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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
           SECURITIES ACT OF 1934 FOR THE PERIOD ENDED DECEMBER 31, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                     SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
 For the transition period from ________ to _________. Commission file number: 0-26680 NICHOLAS FINANCIAL, INC. (Exact name of registrant as specified in its Charter)
 British Columbia, Canada
(State or Other Jurisdiction of
Incorporation or Organization)
    
    8736-3354
(I.R.S. Employer
Identification No.)2454 McMullen Booth Road, Building C
Clearwater, Florida 
(Address of Principal Executive Offices)
    
    33759
(Zip Code)
 (727) 726-0763(Registrants telephone number, Including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 and 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter periods that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ     No o. As of January 31st, 2005 there were 6,553,688 shares of common stock outstanding.




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Nicholas Financial, Inc.
Form 10-QSB
Index  
 PagePart I. Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheet as of December 31, 2004
    
    
    2Condensed Consolidated Statements of Income for the three and nine months ended December 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2004 and 2003
    
    
    4Notes to the Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Controls and Procedures
    
    
    24Part II. Other InformationItem 6.
    
    Exhibits
    
    
    25Ex-31.1 Section 302 CEO CertificationEx-31.2 Section 302 CFO CertificationEx-32.1 Section 906 CEO CertificationEx-32.2 Section 906 CFO Certification
  1




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PART 1. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Nicholas Financial, Inc. 
 
 December 31,2004AssetsCash
    
    $
    1,494,083Finance receivables, net
    
    
    106,988,799Accounts receivable
    
    
    10,716Assets held for resale
    
    
    705,146Prepaid expenses and other assets
    
    
    402,577Property and equipment, net
    
    
    645,749Deferred income taxes
    
    
    3,781,918Total assets
    
    $
    114,028,988LiabilitiesLine of credit
    
    $
    62,207,671Drafts payable
    
    
    552,304Notes payable  related party
    
    
    1,000,000Accounts payable
    
    
    4,144,788Dividends payable
    
    
    324,914Income taxes payable
    
    
    595,895Derivatives
    
    
    62,281Deferred revenues
    
    
    1,331,940Total liabilities
    
    
    70,219,793Shareholders equityPreferred stock, no par: 5,000,000 shares authorized;
none issued and outstanding
    
    
    Common stock, no par: 50,000,000 shares authorized;
6,548,688 shares issued and outstanding
    
    
    15,041,133Accumulated other comprehensive loss
    
    
    (38,605
    )Retained earnings
    
    
    28,806,66743,809,195Total liabilities and shareholders equity
    
    $
    114,028,988
 See accompanying notes. 2




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Nicholas Financial, Inc. 
 
 Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenue:Interest income on finance receivables
    
    $
    8,484,354
    
    
    $
    6,334,652
    
    
    $
    23,495,609
    
    
    $
    18,397,452Sales
    
    
    56,357
    
    
    
    50,447
    
    
    
    155,422
    
    
    
    192,7558,540,711
    
    
    
    6,385,099
    
    
    
    23,651,031
    
    
    
    18,590,207Expenses:Cost of sales
    
    
    17,043
    
    
    
    10,456
    
    
    
    45,904
    
    
    
    39,145Marketing
    
    
    227,009
    
    
    
    221,459
    
    
    
    642,697
    
    
    
    653,282Administrative
    
    
    3,203,333
    
    
    
    2,437,986
    
    
    
    9,079,230
    
    
    
    7,235,719Provision for credit losses
    
    
    565,758
    
    
    
    632,873
    
    
    
    1,806,203
    
    
    
    1,617,028Depreciation
    
    
    58,147
    
    
    
    30,000
    
    
    
    162,973
    
    
    
    162,218Interest
    
    
    909,468
    
    
    
    950,109
    
    
    
    2,719,551
    
    
    
    2,905,7474,980,758
    
    
    
    4,282,883
    
    
    
    14,456,558
    
    
    
    12,613,139Operating income before income taxes
    
    
    3,559,953
    
    
    
    2,102,216
    
    
    
    9,194,473
    
    
    
    5,977,068Income tax expense:Current
    
    
    1,640,355
    
    
    
    1,060,332
    
    
    
    4,532,854
    
    
    
    3,356,708Deferred
    
    
    (294,049
    )
    
    
    (264,155
    )
    
    
    (1,050,092
    )
    
    
    (1,100,546
    )1,346,306
    
    
    
    796,177
    
    
    
    3,482,762
    
    
    
    2,256,162Net Income
    
    $
    2,213,647
    
    
    $
    1,306,039
    
    
    $
    5,711,711
    
    
    $
    3,720,906Earnings per share  basic
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.92
    
    
    $
    0.74Earnings per share  diluted
    
    $
    0.32
    
    
    $
    0.24
    
    
    $
    0.86
    
    
    $
    0.69Dividends declared per share
    
    
    
    
    
    
    
    
    
    $
    0.10
    
    
    $
    0.10
 See accompanying notes. 3




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Nicholas Financial, Inc. 
 
 Nine months endedDecember 31,2004
    
    
    2003Operating activitiesNet income
    
    $
    5,711,711
    
    
    $
    3,720,906Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    162,973
    
    
    
    162,218Provision for credit losses
    
    
    1,806,203
    
    
    
    1,617,028Deferred income taxes
    
    
    (1,050,092
    )
    
    
    (1,100,546
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,207
    
    
    
    (16,167
    )Prepaid expenses, other assets and assets held for resale
    
    
    (144,357
    )
    
    
    (400,466
    )Accounts payable and other liabilities
    
    
    379,745
    
    
    
    477,803Income taxes payable
    
    
    470,277
    
    
    
    (201,379
    )Deferred revenues
    
    
    259,057
    
    
    
    128,318Net cash provided by operating activities
    
    
    7,596,724
    
    
    
    4,387,715Investing activitiesPurchase and origination of finance contracts
    
    
    (58,189,372
    )
    
    
    (48,982,384
    )Principal payments received
    
    
    46,630,886
    
    
    
    40,708,394Purchase of property and equipment, net of disposals
    
    
    (243,160
    )
    
    
    (255,749
    )Net cash used in investing activities
    
    
    (11,801,646
    )
    
    
    (8,529,739
    )Financing activitiesIssuance of notes payable  related party
    
    
    318,470
    
    
    
    172,920Net (repayment) proceeds from line of credit
    
    
    (5,302,619
    )
    
    
    5,850,052Payment of dividend
    
    
    (324,915
    )
    
    
    (253,354
    )Decrease in drafts payable
    
    
    (358,797
    )
    
    
    (190,933
    )Sale of common stock, net of offering costs
    
    
    10,409,182
    
    
    
    243,321Net cash provided by financing activities
    
    
    4,741,321
    
    
    
    5,822,006Net increase in cash
    
    
    536,399
    
    
    
    1,679,982Cash, beginning of period
    
    
    957,684
    
    
    
    481,211Cash, end of period
    
    $
    1,494,083
    
    
    $
    2,161,193
 See accompanying notes. 4




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Nicholas Financial, Inc. 
 
 December 31, 2004 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Nicholas Financial, Inc.
(including its subsidiaries, the Company) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial information and with the
instructions to Form 10-QSB pursuant to the Securities and Exchange Act of 1934, as amended in
Article 10 of Regulation SB. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for interim
periods are not necessarily indicative of the results that may be expected for the year ending
March 31, 2005. For further information, refer to the condensed consolidated financial statements
and footnotes thereto included in the Companys Annual Report on Form 10-KSB for the year ended
March 31, 2004 as filed with the Securities Exchange Commission on June 29, 2004. 2. Revenue Recognition Interest income on finance receivables is recognized using the interest method. Accrual of interest
income on finance receivables is suspended when a loan is contractually delinquent for 60 days or
more or the collateral is repossessed, whichever is earlier. The Company attributes all of the dealer discount and a portion of unearned income to a reserve for
credit losses. Such amounts reduce the interest recognized over the life of the contract. The
Company receives a commission for selling add-on services to consumer borrowers and amortizes the
commission, net of the related costs, over the term of the loan using the interest method. The
Companys net fees charged for processing a loan are recognized as an adjustment to the yield and
are amortized over the life of the loan using the interest method. The amount of future unearned income represents the amount of finance charges the Company expects
to fully earn over the life of the current portfolio, and is computed as the product of the
contract rate, the contract term, and the contract amount. The Company aggregates the contracts
purchased during a three-month period for all of its branch locations. After the analysis of
purchase date accounting is complete, any uncollectable amounts would be contemplated in the
allowance for credit losses. 5




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Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited) 3. Earnings Per Share Basic earnings per share excludes any dilutive effects of common stock equivalents such as options,
warrants, and convertible securities. Diluted earnings per share includes the effects of dilutive
options, warrants, and convertible securities. Basic and diluted earnings per share have been
computed as follows: Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Numerator for earnings per share  net income
    
    $
    2,213,647
    
    
    $
    1,306,039
    
    
    $
    5,711,711
    
    
    $
    3,720,906Denominator:Denominator for basic earnings per share 
weighted average shares
    
    
    6,514,634
    
    
    
    5,064,623
    
    
    
    6,227,129
    
    
    
    5,036,730Effect of dilutive securities:Employee stock options
    
    
    415,285
    
    
    
    374,366
    
    
    
    402,601
    
    
    
    359,085Denominator for diluted earnings per share
    
    
    6,929,919
    
    
    
    5,438,989
    
    
    
    6,629,730
    
    
    
    5,395,815Earnings per share  basic
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.92
    
    
    $
    0.74Earnings per share  diluted
    
    $
    0.32
    
    
    $
    0.24
    
    
    $
    0.86
    
    
    $
    0.69
 6




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Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited) 4. Finance Receivables Finance receivables consist of automobile finance installment contracts and direct consumer loans
and are detailed as follows: Finance receivables, gross Contracts
    
    $
    171,166,964Less: Unearned interest
    
    
    (40,310,612
    )Finance receivables, net of unearned interest
    
    
    130,856,352Less:Dealer discounts
    
    
    (17,306,489
    )Allowance for credit losses
    
    
    (6,561,064
    )Finance receivables, net
    
    $
    106,988,799
 The terms of the receivables range from 12 to 72 months and bear a weighted average effective
interest rate of 24%. 5. Line of Credit The Company has an $85.0 million Line of Credit facility (the Line) expiring on November 30, 2006.
The Company may borrow the lesser of $85.0 million or amounts based upon formulas principally
related to a percentage of eligible finance receivables, as defined. For the three months ended
December 31, 2004, $60.0 million of borrowings under the Line used LIBOR plus 212.5 basis points
pricing options. The remainder of the borrowings under the Line used the prime rate plus 25 basis
points pricing option. The prime rate based borrowings are generally less than $5.0 million. The
Companys cost of borrowed funds based upon the interest rates charged under the line, related
party debt and the effect of the swaps (see note 7) amounted to 5.69% and 5.70% for the three and
nine months ended December 31, 2004, respectively, as compared to 5.73% and 6.03% for the three and
nine month period ended December 31, 2003, respectively. Pledged as collateral for this credit
facility are all of the assets of the Companys subsidiary, Nicholas Financial, Inc. As of December
31, 2004, the amount outstanding under the Line was approximately $62.2 million and the amount
available under the Line was approximately $22.8 million. As of December 31, 2004, the Company was
in full compliance with all debt covenants thereunder. 6. Notes Payable - Related Party The Companys notes payable consist of unsecured notes bearing interest at 5.92% with principal and
interest due within 30-days upon demand. The notes totaled $1,000,000 at December 31, 2004, and are
payable to a related party. 7




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Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited) 7. Derivatives and Hedging The Company is party to interest rate swap agreements classified as derivative instruments. For
derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the
exposure to variability in expected future cash flows that is attributable to a particular risk,
such as interest rate risk), the effective portion of the gain or loss on the derivative instrument
is reported as a component of comprehensive income and reclassified into earnings in the same
period or periods during which the hedged transaction affects earnings. The remaining gain or loss
on the derivative instrument in excess of the cumulative change in the present value of the future
cash flows of the hedged item, if any, is recognized in current earnings during the period of
change. The Company has entered into interest rate swap agreements that effectively convert a portion of
its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on
future interest expense. At December 31, 2004, $50.0 million of the Companys borrowings were
designated as hedged items to interest rate swap agreements. Under the swap agreements, the Company
received a weighted average variable rate of 2.06% and 1.14% for the three months ended December
31, 2004 and 2003, respectively. During the same period the Company paid a weighted average fixed
rate of 3.59% and 4.22%, respectively. Under the swap agreements, the Company received a weighted
average variable rate of 1.55% and 1.18% for the nine months ended December 31, 2004 and 2003,
respectively. During the same period the Company paid a weighted average fixed rate of 3.75% and
4.22%, respectively. A liability of $62,281 related to the fair value of the swaps at December 31,
2004 has been recorded in the caption derivatives on the balance sheet. Accumulated other
comprehensive loss at December 31, 2004, in the amount of $38,605 represents the after-tax effect
of the derivative loss. Amounts of net income or losses on derivative instruments expected to be
reclassified from comprehensive income to earnings in the next 12 months are not expected to be
material. The Company has entered into the following cash-flow hedges: Fixed RateDate Entered
    
    Effective Date
    
    Notional Amount
    
    
    Of Interest
    
    Maturity DateJune 28, 2002
    
    June 28, 2002
    
    $
    10,000,000
    
    
    
    3.83
    %
    
    July 2, 2005January 6, 2003
    
    April 2, 2003
    
    $
    10,000,000
    
    
    
    3.35
    %
    
    April 2, 2007January 31, 2003
    
    August 1, 2003
    
    $
    10,000,000
    
    
    
    3.20
    %
    
    August 2, 2006February 26, 2003
    
    May 17, 2004
    
    $
    10,000,000
    
    
    
    3.91
    %
    
    May 19, 2008March 11, 2004
    
    October 5, 2004
    
    $
    10,000,000
    
    
    
    3.64
    %
    
    October 5, 2009
 The Company utilizes the above noted interest rate swaps to manage its interest rate exposure. The
swaps effectively convert a portion of the Companys floating rate debt to a fixed rate, more
closely matching the interest rate characteristics of the Companys finance receivables. There has
historically been no ineffectiveness associated with the Companys hedges. 8




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Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited) 7. Derivatives and Hedging (continued) The following table reconciles net income with comprehensive income. Three months ended December 31,
    
    
    Nine months ended December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income
    
    $
    2,213,647
    
    
    $
    1,306,039
    
    
    $
    5,711,711
    
    
    $
    3,720,906Mark to market interest rate swaps
(net of tax)
    
    
    263,808
    
    
    
    361,673
    
    
    
    1,026,737
    
    
    
    561,300Comprehensive income
    
    $
    2,477,455
    
    
    $
    1,667,712
    
    
    $
    6,738,448
    
    
    $
    4,282,206
 8. Stock Options The Company has an employee stock incentive plans (the SIP) for officers, directors and key
employees. The Company is authorized to grant options for up to 940,000 common shares under the
SIP, of which 211,633 shares were remaining available for future grants as of December 31, 2004. Of
the 211,633 shares remaining available for future grants 173,333 shares are available for directors
and 38,300 shares are available for employees. Options currently granted by the Company generally
vest over a five-year period. As permitted under Statement of Financial Accounting Standards (SFAS) No. 148, Accounting for
Stock-Based Compensation - Transaction and Disclosure, which amended SFAS 123, Accounting for
Stock-Based Compensation, the Company has elected to continue to follow the intrinsic value method
in accounting for its stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related
interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions
Involving Stock Compensation, an interpretation of APB. 25. No stock-based employee compensation
cost is reflected in operations, as all options granted under those plans have an exercise price
equal to or above the market value of the underlying common stock on the date of grant. The fair value method uses the Black-Scholes option-pricing model to determine compensation expense
associated with the Companys options. The following table illustrates the effect on net income and
net income per share if the Company had applied the fair value recognition provisions of SFAS 123
to stock-based employee compensation: Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Net income
    
    $
    2,213,647
    
    
    $
    1,306,039
    
    
    $
    5,711,711
    
    
    $
    3,720,906Basic earnings per share
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.92
    
    
    $
    0.74Fully diluted earnings per share
    
    $
    0.32
    
    
    $
    0.24
    
    
    $
    0.86
    
    
    $
    0.69Stock based employee compensation
cost under the fair value method
    
    $
    11,759
    
    
    $
    10,509
    
    
    $
    35,149
    
    
    $
    32,535Pro forma net income
    
    $
    2,201,888
    
    
    $
    1,295,530
    
    
    $
    5,676,562
    
    
    $
    3,688,371Pro forma basic earnings per share
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.91
    
    
    $
    0.73Pro forma fully diluted earnings
per share
    
    $
    0.32
    
    
    $
    0.24
    
    
    $
    0.86
    
    
    $
    0.68
 9




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Nicholas Financial, Inc.
Notes to the Condensed Consolidated Financial Statements
(Unaudited) 9. Dividends On August 17, 2004, the Company announced the Board of Directors had approved the payment of an
annual cash dividend of $0.10 per share, payable semi-annually. The first cash dividend of $0.05
per share was paid on September 17, 2004, to shareholders of record as of August 27, 2004. The
second cash dividend of $0.05 per share will be payable as determined by the Board of Directors. 10. Contingencies For discussion of certain legal proceedings to which the Company is a party, see Item 3 in the
Companys Annual Report on Form 10-KSB for the fiscal year ended March 31, 2004, as filed with the
Securities and Exchange Commission on June 29, 2004. 10




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Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Information This Form 10-QSB contains various statements, other than those concerning historical
information, that are based on managements beliefs and assumptions, as well as information
currently available to management, and should be considered forward-looking statements. This
notice is intended to take advantage of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to such forward-looking statements. When used in this
document, the words anticipate, estimate, expect, and similar expressions are intended to
identify forward-looking statements. Although the Company believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance that such expectations
will prove to be correct. Such statements are subject to certain risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those anticipated, estimated
or expected. Among the key factors that may have a direct bearing on the Companys operating
results are fluctuations in the economy, the degree and nature of competition, demand for consumer
financing in the markets served by the Company, the Companys products and services, increases in
the default rates experienced on Contracts, adverse regulatory changes in the Companys existing
and future markets, the Companys ability to expand its business, including its ability to complete
acquisitions and integrate the operations of acquired businesses, to recruit and retain qualified
employees, to expand into new markets and to maintain profit margins in the face of increased
pricing competition. Introduction Consolidated net income increased for the three months ended December 31, 2004, to $2,213,647
from $1,306,039 for the three months ended December 31, 2003. Consolidated net income increased for
the nine months ended December 31, 2004, to $5,711,711 from $3,720,906 for the nine months ended
December 31, 2003. Earnings were favorably impacted by an increase in the outstanding loan
portfolio, a reduction in the average cost of borrowed funds and a reduction in the charge-off
rate. The Companys Nicholas Data Services (NDS) subsidiary did not contribute significantly to
consolidated operations in the three or nine month periods ended December 31, 2004 or 2003. 11




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Portfolio Summary Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Average finance receivables, net of
unearned interest (1)
    
    $
    130,157,442
    
    
    $
    112,338,303
    
    
    $
    127,149,953
    
    
    $
    110,248,781Average indebtedness (2)
    
    $
    63,908,352
    
    
    $
    66,328,452
    
    
    $
    63,564,709
    
    
    $
    64,243,278Finance revenue (3)
    
    $
    8,484,354
    
    
    $
    6,334,652
    
    
    $
    23,495,609
    
    
    $
    18,397,452Interest expense
    
    
    909,468
    
    
    
    950,109
    
    
    
    2,719,551
    
    
    
    2,905,747Net finance revenue
    
    $
    7,574,886
    
    
    $
    5,384,543
    
    
    $
    20,776,058
    
    
    $
    15,491,705Weighted average contractual rate (4)
    
    
    23.80
    %
    
    
    23.85
    %
    
    
    24.03
    %
    
    
    24.02
    %Average cost of borrowed funds (2)
    
    
    5.69
    %
    
    
    5.73
    %
    
    
    5.70
    %
    
    
    6.03
    %Gross portfolio yield (5)
    
    
    26.07
    %
    
    
    22.56
    %
    
    
    24.63
    %
    
    
    22.25
    %Interest expense as a percentage of
average finance receivables, net of
unearned interest
    
    
    2.79
    %
    
    
    3.38
    %
    
    
    2.85
    %
    
    
    3.51
    %Provision for credit losses as a
percentage of average finance
receivables, net of unearned
interest
    
    
    1.74
    %
    
    
    2.25
    %
    
    
    1.89
    %
    
    
    1.96
    %Net portfolio yield (5)
    
    
    21.54
    %
    
    
    16.93
    %
    
    
    19.89
    %
    
    
    16.78
    %Operating expenses as a percentage
of average finance receivables, net
of unearned interest (6)
    
    
    10.54
    %
    
    
    9.39
    %
    
    
    10.18
    %
    
    
    9.51
    %Pre-tax yield as a percentage of
average finance receivables, net of
unearned interest (7)
    
    
    11.00
    %
    
    
    7.54
    %
    
    
    9.71
    %
    
    
    7.27
    %Write-off to liquidation (8)
    
    
    7.45
    %
    
    
    9.64
    %
    
    
    6.99
    %
    
    
    9.12
    %Net charge-off percentage (9)
    
    
    6.52
    %
    
    
    8.11
    %
    
    
    6.03
    %
    
    
    7.79
    %
 See accompanying notes to portfolio summary. 12




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##### Table of Contents



Note:All three and nine month key performance indicators expressed as percentages have
been annualized.  (1)
    Average finance receivables, net of unearned interest, represents the average of gross
finance receivables, less unearned interest during the period.(2)
    Average indebtedness represents the average outstanding borrowings under the Line and notes
payable-related party. Average cost of borrowed funds represents interest expense as a
percentage of average indebtedness.(3)
    Finance revenue does not include revenue generated by NDS. See page 14 and 15 for detail on
NDS revenue during the period.(4)
    Weighted average contractual rate represents the weighted average annual percentage rate
(APR) of all Contracts purchased and direct loans originated during the period.(5)
    Gross portfolio yield represents finance revenues as a percentage of average finance
receivables, net of unearned interest. Net portfolio yield represents finance revenue minus
(a) interest expense and (b) the provision for credit losses as a percentage of average
finance receivables, net of unearned interest.(6)
    Operating expenses represent total expenses, less interest expense, the provision for credit
losses and operating costs associated with NDS. See page 14 and 15 for detail on NDS operating
expenses during the period.(7)
    Pre-tax yield represents net portfolio yield minus operating expenses as a percentage of
average finance receivables, net of unearned interest.(8)
    Write-off to liquidation percentage is defined as net charge-offs divided by liquidation.
Liquidation is defined as beginning receivable balance plus current period purchases minus
voids and refinances minus ending receivable balance.(9)
    Net charge-off percentage represents net charge-offs divided by average finance receivables,
net of unearned interest, outstanding during the period. 13




---



##### Table of Contents



Three months ended December 31, 2004 compared to three months ended December 31, 2003 Interest Income and Loan Portfolio Finance revenue increased 34% to $8.5 million for the three months ended December 31, 2004,
from $6.3 million for the corresponding period ended December 31, 2003. The average finance
receivables, net of unearned interest balance equaled $130.2 million for the three months ended
December 31, 2004, an increase of 16% from the $112.3 million for the three months ended December
31, 2003. The primary reason average finance receivables, net of unearned interest increased was
the increase in the receivable base of several existing branches and having six additional branch
locations open as of December 31, 2004. The gross finance receivable balance increased 16% to
$171.2 million at December 31, 2004, from $147.6 million at December 31, 2003. The primary reason
interest revenue increased was the increase in the outstanding loan portfolio. The gross portfolio
yield increased from 22.56% for the three months ended December 31, 2003, to 26.07% for the
corresponding period ended December 31, 2004. The net portfolio yield increased from 16.93% for the
three months ended December 31, 2003, to 21.54% for the three months ended December 31, 2004. The
primary reasons for the increase in the net portfolio yield were a decrease in charge-offs and a
reduction in the cost of borrowed funds for the period ended December 31, 2004. The net charge-off
percentage for the three-month period ended December 31, 2004, was 6.52% as compared to 8.11% for
the corresponding period ended December 31, 2003. Computer Software Business Sales for the three months ended December 31, 2004, were $56,357 as compared to $50,447 for
the corresponding period ended December 31, 2003, an increase of 12%. This increase was primarily
due to higher revenue from the existing customer base during the three months ended December 31,
2004. Cost of sales and operating expenses increased from $65,754 for the three months ended
December 31, 2003, to $77,229 for the corresponding period ended December 31, 2004. Operating Expenses Operating expenses, excluding provision for credit losses and interest expense and costs
associated with NDS, increased to $3.4 million for the three months ended December 31, 2004, from
$2.6 million for the corresponding period ended December 31, 2003. This increase of 30% was
primarily attributable to the additional staffing of several existing branches, increased general
operating expenses and having six additional branch offices. Operating expenses as a percentage of
average finance receivables, net of unearned interest increased from 9.39% for the three months
ended December 31, 2003, to 10.54% for the corresponding period ended December 31, 2004. Interest Expense Interest expense decreased to $909,468 for the three months ended December 31, 2004, as
compared to $950,109 for the corresponding period ended December 31, 2003. The average indebtedness
for the three months ended December 31, 2004, decreased to $63.9 million compared to $66.3 million
for the corresponding period ended December 31, 2003. The primary reason for the decrease in
average indebtedness was the completion of secondary common stock offering during May of 2004
netting the Company approximately $9.9 million. The average cost of outstanding borrowings
decreased from 5.73% during the three months ended December 31, 2003, to 5.69% during the three
months ended December 31, 2004. 14




---



##### Table of Contents



Nine months ended December 31, 2004 compared to nine months ended December 31, 2003 Interest Income and Loan Portfolio Finance revenue increased 28% to $23.5 million for the nine months ended December 31, 2004,
from $18.4 million for the corresponding period ended December 31, 2003. The average finance
receivables, net of unearned interest balance equaled $127.1 million for the nine months ended
December 31, 2004, an increase of 15% from the $110.2 million for the nine months ended December
31, 2003. The primary reason net finance receivables increased was the increase in the receivable
base of several existing branches and having six additional branch locations as of December 31,
2004. The gross finance receivable balance increased 16% to $171.2 million at December 31, 2004,
from $147.6 million at December 31, 2003. The primary reason interest revenue increased was the
increase in the outstanding loan portfolio. The gross portfolio yield increased from 24.63% for the
nine months ended December 31, 2003, to 22.25% for the corresponding period ended December 31,
2004. The net portfolio yield increased from 16.78% for the nine months ended December 31, 2003 to
19.89% for the nine months ended December 31, 2004. The primary reasons for the increase in the net
portfolio yield were a decrease in charge-offs and a reduction in the cost of borrowed funds for
the period ended December 31, 2004. The net charge-off percentage for the nine-month period ended
December 31, 2004, was 6.03% as compared to 7.79% for the corresponding period ended December 31,
2003. Computer Software Business Sales for the nine months ended December 31, 2004, were $155,422 compared to $192,755 for the
corresponding period ended December 31, 2003, a decrease of 19%. This decrease was primarily due to
lower revenue from the existing customer base during the nine months ended December 31, 2004. Cost
of sales and operating expenses decreased from $230,509 for the nine months ended December 31,
2003, to $221,310 for the corresponding period ended December 31, 2004. Operating Expenses Operating expenses, excluding provision for credit losses and interest expense and costs
associated with NDS, increased to $9.7 million for the nine months ended December 31, 2004, from
$7.9 million for the corresponding period ended December 31, 2003. This increase of 24% was
primarily attributable to the additional staffing of several existing branches, increased general
operating expenses and having six additional branch offices. Operating expenses as a percentage of
average finance receivables, net of unearned interest assets decreased from 10.18% for the nine
months ended December 31, 2003, to 9.51% for the corresponding period ended December 31, 2004. Interest Expense Interest expense decreased to $2,719,551 for the nine months ended December 31, 2004, as
compared to $2,905,747 for the corresponding period ended December 31, 2003. The average
indebtedness for the nine months ended December 31, 2004, decreased to $63.6 million compared to
$64.2 million for the corresponding period ended December 31, 2003. The primary reason for the
decrease in average indebtedness was the completion of secondary common stock offering during May
of 2004 netting the Company approximately $9.9 million. The average cost of outstanding borrowings
decreased from 6.03% during the nine months ended December 31, 2003, to 5.70% during the nine
months ended December 31, 2004. 15




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##### Table of Contents



Contract Procurement The Company purchases Contracts in the seven states listed in the table below. The Company has
been expanding its Contract procurement. See Future Expansion below. The Contracts purchased by
the Company are predominately for used vehicles; for the three and nine month periods ended
December 31, 2004, and 2003, respectively, less than 3% were new. As of December 31, 2004, the
average model year collateralizing the portfolio was a 1999 vehicle. The amounts shown in the tables below represent information on finance receivables, net of
unearned interest of Contracts purchased. Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,State
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003FL
    
    $
    10,121,741
    
    
    $
    8,036,773
    
    
    $
    30,643,243
    
    
    $
    27,210,545GA
    
    
    1,238,711
    
    
    
    1,802,773
    
    
    
    5,547,869
    
    
    
    6,384,776NC
    
    
    2,081,482
    
    
    
    1,581,909
    
    
    
    6,577,416
    
    
    
    5,548,857SC
    
    
    781,675
    
    
    
    664,595
    
    
    
    2,847,066
    
    
    
    2,144,234OH
    
    
    2,064,868
    
    
    
    2,267,575
    
    
    
    8,635,938
    
    
    
    8,453,317MI
    
    
    412,137
    
    
    
    597,254
    
    
    
    2,225,223
    
    
    
    1,665,511VA
    
    
    1,400,228
    
    
    
    438,850
    
    
    
    4,270,114
    
    
    
    611,901KY
    
    
    234,820
    
    
    
    
    
    
    
    234,820
    
    
    
    MD
    
    
    414,908
    
    
    
    
    
    
    
    414,908
    
    
    
    Total
    
    $
    18,750,570
    
    
    $
    15,389,729
    
    
    $
    61,396,597
    
    
    $
    52,019,141
 Three months ended
    
    
    Nine months endedIndirect Contracts
    
    December 31,
    
    
    December 31,Purchased
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Purchases
    
    $
    18,750,570
    
    
    $
    15,389,729
    
    
    $
    61,396,597
    
    
    $
    52,019,141Weighted APR
    
    
    23.65
    %
    
    
    23.66
    %
    
    
    23.90
    %
    
    
    23.88
    %Average Discount
    
    
    8.73
    %
    
    
    8.80
    %
    
    
    8.72
    %
    
    
    8.91
    %Average Term (months)
    
    
    45
    
    
    
    43
    
    
    
    44
    
    
    
    43Average Loan
    
    $
    8,504
    
    
    $
    8,104
    
    
    $
    8,382
    
    
    $
    8,128Number of Contracts
    
    
    2,205
    
    
    
    1,899
    
    
    
    7,325
    
    
    
    6,400
 Loan Origination The following table presents information on direct loans originated by the Company, net of
unearned interest. Three months ended
    
    
    Nine months endedDirect Loans
    
    December 31,
    
    
    December 31,Originated
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Originations
    
    $
    1,446,259
    
    
    $
    1,047,014
    
    
    $
    3,910,700
    
    
    $
    2,940,870Weighted APR
    
    
    25.80
    %
    
    
    26.64
    %
    
    
    26.01
    %
    
    
    26.52
    %Average Term (months)
    
    
    26
    
    
    
    24
    
    
    
    26
    

    
    
    26Average Loan
    
    $
    3,158
    
    
    $
    2,755
    
    
    $
    3,065
    
    
    $
    2,844Number of Loans
    
    
    458
    
    
    
    380
    
    
    
    1,276
    
    
    
    1,034
 16




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##### Table of Contents



Analysis of Credit Losses Because of the nature of the customers under the Companys Contracts, the Company considers
the establishment of adequate reserves for credit losses to be imperative. The Company segregates
its Contracts into static pools for purposes of establishing reserves for losses. All Contracts
purchased by a branch during a fiscal quarter comprise a static pool. The Company pools Contracts
according to branch location because the branches purchase Contracts in different geographic
markets. 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. Each such static pool consists of the Contracts purchased by a Company branch office
during a fiscal quarter. As of December 31, 2004, the Company had 568 active static pools. The
average pool consisted of 69 Contracts with aggregate finance receivables, net of unearned
interest, of approximately $567,000. Contracts are purchased from many different dealers and all are purchased on an individual
Contract by Contract basis. Individual Contract pricing is determined by the automobile dealerships
and is generally the lesser of the applicable state maximum interest rate or the maximum interest
rate at which the customer will accept. In certain markets, competitive forces will drive down
Contract rates from the maximum allowable rate to a level where an individual competitor is willing
to buy an individual Contract. The Company only buys Contracts on an individual basis and never
purchases Contracts in batches, although the Company does consider portfolio acquisitions as part
of its growth strategy. A dealer discount represents the difference between the finance receivable, net of unearned
interest, of a Contract and the amount of money the Company actually pays for the Contract. The
discount negotiated by the Company is a function of the credit quality of the customer and the
wholesale value of the vehicle. The automotive dealer accepts these terms by executing a dealer
agreement with the Company. The entire amount of discount is related to credit quality and is
considered to be part of the credit loss reserve. The Company utilizes a static pool approach to
track portfolio performance. A static pool retains an amount equal to 100% of the discount as 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 static pool, a portion of
future unearned income associated with that specific static 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 static pool which is not
fully liquidated, then a charge to income through the provision is used to reestablish adequate
reserves. If a static pool is fully liquidated and has any remaining reserves, the excess reserves
are immediately recognized into income. For static pools not fully liquidated, that are determined
to have excess reserves, such excess amounts are accreted into income over the remaining life of
the static pool. Reserves accreted into income for the three months ended December 31, 2004, were
approximately $1,557,000 as compared to $443,000 for the three months ended December 31, 2003.
Reserves accreted into income for the nine months ended December 31, 2004, were approximately
$3,498,000 as compared to $1,440,000 for the nine months ended December 31, 2003. The primary
reason for the increase in the three-month period ended December 31, 2004, as compared to the
three-month period ended December 31, 2003, was a decrease in the net charge-off percentage from
8.11% to 6.52%, respectively. The primary reason for the increase in the nine-month period ended
December 31, 2004, as compared to the nine-month period ended December 31, 2003, was a decrease in
the net charge-off percentage from 7.79% to 6.03%, respectively. The Company has detailed underwriting guidelines it utilizes to determine which Contracts to
purchase. These guidelines are specific and are designed to cause all of the Contracts that the
Company purchases to have common risk characteristics. The Company utilizes its District Managers
to evaluate their respective branch locations for adherence to these underwriting guidelines. The
Company also utilizes an internal audit department to assure adherence to its underwriting
guidelines. The Company utilizes the branch model, which allows for Contract purchasing to be done
on the branch level. Each Branch Manager may interpret the guidelines differently, and as a result,
the common risk characteristics tend to be the same on an individual branch level but not
necessarily compared to another branch. 17




---



##### Table of Contents



In analyzing a static pool, the Company considers the performance of prior static pools
originated by the branch office, the performance of prior Contracts purchased from the dealers
whose Contracts are included in the current static pool, the credit rating of the customers under
the Contracts in the static pool, and current market and economic
conditions. Each static pool is analyzed monthly to determine if the loss reserves are adequate
and adjustments are made if they are determined to be necessary. The Company experienced lower losses during the three and nine months ended December 31, 2004,
as compared to the three and nine months ended December 31, 2003. This resulted in static pools
having reserves in excess of estimates currently needed to liquidate these pools. The Company is in
the process of accreting these excess reserves from these more mature static pools over their
remaining life. The Companys overall reserve percentage has increased from 13.46% of gross finance
receivables as of December 31, 2003, to 13.94% of gross finance receivables as of December 31,
2004. The following table sets forth a reconciliation of the changes in dealer discount on
Contracts. Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Balance at beginning of period
    
    $
    17,432,841
    
    
    $
    13,693,963
    
    
    $
    15,377,582
    
    
    $
    12,394,089Discounts acquired on new
volume
    
    
    3,101,373
    
    
    
    2,504,121
    
    
    
    10,132,595
    
    
    
    8,468,596Losses absorbed
    
    
    (1,976,361
    )
    
    
    (2,420,384
    )
    
    
    (5,644,300
    )
    
    
    (6,668,320
    )Recoveries
    
    
    305,387
    
    
    
    258,184
    
    
    
    938,337
    
    
    
    838,396Discounts accreted
    
    
    (1,556,751
    )
    
    
    (442,665
    )
    
    
    (3,497,725
    )
    
    
    (1,439,542
    )Balance at end of period
    
    $
    17,306,489
    
    
    $
    13,593,219
    
    
    $
    17,306,489
    
    
    $
    13,593,219Dealer discounts as a percent
of
gross indirect Contracts
    
    
    10.45
    %
    
    
    9.50
    %
    
    
    10.45
    %
    
    
    9.50
    %
 The following table sets forth a reconciliation of the changes in the allowance for credit
losses on Contracts. Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Balance at beginning of period
    
    $
    6,312,213
    
    
    $
    5,774,119
    
    
    $
    5,787,764
    
    
    $
    5,428,681Current period provision
    
    
    514,119
    
    
    
    467,085
    
    
    
    1,680,596
    
    
    
    1,331,193Losses absorbed
    
    
    (467,770
    )
    
    
    (129,872
    )
    
    
    (1,109,798
    )
    
    
    (648,542
    )Balance at end of period
    
    $
    6,358,562
    
    
    $
    6,111,332
    
    
    $
    6,358,562
    
    
    $
    6,111,332Allowance as a percent of
gross indirect Contracts
    
    
    3.84
    %
    
    
    4.27
    %
    
    
    3.84
    %
    
    
    4.27
    %
 18




---



##### Table of Contents



The following table sets forth a reconciliation of the changes in the allowance for credit
losses on direct loans. Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Balance at beginning of period
    
    $
    180,239
    
    
    $
    201,349
    
    
    $
    184,334
    
    
    $
    176,126Current period provision
    
    
    41,476
    
    
    
    18,199
    
    
    
    94,258
    
    
    
    114,172Losses absorbed
    
    
    (24,744
    )
    
    
    (55,235
    )
    
    
    (98,939
    )
    
    
    (138,974
    )Recoveries
    
    
    5,531
    
    
    
    9,638
    
    
    
    22,849
    
    
    
    22,627Balance at end of period
    
    $
    202,502
    
    
    $
    173,951
    
    
    $
    202,502
    
    
    $
    173,951Allowance as a percent of
gross direct loan
receivables
    
    
    3.63
    %
    
    
    3.83
    %
    
    
    3.63
    %
    
    
    3.83
    %
 The following table summarizes the total amounts of Discounts and Allowances for both Contracts and
direct loans. Three months ended
    
    
    Nine months endedDecember 31,
    
    
    December 31,2004
    
    
    2003
    
    
    2004
    
    
    2003Total Discounts and
Allowances at end
of period
    
    $
    23,867,553
    
    
    $
    19,878,502
    
    
    $
    23,867,553
    
    
    $
    19,878,501Discounts and
Allowances as a
percent of gross
receivables
    
    
    13.94
    %
    
    
    13.46
    %
    
    
    13.94
    %
    
    
    13.46
    %
 The average dealer discount associated with new volume for the three months ended December 31,
2004 and 2003, were 8.73% and 8.80%, respectively. The average dealer discount associated with new
volume for the nine months ended December 31, 2004 and 2003, were 8.72% and 8.91%, respectively.
The Company does not consider these changes to be material, and such changes were not the result of
any change in buying philosophy or competition. The provision for credit losses decreased to approximately $566,000 for the three months ended
December 31, 2004, as compared to approximately $633,000 for the three months ended December 31,
2003. The provision for credit losses increased to approximately $1,806,000 for the nine months
ended December 31, 2004, as compared to approximately $1,617,000 for the nine months ended December
31, 2003. The Companys net charge-off percentage decreased from 8.11% for the three months ended
December 31, 2003, to 6.52% for the three months ended December 31, 2004. The Companys net
charge-off percentage decreased from 7.79% for the nine months ended December 31, 2003, to 6.03%
for the nine months ended December 31, 2004. The Company anticipates losses as a percentage of
liquidation will be in the 7-9% range during the remainder of the current fiscal year. The longer
term outlook for portfolio performance will depend on the overall economic conditions, the
unemployment rate and the Companys ability to monitor, manage and implement its underwriting
philosophy in additional geographic areas as it strives to continue its expansion. The Company does
not believe there have been any significant changes in loan concentrations, terms or quality of
Contracts purchased during the three and nine months ended December 31, 2004, that would have
contributed to the decrease in losses. 19




---



##### Table of Contents



Recoveries as a percentage of charge-offs were 14.1% and 12.6% for the three months ended
December 31, 2004 and 2003, respectively. Recoveries as a percentage of charge-offs were 16.1% and
13.6% for the nine months ended December 31, 2004 and 2003, respectively. The Company believes that as it continues to
expand its operations, it will become more difficult to implement its loss recovery model in
geographic areas further away from its Corporate headquarters, and as a result, the Company will
likely experience declining recovery rates over the long term. Reserves accreted into income for the three months ended December 31, 2004 and 2003, were
approximately $1,557,000 and $443,000, respectively. Reserves accreted into income for the nine
months ended December 31, 2004 and 2003, were approximately $3,498,000 and $1,436,000,
respectively. The amount and timing of reserves accreted into income is a function of individual
static pool performance as compared to their estimated default rate. The U.S. unemployment rate has dropped slightly over the past year. The Company believes there
is a correlation between the unemployment rate and future portfolio performance. The Company does
not expect the U.S. unemployment rate to rise or fall significantly in the foreseeable future.
Therefore the Company does not plan on increasing or decreasing reserves based on the current U.S.
unemployment rate. The number of voluntary repossessions decreased slightly for the three months
ended December 31, 2004, as compared to the three months ended December 31, 2003. The Company
believes its percentage of voluntary repossessions will stabilize in the current fiscal year, and
as a result, management believes that the Companys current reserve levels are adequate for the
foreseeable future. The number of bankruptcy filings by Company customers decreased slightly
during the three months ended December 31, 2004, as compared to the three months ended December 31,
2003. The Company believes the percentage of bankruptcy filings as a percentage of active
receivables will stabilize in the current fiscal year, and as a result, management believes that
the Companys current reserve levels are adequate for the foreseeable future. The amount of future unearned income represents the amount of finance charges the Company
expects to fully earn over the life of the current portfolio, and is computed as the product of the
contract rate, the contract term, and the contract amount. The Company aggregates the contracts
purchased during a three-month period for all of its branch locations, after the analysis of
purchase date accounting is complete, any uncollectable amounts would be contemplated in the
allowance for credit losses. 20




---



##### Table of Contents



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: At December 31, 2004

    
    At December 31, 2003ContractsGross Balance Outstanding
    
    $165,583,890

    
    

    $143,113,043Delinquencies
    
    Dollar Amount
    
    Percent
    
    Dollar Amount
    
    Percent30 to 59 days
    
    $
    3,056,372
    
    
    1.85%
    
    $
    2,836,531
    
    
    1.98%60 to 89 days
    
    
    706,221
    
    
    0.43%
    
    
    805,643
    
    
    0.56%90 + days
    
    
    327,077
    
    
    0.19%
    
    
    247,261
    
    
    0.17%Total Delinquencies
    
    $
    4,089,670
    
    
    2.47%
    
    $
    3,889,435
    
    
    2.71%Direct LoansGross Balance Outstanding
    
    $5,583,074

    
    

    $4,536,172Delinquencies30 to 59 days
    
    $
    61,980
    
    
    1.11%
    
    $
    37,451
    
    
    0.83%60 to 89 days
    
    
    16,758
    
    
    0.30%
    
    
    33,612
    
    
    0.74%90 + days
    
    
    27,475
    
    
    0.49%
    
    
    30,354
    
    
    0.67%Total Delinquencies
    
    $
    106,213
    
    
    1.90%
    
    $
    101,417
    
    
    2.24%
 The delinquency percentage for contracts more than thirty days past due at December 31, 2004,
was 2.47% compared to 2.71% at December 31, 2003. The delinquency percentage for direct loans more
than thirty days past due at December 31, 2004, was 1.90% compared to 2.24% at December 31, 2003. The Company does not give much consideration to short-term trends in delinquency percentages
when evaluating reserve levels. Delinquency percentages tend to be very volatile and often are not
necessarily an indication of future losses. The Company estimates future portfolio performance by
considering several factors. The most significant factors are described as follows. The Company
analyzes historical static pool performance for each branch location when determining appropriate
reserve levels. The Company utilizes internal branch audits as an indication to future static pool
performance. The Company also considers such things as the current unemployment rate in markets the
Company operates in, the percentage of voluntary repossessions as compared to prior periods, the
percentage of bankruptcy filings as compared to prior periods and other leading economic
indicators. Income Taxes The Companys effective tax rate remained relatively consistent at 37.81% and 37.88% for the
three and nine months ended December 31, 2004, compared to 37.87% and 37.75% for the three and nine
months ended December 31, 2003. 21




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##### Table of Contents



Liquidity and Capital Resources The Companys cash flows for the nine months ended December 31, 2004, and December 31, 2003, are
summarized as follows: Nine months ended
    
    
    Nine months endedDecember 31, 2004
    
    
    December 31, 2003Cash provided by:Operating Activities -
    
    $
    7,596,724
    
    
    $
    4,387,715Investing Activities -(primarily purchase of
Contracts, net of
repayments)
    
    
    (11,801,646
    )
    
    
    (8,529,739
    )Financing Activities -
    
    
    4,741,321
    
    
    
    5,822,006Net increase in cash
    
    $
    536,399
    
    
    $
    1,679,982
 The Companys primary use of working capital for the nine months ended December 31, 2004, was
the funding of the purchase of Contracts. The Contracts were financed substantially through
borrowings under the Companys $85.0 million Line. The Line is secured by all of the assets of the
Companys Nicholas Financial, Inc. subsidiary. The Company may borrow the lesser of $85.0 million
or amounts based upon formulas principally related to a percentage of eligible finance receivables,
as defined. Borrowings under the Line may be under various LIBOR pricing options or at the prime
rate plus 25 basis points. Prime rate based borrowings are generally less than $5.0 million. As of
December 31, 2004, the amount outstanding under the Line was approximately $62.2 million and the
amount available under the Line was approximately $22.8 million. As of December 31, 2004, the
Company was in full compliance with all debt covenants there under. The Company has entered into interest rate swap agreements, each of which effectively converts
a portion of the Companys floating-rate debt to a fixed-rate, thus reducing the impact of interest
rate change on the Companys interest expense. At December 31, 2004, approximately 80% of the
Companys borrowings under the Line were subject to interest rate swap agreements. These swap
agreements have maturities ranging from July 2, 2005 through October 5, 2009. The self-liquidating nature of 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 the Line. The Company believes that borrowings available under the Line
as well as cash flow from operations will be sufficient to meet its short-term funding needs. In late May and early June 2004, the Company closed the sale of an aggregate of 1,400,000
shares of its common stock at a public offering price of $8.00 per share. The net proceeds to the
Company of the offering, approximately $9.9 million, were used to pay down the Companys Line. In
addition, approximately 900,000 shares of common stock were sold in the offering by a group of
selling shareholders. Ferris, Baker Watts, Incorporated served as the underwriter for the
offering. On August 17, 2004, the Company announced the Board of Directors had approved the payment
of an annual cash dividend of $0.10 per share, payable semi-annually. The first cash dividend of
$0.05 per share was paid on September 17, 2004, to shareholders of record as of August 27, 2004.
The second cash dividend of $0.05 per share will be payable as determined by the Board of
Directors. 22




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##### Table of Contents



Future Expansion The Company currently operates in eight states through a total of thirty-five branch
locations, including sixteen in Florida, five in Ohio, four in North Carolina, three in Georgia,
two in South Carolina, and three in Virginia, one in Michigan and one in Kentucky. Each office is
budgeted (size of branch, number of employees and location) to handle up to 1,000 accounts and up
to $7.5 million in outstanding receivables. To date none of our branches has reached this capacity. The Company intends to continue its expansion in States it currently operates in through the
purchase of additional Contracts and the expansion of its direct consumer loan program. The
Company believes opportunities for growth continue to exist in Ohio, Michigan, Kentucky and
Virginia and intends to continue its expansion activities in those states. The Company has
targeted additional locations within these States where it believes there is a sufficient market
for its automobile financing program. The Company is currently purchasing Contracts in the States of Maryland and Indiana utilizing
employees who reside in these States. These employees are developing their respective markets
utilizing the Companys Central Buying Office at its Corporate Headquarters to purchase, process
and service these Contracts. The Companys strategy is to monitor these new markets and ultimately
decide where and when to open actual branch locations. No assurances can be given, however, that
the Company will be able to continue to expand or, if it does continue to expand, that it will be
able to do so profitably. 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. In order to increase the size of the Companys portfolio of Contracts, it will be necessary
for the Company to continue to be able to renew and increase its line of credit, either with its
current lender or another lender. The Company has previously and will continue to meet with
investment bankers and financial institutions discussing various strategies to meet future capital
requirements of the Company. Recently Issued Accounting Standards In October 2003, the AICPA issued SOP 03-3, Accounting for Loans or Certain Debt Securities
Acquired in a Transfer. SOP 03-3 applies to a loan with evidence of deterioration in credit
quality subsequent to its origination that is acquired by completion of a transfer (as defined in
SOP 03-3), for which it is probable at acquisition of such loan, that the acquirer will be unable
to collect all contractually required payments receivable. SOP 03-3 requires that the acquirer
recognize the excess of all cash flows expected at acquisition over the investors initial
investment in the loan as interest income on a level-yield basis over the life of the loan as the
accretable yield. The loans contractual required payments receivable in excess of the amount of
its cash flows expected at acquisition (nonaccretable difference) should not be recognized as an
adjustment to yield, a loss accrual or a valuation allowance for credit risk. Subsequent increases
in cash flows expected to be collected generally would be recognized prospectively through
adjustment of the loans yield over its remaining life. Decreases in cash flows expected to be
collected would be recognized as impairment. SOP 03-3 is effective for loans acquired in fiscal
years beginning after December 31, 2004. Management is currently evaluating the provisions of SOP
03-3. In December 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No.
123(R), Accounting for Stock-Based Compensation. SFAS No. 123(R) establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in which an entity
obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the
fair value of such equity instruments be recognized as an expense in the financial statements as
services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value
were required. The provisions of this Statement are effective for the first interim reporting
period that begins after June 15, 2005. The Company does not believe the adoption of Statement No.
123(R) will have a material impact on the Companys consolidated financial statements. 23




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##### Table of Contents



ITEM 3. CONTROLS AND PROCEDURES Evaluation of disclosure controls and procedures. In accordance with Rule 13a-15(b) of the
Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this
Quarterly Report on Form 10-QSB, the Companys management evaluated, with the participation of the
Companys President and Chief Executive Officer and Senior Vice President-Finance and Chief
Financial Officer, the effectiveness of the design and operation of the Companys disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their
evaluation of these disclosure controls and procedures, the President and Chief Executive Officer
and the Senior Vice President-Finance and Chief Financial Officer have concluded that the
disclosure controls and procedures were effective as of the date of such evaluation to ensure that
material information relating to the Company, including its consolidated subsidiaries, was made
known to them by others within those entities, particularly during the period in which this
Quarterly Report on Form 10-QSB was being prepared. Changes in internal controls. There was no change in the Companys internal control over financial
reporting that occurred during the Companys quarter ended December 31, 2004, that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting. 24




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 6. EXHIBITS See exhibit index following the signature page. 25




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##### Table of Contents



SIGNATURES In accordance with the requirements of the Securities Act of 1934, the Registrant certifies
that it has reasonable grounds to believe that it meets all of the requirements for filing on Form
10-QSB and authorized this Report to be signed on its behalf by the undersigned, in the City of
Clearwater, State of Florida, on February 14, 2005. NICHOLAS FINANCIAL, INC.
(Registrant) Date: February 14, 2005
    
    /s/ Peter L VosotasPeter L. VosotasChairman, President, Chief Executive Officer(Principal Executive Officer)Date: February 14, 2005
    
    /s/ Ralph T FinkenbrinkRalph T. FinkenbrinkSenior Vice President  Financeand Chief Financial Officer(Principal Financial Officer and Accounting Officer)
 26




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##### Table of Contents



EXHIBIT INDEX Exhibit No.
    
    Description31.1
    
    Certification of President and Chief Executive Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Written Statement of the Chief Executive Officer Pursuant to 18 U.S.C. § 135032.2
    
    Written Statement of the Chief Financial Officer Pursuant to 18 U.S.C. § 1350
 27