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, 2002
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, 2002 were $20,218,125.As of May 31, 2002, 4,993,764 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 $13,874,787
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 7,
2002, expected to be filed with the Commission pursuant to Regulation
14A, on or about July 2, 2002, 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)
1
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 Property.........................12
Item 3. Legal Proceedings...............................12
Item 4. Submission of Matters to a Vote of
Security Holders...............................12
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters............................13
Item 6. Management's Discussion and Analysis of
Financial Condition and Results
of Operations..................................14
Item 7. Financial Statements............................20
Item 8. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure.........41
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16 (a) of the Exchange Act.............41
Item 10. Executive Compensation..........................41
Item 11. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder
Matters........................................42
Item 12. Certain Relationships and Related
Transactions...................................42
Item 13. Exhibits and Reports on Form 8-K................43
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, adverse regulatory changes in the
Company's existing and future markets, and the Company's ability to
expand its business, including its ability to complete acquisitions
and integrate the operations of acquired businesses, to recruit and
retain qualified employees, to expand into new markets and to maintain
profit margins in the face of increased pricing competition. 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
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 98% of
consolidated revenues for each of the fiscal years ended March 31,
2002 and 2001. NDS's activities accounted for approximately 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 and Ohio 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 and one branch in South
Carolina. As of March 31, 2002 the Company had non-exclusive
agreements with approximately 750 dealers for the purchase of retail
installment sales contracts (the "Contracts") that meet the Company's
financing criteria. The dealer agreements require the dealer to
originate Contracts in accordance with the Company's guidelines.
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
60 months. Accident and health insurance coverage enables the borrower
to make required payments under the Contract in the event the borrower
becomes unable to work because of illness or accident and credit life
insurance pays the borrower's obligations under the Contract upon his
or her death.
4
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, 2002, substantially all of the Company's
loan portfolio consisted of Contracts that were purchased without
recourse against the dealer. Although substantially all the Contracts
in the Company's loan portfolio were acquired without recourse, the
dealer remains liable to the Company for liabilities arising from
certain representations and warranties made by the dealer with respect
to compliance with applicable federal and state laws and valid title
to the vehicle.
The Company purchases a Contract only after the 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 through maturity.
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, 2002 and 2001, approximately 19% and 20%,
respectively, of the borrowers under Contracts in the Company's loan
portfolio had elected to purchase "add on products".
The following table sets forth certain information for each of
the fiscal years ended March 31, 2002, 2001 and 2000, respectively,
relating to the Company's automobile finance business:
2002 2001 2000
-------------------------------------
Contracts purchased -
Face value $56,935,868 $51,193,231 $41,507,381
Number of Contracts
purchased 6,918 6,400 5,264
Weighted APR(1) 24.57% 24.70% 24.67%
Discount 8.67% 8.36% 8.63%
(1) "APR" means the annual interest rate payable by the borrower.
5
Direct Consumer Loans
The Company is licensed to originate direct consumer loans in the
majority of its branch locations. The size of the loan and maximum
interest rate that can be charged varies from State to State. The
average loan made to date by the Company had an initial principal
balance of approximately $3,500. 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 revenue for the Company. As of
March 31, 2002, loans made by the Company pursuant to its direct
consumer loan program constituted approximately 4% 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 68% of the 1,416
direct consumer loan transactions outstanding as of March 31, 2002 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, 2002, 2001 and 2000, respectively,
relating to the Company's direct consumer loan business:
2002 2001 2000
--------------------------------------
Loans purchased -
Face value $4,100,180 $3,816,245 $3,364,897
Number of loans
purchased 1,279 1,143 1,011
Weighted APR(1) 25.85% 25.82% 26.07%
(1) "APR" means the annual interest rate payable by the borrower.
Financing Sources
The Company finances the acquisition of Contracts with its
retained earnings, cash flow from operations, loans from investors,
insiders and a revolving line of credit with Bank of America. In
August 2000, the Company expanded its line of credit capacity to $60
million, extended the maturity date of such line to November 30, 2002
and reduced the rate of interest payable under the line. In February
2001, the Company further expanded its line of credit capacity to $75
million. The Company is currently negotiating to extend its current
maturity date. No assurance can be given that the size of the line
will be increased or that the maturity date will be extended beyond
November 30, 2002. The failure to do so could have a material adverse
effect on the business, financial condition and results of operations
of the Company.
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
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, 2002, the Company had
drawn approximately $54 million under the line of credit.
6
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". 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.
7
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 average 8%.
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 office 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.
The 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 amortization of the Contract and repossession
proceedings are initiated. At 120 days delinquent, if the vehicle has
not yet been repossessed, the account is written off. Once a vehicle
has been repossessed, the related loan balance no longer appears on
the delinquency report. It then appears on the Company's repossession
report and is sold, either at auction or to an automobile dealer.
When an account becomes delinquent, the Company immediately
contacts the borrower to determine the reason for the delinquency and
to determine if arrangements for payment can appropriately be made.
Once payment arrangements acceptable to the Company have been made,
the information is entered in its database and is used to generate a
"Promises Report", which is utilized by the collection staff for
account follow up.
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.
8
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 his
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. During its most recent
fiscal year, repossessed vehicles have been sold at prices that
average approximately $1,500 to $2,000 less than the price paid by the
Company for the Contract. When the Company determines that there is a
reasonable likelihood of recovering part or all of any deficiency
against the borrower under the Contract, it pursues legal remedies
available to it including law suits, judgement liens and wage
garnishments. Historically, the Company has recovered approximately 10-
15% of deficiencies from such borrowers. Proceeds from the disposition
of the vehicles are not included in the percentage range shown above.
9
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.
10
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 State of Ohio. The Company has
targeted certain geographic locations within the State of Ohio where
it believes there is a sufficient market for its automobile financing
program. The Company is currently purchasing Contracts in the State of
Ohio utilizing employees who reside in that state. These employees are
developing their respective markets in Ohio 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. As of May 15, 2002 the Company had
signed two lease obligations for branch locations in Cleveland and
Columbus Ohio. No assurances can be given, however, that any further
such expansion will occur. The Company is also analyzing other markets
in States the Company does not currently operate in, however no
assurance can be given that any expansion will occur in these new
markets.
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 has no intention and 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 the fiscal years ended March 31, 2002 or 2001.
11
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 and Ohio. 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 and the Ohio Secretary of State. 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
and Ohio, 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, 2002 the Company employed a total of 118
persons, five of whom work for NDS and 113 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.
12
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 6,800 square feet. The
Company occupies the space pursuant to a lease that commenced on
January 1, 2000 and expires on November 30, 2002. The current monthly
rent is $7,855. The Company is currently negotiating to expand its
corporate facility by either negotiating for additional space and
extending its current lease or relocating its corporate facility to a
new location.
Each of the Company's 22 branch offices located in Florida,
Georgia, North Carolina and South Carolina 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, 2002.
13
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 "Selected Quarterly
Data" table included below.
As of March 31, 2002, 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 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 and as restated for the two-for-one stock
split effected pursuant to a 100% stock dividend, completed on
September 10, 2001.
Price Range of Common Stock:
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
High Low
Fiscal Year ended March 31, 2001
First Quarter ............ $2.81 $2.25
Second Quarter......... 2.63 2.25
Third Quarter........... 2.50 2.06
Fourth Quarter............ 2.72 2.16
"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."
14
Critical Accounting Policy
The Company's critical accounting policy relates to the allowance
for losses on loans. It is based on management's opinion of an amount
that is adequate to absorb losses in the existing portfolio. The
allowance for credit losses is established through a provision for
loss based on management's evaluation of the risk inherent in the loan
portfolio, the composition of the portfolio, specific impaired loans
and current economic conditions. Such evaluation, which includes a
review of all loans on which full collectibility may not be reasonably
assured, considers among other matters, the estimated net realizable
value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, management's estimate of
probable credit losses and other factors that warrant recognition in
providing for an adequate credit loss allowance.
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, 2002 to $3,932,139 or $0.75 per diluted share from $3,410,877 or
$0.68 per diluted share in the fiscal year ended March 31, 2001.
Earnings for the year were favorably impacted by significant growth in
the outstanding loan portfolio.
The following table sets forth certain financial data:
----------------------------------------------------------------------
Years Ended March 31
Select Portfolio Information 2002 2001
----------------------------------------------------------------------
Average Net Finance Receivables(1) $84,388,641 $73,076,939
Average Indebtedness(2) 50,907,525 46,166,602
Interest Income 19,852,758 17,386,318
Interest Expense 3,898,400 3,761,689
Net Interest Income 15,954,358 13,624,629
----------------------------------------------------------------------
Gross Portfolio Yield(3) 23.53% 23.79%
Average Cost of Borrowed Funds(2) 7.66% 8.15%
Net Interest Spread(4) 15.87% 15.64%
----------------------------------------------------------------------
Net Portfolio Yield(3) 18.91% 18.64%
----------------------------------------------------------------------
Write-off to Liquidation 8.62% 7.21%
Net Charge-Off Percentage 7.63% 6.16%
15
(1)Average net finance receivables represent the average of net
finance receivables throughout the year. Net finance receivables
represents gross finance receivables less any unearned finance
charges related to those receivables.
(2)Average indebtedness represents the average outstanding borrowings
under its line of credit, subordinated debt and notes payable.
Average cost of borrowed funds represents interest expense as
percentage of average indebtedness.
(3)Gross portfolio yield represents interest income as a percentage of
average finance receivables. Net portfolio yield represents net
interest income as a percentage of average finance receivables.
(4)Net interest spread represents the gross portfolio yield less the
average cost of borrowed funds.
Fiscal 2002 compared to Fiscal 2001
Interest Income and Loan Portfolio
Interest income on finance receivables, predominantly finance
charge income, increased 14% to $19.9 million in fiscal 2002 from
$17.4 million in fiscal 2001. The net finance receivable balance
totaled $76.1 million at March 31, 2002, an increase of 17% from $65.0
million at March 31, 2001. The gross finance receivable balance
increased 17% to $120.5 million at March 31, 2002 from $103.2 million
at March 31, 2001. 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 two additional
offices and the increased receivable base of several existing branch
offices.
Computer Software Business
In fiscal 2002, the revenues of NDS were $365,367 compared with
fiscal 2001 revenues of $410,708, a decrease of 11%. Operating loss
for fiscal 2002 was $(11,408) compared with an operating income of
$25,137 for fiscal 2001. The Company expects both operating revenues
and income of NDS to remain relatively stable, although no assurance
can be given in this regard.
Operating Expenses
Operating expenses excluding provision for credit losses and
interest expense increased to $8.1 million in fiscal 2002 from $7.0
million in fiscal 2001. This increase of 16% was primarily
attributable to the opening of two 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 95 employees at the end of
fiscal 2001 to 118 employees at the end of fiscal 2002.
Interest Expense
Interest expense increased to $3.9 million in fiscal 2002 as
compared to $3.8 million in fiscal 2001. This increase was due to an
increase in average outstanding borrowings from $46.2 million to $50.9
million. The average cost of borrowed funds decreased from 8.15% for
fiscal 2001 to 7.66% for fiscal 2002.
16
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 74 Contracts with an aggregate initial principal
amount of approximately $600,141. As of March 31, 2002, the Company
had 365 active pools.
The Company pools Contracts according to branch location because
the branches purchase contracts in different markets located in
Florida, Georgia, North Carolina, South Carolina and Ohio. All
Contracts purchased by a branch during a fiscal quarter comprise a
pool. This method of pooling by branch and quarter allows the Company
to evaluate the different markets where the branches operate. The
pools also allow the Company to evaluate the different levels of
customer income, stability, credit history, and the types of vehicles
purchased in each market.
A pool retains an amount equal to 100% of the discount into a
reserve for credit losses. In situations where, at the date of
purchase, the discount is determined to be insufficient to absorb all
potential losses associated with the pool, a portion of future
unearned income associated with that specific pool will be added to
the reserves for credit losses until total reserves have reached the
appropriate level. Subsequent to the purchase, if the reserve for
credit losses is determined to be inadequate for a pool which is not
fully liquidated, then a charge to income is used to reestablish
adequate reserves. If a pool is fully liquidated and has any remaining
reserves, the excess reserves are recognized as income.
In analyzing a pool, the Company considers the performance of
prior pools originated by the branch office, the performance of prior
Contracts purchased from the dealers whose Contracts are included in
the current pool, the credit rating of the borrowers under the
Contracts in the pool, and current market and economic conditions.
Each pool is analyzed monthly to determine if the loss reserves are
adequate and adjustments are made if they are determined to be
necessary. As of March 31, 2002, the Company had established reserves
for losses on Contracts of $15,565,684 or 12.92% of gross outstanding
receivables under the Contracts.
17
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, 2002 March 31, 2001
------------------------------------------
Contracts
Gross Balance Outstanding $115,683,683 $98,797,992
Dollar Dollar
Delinquencies Amount Percent Amount Percent
------------- ----------- -------- --------- --------
30 to 59 days $2,004,990 1.73% $1,363,532 1.38%
60 to 89 days 400,486 0.35% 328,964 0.33%
90 + days 276,096 0.24% 182,951 0.19%
--------- ------ --------- ------
Total Delinquencies $2,681,572 $1,875,447
Total Delinquencies as a
percent of outstanding balance 2.32% 1.90%
Direct Loans
Gross Balance Outstanding $4,771,275 $4,406,187
Delinquencies
-------------
30 to 59 days 33,992 0.71% 56,781 1.29%
60 to 89 days 5,081 0.11% 2,436 0.06%
90 + days 1,842 0.04% 9,659 0.22%
-------- ------- ------- -------
Total Delinquencies $40,915 $68,876
Total Delinquencies as
apercent of outstanding balance 0.86% 1.56%
The provision for credit losses was $1,912,918 in fiscal 2002 as
compared to $1,470,744 in fiscal 2001. This increase was primarily the
result of a 17% increase in the net portfolio over the prior year. The
Company decreased its total reserve percentage from 13.34% of gross
finance receivables for the fiscal year ended March 31, 2001 to 12.92%
for the fiscal year ended March 31, 2002. Management believes that the
reserve adjustments made during fiscal 2002 are consistent with its
reserve methodology.
Income Taxes
The provision for income taxes increased 10% to $2,338,419 in
fiscal 2002 from $2,120,855 in fiscal 2001 primarily as a result of
higher pretax income. The Company's effective tax rate decreased from
38.34% in fiscal 2001 to 37.29% in fiscal 2002.
18
Net Income
As a result of the above factors, net income increased from
$3,410,877 in fiscal 2001 to $3,932,139 in fiscal 2002.
Liquidity and Capital Resources
The Company's cash flows for fiscal 2002 and 2001 are summarized as
follows:
Fiscal Fiscal
2002 2001
Cash provided by (used in):
Operations $ 7,291,571 $ 5,780,282
Investing activities -
(primarily purchase of
installment contracts) (13,166,260) (14,644,237)
Financing activities 5,605,733 8,924,967
-----------------------------
Net (decrease) increase in cash $ (268,956) $ 61,012
=============================
The Company's primary use of working capital during fiscal year
2002 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 2002,
is secured primarily by Contracts, and available borrowings are based
on a percentage of qualifying Contracts. As of March 31, 2002 the
Company had approximately $21 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
Company is currently negotiating to extend its current maturity date.
No assurance can be given that the size of the line will be increased
or that the maturity date will be extended beyond November 30, 2002.
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.
19
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 State of
Ohio. The Company has targeted certain geographic locations within the
State of Ohio where it believes there is a sufficient market for its
automobile financing program. The Company is currently purchasing
Contracts in the State of Ohio utilizing employees who reside in the
State of Ohio. These employees are developing their respective markets
in Ohio and the Company has created a Central Buying Office in its
Corporate Headquarters 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. As
of May 15, 2002 the Company had signed two lease obligations for
branch locations in Cleveland and Columbus Ohio. No assurances can be
given, however, that any further such expansion will occur. The
Company is also analyzing other markets in States the Company does not
currently operate in, however no assurance can be given that any
expansion will occur in these new markets.
20
Item 7. Financial Statements
The following financial statements are filed as part of this report
(see pages 20-39)
Report of Independent Certified Public Accountants..........21
Audited Consolidated Financial Statements
Consolidated Balance Sheets.................................22
Consolidated Statements of Income...........................23
Consolidated Statements of Stockholders' Equity.............24
Consolidated Statements of Cash Flows.......................25
Notes to Consolidated Financial Statements..................26
21
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, 2002
and 2001, 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, 2002 and 2001, 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.
May 31, 2002
/s/Ernst & Young
22
Nicholas Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31
2002 2001
-------------------------
Assets
Cash $ 51,239 $ 320,195
Finance receivables, net 76,067,387 65,040,868
Accounts receivable 14,444 14,468
Prepaid expenses and other assets 516,653 549,186
Property and equipment, net 370,849 333,759
Deferred income taxes 488,455 1,070,888
-------------------------
Total assets $77,509,027 $67,329,364
=========================
Liabilities and shareholders' equity
Line of credit $53,273,426 $47,823,426
Drafts payable 419,116 387,028
Notes payable-related party 542,282 968,008
Accounts payable 3,400,859 3,017,503
Derivatives 1,151,458 -
Income taxes payable 69,852 93,819
Deferred revenues 655,556 611,729
-------------------------
Total liabilities 59,512,549 52,901,513
Shareholders' equity:
Preferred stock, no par: 5,000,000 shares
authorized;none issued and outstanding - -
Common stock, no par: 50,000,000 shares
authorized; 4,993,764 and 4,634,216 shares
issued and outstanding, respectively 4,402,960 3,601,292
Other comprehensive loss (1,165,180) -
Retained earnings 14,758,698 10,826,559
-------------------------
Total shareholders' equity 17,996,478 14,427,851
-------------------------
Total liabilities and shareholders' equity $77,509,027 $67,329,364
=========================
See accompanying notes.
23
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended March 31
2002 2001
-------------------------
Revenue:
Interest income on finance receivables $19,852,758 $17,386,318
Sales 365,367 410,708
-------------------------
20,218,125 17,797,026
Expenses:
Cost of sales 78,615 84,870
Marketing 565,626 445,869
Administrative 7,302,275 6,356,555
Provision for credit losses 1,912,918 1,470,744
Depreciation 189,733 145,567
Interest expense 3,898,400 3,761,689
-------------------------
13,947,567 12,265,294
-------------------------
Operating income before income taxes 6,270,558 5,531,732
Income tax expense:
Current 1,755,986 2,075,855
Deferred 582,433 45,000
-------------------------
2,338,419 2,120,855
-------------------------
Net income $ 3,932,139 $ 3,410,877
=========================
Earnings per share:
Basic $.81 $.73
=========================
Diluted $.75 $.68
=========================
Weighted average shares - basic 4,869,078 4,673,198
=========================
Weighted average shares - diluted 5,263,966 5,137,732
=========================
See accompanying notes.
24
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 4,704,016 $3,711,602 $7,415,682 $ - $11,127,284
Issuance of common
stock 2,000 3,400 - - 3,400
Issued in
connection with
services rendered - 23,600 - - 23,600
Repurchase and
retirement of
common stock (71,800) (169,794) - - (169,794)
Settlement of
accounts receivable
from shareholder
related to exercise
of options - 32,484 - - 32,484
Net income - - 3,410,877 - 3,410,877
---------------------------------------------------------------
Balance at
March 31, 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
Mark to market -
interest rate
swaps - - - (1,165,180) (1,165,180)
Net income - - 3,932,139 - 3,932,139
---------------------------------------------------------------
Balance at
March 31, 2002 4,993,764 $4,402,960 $14,758,698 $(1,165,180) $17,996,478
===============================================================
See accompanying notes.
25
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended March 31
2002 2001
---------------------------
Cash flows from operating activities
Net income $ 3,932,139 $ 3,410,877
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 189,733 145,567
Provision for credit losses 1,912,918 1,470,744
Deferred income taxes 582,433 45,000
Changes in operating assets and
liabilities:
Accounts receivable 24 6,454
Prepaid expenses and other assets 32,533 (132,902)
Accounts payable 589,843 321,881
Drafts payable 32,088 387,028
Income taxes payable (23,967) 48,854
Deferred revenues 43,827 93,011
Other liabilities - (16,232)
---------------------------
Net cash provided by operating activities 7,291,571 5,780,282
Investing activities
Increase in finance receivables, net of
principal collected (12,939,437) (14,496,505)
Purchase of property and equipment,
net of disposals (226,823) (147,732)
---------------------------
Net cash used in investing activities (13,166,260) (14,644,237)
Financing activities
Issuance (repayment) of notes
payable-related party 83,000 (350,000)
Net proceeds from line of credit 5,450,000 9,408,877
Sale (repurchase) of common stock 72,733 (133,910)
---------------------------
Net cash provided by financing activities 5,605,733 8,924,967
---------------------------
Net decrease in cash (268,956) 61,012
Cash, beginning of year 320,195 259,183
---------------------------
Cash, end of year $ 51,239 $ 320,195
===========================
Supplemental disclosure of noncash investing
and financing activities
Stock issued in connection with
services rendered $ 26,800 $ -
===========================
Conversion of debt to common stock $ 700,000 $ -
===========================
Conversion of accrued interest to notes
payable - related party $ 191,274 $ -
===========================
See accompanying notes.
26
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2002
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.
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
Allowance for Loan Losses
The allowance for loan losses is increased by charges against
earnings and decreased by charge-offs (net of recoveries). In
addition to the allowance for loan losses, a nonrefundable dealer
reserve has been established using unearned interest and dealer
discounts to absorb 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 as an adjustment to
the interest yield over the term of the underlying finance
receivables.
27
2. Summary of Significant Accounting Policies (continued)
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 clear 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.
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
28
2. Summary of Significant Accounting Policies (continued)
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."
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
2002 2001
----------------------------
Numerator:
Numerator for basic earnings per share -
Net income available to common stockholders $3,932,139 $3,410,877
Effect of dilutive securities:
Convertible debt 17,491 59,489
-------------------------
Numerator for dilutive earnings per share -
income available to common stockholders
after assumed conversions $3,949,630 $3,470,366
=========================
Denominator:
Denominator for basic earnings per share -
weighted average shares $4,869,078 $4,673,198
Effect of dilutive securities: (A)
Employee stock options 292,956 117,298
Convertible debt 101,932 347,236
-------------------------
Denominator for diluted earnings per share -
adjusted weighted-average shares and
assumed conversions $5,263,966 $5,137,732
=========================
Earnings per share - basic $.81 $.73
=========================
Earnings per share - diluted $.75 $.68
=========================
Footnote A:
Options - 84,000
The options above were outstanding but not included in the
computation of diluted earnings per share because the effect
would be antidilutive.
29
2. Summary of Significant Accounting Policies (continued)
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 stock 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).
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 and
North Carolina. 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 assumptions 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 (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. SFAS No. 133, comprehensive
net income equaled net income. Accumulated other comprehensive
loss is composed entirely of the fair value of cash flow hedges.
30
2. Summary of Significant Accounting Policies (continued)
Statement of Cash Flows
Cash paid for income taxes for the years ended March 31, 2002 and
2001 was approximately $1,780,000 and $2,027,000, respectively.
Cash paid for interest for the years ended March 31, 2002 and
2001 was approximately $3,972,000 and $3,705,000, respectively.
Derivatives
On April 1, 2001, the Company adopted SFAS No. 133. SFAS No. 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. Derivative instruments are not used for speculative
purposes.
Recent Accounting Pronouncement
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which is
effective for fiscal periods beginning after December 15, 2001.
This statement supersedes SFAS 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 replaces 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 SFAS 121 used fair value less cost to sell and excluded
future operating losses from the framework established in
SFAS 121, for long-lived assets to be disposed of by sale. SFAS
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
31
2. Summary of Significant Accounting Policies (continued)
occurred. SFAS 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 SFAS 144
will not have a material impact on the earnings and financial
position of the Company.
Reclassification
Certain prior year amounts have been reclassified to conform to
the 2002 presentation.
3. Finance Receivables
Finance receivables consist of consumer automobile finance
installment contracts and are detailed as follows:
2002 2001
--------------------------
Finance receivables, gross $120,454,958 $103,204,179
Less:
Unearned interest (28,821,887) (24,391,597)
--------------------------
91,633,071 78,812,582
Nonrefundable dealer reserve (11,259,898) (10,306,699)
Allowance for credit losses (4,305,786) (3,465,015)
--------------------------
Finance receivables, net $ 76,067,387 $ 65,040,868
==========================
The terms of the receivables range from 12 to 60 months and bear
a weighted average effective interest rate of 24% for both 2002
and 2001, respectively.
32
3. Finance Receivables (continued)
The following table sets forth a reconciliation of the changes in
nonrefundable dealer reserves for the years ended March 31:
2002 2001
---------------------------
Balance at beginning of year $ 10,306,699 $ 8,444,103
Discounts acquired on new volume 9,384,892 8,449,361
Recoveries 886,451 696,588
Accreted to income (2,781,776) (2,330,757)
Losses absorbed (6,536,368) (4,952,596)
---------------------------
Balance at end of year $ 11,259,898 $ 10,306,699
===========================
Reserve as a percent of gross
finance receivables 9.35% 9.99%
===========================
The following table sets forth a reconciliation of the changes in
the allowance for credit losses for the years ended March 31:
2002 2001
---------------------------
Balance at beginning of year $ 3,465,015 $ 2,524,611
Current year provision 1,912,918 1,470,744
Recoveries 15,676 10,564
Accreted to income (141,729) (190,724)
Losses absorbed (946,094) (350,180)
---------------------------
Balance at end of year $ 4,305,786 $ 3,465,015
===========================
Reserve as a percent of gross
finance receivables 3.57% 3.36%
===========================
33
4. Property and Equipment
Accumulated Net Book
Cost Depreciation Value
---------------------------------------
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
=======================================
2001
Automobiles $ 169,944 $ 58,670 $111,274
Equipment 372,079 252,871 119,208
Furniture and
fixtures 155,542 101,412 54,130
Leasehold
improvements 169,521 120,374 49,147
---------------------------------------
$ 867,086 $533,327 $333,759
=======================================
5. Line of Credit
The Company has a $75,000,000 line of credit facility (the Line)
with Bank of America, of which approximately $54,000,000 was
outstanding at March 31, 2002. Borrowings under the Line bear
interest at the Bank of America prime rate or several Libor
pricing options. Pledged as collateral for this credit facility
are all of the assets of Nicholas Financial, Inc. and Nicholas
Data Services, Inc. The Line expires on November 30, 2002.
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.
34
5. Line of Credit (continued)
The Companies have 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, 2002,
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 5.37% and paid an average fixed rate of 7.66%
during the year ended March 31, 2002. A loss of $1,165,180
related to the fair value of the swaps at March 31, 2002 has been
recorded in comprehensive income. 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.
On May 11, 1999, the Company entered into an interest rate swap
with a notional amount of $10 million at a fixed rate of 5.81%,
maturing on May 24, 2002. On May 21, 1999, the Company entered
into two interest rate swaps with notional amounts of $5 million
each, at fixed rates of 5.81% and 6.08%, maturing on May 24, 2001
and May 24, 2004, respectively.
On August 18, 1999, the Company terminated a $5-million swap
maturing on May 24, 2004 in exchange for $52,000. In addition the
Company entered into an interest rate swap with a notional amount
of $10 million at a fixed rate of 5.80%.
On May 17, 2000, the Company entered into an interest rate swap
with a notional amount of $10 million at a fixed rate of 6.87%.
On March 30, 2001, the Company entered into an interest rate swap
with a notional amount of $10 million at a fixed rate of 4.89%,
maturing on March 30, 2003.
On October 5, 2001, the Company entered into an interest rate
swap with a notional amount of $10 million at a fixed rate of
3.85%, maturing on October 5, 2004.
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.
35
6. Notes Payable-Related Party
Notes payable to shareholders, directors and individuals related
thereto at March 31:
2002 2001
----------------------
Note payable, unsecured, with interest
at varying rates up to 12%, quarterly
interest payments due through November
2001, at which time the entire
principal balance and unpaid interest
is due, subordinated to the Line. The
note is convertible at the option of
the holder, into common shares at
prices from $2.25 to $3.00 per share. $ - $700,000
Note payable, unsecured, interest at
9.5% principal and interest due upon
30-day demand. 480,544 219,270
Note payable, unsecured, interest at
9.5% principal and interest due upon
30-day demand. 61,738 48,738
----------------------
$542,282 $968,008
======================
The company incurred interest expense on the above notes of
approximately $80,000 and $150,000 for the years ended March 31,
2002 and 2001, 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:
2002 2001
--------------------------
Provision for income taxes at federal
statutory rate $2,131,990 $1,880,789
Increase resulting from:
State income taxes, net of
federal benefit 228,701 202,109
Other (22,272) 37,957
------------------------
$2,338,419 $2,120,855
========================
36
7. Income Taxes (continued)
The Company's deferred tax assets consist of the following as of
March 31:
2002 2001
---------------------
Allowance for credit losses not currently
deductible for tax purposes $ 372,927 $1,005,497
Other items 115,528 65,391
---------------------
$ 488,455 $1,070,888
=====================
NFI, Canada has income tax loss carryforward balances of
approximately Cdn$318,000 (2001-Cdn$298,000) which are available
to reduce future taxable income.
For the years ended March 31, 2002 and 2001, the Company would
have recorded deferred tax assets of approximately $93,000 and
$93,000, respectively, due primarily to these Canadian income tax
loss carryforwards. The assets, however, are offset entirely by a
valuation allowance due to the relative uncertainty surrounding
the realization of the assets.
8. Shareholders' Equity
The Company has an employee stock incentive plan (the SIP) for
officers, directors and key employees under which 653,866 shares
of common stock were reserved for issuance as of March 31, 2002.
Options currently granted by the Company generally vest over a
five-year period.
The Company has elected to follow APB 25, and related
Interpretations in accounting for its employee stock options
because, as discussed below, the alternative fair value
accounting 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.
37
8. Shareholders' Equity (continued)
Pro forma information regarding net income and earnings per share
as required by FAS 123 has been determined as if the Company has
accounted for its employee stock options and warrants granted
subsequent to December 31, 1994 under the fair value method of
that Statement. The fair value for these options and warrants was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions for
2002 and 2001:
2002 2001
-----------------------
Risk free rate of return 4.92% 5.00%
Volatility factor 0.390 .0405
Expected life 7 years 10 years
Expected dividends None None
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option
valuations models require the input of highly subjective
assumptions including the expected stock price volatility.
Because the Company's employee stock options and warrants have
characteristics significantly different from those of traded
options and warrants, and because changes in the subjective input
assumptions can materially effect the fair value estimate, in
management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its
employee stock options and warrants.
For purposes of pro forma disclosures, the estimated fair value
of the options and warrants is amortized to expense over the
option and warrant's vesting period. The Company's pro forma
information is as follows:
2002 2001
----------------------
Pro forma net income $3,829,314 $3,271,584
Pro forma earnings per share:
Basic $0.79 $0.70
Diluted $0.73 $0.65
38
8. Shareholders' Equity (continued)
The following table reflects activity within the SIP for the
years noted:
2002 2001
------------------------------------------
Weighted Weighted
Options Average Options Average
& Exercise & Exercise
Warrants Price Warrants Price
------------------------------------------
Outstanding-beginning
of year 599,400 $2.01 1,184,066 $2.31
Granted 131,000 3.38 91,000 2.74
Exercised (35,534) 1.81 (2,000) 1.70
Canceled/expired (41,000) 2.52 (673,666) 2.55
------------ ------------
Outstanding-end of
year 653,866 2.26 599,400 2.01
============ ============
Exercisable at end
of year 403,045 1.89 266,160 1.82
============ ============
Weighted-average fair
value of options
granted during the
year $1.52 $1.61
Weighted Currently Exercisable
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Shares Price Life Shares Price
-----------------------------------------------------------
$1.00 to 1.99 327,800 $1.70 6.19 years 299,240 $1.70
2.00 to 2.99 208,066 2.49 7.78 years 103,805 2.42
3.00 to 3.99 118,000 3.39 9.32 years - -
Total 653,866 $2.26 7.26 years 403,045 $1.89
39
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, 2002
and 2001, the Company recorded expenses of approximately $59,000
and $27,000, 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, 2002 and 2001, the Company recorded expenses of
$116,000 and $125,000, 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:
----------------------
2003 $369,305
2004 173,587
2005 70,501
2006 20,811
2007 6,937
-----------
$641,141
Rent expense for the years ended March 31, 2002 and 2001 was
approximately $404,000 and $362,000, respectively.
40
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
Financing and Support Corporate Total
---------------------------------------------------
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
Income tax expense 2,342,725 (4,306) - 2,338,419
Identifiable assets 77,470,957 213,382 5,572 77,689,911
Net capital
expenditures 226,823 - - 226,823
Depreciation 189,725 8 - 189,733
2001
Interest income
and sales 17,386,318 410,708 - 17,797,026
Operating income
(loss) before
income taxes 5,521,553 25,137 (14,958) 5,531,732
Income tax expense 2,111,149 9,706 - 2,120,855
Identifiable assets 67,049,298 191,757 1,281 67,242,336
Net capital
expenditures 147,732 - - 147,732
Depreciation 145,498 69 - 145,567
41
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 2, 2002, for the 2002 Annual General Meeting of
Members of the Company to be held August 7, 2002 (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.
42
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,
2002, with respect to compensation plans under which equity securities
of the Company are authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
-----------------------------------------------------------------------
Number of
Securities
Remaining
Available for
Number of Weighted - Future Issuance
Securities to Average Under Equity
be Issued Exercise Compensation
Upon Exerciseof Price of Plans
Outstanding Outstanding Excluding
Options, Options, Securities
Warrants and Warrants and Reflected in
Plan Category Rights Rights Column(a)
------------------------------------------------------------------------
Column (a) (b) (c)
------------------------------------------------------------------------
Equity Compensation
Plans Approved by
Security Holders 653,866 $2.26 286,134
Equity Compensation
Plans Not Approved
by Security Holders Nil NotApplicable Nil
------------------------------------------------------------------------
TOTAL 653,866 $2.26 286,134
------------------------------------------------------------------------
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.
43
Item 13. Exhibits and Reports on Form 8-K
Exhibit Index
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 Specimen 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 March 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
44
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 fiscal 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 fiscal year ended March 31, 2001.
10.2.1 Employee Stock Option Plan
Incorporated by reference to the Company's definitive Proxy
Statement, dated June 29, 1999, relating to the Company's
1999 Annual Meeting of Stockholders as filed on June 29,
1999.
10.2.2 Non-Employee Stock Option Plan
Incorporated by reference to the Company's definitive Proxy
Statement, dated June 29, 1999, relating to the Company's
1999 Annual Meeting of Stockholders as filed on June 29,
1999.
10.3.1 Employment Contract, dated November 22, 1999, between Nicholas
Financial, Inc. and Ralph Finkenbrink, Senior Vice President
of Finance
Incorporated by reference to Exhibit 10.2.1 to the Company's
Form 10-QSB for the three months ended December 31, 1999
10.3.2 Employment Contract, dated March 16, 2001, between Nicholas
Financial, Inc. and Peter L. Vosotas, President and Chief
Executive Officer
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)
Exhibits 10.2.1, 10.2.2, 10.3.1 and 10.3.2 represent
management contracts and compensatory plans.
(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,
2002.
46
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 25, 2002 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 25, 2002
Peter L. Vosotas Chief Executive Officer,
President and Director
/s/ Ralph T. Finkenbrink Vice President-Finance June 25, 2002
Ralph T. Finkenbrink (Principal Financial
Officer)
/s/ Ellis P. Hyman Director June 25, 2002
Ellis P. Hyman
/s/ Stephen Bragin Director June 25, 2002
Stephen Bragin
/s/ Alton R. Neal Director June 25, 2002
Alton R. Neal