##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 FORM 10-QSB x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES ACT OF 1934 FOR THE PERIOD ENDED SEPTEMBER 30, 2004o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES 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 x No o. As of October 31st, 2004 there were 6,499,688 shares of common stock outstanding.




---



##### Table of Contents



Nicholas Financial, Inc.
Form 10-QSB
Index  
 PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheet as of September 30, 2004
    
    
    2Condensed Consolidated Statements of Income for the three and six months ended September 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 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
    
    
    23Part II. Other InformationItem 6. Exhibits
    
    
    24Ex-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




---



##### Table of Contents



PART 1. FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS Nicholas Financial, Inc. 
   September 30,2004AssetsCash
    
    $
    1,685,156Finance receivables, net
    
    
    105,145,864Accounts receivable
    
    
    9,675Assets held for resale
    
    
    819,044Prepaid expenses and other assets
    
    
    672,138Property and equipment, net
    
    
    596,657Deferred income taxes
    
    
    3,649,558Total assets
    
    $
    112,578,092LiabilitiesLine of credit
    
    $
    63,540,367Drafts payable
    
    
    755,759Notes payable  related party
    
    
    1,000,530Accounts payable
    
    
    4,184,571Dividends payable
    
    
    324,914Derivatives
    
    
    487,777Deferred revenues
    
    
    1,285,077Total liabilities
    
    
    71,578,995Shareholders equityPreferred stock, no par: 5,000,000 shares authorized;
none issued and outstanding
    
    
    Common stock, no par: 50,000,000 shares authorized;
6,499,688 shares issued and outstanding
    
    
    14,708,488Accumulated other comprehensive loss
    
    
    (302,413
    )Retained earnings
    
    
    26,593,02240,999,097Total liabilities and shareholders equity
    
    $
    112,578,092
 See accompanying notes. 2




---



##### Table of Contents



Nicholas Financial, Inc. 
   Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenue:Interest income on finance receivables
    
    $
    7,796,997
    
    
    $
    6,074,327
    
    
    $
    15,011,255
    
    
    $
    12,062,800Sales
    
    
    36,668
    
    
    
    70,750
    
    
    
    99,065
    
    
    
    142,3087,833,665
    
    
    
    6,145,077
    
    
    
    15,110,320
    
    
    
    12,205,108Expenses:Cost of sales
    
    
    14,050
    
    
    
    11,615
    
    
    
    28,861
    
    
    
    28,689Marketing
    
    
    219,062
    
    
    
    220,591
    
    
    
    415,688
    
    
    
    431,823Administrative
    
    
    2,981,189
    
    
    
    2,481,856
    
    
    
    5,875,897
    
    
    
    4,797,733Provision for credit losses
    
    
    659,599
    
    
    
    404,156
    
    
    
    1,240,445
    
    
    
    984,155Depreciation
    
    
    55,287
    
    
    
    62,500
    
    
    
    104,825
    
    
    
    132,218Interest expense
    
    
    894,764
    
    
    
    968,310
    
    
    
    1,810,084
    
    
    
    1,955,6384,823,951
    
    
    
    4,149,028
    
    
    
    9,475,800
    
    
    
    8,330,256Operating income before income taxes
    
    
    3,009,714
    
    
    
    1,996,049
    
    
    
    5,634,520
    
    
    
    3,874,852Income tax expense:Current
    
    
    1,481,512
    
    
    
    844,345
    
    
    
    2,892,499
    
    
    
    2,296,376Deferred
    
    
    (337,470
    )
    
    
    (97,188
    )
    
    
    (756,043
    )
    
    
    (836,391
    )1,144,042
    
    
    
    747,157
    
    
    
    2,136,456
    
    
    
    1,459,985Net Income
    
    $
    1,865,672
    
    
    $
    1,248,892
    
    
    $
    3,498,064
    
    
    $
    2,414,867Earnings per share  basic
    
    $
    0.29
    
    
    $
    0.25
    
    
    $
    0.58
    
    
    $
    0.48Earnings per share  diluted
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.54
    
    
    $
    0.45Dividends declared per share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.10
 See accompanying notes. 3




---



##### Table of Contents



Nicholas Financial, Inc. 
   Six months endedSeptember 30,2004
    
    2003Operating activitiesNet income
    
    $
    3,498,064
    
    
    $
    2,414,867Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    104,825
    
    
    
    132,218Provision for credit losses
    
    
    1,240,445
    
    
    
    984,155Deferred income taxes
    
    
    (756,043
    )
    
    
    (836,391
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    2,248
    
    
    
    2,702Prepaid expenses, other assets and assets held for resale
    
    
    (527,816
    )
    
    
    (227,066
    )Accounts payable and other liabilities
    
    
    419,528
    
    
    
    671,733Income taxes payable
    
    
    (125,618
    )
    
    
    629,132Deferred revenues
    
    
    212,194
    
    
    
    82,843Net cash provided by operating activities
    
    
    4,067,827
    
    
    
    3,854,193Investing activitiesPurchase and origination of finance contracts
    
    
    (40,182,092
    )
    
    
    (34,313,256
    )Principal payments received
    
    
    31,032,299
    
    
    
    27,384,548Purchase of property and equipment, net of disposals
    
    
    (135,920
    )
    
    
    (176,611
    )Net cash used in investing activities
    
    
    (9,285,713
    )
    
    
    (7,105,319
    )Financing activitiesIssuance of notes payable  related party
    
    
    319,000
    
    
    
    182,920Net (repayment) proceeds from line of credit
    
    
    (3,969,924
    )
    
    
    4,850,000Payment of dividend
    
    
    (324,913
    )
    
    
    (253,354
    )Decrease in drafts payable
    
    
    (155,342
    )
    
    
    (142,546
    )Sale of common stock, net of offering costs
    
    
    10,076,537
    
    
    
    117,348Net cash provided by financing activities
    
    
    5,945,358
    
    
    
    4,754,368Net increase in cash
    
    
    727,472
    
    
    
    1,503,242Cash, beginning of period
    
    
    957,684
    
    
    
    481,211Cash, end of period
    
    $
    1,685,156
    
    
    $
    1,984,453
 See accompanying notes. 4




---



##### Table of Contents



Nicholas Financial, Inc. 
   September 30, 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




---



##### Table of Contents



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
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Numerator:Numerator for earnings per share  net income
    
    $
    1,865,672
    
    
    $
    1,248,892
    
    
    $
    3,498,064
    
    
    $
    2,414,867Denominator:Denominator for basic earnings per share 
weighted average shares
    
    
    6,491,142
    
    
    
    5,038,318
    
    
    
    6,082,592
    
    
    
    5,022,622Effect of dilutive securities:Employee stock options
    
    
    385,597
    
    
    
    366,858
    
    
    
    390,132
    
    
    
    330,195Denominator for diluted earnings per share
    
    
    6,876,739
    
    
    
    5,405,176
    
    
    
    6,472,724
    
    
    
    5,352,817Earnings per share  basic
    
    $
    0.29
    
    
    $
    0.25
    
    
    $
    0.58
    
    
    $
    0.48Earnings per share  diluted
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.54
    
    
    $
    0.45
 6




---



##### Table of Contents



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
    
    $
    169,428,401Less: Unearned interest
    
    
    (40,357,244
    )Finance receivables, net of unearned interest
    
    
    129,071,157Less: Dealer discounts
    
    
    (17,432,841
    )Allowance for credit losses
    
    
    (6,492,452
    )Finance receivables, net
    
    $
    105,145,864
 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) which
expires 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 September
30, 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 5.67% and 5.71% for the
three and six months ended September 30, 2004, respectively, as compared to
6.04% and 6.19% for the three and six month period ended September 30, 2003,
respectively. Pledged as collateral for this credit facility are all of the
assets of the Companys Nicholas Financial, Inc. subsidiary. As of September
30, 2004 the amount outstanding under the Line was approximately $63.5 million
and the amount available under the Line was approximately $21.5 million. As of
September 30, 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
5.90% with principal and interest due within 30-days upon demand. The notes
totaled $1,000,530 at September 30, 2004 and are payable to a related party. 7




---



##### Table of Contents



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
September 30, 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 1.51% and 1.11% for
the three months ended September 30, 2004 and 2003, respectively. During the
same period the Company paid a weighted average fixed rate of 3.63% and 4.40%,
respectively. Under the swap agreements, the Company received a weighted
average variable rate of 1.31% and 1.21% for the six months ended September 30,
2004 and 2003, respectively. During the same period the Company paid a weighted
average fixed rate of 3.77% and 4.57%, respectively. A liability of $487,777
related to the fair value of the swaps at September 30, 2004 has been recorded
in the caption derivatives on the balance sheet. Accumulated other
comprehensive loss at September 30, 2004 in the amount of $302,413 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
also entered into one forward locking swap included in the table below. The Company has entered into the following cash-flow hedges: Notional
    
    Fixed RateDate Entered
    
    Effective Date
    
    Amount
    
    Of Interest
    
    Maturity DateOctober 5, 2001
    
    October 5, 2001
    
    $
    10,000,000
    
    
    
    3.85
    %
    
    October 5, 2004June 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




---



##### Table of Contents



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 September
    
    Six months ended September30,
    
    30,2004
    
    2003
    
    2004
    
    2003Net Income
    
    $
    1,865,672
    
    
    $
    1,248,892
    
    
    $
    3,498,064
    
    
    $
    2,414,867Mark to market interest rate swaps
(net of tax)
    
    
    (304,808
    )
    
    
    463,896
    
    
    
    762,929
    
    
    
    199,627Comprehensive income
    
    $
    1,560,864
    
    
    $
    1,712,788
    
    
    $
    4,260,993
    
    
    $
    2,614,494
 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 206,133 shares were remaining
available for future grants as of September 30, 2004. 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
    
    Six monthsended September 30,
    
    ended September 30,2004
    
    2003
    
    2004
    
    2003Net income
    
    $
    1,865,672
    
    
    $
    1,248,892
    
    
    $
    3,498,064
    
    
    $
    2,414,867Basic earnings per share
    
    $
    0.29
    
    
    $
    0.25
    
    
    $
    0.58
    
    
    $
    0.48Fully diluted earnings per share
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.54
    
    
    $
    0.45Stock based employee compensation cost
under the Fair Value Method
    
    $
    11,353
    
    
    $
    9,021
    
    
    $
    23,390
    
    
    $
    21,033Pro forma net income
    
    $
    1,854,319
    
    
    $
    1,239,871
    
    
    $
    3,474,674

    
    
    $
    2,393,834Pro forma basic earnings per share
    
    $
    0.29
    
    
    $
    0.25
    
    
    $
    0.57
    
    
    $
    0.48Pro forma fully diluted earnings per share
    
    $
    0.27
    
    
    $
    0.23
    
    
    $
    0.54
    
    
    $
    0.45
 9




---



##### Table of Contents



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




---



##### Table of Contents



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 September 30,
2004, to $1,865,672 from $1,248,892 for the three months ended September 30,
2003. Consolidated net income increased for the six months ended September 30,
2004, to $3,498,064 from $2,414,867 for the six months ended September 30,
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
six-month periods ended September 30, 2004 or 2003. 11




---



##### Table of Contents



Portfolio Summary Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Average finance receivables, net of unearned interest (1)
    
    
    128,266,971
    
    
    
    111,195,574
    
    
    
    125,646,208
    
    
    
    109,204,020Average indebtedness (2)
    
    
    63,070,954
    
    
    
    64,162,081
    
    
    
    63,392,887
    
    
    
    63,200,691Finance revenue (3)
    
    
    7,796,997
    
    
    
    6,074,326
    
    
    
    15,011,255
    
    
    
    12,062,800Interest expense
    
    
    894,764
    
    
    
    968,310
    
    
    
    1,810,084
    
    
    
    1,955,638Net finance revenue
    
    
    6,902,233
    
    
    
    5,106,016
    
    
    
    13,201,171
    
    
    
    10,107,162Weighted average contractual rate (4)
    
    
    24.06
    %
    
    
    23.55
    %
    
    
    24.17
    %
    
    
    23.55
    %Average cost of borrowed funds (2)
    
    
    5.67
    %
    
    
    6.04
    %
    
    
    5.71
    %
    
    
    6.19
    %Gross portfolio yield (5)
    
    
    24.31
    %
    
    
    21.85
    %
    
    
    23.89
    %
    
    
    22.09
    %Interest expense as a percentage of average finance
receivables, net of unearned interest
    
    
    2.79
    %
    
    
    3.48
    %
    
    
    2.88
    %
    
    
    3.58
    %Provision for credit losses as a percentage of average
finance receivables, net of unearned interest
    
    
    2.06
    %
    
    
    1.45
    %
    
    
    1.97
    %
    
    
    1.80
    %Net portfolio yield (5)
    
    
    19.46
    %
    
    
    16.92
    %
    
    
    19.04
    %
    
    
    16.71
    %Operating expenses as a percentage of
average finance receivables, net of unearned interest (6)
    
    
    9.96
    %
    
    
    9.71
    %
    
    
    10.00
    %
    
    
    9.57
    %Pre-tax yield as a percentage of
average finance receivables, net of unearned interest (7)
    
    
    9.50
    %
    
    
    7.21
    %
    
    
    9.04
    %
    
    
    7.14
    %Write-off to liquidation (8)
    
    
    7.99
    %
    
    
    9.89
    %
    
    
    6.75
    %
    
    
    8.85
    %Net charge-off percentage (9)
    
    
    6.85
    %
    
    
    8.58
    %
    
    
    5.77
    %
    
    
    7.63
    %
 See accompanying notes to portfolio summary. 12




---



##### Table of Contents



Note:All three and six 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 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 September 30, 2004 compared to three months ended September
30, 2003 Interest Income and Loan Portfolio Finance revenue increased 28% to $7.8 million for the three months ended
September 30, 2004, from $6.1 million for the corresponding period ended
September 30, 2003. Average finance receivables, net of unearned interest
balance equaled $128.3 million at September 30, 2004, an increase of 15% from
the $111.2 million at September 30, 2003. The primary reason average finance
receivables, net of unearned interest increased was the increase in the
receivable base of several existing branches and the opening of two additional
branch locations. The gross finance receivable balance increased 15% to $169.4
million at September 30, 2004, from $147.0 million at September 30, 2003. The
primary reason interest revenue increased was the increase in the outstanding
loan portfolio. The gross portfolio yield increased from 21.85% for the three
months ended September 30, 2003, to 24.31% for the corresponding period ended
September 30, 2004. The net portfolio yield increased from 16.92% for the three
months ended September 30, 2003, to 19.46% for the three months ended September
30, 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 September 30, 2004. The net charge-off percentage for the
three-month period ended September 30, 2004, was 6.85% as compared to 8.58% for
the corresponding period ended September 30, 2003. Computer Software Business Sales for the three months ended September 30, 2004, were $36,668 as
compared to $70,750 for the corresponding period ended September 30, 2003, a
decrease of 48%. This decrease was primarily due to lower revenue from the
existing customer base during the three months ended September 30, 2004. Cost
of sales and operating expenses decreased from $78,200 for the three months
ended September 30, 2003, to $74,958 for the corresponding period ended
September 30, 2004. Operating Expenses Operating expenses, excluding provision for credit losses and interest
expense and costs associated with NDS, increased to $3.2 million for the three
months ended September 30, 2004, from $2.7 million for the corresponding period
ended September 30, 2003. This increase of 18% was primarily attributable to
the additional staffing of several existing branches, increased general
operating expenses and the opening of two additional branch offices. Operating
expenses as a percentage of average finance receivables, net of unearned
interest increased from 9.71% for the three months ended September 30, 2003, to
9.96% for the corresponding period ended September 30, 2004. Interest Expense Interest expense decreased to $894,764 for the three months ended
September 30, 2004, as compared to $968,310 for the corresponding period ended
September 30, 2003. The average indebtedness for the three months ended
September 30, 2004, decreased to $63.1 million compared to $64.2 million for
the corresponding period ended September 30, 2003. The average cost of
outstanding borrowings decreased from 6.04% during the three months ended
September 30, 2003, to 5.67% during the three months ended September 30, 2004. 14




---



##### Table of Contents



Six months ended September 30, 2004 compared to six months ended September 30,
2003 Interest Income and Loan Portfolio Finance revenue increased 24% to $15.0 million for the six months ended
September 30, 2004, from $12.1 million for the corresponding period ended
September 30, 2003. The net finance receivable balance totaled $105.1 million
at September 30, 2004, an increase of 14% from the $92.1 million at September
30, 2003. The primary reason net finance receivables increased was the increase
in the receivable base of several existing branches and the opening of five
additional branch locations. The gross finance receivable balance increased 15%
to $169.4 million at September 30, 2004, from $147.0 million at September 30,
2003. The primary reason interest revenue increased was the increase in the
outstanding loan portfolio. The gross portfolio yield increased from 22.09% for
the six months ended September 30, 2003, to 23.89% for the corresponding period
ended September 30, 2004. The net portfolio yield increased from 16.71% for the
six months ended September 30, 2003 to 19.04% for the six months ended
September 30, 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 September 30, 2004. The net charge-off percentage
for the six-month period ended September 30, 2004, was 5.77% as compared to
7.63% for the corresponding period ended September 30, 2003. Computer Software Business Sales for the six months ended September 30, 2004, were $99,065 compared
to $142,308 for the corresponding period ended September 30, 2003, a decrease
of 30%. This decrease was primarily due to lower revenue from the existing
customer base during the six months ended September 30, 2004. Cost of sales and
operating expenses decreased from $164,755 for the six months ended September
30, 2003, to $144,081 for the corresponding period ended September 30, 2004. Operating Expenses Operating expenses, excluding provision for credit losses and interest
expense and costs associated with NDS, increased to $6.3 million for the six
months ended September 30, 2004, from $5.2 million for the corresponding period
ended September 30, 2003. This increase of 20% was primarily attributable to
the additional staffing of several existing branches, increased general
operating expenses and the opening of five additional branch offices. Operating
expenses as a percentage of average finance receivables, net of unearned
interest assets increased from 9.57% for the six months ended September 30,
2003, to 10.00% for the corresponding period ended September 30, 2004. Interest Expense Interest expense decreased to $1,810,084 for the six months ended
September 30, 2004, as compared to $1,955,638 for the corresponding period
ended September 30, 2003. The average indebtedness for the six months ended
September 30, 2004, increased to $63.4 million compared to $63.2 million for
the corresponding period ended September 30, 2003. This increase was offset by
a decrease in the average cost of outstanding borrowings from 6.19% during the
six months ended September 30, 2003, to 5.71% during the six months ended
September 30, 2004. 15




---



##### 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 six-month periods ended September 30, 2004,
and 2003, respectively, less than 3% were new. As of September 30, 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
    
    Six months endedSeptember 30,
    
    September 30,State
    
    2004
    
    2003
    
    2004
    
    2003FL
    
    $
    9,500,663
    
    
    $
    9,077,354
    
    
    $
    20,521,502
    
    
    $
    19,125,752GA
    
    
    1,798,615
    
    
    
    2,263,364
    
    
    
    4,309,158
    
    
    
    4,570,548NC
    
    
    2,342,704
    
    
    
    1,998,984
    
    
    
    4,495,934
    
    
    
    3,969,578SC
    
    
    930,773
    
    
    
    743,924
    
    
    
    2,065,391
    
    
    
    1,479,639OH
    
    
    3,319,862
    
    
    
    3,109,399
    
    
    
    6,571,070
    
    
    
    6,214,025MI
    
    
    861,955
    
    
    
    612,723
    
    
    
    1,813,086
    
    
    
    1,068,257VA
    
    
    1,492,136
    
    
    
    184,573
    
    
    
    2,869,886
    
    
    
    201,613Total
    
    $
    20,246,708
    
    
    $
    17,990,321
    
    
    $
    42,646,027
    
    
    $
    36,629,412
 Three months ended
    
    Six months endedIndirect Contracts
    
    September 30,
    
    September 30,Purchased
    
    2004
    
    2003
    
    2004
    
    2003Purchases
    
    $
    20,246,708
    
    
    $
    17,990,321
    
    
    $
    42,646,027
    
    
    $
    36,629,412Weighted APR
    
    
    23.91
    %
    
    
    24.00
    %
    
    
    24.01
    %
    
    
    23.96
    %Average Discount
    
    
    8.67
    %
    
    
    8.95
    %
    
    
    8.71
    %
    
    
    8.95
    %Average Term (months)
    
    
    44
    
    
    
    43
    
    
    
    44
    
    
    
    44Average Loan
    
    $
    8,391
    
    
    $
    8,082
    
    
    $
    8,329
    
    
    $
    8,138Number of Contracts
    
    
    2,413
    
    
    
    2,226
    
    
    
    5,120
    
    
    
    4,501
 Loan Origination The following table presents information on direct loans originated by the
Company, net of unearned interest. Three months ended
    
    Six months endedDirect Loans
    
    September 30,
    
    September 30,Originated
    
    2004
    
    2003
    
    2004
    
    2003Originations
    
    $
    1,308,918
    
    
    $
    961,073
    
    
    $
    2,464,441
    
    
    $
    1,893,856Weighted APR
    
    
    26.14
    %
    
    
    26.29
    %
    
    
    26.13
    %
    
    
    26.46
    %Average Term (months)
    
    
    26
    
    
    
    28
    
    
    
    26
    
    
    
    27Average Loan
    
    $
    3,023
    
    
    $
    2,930
    
    
    $
    3,013
    
    
    $
    2,896Number of Loans
    
    
    433
    
    
    
    328
    
    
    
    818
    
    
    
    654
 16




---



##### 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 September 30, 2004, the
Company had 539 active static pools. The average pool consisted of 70 Contracts
with aggregate finance receivables, net of unearned interest, of approximately
$573,000. 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
September 30, 2004, were approximately $1,056,000 as compared to $473,000 for
the three months ended September 30, 2003. Reserves accreted into income for
the six months ended September 30, 2004, were approximately $1,941,000 as
compared to $997,000 for the six months ended September 30, 2003. The primary
reason for the increase in the three-month period ended September 30, 2004, as
compared to the three-month period ended September 30, 2003, was a decrease in
the net charge-off percentage from 8.58% to 6.85%, respectively. The primary
reason for the increase in the six-month period ended September 30, 2004, as
compared to the six-month period ended September 30, 2003, was a decrease in
the net charge-off percentage from 7.63% to 5.77%, 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 six months ended
September 30, 2004, as compared to the three and six months ended September 30,
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. Static pools originated during the fiscal year ended March 31,
2004 have seen losses lower than their most recent predecessors; however, there
can be no assurances that this trend will continue. The Companys overall
reserve percentage has increased from 13.38% of gross finance receivables as of
September 30, 2003, to 14.12% of gross finance receivables as of September 30,
2004. The following table sets forth a reconciliation of the changes in dealer
discount on Contracts. Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    $
    16,817,393
    
    
    $
    13,358,345
    
    
    $
    15,377,582
    
    
    $
    12,394,089Discounts acquired on new
volume
    
    
    3,349,986
    
    
    
    2,896,626
    
    
    
    7,030,792
    
    
    
    5,964,475Losses absorbed
    
    
    (1,994,088
    )
    
    
    (2,391,406
    )
    
    
    (3,667,937
    )
    
    
    (4,247,938
    )Recoveries
    
    
    315,550
    
    
    
    303,148
    
    
    
    633,378
    
    
    
    580,212Discounts accreted
    
    
    (1,056,000
    )
    
    
    (472,752
    )
    
    
    (1,940,974
    )
    
    
    (996,877
    )Balance at end of period
    
    $
    17,432,841
    
    
    $
    13,693,961
    
    
    $
    17,432,841
    
    
    $
    13,693,961Dealer discounts as a percent
of gross indirect Contracts
    
    
    10.61
    %
    
    
    9.60
    %
    
    
    10.61
    %
    
    
    9.60
    %
 The following table sets forth a reconciliation of the changes in the
allowance for credit losses on Contracts. Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2003
    
    2003Balance at beginning of period
    
    $
    6,224,932
    
    
    $
    5,736,120
    
    
    $
    5,787,764
    
    
    $
    5,428,681Current period provision
    
    
    618,777
    
    
    
    344,655
    
    
    
    1,166,478
    
    
    
    864,108Losses absorbed
    
    
    (531,496
    )
    
    
    (306,656
    )
    
    
    (642,029
    )
    
    
    (518,670
    )Balance at end of period
    
    $
    6,312,213
    
    
    $
    5,774,119
    
    
    $
    6,312,213
    
    
    $
    5,774,119Allowance as a percent of gross
indirect Contracts
    
    
    3.84
    %
    
    
    4.05
    %
    
    
    3.84
    %
    
    
    4.05
    %
 The following table sets forth a reconciliation of the changes in the
allowance for credit losses on direct loans. Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Balance at beginning of period
    
    $
    189,837
    
    
    $
    201,017
    
    
    $
    184,334
    
    
    $
    176,126Current period provision
    
    
    26,138
    
    
    
    35,427
    
    
    
    52,782
    
    
    
    95,973Losses absorbed
    
    
    (46,434
    )
    
    
    (42,488
    )
    
    
    (74,194
    )
    
    
    (83,739
    )
 18




---



##### Table of Contents



Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Recoveries
    
    
    10,698
    
    
    
    7,393
    
    
    
    17,317
    
    
    
    12,989Balance at end of period
    
    $
    180,239
    
    
    $
    201,349
    
    
    $
    180,239
    
    
    $
    201,349Allowance as a percent of gross
direct loan receivables
    
    
    3.51
    %
    
    
    4.59
    %
    
    
    3.51
    %
    
    
    4.59
    %
 The following table summarizes the total amounts of Discounts and Allowances
for both Contracts and direct loans. Three months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Total Discounts and Allowances at
end of period
    
    $
    23,925,293
    
    
    $
    19,669,429
    
    
    $
    23,925,293
    
    
    $
    19,669,429Discounts and Allowances as a percent
of gross receivables
    
    
    14.12
    %
    
    
    13.38
    %
    
    
    14.12
    %
    
    
    13.38
    %
 The average dealer discount associated with new volume for the three
months ended September 30, 2004 and 2003, were 8.67% and 8.95%, respectively.
The average dealer discount associated with new volume for the six months ended
September 30, 2004 and 2003, were 8.71% and 8.95%, 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 increased to approximately $660,000 for
the three months ended September 30, 2004, as compared to approximately
$404,000 for the three months ended September 30, 2003. The provision for
credit losses increased to approximately $1,240,000 for the six months ended
September 30, 2004, as compared to approximately $984,000 for the six months
ended September 30, 2003. The Companys losses as a percentage of liquidation
decreased from 9.89% for the three months ended September 30, 2003, to 7.99%
for the three months ended September 30, 2004. The Companys losses as a
percentage of liquidation decreased from 8.85% for the six months ended
September 30, 2003, to 6.75% for the six months ended September 30, 2004.The
Company anticipates losses as a percentage of liquidation will be in the 8-10%
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 six months ended September 30, 2004, that would
have contributed to the decrease in losses. Recoveries as a percentage of charge-offs were 12.7% and 11.3% for the
three months ended September 30, 2004 and 2003, respectively. Recoveries as a
percentage of charge-offs were 14.8% and 12.2% for the six months ended
September 30, 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 September 30,
2004 and 2003, were approximately $1,056,000 and $473,000, respectively.
Reserves accreted into income for the six months ended September 30, 2004 and
2003, were approximately $1,941,000 and $997,000, respectively. The amount and
timing of reserves accreted into income is a function of individual static pool
performance. The Company has seen improvement in the performance of its
Contract portfolio, more specifically, newer static pools have seen a slight
decrease in the default rate when compared to the preceding year pool
performance during their same liquidation cycle. The Company attributes this
decrease to an improvement in overall general economic conditions. 19




---



##### Table of Contents



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 September 30, 2004, as compared to the
three months ended September 30, 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 September
30, 2004, as compared to the three months ended September 30, 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. 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 September 30, 2004
    
    At September 30, 2003ContractsGross Balance Outstanding
    
    $
    164,289,883
    
    
    $
    142,611,322
 Delinquencies
    
    Dollar Amount
    
    Percent
    
    Dollar Amount
    
    Percent30 to 59 days
    
    $
    2,866,168
    
    
    
    1.75
    %
    
    $
    2,554,310
    
    
    
    1.79
    %60 to 89 days
    
    
    801,212
    
    
    
    0.49
    %
    
    
    921,969
    
    
    
    0.65
    %90 + days
    
    
    253,180
    
    
    
    0.15
    %
    
    
    269,734
    
    
    
    0.19
    %Total Delinquencies
    
    $
    3,920,560
    
    
    
    2.39
    %
    
    $
    3,746,013
    
    
    
    2.63
    %Direct LoansGross Balance Outstanding
    

    $ 5,138,518

    
    
    

    $ 4,378,131Delinquencies30 to 59 days
    
    $
    39,728
    
    
    
    0.77
    %
    
    $
    67,549
    
    
    
    1.54
    %60 to 89 days
    
    
    33,915
    
    
    
    0.66
    %
    
    
    15,716
    
    
    
    0.36
    %90 + days
    
    
    27,475
    
    
    
    0.54
    %
    
    
    47,737
    
    
    
    1.09
    %Total Delinquencies
    
    $
    101,118
    
    
    
    1.97
    %
    
    $
    131,002
    
    
    
    2.99
    %
 The delinquency percentage for contracts more than thirty days past due at
September 30, 2004, was 2.39% compared to 2.63% at September 30, 2003. The
delinquency percentage for direct loans more than thirty days past due for the
three months ended September 30, 2004, was 1.97% compared to 2.99% for the
three months ended September 30, 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. 20




---



##### Table of Contents



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 38.01%
and 37.92% for the three and six month periods ended September 30, 2004,
compared to 37.43% and 37.68% for the three and six months ended September 30,
2003. Liquidity and Capital Resources The Companys cash flows for the six months ended September 30, 2004, and
September 30, 2003, are summarized as follows: Six months ended
    
    Six months endedSeptember 30,
    
    September 30,2004
    
    2003Cash provided by:Operating Activities -
    
    $
    4,067,827
    
    
    $
    3,854,193Investing Activities -
(primarily purchase of Contracts)
    
    
    (9,285,713
    )
    
    
    (7,105,319
    )Financing Activities
    
    
    5,945,358
    
    
    
    4,754,368Net increase in cash
    
    
    727,472
    
    
    
    1,503,242
 The Companys primary use of working capital for the six months ended
September 30, 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 twenty-five basis
points. Prime rate based borrowings are generally less than $5.0 million. As of
September 30, 2004, the amount outstanding under the Line was approximately
$63.5 million and the amount available under the Line was approximately $21.5
million. As of September 30, 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 September 30, 2004, approximately 79% of the Companys
borrowings under the Line were subject to interest rate swap agreements. These
swap agreements have maturities ranging from October 5, 2004 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. 21




---



##### Table of Contents



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. Future Expansion The Company currently operates in seven states through a total of
thirty-four branch locations, including sixteen in Florida, five in Ohio, four
in North Carolina, three in Georgia, two in South Carolina, and three in
Virginia and one in Michigan. 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 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 Kentucky utilizing employees who resides 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 22




---



##### Table of Contents



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. 23




---



##### 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 September 30, 2004, that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting. 24




---



##### Table of Contents



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




---



##### 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 November 12, 2004. NICHOLAS FINANCIAL, INC.
(Registrant) Date: November 12, 2004
    
    /s/Peter L VosotasPeter L. VosotasChairman, President, Chief Executive Officer(Principal Executive Officer)Date: November 12, 2004
    
    /s/Ralph T FinkenbrinkRalph T. FinkenbrinkSenior Vice President  Financeand Chief Financial Officer(Principal Financial Officer and Accounting Officer)
 26




---



##### 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