##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM ________ TO _________.
 Commission file number: 0-26680
 NICHOLAS FINANCIAL, INC.
  British Columbia, Canada
    
    8736-3354(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)2454 McMullen Booth Road, Building CClearwater, Florida
    
    33759(Address of Principal Executive Offices)
    
    (Zip Code)
 (727) 726-0763
 þ o
 o þ




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NICHOLAS FINANCIAL, INC.
FORM 10-Q
TABLE OF CONTENTS
 PagePart I. Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of June 30, 2005 and as of March 31, 2005
    
    
    2Condensed Consolidated Statements of Income for the three months ended June 30, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2005 and 2004
    
    
    4Notes to the Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21Part II.
    
    Other InformationItem 6.
    
    Exhibits
    
    
    22Ex-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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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 
 June 30,
    
    March 31,2005
    
    2005(Unaudited)AssetsCash
    
    $
    1,441,808
    
    
    $
    853,494Finance receivables, net
    
    
    118,089,979
    
    
    
    113,708,122Accounts receivable
    
    
    8,718
    
    
    
    12,849Assets held for resale
    
    
    692,427
    
    
    
    530,230Prepaid expenses and other assets
    
    
    537,095
    
    
    
    507,952Property and equipment, net
    
    
    792,522
    
    
    
    763,247Derivatives
    
    
    150,174
    
    
    
    740,223Deferred income taxes
    
    
    4,106,808
    
    
    
    3,699,324Total assets
    
    $
    125,819,531
    
    
    $
    120,815,441LiabilitiesLine of credit
    
    $
    67,042,114
    
    
    $
    65,330,897Drafts payable
    
    
    934,603
    
    
    
    973,268Notes payable  related party
    
    
    600,000
    
    
    
    1,000,000Accounts payable and accrued expenses
    
    
    5,327,299
    
    
    
    4,852,787Income taxes payable
    
    
    1,546,915
    
    
    
    540,899Deferred revenues
    
    
    1,426,359
    
    
    
    1,359,696Total liabilities
    
    
    76,877,290
    
    
    
    74,057,547Shareholders equityPreferred stock, no par: 5,000,000 shares authorized;
none issued and outstandingCommon stock, no par: 50,000,000 shares authorized;
9,870,531 and 9,840,531 shares issued and
outstanding, respectively
    
    
    15,284,282
    
    
    
    15,127,922Accumulated other comprehensive income
    
    
    93,108
    
    
    
    458,949Retained earnings
    
    
    33,564,851
    
    
    
    31,171,023Total shareholders equity
    
    
    48,942,241
    
    
    
    46,757,894Total liabilities and shareholders equity
    
    $
    125,819,531
    
    
    $
    120,815,441
 See accompanying notes.
 2




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Three months ended June 30,2005
    
    2004Revenue:Interest income on finance receivables
    
    $
    9,109,701
    
    
    $
    7,214,258Sales
    
    
    50,690
    
    
    
    62,3979,160,391
    
    
    
    7,276,655Expenses:Cost of sales
    
    
    12,371
    
    
    
    14,811Marketing
    
    
    251,255
    
    
    
    196,626Salaries and employee benefits
    
    
    2,634,298
    
    
    
    2,094,070Administrative
    
    
    924,909
    
    
    
    800,638Provision for credit losses
    
    
    428,025
    
    
    
    580,846Depreciation
    
    
    73,664
    
    
    
    49,538Interest expense
    
    
    980,553
    
    
    
    915,3205,305,075
    
    
    
    4,651,849Operating income before taxes
    
    
    3,855,316
    
    
    
    2,624,806Income tax expense:Current
    
    
    1,644,764
    
    
    
    1,410,987Deferred
    
    
    (183,276
    )
    
    
    (418,573
    )1,461,488
    
    
    
    992,414Net income
    
    $
    2,393,828
    
    
    $
    1,632,392Earnings per share:Basic
    
    $
    0.24
    
    
    $
    0.19Diluted
    
    $
    0.23
    
    
    $
    0.18
 See accompanying notes.
 3




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##### Table of Contents



Three months ended June 30,2005
    
    2004Cash flows from operating activitiesNet income
    
    $
    2,393,828
    
    
    $
    1,632,392Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation
    
    
    73,664
    
    
    
    49,538Gain on sale of property and equipment
    
    
    (14,366
    )
    
    
    Provision for credit losses
    
    
    428,025
    
    
    
    580,846Deferred income taxes
    
    
    (183,276
    )
    
    
    (418,573
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    4,131
    
    
    
    (2,564
    )Prepaid expenses, other assets and assets held for resale
    
    
    (191,340
    )
    
    
    (96,155
    )Accounts payable and accrued expenses
    
    
    474,512
    
    
    
    579,228Income taxes payable
    
    
    1,006,016
    
    
    
    1,264,926Deferred revenues
    
    
    66,663
    
    
    
    77,692Net cash provided by operating activities
    
    
    4,057,857
    
    
    
    3,667,330Cash flows from investing activitiesPurchase and origination of finance contracts
    
    
    (22,876,250
    )
    
    
    (21,004,123
    )Principal payments received
    
    
    18,066,368
    
    
    
    15,628,556Purchase of property and equipment
    
    
    (102,939
    )
    
    
    (68,652
    )Proceeds from sale of property and equipment
    
    
    14,366
    
    
    
    Net cash used in investing activities
    
    
    (4,898,455
    )
    
    
    (5,444,219
    )Cash flows from financing activities(Repayment) issuance of notes payable  related party
    
    
    (400,000
    )
    
    
    319,000Net proceeds from (repayment of) line of credit
    
    
    1,711,217
    
    
    
    (7,450,000
    )Decrease in drafts payable
    
    
    (38,665
    )
    
    
    (280,838
    )Proceeds from exercise of stock options and income tax benefit
related thereto
    
    
    156,360
    
    
    
    Proceeds from the issuance of common stock, net of offering costs
    
    
    
    
    
    
    10,012,299Net cash provided by financing activities
    
    
    1,428,912
    
    
    
    2,600,461Net increase in cash
    
    
    588,314
    
    
    
    823,572Cash, beginning of period
    
    
    853,494
    
    
    
    957,684Cash, end of period
    
    $
    1,441,808
    
    
    $
    1,781,256
 See accompanying notes.
 4




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1. Basis of Presentation
    2. Revenue Recognition
     5




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##### Table of Contents



3. Earnings Per Share
  Three months ended June 30,2005
    
    
    2004Numerator for earnings per share  net income
    
    $
    2,393,828
    
    
    $
    1,632,392Denominator:Denominator for basic earnings per share 
weighted average shares
    
    
    9,851,657
    
    
    
    8,504,328Effect of dilutive securities:Employee stock options
    
    
    630,116
    
    
    
    591,105Denominator for diluted earnings per share
    
    
    10,481,773
    
    
    
    9,095,433Earnings per share  basic
    
    $
    0.24
    
    
    $
    0.19Earnings per share  diluted
    
    $
    0.23
    
    
    $
    0.18
 6




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4. Finance Receivables
  June 30,
    
    March 31,2005
    
    2005Finance receivables, gross Contract
    
    $
    189,504,014
    
    
    $
    182,386,735Unearned interest
    
    
    (47,021,293
    )
    
    
    (43,432,023
    )Finance receivables, net of unearned interest
    
    
    142,482,721
    
    
    
    138,954,712Dealer discounts
    
    
    (17,893,618
    )
    
    
    (18,598,147
    )Allowance for credit losses
    
    
    (6,499,124
    )
    
    
    (6,648,443
    )Finance receivables, net
    
    $
    118,089,979
    
    
    $
    113,708,122
  5. Line of Credit
  6. Notes Payable  Related Party
   7




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7. Derivatives and Hedging
   Fixed RateDate Entered
    
    Effective Date
    
    Notional Amount
    
    Of Interest
    
    Maturity DateJune 27, 2002
    
    July 2, 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, 2009January 18, 2005
    
    July 2, 2005
    
    
    10,000,000
    
    
    
    4.38
    %
    
    July 2, 2010
  8




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##### Table of Contents



7. Derivatives and Hedging (continued)
  Three months ended June 30,2005
    
    2004Net income
    
    $
    2,393,828
    
    
    $
    1,632,392Mark to market interest rate swaps (net of tax)
    
    
    (365,841
    )
    
    
    1,067,737Comprehensive income
    
    $
    2,027,987
    
    
    $
    2,700,129
 8. Stock Options
    Three months endedJune 30,2005
    
    2004Reported net income
    
    $
    2,393,828
    
    
    $
    1,632,392Stock based employee compensation cost under
the fair value method, net of tax
    
    
    14,003
    
    
    
    12,037Pro forma net income
    
    $
    2,379,825
    
    
    $
    1,620,355Reported basic earnings per share
    
    $
    0.24
    
    
    $
    0.19Pro forma basic earnings per share
    
    $
    0.24
    
    
    $
    0.19Reported diluted earnings per share
    
    $
    0.23
    
    
    $
    0.18Pro forma diluted earnings per share
    
    $
    0.23
    
    
    $
    0.18
 9




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Forward-Looking Information
  Critical Accounting Policy
  Introduction
  10




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Portfolio Summary
 Three months ended June 30,2005
    
    
    2004Average finance receivables, net of unearned interest (1)
    
    $
    140,718,177
    
    
    $
    123,025,445Average indebtedness (2)
    
    $
    66,986,506
    
    
    $
    63,714,820Finance revenue (3)
    
    $
    9,109,701
    
    
    $
    7,214,258Interest expense
    
    
    980,553
    
    
    
    915,320Net finance revenue
    
    $
    8,129,148
    
    
    $
    6,298,938Weighted average contractual rate (4)
    
    
    24.12
    %
    
    
    24.29
    %Average cost of borrowed funds (2)
    
    
    5.86
    %
    
    
    5.75
    %Gross portfolio yield (5)
    
    
    25.90
    %
    
    
    23.46
    %Interest expense as a percentage of average finance
receivables, net of unearned interest
    
    
    2.79
    %
    
    
    2.98
    %Provision for credit losses as a percentage of average
finance receivables, net of unearned interest
    
    
    1.22
    %
    
    
    1.89
    %Net portfolio yield (5)
    
    
    21.89
    %
    
    
    18.59
    %Operating expenses as a percentage of average finance
receivables, net of unearned interest (6)
    
    
    10.83
    %
    
    
    10.04
    %Pre-tax yield as a percentage of average finance
receivables, net of unearned interest (7)
    
    
    11.06
    %
    
    
    8.55
    %Write-off to liquidation (8)
    
    
    5.03
    %
    
    
    5.46
    %Net charge-off percentage (9)
    
    
    4.44
    %
    
    
    4.65
    %
 Note: .
 (1)
    
    Average finance receivables, net of unearned interest, represents the average of gross
finance receivables, less unearned interest throughout 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 12 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 12 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. 11




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##### Table of Contents



(9)
    
    Net charge-off percentage represents net charge-offs divided by average finance receivables,
net of unearned interest, outstanding during the period. Three months ended June 30, 2005 compared to three months ended June 30, 2004
 Interest Income and Loan Portfolio
  Computer Software Business
  Operating Expenses
  Interest Expense
  12




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Contract Procurement
   Three months ended June 30,State
    
    2005
    
    
    2004FL
    
    $
    11,819,021
    
    
    $
    11,020,839GA
    
    
    1,933,043
    
    
    
    2,510,543NC
    
    
    2,591,591
    
    
    
    2,153,230SC
    
    
    815,727
    
    
    
    1,134,618OH
    
    
    3,098,464
    
    
    
    3,251,208MI
    
    
    357,375
    
    
    
    951,131VA
    
    
    1,585,678
    
    
    
    1,377,750IN
    
    
    513,168
    
    
    
    KY
    
    
    433,092
    
    
    
    MD
    
    
    274,803
    
    
    
    Total
    
    $
    23,421,962
    
    
    $
    22,399,319
 Three months ended June 30,Contracts
    
    2005
    
    
    2004Purchases
    
    $
    23,421,962
    
    
    $
    22,399,319Weighted APR
    
    
    23.99
    %
    
    
    24.11
    %Average Discount
    
    
    8.55
    %
    
    
    8.76
    %Weighted Average
Term (months)
    
    
    45
    
    
    
    44Average Loan
    
    $
    8,704
    
    
    $
    8,275Number of Contracts
    
    
    2,691
    
    
    
    2,707
 Loan Origination
  Direct Loans
    
    Three Months Ended June
30,Originated
    
    2005
    
    
    2004Originations
    
    $
    1,914,631
    
    
    $
    1,155,523Weighted APR
    
    
    25.73
    %
    
    
    26.13
    %Weighted Average
Term (months)
    
    
    28
    
    
    
    26Average Loan
    
    $
    3,419
    
    
    $
    3,001Number of Loans
    
    
    560
    
    
    
    385
 13




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Analysis of Credit Losses
       14




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June 30, 2005
    
    
    June 30, 2004% of Gross
    
    
    
    
    
    
    % of GrossAmount
    
    
    Contracts
    
    
    Amount
    
    
    ContractsFinance receivables, gross Contract
    
    $
    189,504,014
    
    
    
    100.00
    
    
    $
    164,713,489
    
    
    
    100.00Unearned interest
    
    
    (47,021,293
    )
    
    
    (24.81
    )
    
    
    (39,450,090
    )
    
    
    (23.95
    )Finance receivables, net of
unearned interest
    
    
    142,482,781
    
    
    
    75.19
    
    
    
    125,263,399
    
    
    
    76.04Dealer discounts
    
    
    (17,893,018
    )
    
    
    (9.44
    )
    
    
    (16,817,392
    )
    
    
    (10.21
    )Allowance for credit losses
    
    
    (6,499,124
    )
    
    
    (3.43
    )
    
    
    (6,414,770
    )
    
    
    (3.89
    )Finance receivables, net
    
    $
    118,089,979
    
    
    
    62.32
    
    
    $
    102,031,237
    
    
    
    61.94
     15




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Three months ended June 30,2005
    
    
    2004Balance at beginning of period
    
    $
    18,598,147
    
    
    $
    15,377,582Discounts acquired on new volume
    
    
    1,965,210
    
    
    
    1,933,527Finance charges allocated to reserves
    
    
    
    
    
    
    1,747,279Losses absorbed
    
    
    (1,399,975
    )
    
    
    (1,673,850
    )Recoveries
    
    
    362,679
    
    
    
    317,829Discounts accreted
    
    
    (1,632,443
    )
    
    
    (884,974
    )Balance at end of period
    
    $
    17,893,618
    
    
    $
    16,817,393Dealer discounts as a percent of gross
indirect Contracts
    
    
    9.78
    %
    
    
    10.51
    %
  Three months ended June 30,2005
    
    
    2004Balance at beginning of period
    
    $
    6,448,790
    
    
    $
    5,787,764Current period provision
    
    
    381,607
    
    
    
    547,701Losses absorbed
    
    
    (542,067
    )
    
    
    (110,533
    )Balance at end of period
    
    $
    6,288,330
    
    
    $
    6,224,932Allowance as a percent of gross
indirect Contracts
    
    
    3.44
    %
    
    
    3.89
    %
  Three months ended June 30,2005
    
    
    2004Balance at beginning of period
    
    $
    199,653
    
    
    $
    184,334Current period provision
    
    
    39,518
    
    
    
    26,644Losses absorbed
    
    
    (36,894
    )
    
    
    (27,760
    )Recoveries
    
    
    8,517
    
    
    
    6,619Balance at end of period
    
    $
    210,794
    
    
    $
    189,837Allowance as a percent of gross
direct loan receivables
    
    
    3.24
    %
    
    
    4.02
    %
  16




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17




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At June 30, 2005
    
    
    At June 30, 2004ContractsGross Balance Outstanding
    
    $
    183,005,750
    
    
    
    
    
    
    $
    159,986,743Delinquencies30 to 59 days
    
    $
    2,440,862
    
    
    
    1.33
    %
    
    $
    2,704,294
    
    
    
    1.68
    %60 to 89 days
    
    
    649,406
    
    
    
    0.35
    %
    
    
    539,691
    
    
    
    0.34
    %90 + days
    
    
    174,630
    
    
    
    0.10
    %
    
    
    219,687
    
    
    
    0.14
    %Total Delinquencies
    
    $
    3,264,898
    
    
    
    1.78
    %
    
    $
    3,463,672
    
    
    
    2.16
    %Direct LoansGross Balance Outstanding
    
    $
    6,498,264
    
    
    
    
    
    
    $
    4,726,746Delinquencies30 to 59 days
    
    $
    70,102
    
    
    
    1.08
    %
    
    $
    26,903
    
    
    
    0.57
    %60 to 89 days
    
    
    28,183
    
    
    
    0.43
    %
    
    
    20,089
    
    
    
    0.43
    %90 + days
    
    
    14,144
    
    
    
    0.22
    %
    
    
    26,998
    
    
    
    0.57
    %Total Delinquencies
    
    $
    112,429
    
    
    
    1.73
    %
    
    $
    73,990
    
    
    
    1.57
    %
   Income Taxes
  18




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Liquidity and Capital Resources
  Three months ended June 30,2005
    
    2004Cash provided by (used in):Operating activities -
    
    $
    4,057,857
    
    
    $
    3,667,330Investing activities -(primarily purchase of Contracts)
    
    
    (4,898,455
    )
    
    
    (5,444,219
    )Financing activities
    
    
    1,428,912
    
    
    
    2,600,461Net increase in cash
    
    $
    588,314
    
    
    $
    823,572
    19




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Future Expansion
   Recently Issued Accounting Standards
    20




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Item 3. Quantitative And Qualitative Disclosures About Market Risk
 Note
 
 Item 4. Controls and Procedures
 Evaluation of disclosure controls and procedures
 Changes in internal controls
 21




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PART II  OTHER INFORMATION
 
 ITEM 6. EXHIBITS
  22




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SIGNATURES
  NICHOLAS FINANCIAL, INC.
 Date: August 12, 2005
    /s/ Peter L. VosotasPeter L. VosotasChairman of the Board, President,
Chief Executive Officer and DirectorDate: August 12, 2005
    /s/ Ralph T. FinkenbrinkRalph T. FinkenbrinkSr. Vice President
Chief Financial Officer and Director 23




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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
 24