested sale price, location of the vehicle,
original dealer, and notes other information that may be helpful to
the Company such as the condition of the vehicle.
The Company also prepares a dealer analysis report that provides
information regarding each dealer from which it purchases Contracts.
This report allows the Company to analyze the volume of business done
with each dealer and the terms on which it purchased Contracts from
the dealer.
The Company's policy is to aggressively pursue legal remedies to
collect deficiencies from customers. Delinquency notices are sent to
customers and verbal requests for payment are made beginning when an
account becomes 11 days delinquent. When an account becomes 30 days
delinquent and the borrower has not made payment arrangements
acceptable to the Company or has failed to respond to the requests for
payment, a repossession request form is prepared by the responsible
branch office employee for approval by the branch manager for the
vicinity in which the borrower lives. Once the repossession request
has been approved, first by the Branch Manager and secondly by their
District Manager, it must then be approved by a corporate officer. The
repossessor delivers the vehicle to a secure location specified by the
Company where it is held. The Company maintains relationships with
several licensed repossession firms which repossess vehicles for fees
that range from $150 to $350 for each vehicle repossessed. As
required by Florida, Georgia, North Carolina, South Carolina and Ohio
law, the customer is notified by certified letter the vehicle has been
repossessed and to regain the vehicle they must make arrangements
satisfactory to the Company and pay the amount owed under the Contract
within ten days after delivery of the letter. The minimum requirement
for return of the vehicle is payment of all past due amounts under the
Contract and all expenses associated with the repossession incurred by
the Company. If satisfactory arrangements for return of the vehicle
are not made within the statutory period, the Company then sends title
to the vehicle to the state title transfer department, which then
registers the vehicle in the name of the Company. The Company then
either sells the vehicle to a dealer or has it transported to an
automobile auction for sale. On average, approximately 30 days lapse
between the time the Company takes possession of a vehicle and the
time it is sold by a dealer or at auction. When the Company determines
that there is a reasonable likelihood of recovering part or all of any
deficiency against the borrower under the Contract, it pursues legal
remedies available to it including lawsuits, judgement liens and wage
garnishments. Historically, the Company has recovered approximately 10-
15% of deficiencies from such borrowers. Proceeds from the disposition
of the vehicles are not included in the percentage range shown above.
10
Marketing and Advertising
The Company's Contract marketing efforts are directed toward
automobile dealers. The Company attempts to meet dealers' needs by
offering highly-responsive, cost-competitive and service-oriented
financing programs. The Company relies on its District and Branch
Managers to solicit agreements for the purchase of Contracts with
automobile dealers located within a 25-mile radius of each branch
office. The Branch Manager provides dealers with information regarding
the Company and the general terms upon which the Company is willing to
purchase Contracts. The Company presently has no plans to implement
any other forms of advertising for the purchase of Contracts such as
radio or newspaper advertisements.
Currently, the primary method utilized by the Company in
soliciting borrowers under its direct consumer loan program is through
direct mailings followed by telephone calls to individuals who have a
good credit history with the Company in connection with Contracts
purchased by the Company. The Company to some extent uses direct mail
marketing to those customers who meet the criteria for a consumer
loan.
The Industry
The non-prime automobile finance market is highly fragmented and
historically has been serviced by a variety of financial entities,
including captive finance subsidiaries of major automobile
manufactures, banks, independent finance companies, and small loan
companies. Many of these financial entities do not consistently
provide financing to this market. Although prime borrowers represent a
large segment of the automobile financing market, there are many
potential purchasers of automobiles who do not qualify as prime
borrowers. Purchasers considered by the Company to be non-prime
borrowers are generally unable to obtain credit from traditional
sources of automobile financing. The Company believes that, because
these potential purchasers represent a substantial market, there is a
demand by automobile dealers with respect to financing for non-prime
borrowers that has not been effectively served by traditional
automobile financing sources.
Computerized Information System
The Company's utilizes integrated computer systems developed by
NDS to enhance its ability to respond to customer inquiries and to
monitor the performance of its indirect and direct loan portfolio and
the performance of individual borrowers under Contracts. All
personnel are provided with instant, simultaneous access to
information from a single shared database. The Company has created
specialized programs to automate the tracking of loans from inception.
The capacity of the networking system includes the Company's branch
office locations. See the discussion above under the caption
"Servicing and Monitoring of Contracts" for a summary of the different
reports prepared by the Company.
11
Strategy
The Company's principal business strategy is to continue its
growth and to increase its profitability through greater penetration
in its current markets, controlled geographic expansion into new
markets and selective portfolio acquisitions. As of the date of this
report, the Company has no commitments or agreements in principle with
respect to any portfolio acquisitions. The Company also intends to
continue its expansion through the increased origination of additional
direct consumer loans. The Company is currently expanding its
automobile financing program in the States of Michigan and South
Carolina. The Company has targeted certain geographic locations within
these states where it believes there is a sufficient market for its
automobile financing program. The Company is currently purchasing
Contracts utilizing employees who reside in these states. These
employees are developing their respective markets and the Company has
created a Central Buying Office in its Corporate Headquarters 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 assurances can be given that any expansion
will occur in these new markets.
Competition
The consumer finance industry is fragmented and highly
competitive. There are numerous financial service companies that
provide consumer credit in the markets served by the Company including
banks, other consumer finance companies, and captive finance companies
owned by automobile manufacturers and retailers. Many of these
companies have significantly greater resources than the Company. The
Company does not believe that increased competition for the purchase
of Contracts will cause a reduction in the interest rate payable by
the purchaser of the automobile. However, increased competition for
the purchase of Contracts will enable automobile dealers to shop for
the best price, thereby giving rise to an erosion in the discount from
the initial principal amount at which the Company would be willing to
purchase Contracts.
The Company's target market consists of persons who are generally
unable to obtain traditional used car financing because of their
credit history, the vehicle's mileage or age. The Company has been
able to expand its automobile finance business in the non-prime credit
market by offering to purchase Contracts on terms that are competitive
with those of other companies which purchase automobile receivables in
that market segment. Because of the daily contact that many of its
employees have with automobile dealers located throughout the market
areas served by it, the Company is generally aware of the terms upon
which its competitors are offering to purchase Contracts. The
Company's policy is to modify its terms if necessary to remain
competitive. The Company will not sacrifice credit quality, its
purchasing criteria or prudent business practices in order to meet the
competition or be driven by unrealizable growth expectations. The
Company expects to analyze new lending programs and marketing methods
which may be implemented with the objective of increasing profits and
or its market share, including the possibility of offering to purchase
portfolios of seasoned Contracts from dealers in bulk transactions
from $100,000 to $10,000,000.
The Company's ability to compete effectively with other companies
offering similar financing arrangements depends upon maintaining close
business relationships with dealers of new and used vehicles. No
single dealer out of the approximately 750 dealers that the Company
has Contractual relationships with accounted for over 3% of its
business volume for either of the fiscal years ended March 31, 2003 or
2002.
12
Regulation
The Company's financing operations are subject to regulation,
supervision and licensing under various federal, state and local
statutes and ordinances. Additionally, the procedures that must be
followed by the Company in connection with the repossession of
vehicles securing Contracts are regulated by each of the states in
which the Company does business. To date, the Company's operations
have been conducted exclusively in the states of Florida, Georgia,
North Carolina, South Carolina, Ohio and Michigan. Accordingly, the
laws of such states as well as applicable federal laws, govern the
Company's operations. Compliance with existing laws and regulations
applicable to the Company has not had a material adverse effect on the
Company's operations to date. Management believes that it maintains
all requisite licenses and permits and is in material compliance with
all applicable local, state and federal regulations.
The Company maintains a Retail Installment Seller's License and a
Sales Finance Company License with the Florida Department of Banking
and Finance, the Georgia Secretary of State (Business Services &
Regulation), the North Carolina Secretary of State, the South Carolina
Secretary of State, the Ohio Secretary of State and the Michigan
Department of Revenue. Pursuant to regulations of the State of Florida
governing the Company's financing business activities, the Department
of Banking and Finance conducts an on site audit of each of the
Company's Florida branches periodically to monitor compliance with the
applicable regulations. The regulations govern, among other matters,
licensure requirements, requirements for maintenance of proper
records, payment of required fees to the States of Florida, Georgia,
North Carolina, South Carolina, Ohio and Michigan, maximum interest
rates that may be charged on loans to finance used vehicles and proper
disclosure to customers regarding financing terms.
Employees
The Company's executive management and various support functions
are centralized at the Company's Corporate Headquarters in Clearwater,
Florida. As of March 31, 2003 the Company employed a total of 133
persons, five of whom work for NDS and 128 of whom work for Nicholas
Financial. The Company provides paid holidays, vacation, sick time,
jury time, health and life insurance, long-term disability insurance,
dental insurance and a retirement plan that includes a Company
matching formula on employee contributions as well as a Company profit
sharing contribution for all qualified employees. No employees are
covered by a collective bargaining agreement and the Company believes
it has good relations with its employees.
13
Item 2. Description of Properties
The Company leases its Headquarters and branch office facilities.
Its Headquarters, located at 2454 McMullen Booth Road, Building C in
Clearwater, Florida, consist of approximately 9,959 square feet. The
Company occupies the space pursuant to a lease that commenced on
January 1, 2000 and was amended on November 25, 2002. The amended
lease expires in January 2008.
Each of the Company's 27 branch offices located in Florida,
Georgia, North Carolina, South Carolina and Ohio consists of
approximately 1,200 square feet. These offices are located in office
parks, shopping centers or strip malls and are occupied pursuant to
leases with an initial term of from two to five years at annual rates
ranging from approximately $8.00 to $16.00 per square foot. The
Company believes that these facilities and additional or alternate
space available to it are adequate to meet its needs for the
foreseeable future.
Item 3. Legal Proceedings
The Company is not a party to any pending legal proceedings other
than ordinary routine litigation incidental to its business, none of
which, in the opinion of management, will have a material adverse
effect on the Company's business, financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the quarter ended March 31, 2003.
14
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Since December 23, 1997, the Company's Common Stock has traded on
the NASDAQ SmallCap System. Effective May 5, 1999, the Company's
trading symbol changed from "NICKF" to "NICK". Share information with
respect to the Common Stock is set forth in the table included below.
As of March 31, 2003, there were approximately 500 holders of
record of the Company's Common Stock. Holders of Common Stock are
entitled to receive dividends if and when declared by the Board of
Directors out of funds legally available therefore. To date, it has
been the Company's policy to retain earnings to finance the growth of
its business. Accordingly, the Company has not declared or paid any
cash dividends since its inception and does not anticipate declaring
or paying any cash dividends in the foreseeable future. Any dividends
on the Common Stock will be at the sole discretion of the Board of
Directors and will depend upon the Company's profitability, capital
requirements, requirements of the Company's lenders, statutory
restrictions and other factors deemed relevant by the Company's Board
of Directors. The Company's line of credit prohibits the payment of
dividends without written approval from the Company's consortium of
lenders.
The following table reflects the high and low sale prices for the
Company's Common Stock for each of the periods indicated as reported
by the NASDAQ Stock Market.
Price Range of Common Stock:
High Low
Fiscal Year ended March 31, 2003
First Quarter ............ $6.09 $3.95
Second Quarter......... 5.34 4.01
Third Quarter........... 4.34 3.85
Fourth Quarter............ 4.08 3.72
High Low
Fiscal Year ended March 31, 2002
First Quarter ............ $3.75 $2.40
Second Quarter......... 5.50 3.15
Third Quarter........... 4.75 3.54
Fourth Quarter............ 4.50 3.65
The information set forth in the second paragraph (and
accompanying table) under the caption "Item 11. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters" of this Annual Report on Form 10-KSB is incorporated herein
by reference.
15
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 allocations of
dealer discount and unearned income and 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.
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Consolidated net income increased in the fiscal year ended March
31, 2003 to $4,281,394 or $0.81 per diluted share from $3,932,139 or
$0.75 per diluted share in the fiscal year ended March 31, 2002.
Earnings for the year were favorably impacted by significant growth in
the outstanding loan portfolio. The following table sets forth certain
financial data:
Year ended March 31
Select Portfolio Information 2003 2002
--------------------------------------------------------------------
Average Net Finance Receivables(1) $97,806,772 $84,388,641
Average Indebtedness(2) 57,335,767 50,907,525
Total Finance Revenue(3) 22,048,535 19,852,758
Interest Expense 3,936,042 3,898,400
----------------------------
Net Finance Revenue 18,112,493 15,954,358
Weighted average Contractual rate(5) 23.65% 23.93%
Gross Portfolio Yield(4) 22.54% 23.53%
Average Cost of Borrowed Funds(2) 6.86% 7.66%
Provision for Credit Losses
as a Percentage of Average Net
Finance Receivables 2.26% 2.27%
Net Portfolio Yield(4) 16.26% 16.64%
Operating Expenses as a
Percentage of Average Net
FinanceReceivables (6) 9.16% 9.09%
Pre-tax Yield as a Percentage of
Average Net Finance Receivables(7) 7.10% 7.55%
Write-off to Liquidation(8) 9.32% 8.62%
Net Charge-Off Percentage(9) 8.13% 7.63%
16
(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 17 for detail on NDS revenue for the
year ended March 31, 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 $426,349 and $466,775
associated with the Company's software subsidiary "NDS for the
year ended March 31, 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.
17
Fiscal 2003 compared to Fiscal 2002
Interest Income and Loan Portfolio
Interest income on finance receivables, predominantly finance
charge income, increased 11% to $22.0 million in fiscal 2003 from
$19.9 million in fiscal 2002. The net finance receivable balance
totaled $86.2 million at March 31, 2003, an increase of 13% from $76.1
million at March 31, 2002. The gross finance receivable balance
increased 13% to $136.7 million at March 31, 2003 from $120.5 million
at March 31, 2002. The primary reason interest revenue increased was
the increase in the outstanding loan portfolio. The primary reason net
finance receivables increased was the opening of five additional
offices and the increased receivable base of several existing branch
offices.
Computer Software Business
In fiscal 2003, the revenues of NDS were $328,340 compared with
fiscal 2002 revenues of $365,367, a decrease of 10%. Operating loss
for fiscal 2003 was $(8,009) compared with an operating loss of
$(11,408) for fiscal 2002. The Company expects both operating revenues
and income of NDS to remain relatively stable, although no assurances
can be given in this regard.
Operating Expenses
Operating expenses excluding provision for credit losses and
interest expense increased to $9.4 million in fiscal 2003 from $8.1
million in fiscal 2002. This increase of 15% was primarily
attributable to the opening of five additional branch locations,
increasing the number of employees in several existing branch
locations and also increasing the number of corporate personnel. The
Company increased its work force from 118 employees at the end of
fiscal 2002 to 133 employees at the end of fiscal 2003.
Interest Expense
Interest expense was $3.9 million in fiscal 2003 as compared to
$3.9 million in fiscal 2002. The reason interest expense did not
increase even though there was an increase in average outstanding
borrowings from $50.9 million to $57.3 million was due to a decrease
in the average cost of borrowed funds. The average cost of borrowed
funds decreased from 7.66% for fiscal 2002 to 6.86% for fiscal 2003.
18
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 68 Contracts with an aggregate initial principal
amount of approximately $550,937. As of March 31, 2003, the Company
had 429 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 and Michigan.
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 the dealer 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 year
ended March 31, 2003 were $2,214,826 compared to $2,923,505 for the
year ended March 31, 2002. The reason for this decrease was an
increase in the charge-off rate for the year ended March 31, 2003 to
9.32% from 8.62% for the year ended March 31, 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 may 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.
19
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.
The Company has experienced higher losses during the fiscal year
ended March 31, 2003, although not to the extent management had
anticipated. This resulted in more mature static pools having reserves
in excess of estimates currently needed to liquidate these pools. The
Company is in the process of accreting these excess reserves from
these more mature pools over the remaining life of the pools. Static
pools originated during the fiscal year ended March 31, 2003 have seen
higher losses than their most recent predecessors, however, these
specific pools still have adequate reserves even though the spread
between reserve percentage and write-off percentage has tightened. The
Company's overall reserve percentage has increased from 12.92% of
gross receivables as of March 31, 2002 to 13.17% of gross receivables
as of March 31, 2003.
20
The following table sets forth a reconciliation of the changes in
dealer discount on Contracts.
Year ended March 31,
2003 2002
-----------------------------
Balance at beginning of period $11,259,898 $10,306,699
Discounts acquired on new volume 10,534,472 9,384,892
Losses absorbed (8,401,071) (6,536,368)
Recoveries 1,068,556 886,451
Reserves accreted (2,067,766) (2,781,776)
----------------------------
Balance at end of period $12,394,089 $11,259,898
============================
Dealer discount as a
percent of gross
Finance receivables 9.37% 9.73%
============================
The following table sets forth a reconciliation of the changes in
the allowance for credit losses on Contracts.
Year ended March 31,
2003 2002
--------------------------
Balance at beginning of period $4,105,174 $3,145,470
Current period provision 1,911,855 1,728,786
Losses absorbed (588,348) (769,082)
------------------------
Balance at end of period $5,428,681 $4,105,174
========================
Allowance as a percent of
gross Finance receivables 4.10% 3.55%
========================
The following table sets forth a reconciliation of the changes in the
allowance for credit losses on Direct loans.
Year ended March 31,
2003 2002
--------------------------
Balance at beginning of period $200,612 $319,545
Current period provision 302,004 184,132
Losses absorbed (208,802) (177,012)
Recoveries 29,372 15,676
Reserves accreted (147,060) (141,729)
----------------------
Balance at end of period $176,126 $200,612
======================
Reserves as a percent
of gross Finance receivables 4.04% 4.20%
======================
Total reserves at end of period $17,998,896 $15,565,684
========================
Reserves as a percent of gross
Finance receivables 13.17% 12.92%
========================
21
The average dealer discount associated with new volume for the
years ended March 31, 2003 and 2002 were 8.91% and 8.66%,
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 increased for the year ended
March 31, 2003 to $2,213,859 compared to $1,912,918 for the year ended
March 31, 2002. This increase is primarily attributed to an increase
in the Net Finance Receivable balance from $76.1 million at March 31,
2002 to $86.2 million at March 31, 2003. To a lesser extent, the
provision for credit losses increased as a result of certain static
pools reaching reserve levels below Company estimates to absorb future
credit losses. In these instances, the Company increased reserves
related to specific static pools through a direct charge to income
through the provision.
The Company's losses as a percentage of liquidation increased
from 8.62% for the fiscal year ended March 31, 2002 to 9.32% for the
fiscal year ended March 31, 2003. The Company anticipates portfolio
performance will deteriorate in the near term but will stabilize over
the longer term, unless the overall economic conditions and
unemployment rate continues to deteriorate from current levels. 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 fiscal year ended March 31, 2003 decreased to 2.20%
from 2.32% for the fiscal year ended March 31, 2002. The delinquency
percentage for direct loans more than thirty days past due for the
fiscal year ended March 31, 2003 increased to 2.22% from 0.86% for the
fiscal year ended March 31, 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 year losses were 11.9% and
12.1% for the years ended March 31, 2003 and 2002, respectively.
Recoveries as a percent of losses have been declining and as the
Company continues to expand, it has become more difficult to implement
the loss recovery model in geographic areas further away from the
Company's corporate headquarters.
Reserves accreted into income for the year ended March 31, 2003
and 2002 were $2,214,826 and $2,923,505, respectively. 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 markets in which the Company does business.
22
The current unemployment rate compared to last year has risen
slightly. 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 increased for the year ended March 31, 2003 as
compared to the year ended March 31, 2002, however the Company
experienced stabilization in the number of voluntary repossessions in
the fourth quarter ended March 31, 2003. As a result of this stability
the Company believes the current reserve levels are adequate in this
regard. The number of bankruptcy filings decreased slightly in the
first six months of the fiscal year ended March 31, 2003 as compared
to the first six months of the fiscal year ended March 31, 2002,
however the last six months of the fiscal year ended March 31, 2003
saw a slight increase in the percentage of bankruptcy filings as
compared to the last six months of the fiscal year ended March 31,
2002. The Company believes the percentage of bankruptcy filings as a
percentage of active receivables will stabilize in the coming fiscal
year, as a result management believes current reserve levels reflect
these assumptions.
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.
23
The following tables present certain information regarding the
delinquency rates experienced by the Company with respect to Contracts
and under its direct consumer loan program:
Year Ended Year Ended
March 31, 2003 March 31, 2002
---------------------------------------
Contracts
Gross Balance Outstanding $132,316,816 $115,683,683
Dollar Dollar
Delinquencies Amount Percent Amount Percent
------------- ----------------------------------------------
30 to 59 days $2,166,719 1.64% $2,004,990 1.73%
60 to 89 days 551,838 0.42% 400,486 0.35%
90 + days 180,499 0.14% 276,096 0.24%
----------- ----- ---------- ------
Total Delinquencies $2,899,056 $2,681,572
Total Delinquencies as a
percent of outstanding balance 2.20% 2.32%
Direct Loans
Gross Balance Outstanding $4,357,032 $4,771,275
Delinquencies
30 to 59 days 50,199 1.15% 33,992 0.71%
60 to 89 days 5,724 0.13% 5,081 0.11%
90 + days 40,987 0.94% 1,842 0.04%
--------- ----- ------- -----
Total Delinquencies $96,910 $40,915
Total Delinquencies as a
percent of outstanding balance 2.22% 0.86%
The Company does not give significant consideration to short-
term trends in delinquency when evaluating reserve levels. Delinquency
percentages tend to be volatile and often are not necessarily an
indication of future losses. The delinquency percentage for Contracts
more than thirty days past due for the fiscal year ended March 31,
2003 decreased to 2.20% from 2.32% for the fiscal year ended March 31,
2002. The delinquency percentage for direct loans more than thirty
days past due for the fiscal year ended March 31, 2003 increased to
2.22% from 0.86% for the fiscal year ended March 31, 2002. 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 "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.
24
Income Taxes
The provision for income taxes increased 9% to $2,556,188 in
fiscal 2003 from $2,338,419 in fiscal 2002 primarily as a result of
higher pretax income. The Company's effective tax rate increased from
37.29% in fiscal 2002 to 37.38% in fiscal 2003.
Net Income
As a result of the above factors, net income increased from
$3,932,139 in fiscal 2002 to $4,281,394 in fiscal 2003.
Liquidity and Capital Resources
The Company's cash flows for fiscal 2003 and 2002 are summarized as
follows:
Fiscal Fiscal
2003 2002
--------------------------------------
Cash provided by (used in):
Operations $5,889,825 $7,291,571
Investing activities -
(primarily purchase of
installment Contracts) (12,611,588) (13,166,260)
Financing activities 7,151,735 5,605,733
------------------------------
Net increase(decrease) in cash $429,972 $(268,956)
==============================
The Company's primary use of working capital during fiscal year
2003 was the funding of the purchase of Contracts. The Contracts were
financed substantially through borrowings on the Company's $75 million
line of credit. The line of credit, which expires in November 2004,
is secured primarily by Contracts, and available borrowings are based
on a percentage of qualifying Contracts. As of March 31, 2003 the
Company had approximately $15 million available under the line of
credit. Since inception, the Company has also funded a portion of its
working capital needs from cash flows from operating activities.
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 ability to borrow under the terms of its line of credit.
The Company believes that borrowings available under the line of
credit as well as cash flow from operations and, if necessary, the
issuance of additional subordinated debt and or additional securities
in the capital markets, will be sufficient to meet its short term
funding needs.
25
Impact of Inflation
The Company is affected by inflation primarily through increased
operating costs and expenses including increases in interest rates.
Inflationary pressures on operating costs and expenses have been
offset by the Company's continued emphasis on stringent operating and
cost controls. Management believes that the Company's financial
position has enabled it to negotiate favorable interest rates. No
assurances can be given that the Company will be able to continue to
do so in the future.
The Company believes the current downturn in the economy would
increase the number of purchasers of automobiles financed with
Contracts. During a modest downturn in economic activity more people
will experience a reduction in income because of downsizing, fewer and
smaller raises, and the necessity of accepting lower paying jobs. In
addition, it may be difficult for individuals who have financially
over-extended themselves to meet their debt obligations and they may
find it necessary to purchase used rather than new automobiles.
Although the number of potential customers can be expected to increase
during periods of slow economic activity, the number of defaults in
payment obligations can also be expected to increase with a resulting
increase in repossessions of vehicles securing Contracts. The Company
believes the net effect of such a continued downturn in the economy
would be unfavorable to the operating results of the Company.
Future Expansion
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 States of
Michigan and South Carolina. The Company has targeted certain
geographic locations within these states where it believes there is a
sufficient market for its automobile financing program. The Company is
currently purchasing Contracts utilizing employees who reside in these
states. These employees are developing their respective markets and
the Company has created a Central Buying Office in its Corporate
Headquarters 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. As
of the date of this report, the Company is considering opening a
branch location outside of Detroit, Michigan, although no assurances
can be given as to whether the Company will do so. 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.
26
Item 7. Financial Statements
The following financial statements are filed as part of this report
(see pages 27-48)
Report of Independent Certified Public Accountants..........27
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................28
Consolidated Statements of Income...........................29
Consolidated Statements of Shareholders' Equity.............30
Consolidated Statements of Cash Flows.......................31
Notes to Consolidated Financial Statements..................32
27
Report of Independent Certified Public Accountants
To the Board of Directors of
Nicholas Financial, Inc.
We have audited the accompanying consolidated balance sheets of
Nicholas Financial, Inc. and subsidiaries as of March 31, 2003
and 2002, and the related consolidated statements of income,
shareholders' equity and cash flows for the years then ended.
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Nicholas Financial, Inc. and subsidiaries
at March 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for the years then ended
in conformity with accounting principles generally accepted in
the United States.
/s/Ernst & Young
June 9, 2003
Tampa, Florida
28
Nicholas Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31
2003 2002
-------------------------
Assets
Cash $ 481,211 $ 51,239
Finance receivables, net 86,178,112 76,067,387
Accounts receivable 16,228 14,444
Assets held for resale 319,788 227,008
Prepaid expenses and other assets 317,485 289,645
Property and equipment, net 467,596 370,849
Deferred income taxes 2,256,508 928,310
-------------------------
Total assets $90,036,928 $77,948,882
=========================
Liabilities and shareholders' equity
Line of credit $60,160,238 $53,273,426
Drafts payable 664,520 419,116
Notes payable-related party 808,610 542,282
Accounts payable 3,070,876 3,400,859
Derivatives 2,219,480 1,151,458
Income taxes payable 105,875 69,852
Deferred revenues 916,889 655,556
-------------------------
Total liabilities 67,946,488 59,512,549
Shareholders' equity:
Preferred stock, no par: 5,000,000 shares
authorized;none issued and outstanding - -
Common stock, no par: 50,000,000 shares
authorized; 5,006,021 and 4,993,764 shares
issued and outstanding, respectively 4,452,693 4,402,960
Other comprehensive loss (1,402,345) (725,325)
Retained earnings 19,040,092 14,758,698
-------------------------
Total shareholders' equity 22,090,440 18,436,333
-------------------------
Total liabilities and shareholders' equity $90,036,928 $77,948,882
=========================
See accompanying notes.
29
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended March 31
2003 2002
-------------------------
Revenue:
Interest income on finance receivables $22,048,535 $19,852,758
Sales 328,340 365,367
---------------------------
22,376,875 20,218,125
Expenses:
Cost of sales 83,904 78,615
Marketing 654,569 565,626
Administrative 8,460,662 7,302,275
Provision for credit losses 2,213,859 1,912,918
Depreciation 190,257 189,733
Interest expense 3,936,042 3,898,400
-------------------------
15,539,293 13,947,567
-------------------------
Operating income before income taxes 6,837,582 6,270,558
Income tax expense:
Current 3,884,386 2,195,841
Deferred (1,328,198) 142,578
-------------------------
2,556,188 2,338,419
-------------------------
Net income $4,281,394 $3,932,139
=========================
Earnings per share:
Basic $.86 $.81
=========================
Diluted $.81 $.75
=========================
Weighted average shares - basic 5,004,055 4,869,078
=========================
Weighted average shares - diluted 5,299,206 5,263,966
=========================
See accompanying notes.
30
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statement of Shareholders' Equity
Accumulated
Other Total
Common Stock Retained Comprehensive Shareholders'
Shares Amount Earnings Loss Equity
---------------------------------------------------------------
Balance at
April 1, 2001 4,634,216 $3,601,292 $ - $10,826,559 $14,427,851
Issuance of
common stock 35,534 64,488 - - 64,488
Issued in
connection with
services rendered 13,404 26,800 - - 26,800
Repurchase and
retirement of
common stock (1,000) (3,550) - - (3,550)
Issued in connection
with employee bonus
plan 500 2,135 - - 2,135
Shares issued in
connection with the
conversion of debt 311,110 711,795 - - 711,795
Net Income - - - 3,932,139 3,932,139
Mark to market -
interest rate swaps - - (725,325) - (725,325)
-------------
Total comprehensive
income - - - - 3,206,814
---------------------------------------------------------------
Balance at
March 31, 2002 4,993,764 4,402,960 (725,325) 14,758,698 18,436,333
---------------------------------------------------------------
Issuance of common
stock 21,667 47,717 - - 47,717
Issued in connection
with services
rendered 90 405 - - 405
Repurchase and
retirement of
common stock (9,500) (38,012) - - (38,012)
Income tax benefit
on exercise of
non-qualified
stock options - 39,623 - - 39,623
Net income - - - 4,281,394 4,281,394
Mark to market -
interest rate swaps - - (677,020) - (677,020)
-------------
Total comprehensive
income - - - - 3,604,374
---------------------------------------------------------------
Balance at
March 31, 2003 5,006,021 $4,452,693 $(1,402,345) $19,040,092 $22,090,440
===============================================================
See accompanying notes.
31
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended March 31
2003 2002
---------------------------
Cash flows from operating activities
Net income $ 4,281,394 $ 3,932,139
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 190,257 189,733
Provision for credit losses 2,213,859 1,912,918
Deferred income taxes (917,635) 582,433
Changes in operating assets and
liabilities:
Accounts receivable (1,784) 24
Prepaid expenses and other assets (120,620) 32,533
Accounts payable (298,406) 589,843
Drafts payable 245,404 32,088
Income taxes payable 36,023 (23,967)
Deferred revenues 261,333 43,827
---------------------------
Net cash provided by operating activities 5,889,825 7,291,571
Investing activities
Purchase and origination of finance
contracts (60,795,789) (56,104,016)
Principal payments received 48,471,205 43,164,579
Purchase of property and equipment,
net of disposals (287,004) (226,823)
---------------------------
Net cash used in investing activities (12,611,588) (13,166,260)
Financing activities
Issuance of notes payable-related party 215,595 83,000
Net proceeds from line of credit 6,886,812 5,450,000
Sale of common stock 49,328 72,733
---------------------------
Net cash provided by financing activities 7,151,735 5,605,733
---------------------------
Net increase (decrease) in cash 429,972 (268,956)
Cash, beginning of year 51,239 320,195
---------------------------
Cash, end of year $ 481,211 $ 51,239
===========================
Supplemental disclosure of noncash
investing and financing activities
Stock issued in connection with services
rendered $ 405 $ 26,800
===========================
Conversion of debt to common stock - $ 700,000
===========================
Conversion of accrued interest to notes
payable - related party $ 50,733 $ 191,274
===========================
See accompanying notes.
32
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2003
1. Organization
Nicholas Financial, Inc. (NFI, Canada or the Company) is a Canadian
holding company incorporated under the laws of British Columbia
with two wholly-owned United States subsidiaries, Nicholas Data
Services, Inc. (NDS) and Nicholas Financial, Inc. (NFI). NDS is
engaged principally in the development, marketing and support of
computer application software. NFI is engaged principally in
providing installment sales financing. Both NDS and NFI are based
in Florida, U.S.A. The accompanying financial statements are stated
in U.S. dollars and are presented in accordance with accounting
principles generally accepted in the United States.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of NFI,
Canada and its wholly-owned subsidiaries, NDS and NFI, collectively
referred to as the Company. All intercompany transactions and
balances have been eliminated.
Finance Receivables
Finance receivables purchased and originated are recorded at cost.
Assets Held for Resale
Assets held for resale are stated at net realizable value and
consist primarily of automobiles that have been repossessed
by the Company and are awaiting final disposition. Automobiles
repossessed are charged-off in the month in which the repossession
occurred. 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.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for
repairs and maintenance are charged to expense as incurred.
Depreciation of property and equipment is computed using the
straight-line method over the estimated useful lives of the assets
as follows:
Automobiles 3 years
Equipment 5 years
Furniture and fixtures 7 years
Leasehold improvements Lease term
33
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Allowance for Loan Losses
The allowance for loan losses is increased by charges against
earnings and decreased by charge-offs (net of recoveries). In
addition to the allowance for loan losses, a reserve for credit
losses has been established using unearned interest and dealer
discounts to absorb potential credit losses. To the extent actual
credit losses exceed these reserves, a bad debt provision is
recorded; and to the extent credit losses are less than the reserve,
the reserve is accreted into income over the remaining estimated
life of the pool. Management's periodic evaluation of the adequacy
of the allowance is based on the Company's past loan experience,
known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, the estimated value of
any underlying collateral, and current economic conditions.
Drafts Payable
Drafts payable represent checks disbursed for loan purchases which
have not yet been funded through the line of credit. Amounts
cleared within one to two business days of period end are then
added to the line of credit.
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rate is recognized in income in the
period that includes the enactment date.
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. As of
March 31, 2003 and March 31, 2002 the amount of gross finance
receivables not accruing interest was $575,554 and $424,827,
respectively.
34
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Deferred revenues consist primarily of commissions received from
the sale of ancillary products. These products include automobile
warranties, road-side assistance programs, accident & health
insurance, credit life insurance and forced placed automobile
insurance. These commissions are amortized over the life of the
contract using the effective annual interest method.
The Company attributes its entire dealer discount and a portion of
unearned income to a reserve for credit losses. Such amounts reduce
the interest income 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 estimating the allowance for credit losses.
Revenues resulting from the sale of hardware and software are
recognized when persuasive evidence of an agreement exists,
delivery of the products has occurred, no significant Company
obligation with regard to implementation remain, the fee is fixed
or determinable and collectibility is probable. If the fee due from
the customer is not fixed or determinable, revenue is recognized as
payments become due from the customer.
If collectibility is not considered probable, revenue is recognized
when the fee is collected. Arrangements that included software
services are evaluated to determine whether those services are
essential to the functionality of other elements of the arrangement.
When software services are considered essential, revenue under the
arrangement is recognized using contract accounting. When software
services are not considered essential, the revenue related to the
software services is recognized as the services are performed. The
unamortized amounts are included in the caption "deferred revenues."
35
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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:
Year ended March 31
2003 2002
----------------------------
Numerator:
Numerator for basic earnings per share -
Net income available to common stockholders $4,281,394 $3,932,139
Effect of dilutive securities:
Convertible debt - 17,491
----------------------------
Numerator for dilutive earnings per share -
income available to common stockholders
after assumed conversions $4,281,39 $3,949,630
============================
Denominator:
Denominator for basic earnings per share -
weighted average shares 5,004,055 4,869,078
Effect of dilutive securities:
Employee stock options 295,151 292,956
Convertible debt - 101,932
----------------------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 5,299,206 5,263,966
============================
Earnings per share - basic $.86 $.81
============================
Earnings per share - diluted $.81 $.75
============================
Stock Option Accounting
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its stoc k option grants and to
present the disclosure requirements relating to stock - based
compensation plans required by Financial Accounting Standards Board
Statement No. 123, Accounting for Stock-Based Compensation (FAS 123).
36
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
In December 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure
(FAS 148) which amends FAS 123. FAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method
of accounting for stock-based-employee compensation. FAS 148 also
amends the disclosure requirements of FAS 123 to require more
prominent and more frequent disclosures in financial statements
concerning the effects of stock-based compensation. The effective
date of FAS 148 is for fiscal years ending after December 15, 2002.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition
provisions of FAS 123:
Year ended March 31
2003 2002
----------------------------
Net income $4,281,394 $3,932,139
Basic earnings per share $0.86 $0.81
Fully diluted earnings per share $0.81 $0.75
Stock based employee compensation cost
under the Fair Value Method $69,932 $102,825
Pro forma net income $4,211,462 $3,829,314
Pro forma basic earnings per share $0.84 $0.79
Pro forma fully diluted earnings per share $0.79 $0.73
The effects of applying FAS 123 for pro-forma disclosures are not
likely to be representative of the effects on reported net income for
future years.
The fair value of each option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2002 were: expected
volatility of 39%, risk-free interest rate of 4.92% and expected life
of 7 years. No options were granted in 2003.
37
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Financial Instruments
The Company's financial instruments consist of finance receivables,
accounts receivable, line of credit, notes payable-related party and
accounts payable. For each of these financial instruments, the carrying
value approximates its fair value.
The Company's financial instruments that are exposed to concentrations
of credit risk are primarily finance receivables which are concentrated
in the states of Florida, Georgia, North Carolina, South Carolina, Ohio
and Michigan. The Company provides credit during the normal course of
business and performs ongoing credit evaluations of it customers. The
Company maintains allowances for potential credit losses which, when
realized, have been within the range of management's expectations. The
Company perfects a primary security interest in all vehicles financed
as a form of collateral.
Use of Estimates
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and a ssumptions that affect the amounts
reported in the financial statements and accompanying notes. The most
significant of these estimates relates to the determination of the
allowance for credit losses and related reserves. Actual results could
differ from those estimates.
Accumulated Other Comprehensive Income
Prior to the adoption of Statement of Financial Accounting Standard
No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133), as amended, comprehensive net income equaled net income.
Accumulated other comprehensive loss is composed entirely of the fair
value of cash flow hedges, net of the related tax effect.
Statement of Cash Flows
Cash paid for income taxes for the years ended March 31, 2003 and 2002
was approximately $2,520,165 and $1,780,000, respectively. Cash paid
for interest for the years ended March 31, 2003 and 2002 was
approximately $3,743,113 and $3,972,000, respectively.
Reclassification
Certain prior year amounts have been reclassified to conform to the
2003 presentation.
38
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Derivatives
On April 1, 2001, the Company adopted FAS 133. FAS 133 requires the
recognition of all derivative instruments as either assets or
liabilities in the consolidated balance sheet at fair value. The
accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and
qualifies as part of a hedging relationship and further, on the type of
hedging relationship. For those derivative instruments that are
designated and qualify as hedging instruments, a company must designate
the hedging instrument, based on the exposure being hedged, as either a
fair value hedge, cash flow hedge, or a hedge of a net investment in a
foreign operation. The Company does not use derivative instruments for
speculative purposes.
Recent Accounting Pronouncement
In August 2001, the FASB issued FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (FAS 144), which is
effective for fiscal periods beginning after December 15, 2001. This
statement superseded FAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. The
accounting model for long - lived assets to be disposed of by sales
applies to all long-lived assets, including discontinued operations,
and replaced the provisions of Accounting Principles Board (APB)
Opinion No. 30, Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions, for the
disposal of a segment of a business. Under the provisions of APB 30, a
segment of a business to be disposed of was measured at the lower of
its carrying amount or net realizable value, adjusted for expected
future operating losses, whereas FAS 121 used fair value less cost to
sell and excluded future operating losses from the framework
established in FAS 121, for long-lived assets to be disposed of
by sale. FAS No. 144 requires that those long-lived assets be measured
at the lower of the carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be
measured at net realizable value or include amounts for operating
losses that have not yet occurred. FAS No. 144 also broadens the
reporting for discontinued operations to include all components of an
entity with operations that can be distinguished from the rest of the
entity and that will be eliminated from the ongoing operations of the
entity in a disposal transaction. The adoption of FAS 144 did not have
a material impact on the earnings and financial position of the
Company.
39
3. Finance Receivables
The Company purchases individual installment loan contracts from new
and used automobile dealers in its markets. 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.
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.
Consumer automobile finance installment contracts are included in
finance receivables and are detailed as follows:
As of March 31,
2003 2002
---------------------------------
Finance receivables, gross $132,316,816 $115,683,683
Less:
Unearned interest (31,610,003) (27,783,082)
--------------------------------
100,706,813 87,900,601
Dealer discounts (12,394,089) (11,259,898)
Allowance for credit losses (5,428,681) (4,105,174)
---------------------------------
Finance receivables, net $ 82,884,043 $ 72,535,529
=================================
The terms of the receivables range from 12 to 66 months and bear a
weighted average effective interest rate of 24% for both 2003 and 2002,
respectively.
Direct consumer loans are also included in finance receivables and are
detailed as follows:
As of March 31,
2003 2002
--------------------------------
Direct loans, gross $ 4,357,032 $ 4,771,275
Less:
Unearned interest (886,837) (1,038,805)
------------------------------
3,470,195 3,732,470
Allowance for credit losses (176,126) (200,612)
------------------------------
Finance receivables, net $ 3,294,069 $ 3,531,858
==============================
40
3. Finance Receivables (continued)
The terms of the receivables range from 6 to 48 months and bear a
weighted average effective interest rate of 25% for both 2003 and 2002,
respectively.
The following table sets forth a reconciliation of the changes in
dealer discount for the years ended March 31:
As of March 31,
2003 2002
-----------------------------------
Balance at beginning of year $11,259,898 $10,306,699
Discounts acquired on new volume 10,534,472 9,384,892
Losses absorbed (8,401,071) (6,536,368)
Recoveries 1,068,556 886,451
Reserves accreted (2,067,766) (2,781,776)
----------------------------------
Balance at end of year $12,394,089 $11,259,898
=================================
Reserve as a percent of gross
finance receivables 9.37% 9.73%
=================================
The following table sets forth a reconciliation of the changes in
the allowance for credit losses on consumer automobile finance
installment contracts for the years ended March 31:
As of March 31,
2003 2002
-------------------------------
Balance at beginning of year $4,105,174 $3,145,470
Current year provision 1,911,855 1,728,786
Losses absorbed (588,348) (769,082)
-------------------------------
Balance at end of year $5,428,681 $4,105,174
===============================
Reserve as a percent of
gross finance receivables 4.10% 3.55%
===============================
41
3. Finance Receivables (continued)
The following table sets forth a reconciliation of the changes in the
allowance for credit losses on direct loans for the years ended March
31:
2003 2002
---------------------------
Balance at beginning of year $200,612 $319,545
Current year provision 302,004 184,132
Losses absorbed (208,802) (177,012)
Recoveries 29,372 15,676
Accreted to income (147,060) (141,729)
-------------------------
Balance at end of year $176,126 $200,612
=========================
Reserve as a percent of
gross finance receivables 4.04% 4.20%
42
4. Property and Equipment
Accumulated Net Book
Cost Depreciation Value
-------------------------------------
2003
Automobiles $285,680 $146,312 $139,368
Equipment 515,210 373,457 141,753
Furniture and fixtures 234,828 130,672 104,156
Leasehold improvements 274,025 191,706 82,319
-------------------------------------
$1,309,743 $842,147 $467,596
=====================================
2002
Automobiles $262,238 $119,149 $143,089
Equipment 449,007 319,664 129,343
Furniture and fixtures 176,256 112,033 64,223
Leasehold improvements 187,637 153,443 34,194
------------------------------------
$1,075,138 $ 704,289 $ 370,849
====================================
5. Line of Credit
The Company has a $75,000,000 line of credit facility (the Line) with Bank
of America, of which approximately $60,000,000 was outstanding at March
31, 2003. Borrowings under the Line bear interest at the Bank of America
prime rate plus 25 basis points or several Libor pricing options. Pledged
as collateral for this credit facility are all of the assets of NFI and
NDS. The Line expires on November 30, 2004. As of March 31, 2003 the
Company was in compliance with all of its Line covenants.
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.
43
5. Line of Credit (continued)
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 March 31, 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 3.90% and paid an average fixed rate of 6.86%
during the year ended March 31, 2003. A loss of $1,402,345 related to the
fair value of the swaps at March 31, 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 three forward locking swaps disclosed in the
table below.
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
March 30, 2001 March 30, 2001 10,000,000 4.89% April 2, 2003
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.
44
6. Notes Payable-Related Party
Notes payable to shareholders, directors and individuals related thereto
at March 31:
The Company has unsecured notes totaling $808,610 and $542,282 for 2003
and 2002, respectively. The notes bear an interest rate of 8.87% and are
due upon 30-day demand.
The company incurred interest expense on the above notes of approximately
$62,000 and $80,000 for the years ended March 31, 2003 and 2002
respectively.
7. Income Taxes
The provision for income taxes reflects an effective U.S tax rate, which
differs from the corporate tax rate (34%) for the following reasons:
2003 2002
--------------------------
Provision for income taxes
at federal statutory rate $2,324,778 $2,131,990
Increase resulting from:
State income taxes, net
of federal benefit 258,686 228,701
Other (27,276) (22,272)
---------------------------
$2,556,188 $2,338,419
===========================
45
7. Income Taxes (continued)
The Company's deferred tax assets consist of the following as of March 31:
2003 2002
-------------------------
Allowance for credit losses
not currently deductible
for tax purposes $1,379,024 $372,927
Derivatives 850,418 439,855
Other items 27,066 115,528
--------------------------
$2,256,508 $928,310
==========================
The deferred tax asset related to derivatives represents the tax effect at
37.38% of the fair value adjustment discussed in Footnote 5.
NFI, Canada has income tax loss carryforward balances of approximately
Cdn$318,000 (2002-Cdn$318,000) which are available to reduce future
taxable income. The related deferred tax asset , more likely than not,
will not be realized and is offset entirely by a valuation allowance.
The tax loss carryforwards are the result of the Company's annual
Canadian operating expenses not deductible for U.S. tax purposes.
The Company has no operations in Canada, does not expect to have such
operations and therefore does not create any revenue to offset these
income tax loss carryforwards.
8. Shareholders' Equity
The Company has an employee stock incentive plan (the SIP) for officers,
directors and key employees under which 590,266 shares of common stock
were reserved for issuance as of March 31, 2003. Options currently granted
by the Company generally vest over a five-year period.
Prior to the adoption of FAS 148, the Company had elected to follow APB 25,
and related Interpretations in accounting for its employee stock options
because the alternative, fair value method , provided for under FAS 123
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, if the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
46
8. Shareholders' Equity (continued)
The following table reflects activity within the SIP for the years noted:
2003 2002
-----------------------------------------------
Weighted Weighted
Average Average
Options & Exercise Options & Exercise
Warrants Price Warrants Price
-----------------------------------------------
Outstanding-beginning
of year 653,866 $2.26 599,400 $2.01
Granted - - 131,000 3.38
Exercised (21,667) 2.20 (35,534) 1.81
Canceled/expired (41,933) 2.90 (41,000) 2.52
--------- ----------
Outstanding-end
of year 590,266 2.21 653,866 2.26
========= =========
Exercisable at
end of year 490,776 $2.03 403,045 $1.89
========= =========
Weighted-average fair value of
options granted during the year - $1.52
Weighted Currently Exercisable
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Shares Price Life Shares Price
-------------------------------------------------------------------------------
$1.00 to 1.99 310,600 $1.70 5.20 years 304,039 $1.70
2.00 to 2.99 185,666 2.46 7.10 years 159,604 2.43
3.00 to 3.99 94,000 3.39 8.32 years 27,133 3.40
-------------------------------------------------------------------------------
Total 590,266 $2.21 6.20 years 490,776 $2.03
========= ==========
47
9. Employee Benefit Plans
The Company has a 401(k) profit sharing plan under which all employees are
eligible to participate. Employee contributions are voluntary and subject
to Internal Revenue Service limitations. The Company matches, based on
annually determined factors, employee contributions provided the employee
completes certain levels of service annually. For the years ended March 31,
2003 and 2002, the Company recorded expenses of approximately $68,000 and
$59,000, respectively, related to this plan. All employees who were
eligible under the plan received a profit sharing contribution based on
their total compensation in relation to the total compensation of all
eligible employees. For the years ended March 31, 2003 and 2002, the
Company recorded expenses of $139,000 and $116,000, respectively, related
to this plan.
10. Commitments
The Company leases its corporate and branch offices under operating lease
agreements which provide for annual minimum rental payments as follows:
Year ending March 31:
2004 $497,647
2005 319,089
2006 210,231
2007 59,091
2008 14,940
-----------
$1,100,998
============
Rent expense for the years ended March 31, 2003 and 2002 was approximately
$503,000 and $404,000, respectively.
48
11. Segment Information
The segments presented have been identified based on the difference in the
products and services of the Company's two wholly owned subsidiaries.
Internal financial results for each subsidiary are presented to and
reviewed by the senior management of the Company. Substantially all of the
Company's operations are in the United States. The industry segments are
as follows:
Computer
Application
General Software and
Financing Support Corporate Total
---------------------------------------------------
2003
Interest income and sales $22,048,535 $328,340 - $22,376,875
Operating income (loss)
before income taxes 6,845,591 (8,009) - 6,837,582
Interest expense 3,936,042 - - 3,936,042
Income tax expense 2,559,212 (3,024) - 2,556,188
Identifiable assets 89,772,818 262,735 1,375 90,036,928
Net capital expenditures 287,004 - - 287,004
Depreciation 190,257 - - 190,257
2002
Interest income and sales $19,852,758 $365,367 - $20,218,125
Operating income (loss)
before income taxes 6,281,966 (11,408) - 6,270,558
Interest expense 3,898,400 - - 3,898,400
Income tax expense 2,342,725 (4,306) - 2,338,419
Identifiable assets 77,729,928 213,382 5,572 77,948,882
Net capital expenditures 226,823 - - 226,823
Depreciation 189,725 8 - 189,733
49
Item 8. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons
The information set forth under the caption "Proposal 1: Election
of Directors" in the Proxy Statement and Information Circular, dated
on or about July 9, 2003, for the 2003 Annual General Meeting of
Members of the Company to be held August 6, 2003 (the "Proxy
Statement"), the information set forth under the caption "Executive
Officers and Compensation" in the Proxy Statement, and the information
set forth under the caption "Section 16 (a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement are incorporated herein
by reference.
Item 10. Executive Compensation
The information set forth under the caption "Executive Officers
and Compensation" in the Proxy Statement is incorporated herein by
reference.
50
Item 11. Security Ownership of Certain Beneficial Owners, Management
and Related Stockholder Matters
The information set forth under the caption "Voting Shares and
Ownership of Management and Principal Holders" in the Proxy Statement
is incorporated herein by reference.
Securities Authorized for Issuance Under Equity Compensation
Plans
The following table sets forth certain information, as of March 31,
2003, with respect to compensation plans under which equity securities
of the Company are authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
Number of Number of
Securities Securities
to be Remaining
Issued Weighted - Available for
Upon Average Future Issuance
Exercise Exercise Under Equity
of Price of Compensation
Outstanding Outstanding Plans (Excluding
Options, Options, Securities
Warrants Warrants Reflected in
Plan Category and Rights and Rights Column (a)
---------------------------------------------------------------------------
(a) (b) (c)
Equity Compensation
Plans Approved by
Security Holders 590,266 $2.21 349,734
Equity Compensation
Plans Not Approved
by Security Holders Nil Not Nil
Applicable
-----------------------------------------------
TOTAL 590,266 $2.21 349,734
===============================================
Item 12. Certain Relationships and Related Transactions
The information set forth under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement is
incorporated herein by reference.
51
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Exhibit Description
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
52
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
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
53
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
(b) Reports on Form 8-K
The Company did not file any current reports on Form 8-K
during the fourth quarter of the fiscal year ended March 31,
2003.
54
Item 14. Controls and Procedures
Within the 90-day period prior to the filing of this report, an
evaluation was carried out under the supervision and with the
participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure
controls and procedures (as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934). Based upon the evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
design and operation of these disclosure controls and procedures were
effective. No significant changes were made in the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Item 15. Principal Accountant Fees and Services
55
The information set forth under the caption "Appointment of
Auditors" in the Proxy Statement is incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
NICHOLAS FINANCIAL, INC.
Dated: June 30, 2003 By: /s/ Peter L. Vosotas
------------------------------
Peter L. Vosotas
Chairman, Chief Executive Officer
and President
KNOW ALL MEN BY THESE PRESENTS that each person whose signature
appears below constitutes and appoints Peter L. Vosotas and Ralph T.
Finkenbrink, and each of them, his or her true and lawful attorneys-in-
fact and agents, with full power of substitution and resubstitution,
for him or her and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file
the same, with all exhibits thereto, and any other documents in
connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully
to all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorney-in-fact and
agents or either of them, or their substitutes, may lawfully do or
cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Peter L. Vosotas Chairman of the Board, June 30, 2003
---------------------- Chief Executive Officer,
Peter L. Vosotas President and
Director
/s/Ralph T. Finkenbrink Sr. Vice President-Finance June 30,2003
------------------------- (Principal Accounting
Ralph T. Finkenbrink Officer)
/s/Ellis P. Hyman Director June 30, 2003
----------------------
Ellis P. Hyman
/s/Stephen Bragin Director June 30, 2003
---------------------
Stephen Bragin
/s/Alton R. Neal Director June 30, 2003
---------------------
Alton R. Neal
56
CERTIFICATION
I, Peter L. Vosotas, certify that:
1. I have reviewed this Annual Report on Form 10-KSB of Nicholas
Financial, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 annual 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: June 30, 2003 /s/ Peter L Vosotas
------------------------------------
Peter L. Vosotas
President & Chief Executive Officer
57
CERTIFICATION
I, Ralph T. Finkenbrink, certify that:
1. I have reviewed this Annual Report on Form 10-QSB of Nicholas
Financial, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other
financial information included in this annual 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 annual 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
annual 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 annual report
(the "Evaluation Date"); and
c) presented in this annual 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 annual 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: June 30, 2003 /s/Ralph T Finkenbrink
---------------------------
Ralph T. Finkenbrink
Senior Vice President
58
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
Annual Report on Form 10-KSB of the Company for the year ended March
31, 2003 (the "Report") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and the
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
June 30, 2003
59
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
Annual Report on Form 10-KSB of the Company for the year ended March
31, 2003 (the "Report") fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and the
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 Financial Officer
June 30, 2003