UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________.
COMMISSION FILE NUMBER: 0-26680
NICHOLAS FINANCIAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
BRITISH COLUMBIA, CANADA 8736-3354
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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NICHOLAS FINANCIAL, INC.
2454 MCMULLEN BOOTH ROAD, BUILDING C
CLEARWATER, FLORIDA 33759
(Address of Principal Executive Offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(727) 726-0763
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: NONE
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, NO PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year ended March 31, 2004 were
$25,500,485.
As of June 8, 2004, 6,487,288 shares of the issuer's Common Stock, no par value,
were outstanding, and the aggregate market value of the shares held by
non-affiliates was approximately $38,666,596
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the issuer's definitive Proxy Statement for the Annual Meeting of Stockholders currently scheduled to be held on August 5, 2004, expected to be filed with the Commission pursuant to Regulation 14A on or about July 8, 2004, are incorporated by reference in Part III of this Annual Report on Form 10-KSB.
Transitional Small Business Disclosure Format (check one) : Yes [ ] No [X]
(This page intentionally left blank)
NICHOLAS FINANCIAL, INC.
FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PAGE NO.
PART I
ITEM 1. Description of Business............................................................. 3
ITEM 2. Description of Property............................................................. 13
ITEM 3. Legal Proceedings................................................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders................................. 13
PART II
ITEM 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities.................................... 14
ITEM 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 16
ITEM 7. Financial Statements................................................................ 25
ITEM 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure................................................. 50
ITEM 8A. Controls and Procedures............................................................. 50
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) of the Exchange Act....................... 50
ITEM 10. Executive Compensation.............................................................. 50
ITEM 11. Security Ownership of Certain Beneficial Owners, Management and
Related Stockholder Matters.............................................. 51
ITEM 12. Certain Relationships and Related Transactions...................................... 51
ITEM 13. Exhibits and Reports on Form 8-K.................................................... 52
ITEM 14. Principal Accountant Fees and Services.............................................. 53
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FORWARD-LOOKING INFORMATION
THIS REPORT ON FORM 10-KSB CONTAINS VARIOUS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND INFORMATION THAT IS BASED ON MANAGEMENT'S BELIEFS AND ASSUMPTIONS, AS WELL AS INFORMATION CURRENTLY AVAILABLE TO MANAGEMENT. WHEN USED IN THIS DOCUMENT, THE WORDS "ANTICIPATE," "ESTIMATE," "EXPECT," AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ALTHOUGH NICHOLAS FINANCIAL, INC., INCLUDING ITS SUBSIDIARIES ("COLLECTIVELY THE COMPANY"), BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS. SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY FROM THOSE ANTICIPATED, ESTIMATED OR EXPECTED. AMONG THE KEY FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS INCLUDE FLUCTUATIONS IN THE ECONOMY, THE DEGREE AND NATURE OF COMPETITION, FLUCTUATIONS IN INTEREST RATES, DEMAND FOR CONSUMER FINANCING IN THE MARKETS SERVED BY THE COMPANY, THE COMPANY'S PRODUCTS AND SERVICES, INCREASES IN THE DEFAULT RATES EXPERIENCED ON RETAIL INSTALLMENT SALES CONTRACTS, REGULATORY CHANGES IN THE COMPANY'S EXISTING AND FUTURE MARKETS, AND THE COMPANY'S ABILITY TO EXPAND ITS BUSINESS, INCLUDING ITS ABILITY TO IDENTIFY AND COMPLETE ACQUISITIONS AND INTEGRATE THE OPERATIONS OF ACQUIRED BUSINESSES, TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, TO EXPAND INTO NEW MARKETS AND TO MAINTAIN PROFIT MARGINS IN THE FACE OF INCREASED PRICING COMPETITION. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENT. PROSPECTIVE INVESTORS SHOULD ALSO CONSULT THE RISK FACTORS DESCRIBED FROM TIME TO TIME IN THE COMPANY'S FILINGS MADE WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING ITS REPORTS ON FORMS 10-QSB, 8-K AND 10-KSB AND ANNUAL REPORTS TO SHAREHOLDERS.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Nicholas Financial, Inc. ("Nicholas Financial-Canada") is a Canadian holding company incorporated under the laws of British Columbia in 1986. The business activities of Nicholas Financial-Canada are conducted through its two wholly-owned subsidiaries formed pursuant to the laws of the State of Florida, Nicholas Financial, Inc. ("Nicholas Financial") and Nicholas Data Services, Inc., ("NDS"). Nicholas Financial is a specialized consumer finance company engaged primarily in acquiring and servicing retail installment sales Contracts ("Contracts") for purchases of new and used automobiles and light trucks. To a lesser extent, Nicholas Financial also makes direct loans and sells consumer-finance related products. NDS is engaged in supporting and updating industry specific computer application software for small businesses located primarily in the Southeast United States. Nicholas Financial's financing activities accounted for approximately 99% of consolidated revenues for each of the fiscal years ended March 31, 2004 and 2003. NDS's activities accounted for approximately 1% of such revenues during the same periods.
Nicholas Financial-Canada, Nicholas Financial and NDS are hereafter collectively referred to as the "Company". All financial information herein is designated in United States currency.
The Company's principal executive offices are located at 2454 McMullen
Booth Road, Building C, Clearwater Florida 33759, and its telephone number is
(727) 726-0763.
GROWTH STRATEGY
The Company's principal goals are to increase its profitability and its long-term shareholder value through greater penetration in its current markets and controlled geographic expansion into new markets. The Company also intends to continue its expansion through a proportionate increase in its origination of direct consumer loans. The Company is currently expanding its automobile financing program in the States of Georgia, Michigan, North Carolina, Ohio, South Carolina and Virginia. The Company has targeted certain geographic locations within these states where it believes there is a sufficient market for its automobile financing program. The Company is currently purchasing Contracts utilizing employees who reside in these states. These employees are developing their respective markets, and the Company has created a Central Buying Office in its Corporate Headquarters to purchase, process and service these Contracts. The Company's strategy is to monitor these new markets and ultimately decide where and when to open additional branch locations. The Company also continues to analyze other markets in states in which it does not currently operate. Although the Company has not made any bulk purchases of Contracts in the last five years, if the opportunity arises, the Company may consider possible acquisitions of portfolios of seasoned Contracts from dealers in bulk transactions as a means of further penetrating its existing markets or expanding its presence in targeted geographic locations. The Company cannot provide any assurances, however, that it will be able to further expand in either its current markets or any targeted new markets.
AUTOMOBILE FINANCE BUSINESS - CONTRACTS
The Company is engaged in the business of providing financing programs, primarily on behalf of purchasers of new and used cars and light trucks who meet the Company's credit standards, but who do not meet the credit standards of traditional lenders, such as banks and credit unions, because of the age of the vehicle being financed or the customer's job instability or credit history. Unlike traditional lenders, which look primarily to the credit history of the borrower in making lending decisions and typically finance new automobiles, the Company is willing to purchase Contracts for purchases made by borrowers who do not have a good credit history and for older model and high mileage automobiles. In making decisions regarding the purchase of a particular Contract the Company considers the following factors related to the borrower: place and length of residence, current and prior job status, history in making installment payments for automobiles, current income and credit history. In addition, the Company examines its prior experience with Contracts purchased from the dealer from which the Company is purchasing the Contract, and the value of the automobile in relation to the purchase price and the term of the Contract.
The Company's automobile finance programs are currently conducted in seven states through a total of 32 branch offices, consisting of 16 in Florida, five in Ohio, four in North Carolina, three in Georgia, two in South Carolina, and one in each of Michigan and Virginia. Each branch 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. As of March 31, 2004 the Company had non-exclusive agreements with approximately 1,275 dealers, of which approximately 950 are active, for the purchase of individual Contracts that meet the Company's financing criteria. The Company considers a dealer agreement to be active if the Company has purchased a Contract thereunder in the last six months. The dealer agreements require the dealer to originate Contracts in accordance with the Company's guidelines. Once a Contract is purchased by the Company the dealer is no longer involved in the relationship between the Company and the borrower, other than through the existence of limited representation and warranties of the dealer.
Customers under the Contracts typically make down payments, in the form of cash or trade-in, ranging from 5% to 20% of the sale price of the vehicle financed. The balance of the purchase price of the vehicle plus taxes, title fees and, if applicable, premiums for extended service Contracts, accident and health insurance and/or credit life insurance, are generally financed over a period of 12 to 66 months. Accident and health insurance coverage enables the customer to make required payments under the Contract in the event the borrower becomes unable to work because of illness or accident and credit life insurance pays the customer's obligations under the Contract upon his or her death.
The Company purchases Contracts from automobile dealers at a negotiated price that is less than the original principal amount being financed (the discount) by the purchaser of the automobile. The amount of the discount depends upon factors such as the age and value of the automobile and the creditworthiness of the customer. The Company will pay more (i.e., purchase the Contract at a smaller discount from the original principal amount) for Contracts as the credit risk of the customer improves. In certain markets, competition determines the discount that the Company can charge. Historically, the Contracts purchased by the Company have been purchased at discounts that range from 1% to 15% of the original principal amount of the Contract. In addition to the discount, the Company charges the dealer a processing fee of $75 per Contract purchased. As of March 31, 2004, the Company's loan portfolio consists exclusively of Contracts purchased without recourse to the dealer. Although all the Contracts in the Company's loan portfolio were acquired without recourse, the dealer remains liable to the Company for liabilities arising from certain representations and warranties made by the dealer with respect to compliance with applicable federal and state laws and valid title to the vehicle.
The Company's policy is to only purchase a Contract after the dealer has provided the Company with the requisite proof that the Company has a first priority lien on the financed vehicle (or the Company has, in fact perfected such first priority lien) that the customer has obtained the required collision insurance naming the Company as loss payee and that the Contract has been fully and accurately completed and validly executed. Once the Company has received and approved all required documents, it pays the dealer for the Contract and commences servicing the Contract.
The Company requires the owner of the vehicle to obtain and maintain collision insurance, naming the Company as the loss payee, with a deductible of not more than $500. Both the Company and the dealers we do business with offer purchasers of vehicles certain other "add on products." These products are offered by the dealer on behalf of the Company or by the automobile dealer on behalf of the dealership at the time of sale. They consist of a roadside assistance plan, extended warranty protection, gap insurance, credit life insurance, credit accident and health insurance and credit property insurance. If the purchaser so desires, the cost of these products may be included in the amount financed under the Contract.
CONTRACT PROCUREMENT
The Company purchases Contracts in the states listed below. The Contracts purchased by the Company are predominately for used vehicles; for the periods shown below, less than 3% were new. The average model year collateralizing the portfolio as of March 31, 2004 and 2003 was a 2000 and 1999 vehicle, respectively. The amounts shown in the table represent the Company's finance receivables, net of unearned interest on Contracts purchased:
MAXIMUM FISCAL YEAR ENDED
ALLOWABLE MARCH 31,
STATE INTEREST RATE (1) 2004 2003
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FL 18-30% (2) $38,887,398 $37,230,822
GA 18-30% (2) 8,682,016 7,880,717
NC 18-29% (2) 7,428,824 7,618,287
SC (3) 3,252,211 2,788,167
OH 25% 11,489,914 8,484,637
VA (3) 1,536,667 134,636
MI 25% 2,143,231 291,994
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Total $73,420,261 $64,429,260
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(1) The allowable maximum interest rates by state is subject to change and are governed by the individual states the Company conducts business in.
(2) The maximum allowable interest rate in each of these states varies depending upon the model year of the vehicle being financed. In addition, Georgia does not currently impose a maximum allowable interest rate with respect to Contracts over $5,000.
(3) Neither of these states currently impose a maximum allowable interest rate with respect to the types and sizes of Contracts the Company purchases. The maximum rate which the Company will currently charge any customer in each of these states is 29% per annum.
The following table represents information on Contracts purchased by the Company, net of unearned interest:
FISCAL YEAR ENDED
MARCH 31,
CONTRACTS 2004 2003
--------------------- ----------- -----------
Purchases $73,420,261 $64,429,260
Weighted APR 24.04% 24.22%
Average Discount 8.95% 8.91%
Average Term (months) 44 43
Average Loan $ 8,121 $ 8,102
Number of Contracts 9,041 7,952
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DIRECT LOANS
The Company currently originates direct loans in Florida, Georgia and North Carolina. Direct loans are loans originated directly between the Company and the consumer. These loans are typically for amounts ranging from $1,000 to $6,000 and are generally secured by a lien on an automobile, water craft or other permissible tangible personal property. The average loan made to date by the Company had an initial principal balance of approximately $3,000. The Company does not expect the average loan size to increase significantly within the foreseeable future. The majority of direct loans are originated with current or former customers under the Company's automobile financing program. The typical direct loan has significantly better credit risk due to the customer's historical payment history with the Company. The Company does not have a direct loan license in Ohio, South Carolina, Michigan or Virginia, and none is presently required in Georgia (as the Company currently does not make direct loans under $3,000 in that state). Typically, the Company allows for a seasoning process to occur in a new market prior to determining whether to pursue a direct loan license there. The Company expects to make a decision in the current fiscal year on whether or not to pursue a direct loan license for Ohio. The Company does not expect to pursue a direct loan license in any other states during the current fiscal year. The size of the loan and maximum interest rate that can be charged varies from state to state. In deciding whether or not to make a loan, the Company considers the individual's credit history, job stability, income and impressions created during a personal interview with a Company loan officer. Additionally, because most of the direct consumer loans made by the Company to date have been made to borrowers under Contracts previously purchased by the Company, the payment history of the borrower under the Contract is a significant factor in making the loan decision. The Company's direct loan program was implemented in April 1995 and currently accounts for approximately 4% of total annual revenue for the Company. As of March 31, 2004, loans made by the Company pursuant to its direct loan program constituted approximately 3% of the aggregate principal amount of the Company's loan portfolio.
In connection with its direct loan program, the Company also offers health and accident insurance coverage and credit life insurance to customers. Customers in approximately 71% of the 1,452 direct loan transactions outstanding as of March 31, 2004 had elected to purchase insurance coverage offered by the Company. The cost of this insurance is included in the amount financed by the customer.
The following table represents information on direct loans originated by the Company, net of unearned interest:
FISCAL YEAR ENDED
MARCH 31,
DIRECT LOAN ORIGINATIONS 2004 2003
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Originations $3,925,537 $3,647,074
Weighted APR 26.27% 26.29%
Average Term (months) 27 27
Average Loan $ 2,967 $ 2,965
Number of Contracts 1,323 1,230
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UNDERWRITING GUIDELINES
The Company's typical customer has a credit history that fails to meet the lending standards of most banks and credit unions. Among the credit problems experienced by the Company's customers that resulted in a poor credit history are: unpaid revolving credit card obligations; unpaid medical bills; unpaid student loans; prior bankruptcy; and evictions for nonpayment of rent. The Company believes that its customer profile is similar to that of its direct competitors.
Prior to its approval of the purchase of a Contract, the Company is provided with a standardized credit application completed by the consumer which contains information relating to the consumer's background, employment, and credit history. The Company also obtains credit reports from Equifax, TRW or TransUnion, which are independent reporting services. The Company verifies the consumer's employment history, income and residence. In most cases, consumers are interviewed by telephone by a Company application processor.
The Company has established internal buying guidelines to be used by its Branch Managers and underwriters when purchasing Contracts. Any Contract that does not meet these guidelines must be approved by the senior management of the Company. The Company currently has District Managers charged with managing the specific branches in a defined geographic area. In addition to a variety of administrative duties, the District Managers are responsible for monitoring their assigned branch's compliance with the Company's underwriting standards.
The Company uses essentially the same criteria in analyzing a direct loan as it does in analyzing the purchase of a Contract. Lending decisions regarding direct loans are made based upon a review of the customer's loan application, credit history, job stability, income, in-person interviews with a Company loan officer and the value of the collateral offered by the borrower to secure the loan. To date, since approximately 90% of the Company's direct loans have been made to individuals whose automobiles have been financed by the Company, the customer's payment history under his or her existing or past Contract is a significant factor in the lending decision. The decision process with respect to the purchase of Contracts is similar, although the customer's prior payment history with automobile loans is weighted more heavily in the decision making process and the collateral value of the automobile being financed is considered.
After reviewing the information included in the Contract or direct loan application and taking the other factors into account, Company representatives categorize the customer using internally developed credit classifications of "1", indicating higher creditworthiness, through "5", indicating lower creditworthiness. In the absence of other factors, such as a favorable payment history on a Contract held by the Company, the Company generally makes direct loans only to individuals rated in categories "3" or higher. Contracts are financed for individuals who fall within all five acceptable rating categories utilized, "1" through "5".
Usually customers who fall within the two highest categories are purchasing a two- to four-year old, low mileage used automobile from the inventory of a new car or franchise dealer while customers in the two lowest categories are purchasing an older, high mileage automobile from an independent used automobile dealer.
The Company continues to utilize its Loss Recovery Department ("LRD") to perform on-site audits of branch compliance with Company buying guidelines. LRD audits Company branches on a schedule that is variable depending on the size of the branch, length of time a branch has been open, current tenure of the branch manager, previous branch audit score and current and historical branch profitability. LRD reports directly to the Accounting and Administrative Management of the Company. The Company believes that an independent review and audit of its branches that is not tied to the sales function of the Company is imperative in order to assure the information obtained is impartial.
MONITORING AND ENFORCEMENT OF CONTRACTS
The Company requires all customers to obtain and maintain collision insurance covering damage to the vehicle. Failure to maintain insurance constitutes a default under the Contract and the Company may at its discretion, repossess the vehicle. To reduce potential loss due to insurance lapse, the Company has the Contractual right to force place its own collateral protection insurance policy, which covers loss due to physical damage to vehicles not covered by collision insurance.
The Company's Management Information Services personnel maintain a number of reports to monitor compliance by customers with their obligations under Contracts and direct loans made by the Company. These reports may be accessed on a real-time basis throughout the Company by management personnel, including Branch Managers and staff, at computer terminals located in the main office and each branch office. The reports include: delinquency aging reports, insurance due reports, customer promises reports, vehicle information reports, purchase reports, dealer analysis reports, static pool reports, and repossession reports.
A delinquency report is an aging report that provides basic information regarding each account and indicates accounts that are past due. The report includes information such as the account number, address of the customer, home and work phone numbers of the customer, original term of the Contract, number of remaining payments, outstanding balance, due dates, date of last payment, number of days past due, scheduled payment amount, amount of last payment, total past due, and special payment arrangements or agreements.
Accounts that are less than 120 days matured are included on the delinquency report on the first day that the Contract is contractually past due. After an account has matured more than 120 days, it is not included on the delinquency report until it is 11 days past due. Once an account becomes 30 days past due, repossession proceedings are implemented unless the customer provides the Company with an acceptable explanation for the delinquency and displays a willingness, and the ability to make the payment, and commits to a plan to return the account to current status. When an account is 60 days past due, the Company ceases recognition of income on the Contract and repossession proceedings are initiated. At 120 days delinquent, if the vehicle has not yet been repossessed, the account is written off. Once a vehicle has been repossessed, the related loan balance no longer appears on the delinquency report. It instead appears on the Company's repossession report and is sold, either at auction or to an automobile dealer.
When an account becomes delinquent, the Company immediately contacts the customer to determine the reason for the delinquency and to determine if arrangements for payment can appropriately be made. Once payment arrangements acceptable to the Company have been made, the information is entered in its database and is used to generate a "Promises Report", which is utilized by the Company's collection staff for account follow up.
The Company generates an insurance report to monitor compliance with the insurance obligations imposed upon customers. This report includes the account number, name and address of the customer, and information regarding the insurance carrier, as well as summarizes the insurance coverage, identifies the expiration date of the policy, and provides basic information regarding payment dates and the term of the Contract. This report assists the Company in identifying customers whose insurance policies are up for renewal or are in jeopardy of being canceled. The Company sends written notices to, and makes direct contact with, customers whose insurance policies are about to lapse or be canceled. If a customer fails to provide proof of coverage within 30 days of notice, the Company has the option of purchasing insurance and adding the cost and applicable finance charges to the balance of the Contract.
The Company prepares a repossession report that provides information regarding repossessed vehicles and aids the Company in disposing of repossessed vehicles. In addition to information regarding the customer, this report provides information regarding the date of repossession, date the vehicle was sold, number of days it was held in inventory prior to sale, year and make and model of the vehicle, mileage, payoff amount on the Contract, NADA book value, Black Book value, suggested sale price, location of the vehicle, original dealer, condition of the vehicle, and notes other information that may be helpful to the Company.
The Company also prepares a dealer analysis report that provides information regarding each dealer from which it purchases Contracts. This report allows the Company to analyze the volume of business done with each dealer and the terms on which it purchased Contracts from the dealer.
The Company's policy is to aggressively pursue legal remedies to collect deficiencies from customers. Delinquency notices are sent to customers and verbal requests for payment are made beginning when an account becomes 11 days delinquent. When an account becomes 30 days delinquent and the customer has not made payment arrangements acceptable to the Company or has failed to respond to the requests for payment, a repossession request form is prepared by the responsible branch office employee for approval by the Branch Manager for the vicinity in which the borrower lives. Once the repossession request has been approved, first by the Branch Manager and secondly by their District Manager, it must then be approved by a corporate officer. The repossessor delivers the vehicle to a secure location specified by the Company where it is held. The Company maintains relationships with several licensed repossession firms that repossess vehicles for fees that range from $175 to $350 for each vehicle repossessed. As required by Florida, Georgia, North Carolina, South Carolina, Ohio, Michigan and Virginia law, the customer is notified by certified letter that the vehicle has been repossessed and that to regain the vehicle, he or she must make arrangements satisfactory to the Company and pay the amount owed under the Contract within ten days after delivery of the letter.
The minimum requirement for return of the vehicle is payment of all past due amounts under the Contract and all expenses associated with the repossession incurred by the Company. If satisfactory arrangements for return of the vehicle are not made within the statutory period, the Company then sends title to the vehicle to the applicable state title transfer department, which then registers the vehicle in the name of the Company. The Company then either sells the vehicle to a dealer or has it transported to an automobile auction for sale. On average, approximately 30 days lapse between the time the Company takes possession of a vehicle and the time it is sold by a dealer or at auction. When the Company determines that there is a reasonable likelihood of recovering part or all of any deficiency against the customer under the Contract, it pursues legal remedies available to it, including lawsuits, judgement liens and wage garnishments. Historically, the Company has recovered approximately 10-15% of deficiencies from such customers. Proceeds from the disposition of the vehicles are not included in calculating the foregoing percentage range.
MARKETING AND ADVERTISING
The Company's Contract marketing efforts are directed toward automobile dealers. The Company attempts to meet dealers' needs by offering highly-responsive, cost-competitive and service-oriented financing programs. The Company relies on its District and Branch Managers to solicit agreements for the purchase of Contracts with automobile dealers located within a 25-mile radius of each branch office. The Branch Manager provides dealers with information regarding the Company and the general terms upon which the Company is willing to purchase Contracts. The Company presently has no plans to implement any other forms of advertising for the purchase of Contracts such as radio or newspaper advertisements.
The Company solicits customers under its direct loan program primarily through direct mailings, followed by telephone calls, to individuals who have a good credit history with the Company in connection with Contracts purchased by the Company. To some extent the Company also uses direct mail marketing to those customers who meet the criteria for a direct loan.
COMPUTERIZED INFORMATION SYSTEM
The Company utilizes integrated computer systems developed by NDS to enhance its ability to respond to customer inquiries and to monitor the performance of its Contract and direct loan portfolio and the performance of individual customers under Contracts. All Company personnel are provided with instant, simultaneous access to information from a single shared database. The Company has created specialized programs to automate the tracking of Contracts and direct loans from inception. The capacity of the networking system includes the Company's branch office locations. See " Monitoring and Enforcement of Contracts" for a summary of the different reports prepared by the Company.
COMPETITION
The consumer finance industry is highly fragmented and highly competitive. There are numerous financial service companies that provide consumer credit in the markets served by the Company, including banks, other consumer finance companies, and captive finance companies owned by automobile manufacturers and retailers. Many of these companies have significantly greater resources than the Company. The Company does not believe that increased competition for the purchase of Contracts will cause a material reduction in the interest rate payable by the purchaser of the automobile. However, increased competition for the purchase of Contracts will enable automobile dealers to shop for the best price, thereby giving rise to an erosion in the discount from the initial principal amount at which the Company would be willing to purchase Contracts.
The Company's target market consists of persons who are generally unable to obtain traditional used car financing because of their credit history or the vehicle's mileage or age. The Company has been able to expand its automobile finance business in the non-prime credit market by offering to purchase Contracts on terms that are competitive with those of other companies which purchase automobile receivables in that market segment. Because of the daily contact that many of its employees have with automobile dealers located throughout the market areas served by it, the Company is generally aware of the terms upon which its competitors are offering to purchase Contracts. The Company's policy is to modify its terms, if necessary, to remain competitive. However, the Company will not sacrifice credit quality, its purchasing criteria or prudent business practices in order to meet the competition.
The Company's ability to compete effectively with other companies offering similar financing arrangements depends upon maintaining close business relationships with dealers of new and used vehicles. No single dealer out of the approximately 950 dealers that the Company currently has active Contractual relationships with accounted for over 3% of its business volume for either of the fiscal years ended March 31, 2004 or 2003.
REGULATION
The Company's financing operations are subject to regulation, supervision and licensing under various federal, state and local statutes and ordinances. Additionally, the procedures that the Company must follow in connection with the repossession of vehicles securing Contracts are regulated by each of the states in which the Company does business. To date, the Company's operations have been conducted exclusively in the states of Florida, Georgia, Michigan, North Carolina, Ohio, South Carolina and Virginia. Accordingly, the laws of such states, as well as applicable federal law, govern the Company's operations. Compliance with existing laws and regulations has not had a material adverse effect on the Company's operations to date. The Company's management believes that the Company maintains all requisite licenses and permits and is in material compliance with all applicable local, state and federal laws and regulations. The Company periodically reviews its branch office practices in an effort to ensure such compliance. The following constitute certain of the federal, state and local statutes and ordinances with which the Company must comply:
- State consumer regulatory agency requirements. Pursuant to regulations of the state of Florida governing the Company's financing business activities, the Department of Banking and Finance periodically conducts an on-site audit of each of the Company's Florida branches to monitor compliance with applicable regulations. These regulations govern, among other matters, licensure requirements, requirements for maintenance of proper records, payment of required fees, maximum interest rates that may be charged on loans to finance used vehicles and proper disclosure to customers regarding financing terms. Pursuant to North Carolina law, the Company's direct loan activities in that state are subject to similar periodic on-site audits by the North Carolina Office of the Commissioner of Banks.
- State licensing requirements. The Company maintains a Sales Finance Company License with the Florida Department of Banking and Finance, as well as consumer loan licenses in Florida and North Carolina. The dealers that the Company does business with are required to maintain a Retail Installment Seller's License with the state or states in which they operate.
- Fair Debt Collection Act. The Fair Debt Collection Act and applicable state law counterparts prohibit the Company from contacting customers during certain times and at certain places, from using certain threatening practices and from making false implications when attempting to collect a debt.
REGULATION (CONTINUED)
- Truth in Lending Act. The Truth in Lending Act requires the Company and the dealers it does business with to make certain disclosures to customers, including the terms of repayment, the total finance charge and the annual percentage rate charged on each Contract or direct loan.
- Equal Credit Opportunity Act. The Equal Credit Opportunity Act prohibits creditors from discriminating against loan applicants on the basis of race, color, sex, age or marital status. Pursuant to Regulation B promulgated under the Equal Credit Opportunity Act, creditors are required to make certain disclosures regarding consumer rights and advise consumers whose credit applications are not approved of the reasons for the rejection.
- Fair Credit Reporting Act. The Fair Credit Reporting Act requires the Company to provide certain information to consumers whose credit applications are not approved on the basis of a report obtained from a consumer reporting agency.
- Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act requires the Company to maintain privacy with respect to certain consumer data in its possession and to periodically communicate with consumers on privacy matters.
- Soldiers' and Sailors' Civil Relief Act. The Soldiers' and Sailors' Civil Relief Act requires the Company to reduce the interest rate charged on each loan to customers who have subsequently joined, enlisted, been inducted or called to active military duty.
- Electronic Funds Transfer Act. The Electronic Funds Transfer Act prohibits the Company from requiring its customers to repay a loan or other credit by electronic funds transfer ("EFT"), except in limited situations which do not apply to the Company. The Company is also required to provide certain documentation to its customers when an EFT is initiated and to provide certain notifications to its customers with regard to preauthorized payments.
- Telephone Consumer Protection Act. The Telephone Consumer Protection Act prohibits telephone solicitation calls to a customer's home before 8 a.m. or after 9 p.m. In addition, if the Company makes a telephone solicitation call to a customer's home, the representative making the call must provide his or her name, the Company's name, and a telephone number or address at which the Company's representative may be contacted. The Telephone Consumer Protection Act also requires that the Company maintain a record of any requests by customers not to receive future telephone solicitations, which must be maintained for five years.
- Bankruptcy. Federal bankruptcy and related state laws may interfere with or affect the Company's ability to recover collateral or enforce a deficiency judgment.
EMPLOYEES
The Company's executive management and various support functions are centralized at the Company's Corporate Headquarters in Clearwater, Florida. As of March 31, 2004 the Company employed a total of 155 persons, three of whom work for NDS and 152 of whom work for Nicholas Financial. None of the Company's employees is subject to a collective bargaining agreement, and the Company considers its relations with its employees generally to be good.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its Headquarters and branch office facilities. The Company's Headquarters, located at 2454 McMullen Booth Road, Building C, in Clearwater, Florida, consist of approximately 10,000 square feet of office space. The current lease relating to this space expires in January 2008.
Each of the Company's 32 branch offices located in Florida, Georgia, North Carolina, South Carolina, Michigan, Virginia and Ohio consists of approximately 1,200 square feet. These offices are located in office parks, shopping centers or strip malls and are occupied pursuant to leases with an initial term of from two to five years at annual rates ranging from approximately $8.00 to $16.00 per square foot. The Company believes that these facilities and additional or alternate space available to it are adequate to meet its needs for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On April 8, 2004, the defendant in a deficiency action brought by the Company under the Ohio Uniform Commercial Code, filed a counterclaim in Cleveland Municipal Court, Cuyahoga County, Ohio, on behalf of a putative class of all persons who purchased motor vehicles pursuant to retail installment sales agreements later assigned to the Company, which motor vehicles were subsequently repossessed in Ohio by the Company or its agents (Nicholas Financial, Inc. v. Sanborn, Case No. 2004 CVI 6969). The defendant counter-plaintiff's counterclaim alleges, among other things; that the Company violated the Ohio Retail Installment Sales Act, the Ohio Uniform Commercial Code and the Ohio Consumer Sales Practices Act by: failing to provide members of the putative class with accurate disclosures of their statutory rights upon repossession; unilaterally abrogating those rights in the Company's repossession procedures; and improperly collecting deficiencies from members of the putative class. The counterclaim seeks compensatory, statutory and punitive damages (including compensatory damages of at least $500,000 pursuant to one alleged cause of action), prejudgment interest and attorneys' fees and expenses, as well as injunctive and other equitable relief, including a restitution remedy.
The Company's believes the material allegations of the counterclaim are substantially without merit and intends to vigorously defend the counterclaim. No assurances can be given, however, with respect to the outcome of the counterclaim, and an adverse result could have a material adverse effect on the Company's financial condition.
Except as described above, the Company currently is not a party to any pending legal proceedings other than ordinary routine litigation incidental to its business, none of which, if decided adversely to the Company, would, in the opinion of management, have a material adverse affect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter ended March 31, 2004.
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
On April 7, 2004, the Company's common stock began trading on the NASDAQ National Market under the symbol "NICK." The Company's common stock was traded on the NASDAQ SmallCap System under the symbol "NICK" through April 6, 2004.
As of June 5, 2004, there were approximately 1,537 holders of record of the Company's common stock.
The following table reflects the high and low bid prices for the Company's common stock for each of the periods indicated as reported by the NASDAQ Stock Market. The over-the-counter market quotations reflect inter-dealer prices and do not include retail mark-up, mark-down or commission, and may not necessarily represent actual transactions.
HIGH LOW
---- -----
FISCAL YEAR ENDED MARCH 31, 2004
First Quarter .............. $5.22 $3.40
Second Quarter.............. 7.57 4.77
Third Quarter............... 8.80 5.60
Fourth Quarter.............. 9.46 7.61
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HIGH LOW
---- -----
FISCAL YEAR ENDED MARCH 31, 2003
First Quarter .............. $6.15 $3.80
Second Quarter.............. 5.30 4.00
Third Quarter............... 4.28 3.50
Fourth Quarter.............. 4.06 3.62
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In August, 2003, the Company's Board of Directors announced an annual cash dividend of $0.10 per share of common stock, payable semi-annually. The Company paid its first cash dividend of $0.05 per share in September 2003, and its second cash dividend of $0.05 per share in March 2004. The Company intends to continue to pay cash dividends for the foreseeable future, provided its future earnings meet expectations. Any payment of future cash dividends and the amounts thereof will be dependent upon the Company's earnings, financial requirements, requirements of its lenders and other factors deemed relevant by the Company's Board of Directors. The Company's Line of credit facility prohibits the payment of dividends without the written approval of the Company's consortium of lenders. The Company's ability to receive the necessary approvals is largely dependent upon its portfolio performance, and no assurances can be given that the Company will be able to obtain the necessary approvals in the future.
There are no Canadian foreign exchange controls or laws that would affect the remittance of dividends or other payments to the Company's non-Canadian resident shareholders. There are no Canadian laws that restrict the export or import of capital, other than the Investment Canada Act (Canada), which requires the notification or review of certain investments by non-Canadians to establish or acquire control of a Canadian business. The Company is not a Canadian business as defined under the Investment Canada Act because it has no place of business in Canada, has no individuals employed in Canada in connection with its business, and has no assets in Canada used in carrying on its business.
Canada and the United States of America are signatories to the Canada-United States Tax Convention Act, 1984 (the "Tax Treaty"). The Tax Treaty contains provisions governing the tax treatment of interest, dividends, gains and royalties paid to or received by a person residing in the United States. The Tax Treaty also contains provisions to prevent the occurrence of double taxation, essentially by permitting the taxpayer to claim a tax credit for taxes paid in the foreign jurisdiction.
Dividends paid to the Company from its U.S. subsidiaries current and accumulated earnings and profits will be subject to a U.S. withholding tax of 5%. The gross dividends (i.e., before payment of the withholding tax) must be included in the Company's net income. However, under certain circumstances, the Company may be allowed to deduct the dividends in the calculation of its Canadian taxable income. If the Company has no other foreign (i.e., non-Canadian) non-business income, no relief is available in that case to recover the withholding taxes previously paid.
A 15% Canadian withholding tax applies to dividends paid by the Company to a U.S. shareholder that is an individual. The U.S. shareholder must include the gross amount of the dividends in his net income to be taxed at the regular rates. A foreign tax credit will be available to the extent of the lesser of:
(i) withholding taxes paid (up to a maximum of 15% of certain foreign income from property); and
(ii) the U.S. taxes payable in respect to that foreign income.
Alternatively, an individual can claim the foreign withholding taxes paid as a deduction in the computation of income for tax purposes. If the withholding taxes paid exceed 15% of the foreign income from property, such excess must be deducted in computing net income.
Dividends paid to a corporate U.S. shareholder that owns less than 10% of the Company's voting shares are also subject to a Canadian withholding tax of 15%.
The information set forth in the second paragraph (and accompanying table) under the caption "Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" of this Annual Report on Form 10-KSB is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a Canadian holding company incorporated under the laws of British Columbia in 1986. The Company conducts its business activities through two wholly-owned Florida corporations: Nicholas Financial, which purchases and services Contracts, makes direct loans and sells consumer-finance related products; and NDS, which supports and updates certain computer application software. Nicholas Financial accounted for approximately 99% of the Company's consolidated revenue for the fiscal years ended March 31, 2004 and 2003, respectively.
The Company's consolidated revenues increased for the fiscal year ended March 31, 2004 to $25.5 million as compared to $22.4 million for the fiscal year ended March 31, 2003. The Company's consolidated net income increased for the fiscal year ended March 31, 2004 to $5.2 million compared to $4.3 million for the fiscal year ended March 31, 2003. The Company's earnings were favorable impacted by the following: average finance receivables, net of unearned interest, increased 14% in the fiscal year ended March 31, 2004 as compared to the fiscal year ended March 31, 2003; average cost of borrowed funds decreased from 6.86% for the fiscal year ended March 31, 2003 as compared to 5.93% for the fiscal year ended March 31, 2004; and the Company's net charge-off rate decreased from 8.13% for the fiscal year ended March 31, 2003 as compared to 7.26% for the fiscal year ended March 31, 2004.
FISCAL YEAR ENDED MARCH 31
PORTFOLIO SUMMARY 2004 2003
------------------------------------------------------------------ ------------ -----------
Average finance receivables, net of unearned interest (1) $111,685,661 $97,806,772
============ ===========
Average indebtedness (2) 64,922,080 57,335,767
============ ===========
Finance revenue (3) 25,236,638 22,048,535
Interest expense 3,851,924 3,936,042
------------ -----------
Net finance revenue 21,384,714 18,112,493
============ ===========
Weighted average contractual rate (4) 24.04% 24.22%
============ ===========
Average cost of borrowed funds (2) 5.93% 6.86%
============ ===========
Gross portfolio yield (5) 22.60% 22.54%
Interest expense as a percentage of average finance receivables,
net of unearned interest 3.45% 4.02%
Provision for credit losses as a percentage of average finance
receivables, net of unearned interest 1.97% 2.26%
------------ -----------
Net portfolio yield (5) 17.18% 16.26%
Operating expenses as a percentage of average finance receivables,
net of unearned interest (6) 9.63% 9.16%
------------ -----------
Pre-tax yield as a percentage of average finance receivables, net
of unearned interest(7) 7.55% 7.10%
============ ===========
Write-off to liquidation (8) 8.41% 9.32%
Net charge-off percentage (9) 7.26% 8.13%
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(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.
(4) Weighted average contractual rate represents the weighted average annual percentage rate (APR) of all Contracts purchased and direct loans originated during the fiscal years ended March 31, 2004 and 2003, respectively.
(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.
(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 pluc 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.
CRITICAL ACCOUNTING POLICY
The Company's critical accounting policy relates to the allowance for losses on loans. It is based on management's opinion of an amount that is adequate to absorb losses in the existing portfolio. The allowance for credit losses is established through allocations of dealer discount and unearned income and a provision for loss based on management's evaluation of the risk inherent in the loan portfolio, the composition of the portfolio, specific impaired loans and current economic conditions. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management's estimate of probable credit losses and other factors that warrant recognition in providing for an adequate credit loss allowance.
FISCAL 2004 COMPARED TO FISCAL 2003
INTEREST INCOME AND LOAN PORTFOLIO
Interest income on finance receivables, predominantly finance charge income, increased 14% to $25.2 million in fiscal 2004 from $22.0 million in fiscal 2003. The average finance receivables, net of unearned interest, totaled $111.6 million at March 31, 2004, an increase of 14% from $97.8 million at March 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 the opening of two additional branch locations. The gross finance receivable balance increased 14% to $151.1 million at March 31, 2004 from $132.3 million at March 31, 2003. The primary reason interest income increased was the increase in the outstanding loan portfolio. The gross portfolio yield increased from 22.54% for the fiscal year ended March 31, 2003 to 22.60% for the fiscal year ended March 31, 2004. The net portfolio yield increased from 16.26% for the fiscal year ended March 31, 2003 to 17.18% for the fiscal year ended March 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 fiscal year ended March 31, 2004. The net charge-off percentage for the fiscal year ended March 31, 2004 was 7.26% as compared to 8.13% for the fiscal year ended March 31, 2003.
COMPUTER SOFTWARE BUSINESS
Sales for the fiscal year ended March 31, 2004 were $263,847 as compared to $328,340 for the fiscal year ended March 31, 2003, a decrease of 20%. This decrease was primarily due to lower revenue from the existing customer base during the fiscal year ended March 31, 2004. Cost of sales and operating expenses decreased from $426,349 for the fiscal year ended March 31, 2003 to $303,402 for the fiscal year ended March 31, 2004.
OPERATING EXPENSES
Total expenses, less the provision for credit losses, interest expense and costs associated with NDS, increased to $10.8 million for the fiscal year ended March 31, 2004 from $9.0 million for the fiscal year ended March 31, 2003. This increase of 20% 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 9.16% for the fiscal year ended March 31, 2003 to 9.63% for the fiscal year ended March 31, 2004.
INTEREST EXPENSE
Interest expense decreased to $3,851,924 for the fiscal year ended March 31, 2004 as compared to $3,936,042 for the fiscal year ended March 31, 2003. The average indebtedness for the fiscal year ended March 31, 2004 increased to $64.9 million as compared to $57.4 million for the fiscal year ended March 31, 2003. The cost associated with this increase was offset by a decrease in the average cost of borrowed funds from 6.86% during the fiscal year ended March 31, 2003 to 5.93% during the fiscal year ended March 31, 2004.
ANALYSIS OF CREDIT LOSSES
Because of the nature of the customers under the Company's Contracts and its direct loan program, 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 fiscal quarter. The average pool consists of 66 Contracts with aggregate finance receivables, net of unearned interest, of approximately $570,000. As of March 31, 2004, the Company had 488 active static pools.
Contracts are purchased from many different dealers and are all purchased on an individual Contract by Contract basis. Individual Contract pricing is determined by the automobile dealerships and is generally the lesser of state maximum interest rates or the maximum interest rate at which the customer will accept. In certain markets, competitive forces will drive down Contract rates from the maximum rate to a level where an individual competitor is willing to buy an individual Contract. The Company only buys Contracts on an individual basis and never purchases Contracts in batches, 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 year ended March 31, 2004 were approximately $2.5 million as compared to $2.2 million for the year ended March 31, 2003. The primary reason for this increase in fiscal year 2004 as compared to fiscal year 2003 was a decrease in the net charge-off rate from 8.13% to 7.26%.
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 will be the same on an individual branch level but not necessarily compared to another branch.
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 fiscal year ended March 31, 2004 as compared to the fiscal year ended March 31, 2003. This resulted in static pools having reserves in excess of estimates currently needed to liquidate these static 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 13.17% of gross finance receivables as of March 31, 2003 to 13.72% of gross finance receivables as of March 31, 2004.
The following table sets forth a reconciliation of the changes in dealer discounts on Contracts.
FISCAL YEAR ENDED MARCH 31,
2004 2003
----------- -----------
Balance at beginning of year $12,394,089 $11,259,898
Discounts acquired on new volume 12,019,745 10,534,472
Losses absorbed (7,867,889) (8,401,071)
Recoveries 1,153,505 1,068,556
Discounts accreted (2,321,868) (2,067,766)
----------- -----------
Balance at end of year $15,377,582 $12,394,089
=========== ===========
Dealer discounts as a percent of gross
indirect contracts 10.18% 9.37%
=========== ===========
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The following table sets forth a reconciliation of the changes in the allowance for credit losses on Contracts.
FISCAL YEAR ENDED MARCH 31,
2004 2003
----------- -----------
Balance at beginning of year $ 5,428,681 $ 4,105,174
Current period provision 1,805,038 1,911,855
Losses absorbed (1,445,955) (588,348)
----------- -----------
Balance at end of year $ 5,787,764 $ 5,428,681
=========== ===========
Allowance as a percent of gross
indirect contracts 3.83% 4.10%
=========== ===========
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The following table sets forth a reconciliation of the changes in the allowance for credit losses on direct loans.
FISCAL YEAR ENDED MARCH 31,
2004 2003
----------- -----------
Balance at beginning of year $ 176,126 $ 200,612
Current period provision 298,649 302,004
Losses absorbed (176,367) (208,802)
Recoveries 29,714 29,372
Reserves accreted (143,788) (147,060)
----------- -----------
Balance at end of year $ 184,334 $ 176,126
=========== ===========
Allowance as a percent of gross
direct loan receivables 4.03% 4.04%
=========== ===========
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The following table summarizes the total amounts of Discounts and Allowances for both Contracts and direct loans.
FISCAL YEAR ENDED MARCH 31,
2004 2003
----------- -----------
Total Discounts and Allowances at end of
year $21,349,680 $17,998,896
=========== ===========
Discounts and Allowances as a percent of
gross receivables 13.72% 13.17%
=========== ===========
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The average dealer discount associated with new volume for the years ended March 31, 2004 and 2003 were 8.95% and 8.91%, respectively. The Company does not consider this change to be material and such changes was not the result of any change in buying philosophy or competition.
The provision for credit losses remained virtually unchanged at $2.2 million for each of the fiscal years ended March 31, 2004 and 2003, respectively. The Company's losses as a percentage of liquidation decreased from 9.32% for the fiscal year ended March 31, 2003 to 8.41% for the fiscal year ended March 31, 2004. The Company anticipates losses as a percentage of liquidation will continue to be in the 8-10% range in 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 fiscal 2004 that would have contributed to the decrease in losses.
Recoveries as a percentage of charge-offs were 12.5% and 11.9% for the fiscal years ended March 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 fiscal years ended March 31, 2004 and 2003 were $2.5 million and $2.2 million 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 the portfolio, more specifically, newer static pools have seen a slight decrease in the default rate when compared to prior year pool performance during their same liquidation cycle. The Company attributes this decrease to an improvement in overall general economic conditions.
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 fiscal year ended March 31, 2004 as compared to the fiscal year ended March 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 decreased slightly during the fiscal year ended March 31, 2004 as compared to the fiscal year ended March 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 its current Contract portfolio, and is computed as the product of the Contract rate, the Contract term, and the Contract amount. After the analysis of purchase date accounting with respect to static pools 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 loan program:
AT MARCH 31, 2004 AT MARCH 31, 2003
----------------- -----------------
CONTRACTS
Gross Balance Outstanding $ 151,082,036 $ 132,316,816
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Dollar Dollar
Amount Percent Amount Percent
----------- ------- ---------- -------
Delinquencies
30 to 59 days $ 1,848,735 1.22% $2,166,719 1.64%
60 to 89 days 388,309 0.26% 551,838 0.42%
90 + days 91,172 0.06% 180,499 0.14%
----------- ------- ---------- -------
Total Delinquencies $ 2,328,216 1.54% $2,899,056 2.20%
DIRECT LOANS
Gross Balance Outstanding $ 4,572,030 $4,357,032
Delinquencies
30 to 59 days 44,296 0.97% 50,199 1.15%
60 to 89 days 10,371 0.22% 5,724 0.13%
90 + days 30,451 0.67% 40,987 0.94%
----------- ------- ---------- -------
Total Delinquencies $ 85,118 1.86% $ 96,910 2.22%
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The delinquency percentage for Contracts more than thirty days past due as of March 31, 2004 decreased to 1.54% from 2.20% as of March 31, 2003. The delinquency percentage for direct loans more than thirty days past due as of March 31, 2004 decreased to 1.86% from 2.22% as of March 31, 2003. The Company does not give significant consideration to short-term trends in delinquency when evaluating reserve levels. Delinquency percentages tend to be volatile and often are not necessarily an indication of future losses. The Company utilizes a static pool approach to analyzing portfolio performance and looks at specific static pool performance and recent trends as leading indicators to future performance of the portfolio.
INCOME TAXES
The provision for income taxes increased 24% to approximately $3.2 million in fiscal year 2004 from approximately $2.6 million in fiscal year 2003 primarily as a result of higher pretax income. The Company's effective tax rate increased from 37.38% in fiscal 2003 to 37.87% in fiscal 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows for fiscal 2004 and 2003 are summarized as follows:
FISCAL FISCAL
2004 2003
------------ ------------
Cash provided by (used in):
Operations $ 6,900,644 $ 5,644,421
Investing activities -
(primarily purchase of Contracts) (13,564,996) (12,611,588)
Financing activities 7,140,825 7,397,139
------------ ------------
Net increase in cash $ 476,473 $ 429,972
============ ============
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The Company's primary use of working capital during fiscal year ended March 31, 2004 was the funding of the purchase of Contracts. The Contracts were financed substantially through borrowings under the Company's $75.0 million Line. The Line is secured by all of the assets of Nicholas Financial. The Company may borrow the lesser of $75.0 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 March 31, 2004, the amount outstanding under the Line was approximately $67.5 million and the amount available under the Line was approximately $7.5 million. As of March 31, 2004, the Company was in full compliance with all debt covenants thereunder.
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 March 31, 2004, approximately 75% 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 May 19, 2008.
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.
The Company is currently negotiating amendments to the Line. The amendments would increase the amount of the Line from $75.0 million to $85.0 million and extend the maturity date from November 30, 2004 to November 30, 2006. We currently anticipate completing such amendments on or before June 30, 2004.
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 of the offering, approximately $9.8 million, was 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.
In August, 2003, the Company's Board of Directors announced an annual cash dividend of $0.10 per share of common stock, payable semi-annually. The Company paid its first cash dividend of $0.05 per share in September 2003, and its second cash dividend of $0.05 per share in March 2004. The Company intends to continue to pay cash dividends for the foreseeable future, provided its future earnings meet expectations. Any payment of future cash dividends and the amounts thereof will be dependent upon the Company's earnings, financial requirements, requirements of its lenders and other factors deemed relevant by the Company's Board of Directors. The Company's Line prohibits the payment of dividends without the written approval of the Company's consortium of lenders. The Company's ability to receive the necessary approvals is largely dependent upon its portfolio performance, and no assurances can be given that the Company will be able to obtain the necessary approvals in the future.
IMPACT OF INFLATION
The Company is affected by inflation primarily through increased operating costs and expenses including increases in interest rates. Inflationary pressures on operating costs and expenses have been offset by the Company's continued emphasis on stringent operating and cost controls. Management believes that the Company's financial condition has enabled it to negotiate favorable interest rates under its existing Line. No assurances can be given that the Company will be able to continue to do so in the future.
ITEM 7. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report (see pages 26-49)
Reports of Independent Registered Public Accounting Firms................. 26-27 Audited Consolidated Financial Statements Consolidated Balance Sheets............................................... 28 Consolidated Statements of Income ........................................ 29 Consolidated Statements of Shareholders' Equity .......................... 30 Consolidated Statements of Cash Flows..................................... 31 Notes to Consolidated Financial Statements................................ 32 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
Nicholas Financial, Inc.
We have audited the accompanying consolidated balance sheet of Nicholas Financial, Inc. and subsidiaries as of March 31, 2004 and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nicholas Financial, Inc. and subsidiaries as of March 31, 2004 and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.
/s/ Dixon Hughes PLLC May 21, 2004, except for Note 13 as to which the date is June 8, 2004. Atlanta, Georgia |
Report of Independent Registered Public Accounting Firm
To the Board of Directors of Nicholas Financial, Inc.
We have audited the accompanying consolidated balance sheet of Nicholas Financial, Inc. and subsidiaries as of March 31, 2003, and the related consolidated statements of income, shareholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nicholas Financial, Inc. and subsidiaries at March 31, 2003, and the consolidated results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles..
June 9, 2003 /s/ ERNST & YOUNG LLP Tampa, Florida |
Nicholas Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
MARCH 31,
2004 2003
------------- -------------
ASSETS
Cash $ 957,684 $ 481,211
Finance receivables, net 97,236,516 86,178,112
Accounts receivable 11,923 16,228
Assets held for resale 492,889 319,788
Prepaid stock offering costs 134,200 -
Prepaid expenses and other assets 470,476 317,485
Property and equipment, net 565,562 467,596
Deferred income taxes 3,354,202 2,256,508
------------- -------------
Total assets $ 103,223,452 $ 90,036,928
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Line of credit $ 67,510,290 $ 60,160,238
Drafts payable 911,101 664,520
Notes payable -- related party 681,530 808,610
Accounts payable 3,765,044 3,070,876
Derivatives 1,711,393 2,219,480
Income taxes payable 125,618 105,875
Deferred revenues 1,072,883 916,889
------------- -------------
Total liabilities 75,777,859 67,946,488
Shareholders' equity:
Preferred stock, no par: 5,000,000 shares authorized;
none issued and outstanding - -
Common stock, no par: 50,000,000 shares authorized; 5,085,288 and
5,006,021 shares issued and outstanding, respectively 4,766,150 4,452,693
Accumulated other comprehensive loss (1,065,342) (1,402,345)
Retained earnings 23,744,785 19,040,092
------------- -------------
Total shareholders' equity 27,445,593 22,090,440
------------- -------------
Total liabilities and shareholders' equity $ 103,223,452 $ 90,036,928
============= =============
|
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Income
YEAR ENDED MARCH 31,
2004 2003
----------- -----------
Revenue:
Interest income on finance receivables $25,236,638 $22,048,535
Sales 263,847 328,340
----------- -----------
25,500,485 22,376,875
Expenses:
Cost of sales 66,193 83,904
Marketing 865,930 654,569
Administrative 9,918,151 8,460,662
Provision for credit losses 2,198,501 2,213,859
Depreciation 210,125 190,257
Interest expense 3,851,924 3,936,042
----------- -----------
17,110,824 15,539,293
----------- -----------
Operating income before income taxes 8,389,661 6,837,582
Income tax expense:
Current 4,445,761 3,473,823
Deferred (1,268,778) (917,635)
----------- -----------
3,176,983 2,556,188
----------- -----------
Net income $ 5,212,678 $ 4,281,394
=========== ===========
Earnings per share:
Basic $ 1.03 $ 0.86
=========== ===========
Diluted $ 0.96 $ 0.81
=========== ===========
Dividends declared per share $ 0.10 -
=========== ===========
|
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
ACCUMULATED
COMMON STOCK OTHER TOTAL
------------------------- COMPREHENSIVE RETAINED SHAREHOLDERS'
SHARES AMOUNT LOSS EARNINGS EQUITY
--------- ---------- ------------- ------------ ------------
Balance at April 1, 2002 4,993,764 $4,402,960 $ (725,325) $ 14,758,698 $ 18,436,333
Issuance of common stock under
stock options 21,667 47,717 - - 47,717
Issued in connection with
services rendered 90 405 - - 405
Repurchase and retirement of
common stock (9,500) (38,012) - - (38,012)
Income tax benefit on exercise
of non-qualified stock options - 39,623 - - 39,623
Net Income - - - 4,281,394 4,281,394
Mark to market - interest rate
swaps - - (677,020) - (677,020)
--------- ---------- ------------- ------------ ------------
Balance at March 31, 2003 5,006,021 4,452,693 (1,402,345) 19,040,092 22,090,440
--------- ---------- ------------- ------------ ------------
Issuance of common stock under
stock options 79,267 175,698 - - 175,698
Dividends paid (507,985) (507,985)
Income tax benefit on exercise
of non-qualified stock options - 137,759 - - 137,759
Net income - - - 5,212,678 5,212,678
Mark to market - interest rate
swaps - - 337,003 - 337,003
--------- ---------- ------------- ------------ ------------
Balance at March 31, 2004 5,085,288 $4,766,150 $ (1,065,342) $ 23,744,785 $ 27,445,593
========= ========== ============= ============ ============
|
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
YEAR ENDED MARCH 31,
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,212,678 $ 4,281,394
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 210,125 190,257
Provision for credit losses 2,198,501 2,213,859
Deferred income taxes (1,268,778) (917,635)
Changes in operating assets and liabilities:
Accounts receivable 4,305 (1,784)
Prepaid expenses, other assets and assets held for resale (326,092) (120,620)
Accounts payable 694,168 (298,406)
Income taxes payable 19,743 36,023
Deferred revenues 155,994 261,333
------------ ------------
Net cash provided by operating activities 6,900,644 5,644,421
INVESTING ACTIVITIES
Purchase and origination of finance contracts (68,920,330) (60,795,789)
Principal payments received 55,663,425 48,471,205
Purchase of property and equipment, net of disposals (308,091) (287,004)
------------ ------------
Net cash used in investing activities (13,564,996) (12,611,588)
FINANCING ACTIVITIES
(Repayment) issuance of notes payable -- related party (127,080) 215,595
Net proceeds from line of credit 7,350,052 6,886,812
Increase in drafts payable 246,581 245,404
Prepaid stock offering costs (134,200) -
Payment of dividend (507,985) -
Proceeds from exercise of stock options 313,457 49,328
------------ ------------
Net cash provided by financing activities 7,140,825 7,397,139
------------ ------------
Net increase in cash 476,473 429,972
Cash, beginning of year 481,211 51,239
------------ ------------
Cash, end of year $ 957,684 $ 481,211
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Stock issued in connection with services rendered - $ 405
============ ============
Conversion of accrued interest to notes payable - related party - $ 50,733
============ ============
|
See accompanying notes.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2004
1. ORGANIZATION
Nicholas Financial, Inc. "Nicholas Financial - Canada" is a Canadian holding company incorporated under the laws of British Columbia with two wholly-owned United States subsidiaries, Nicholas Data Services, Inc. (NDS) and Nicholas Financial, Inc. (NFI). NDS is engaged principally in the development, marketing and support of computer application software. NFI is engaged principally in providing installment sales financing. Both NDS and NFI are based in Florida, U.S.A. The accompanying financial statements are stated in U.S. dollars and are presented in accordance with accounting principles generally accepted in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of "Nicholas Financial - Canada" and its wholly-owned subsidiaries, NDS and NFI, collectively referred to as the Company. All intercompany transactions and balances have been eliminated.
FINANCE RECEIVABLES
Finance receivables purchased and originated are recorded at cost.
ASSETS HELD FOR RESALE
Assets held for resale are stated at net realizable value and consist primarily of automobiles that have been repossessed by the Company and are awaiting final disposition. Automobiles repossessed are charged-off in the month in which the repossession occurred. Costs associated with repossession, transport and auction preparation expenses are charges reported under operating expenses in the period in which they were incurred. The Company maintains full responsibility for repossessions.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for repairs and maintenance are charged to expense as incurred. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the assets as follows:
Automobiles 3 years Equipment 5 years Furniture and fixtures 7 years Leasehold improvements Lease term |
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by charges against earnings and decreased by charge-offs (net of recoveries). In addition to the allowance for loan losses, a reserve for credit losses has been established using unearned interest and dealer discounts to absorb potential credit losses. To the extent actual credit losses exceed these reserves, a bad debt provision is recorded; and to the extent credit losses are less than the reserve, the reserve is accreted into income over the remaining estimated life of the pool. Management's periodic evaluation of the adequacy of the allowance is based on the Company's past loan experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions.
DRAFTS PAYABLE
Drafts payable represent checks disbursed for loan purchases which have not yet been funded through the line of credit. Amounts cleared within one to two business days of period end are then added to the line of credit.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date.
REVENUE RECOGNITION
Interest income on finance receivables is recognized using the interest method. Accrual of interest income on finance receivables is suspended when a loan is contractually delinquent for 60 days or more or the collateral is repossessed, whichever is earlier. As of March 31, 2004 and 2003 the amount of gross finance receivables not accruing interest was $520,303 and $575,554, respectively.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred revenues consist primarily of commissions received from the sale of ancillary products. These products include automobile warranties, road-side assistance programs, accident & health insurance, credit life insurance and forced placed automobile insurance. These commissions are amortized over the life of the contract using the effective annual interest method.
The Company attributes its entire dealer discount and a portion of unearned income to a reserve for credit losses. Such amounts reduce the interest income recognized over the life of the contract. The Company's net fees charged for processing a loan are recognized as an adjustment to the yield and are amortized over the life of the loan using the interest method.
The amount of future unearned income represents the amount of finance charges the Company expects to fully earn over the life of the current portfolio, and is computed as the product of the contract rate, the contract term, and the contract amount. The Company aggregates the contracts purchased during a three-month period for all of its branch locations. After the analysis of purchase date accounting is complete, any uncollectable amounts would be contemplated in estimating the allowance for credit losses.
Revenues resulting from the sale of hardware and software are recognized when persuasive evidence of an agreement exists, delivery of the products has occurred, no significant Company obligation with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collectibility is not considered probable, revenue is recognized when the fee is collected. Arrangements that included software services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. When software services are considered essential, revenue under the arrangement is recognized using contract accounting. When software services are not considered essential, the revenue related to the software services is recognized as the services are performed. The unamortized amounts are included in the caption "deferred revenues."
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EARNINGS PER SHARE
Basic earnings per share excludes any dilutive effects of common stock equivalents such as options, warrants, and convertible securities. Diluted earnings per share includes the effects of dilutive options, warrants, and convertible securities. Basic and diluted earnings per share have been computed as follows:
YEAR ENDED MARCH 31,
2004 2003
---------- ----------
Numerator for earnings per share - net income $5,212,678 $4,281,394
========== ==========
Denominator:
Denominator for basic earnings per share - weighted average shares 5,047,094 5,004,055
Effect of dilutive securities:
Employee stock options 371,614 295,151
---------- ----------
Denominator for diluted earnings per share 5,418,708 5,299,206
========== ==========
Earnings per share - basic $ 1.03 $ 0.86
========== ==========
Earnings per share - diluted $ 0.96 $ 0.81
========== ==========
|
STOCK OPTION ACCOUNTING
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.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of finance receivables, accounts receivable, line of credit, notes payable -- related party and accounts payable. For each of these financial instruments, the carrying value approximates its fair value.
The Company's financial instruments that are exposed to concentrations of credit risk are primarily finance receivables. The Company operates in seven states through its twenty-nine branch locations. Fifteen of these branch locations are in the state of Florida, which represents 60% of the finance receivables total as of March 31, 2004. Of the remaining six states, no one state represents more than 9% of the total finance receivables. The Company provides credit during the normal course of business and performs ongoing credit evaluations of it customers. The Company maintains allowances for potential credit losses which, when realized, have been within the range of management's expectations. The Company perfects a primary security interest in all vehicles financed as a form of collateral.
USE OF ESTIMATES
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant of these estimates relates to the determination of the allowance for credit losses and related reserves. Actual results could differ from those estimates.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive loss is composed entirely of the fair value of cash flow hedges, net of the related tax effect.
STATEMENT OF CASH FLOWS
Cash paid for income taxes for the years ended March 31, 2004 and 2003 was $4,288,259 and $3,399,990, respectively. Cash paid for interest for the years ended March 31, 2004 and 2003 was $3,804,440 and $3,743,113, respectively.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 2004 presentation.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DERIVATIVES
Derivatives are accounted for under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS 133 requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based on the exposure being hedged, as either a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. The Company does not use derivative instruments for speculative purposes.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounts Standards Board ("FASB") issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which is an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." FIN 46 was amended in December 2003. FIN 46 requires business enterprises to consolidate variable interest entities which certain characteristics. FIN 46 excludes qualifying special purpose entities subject to the reporting requirements of SFAS 140. FIN 46 applies upon formation to variable interest entities created after January 31, 2003, and to all variable interest entities in the first fiscal year or interim period beginning after June 15, 2003. At March 31, 2004, the Company's corporate structure included only companies whose accounts were consolidated into the Company's financial statements. Therefore, the adoption of FIN 46 did not have an impact on the Company's financial statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The changes in this Statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This Statement is generally effective for contracts entered into or modified after June 30, 2003. The adoption of SFAS 149 did not have a material effect on the Company's consolidated financial statements.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. The Statement also includes required disclosures for financial instruments within its scope. The Company currently does not have any financial instruments that are within the scope of this Statement.
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.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. FINANCE RECEIVABLES
The Company purchases individual installment loan contracts from new and used automobile dealers in its markets. There is no relationship between the Company and the dealer with respect to a given contract once the assignment of that contract is complete. The dealer has no vested interest in the performance of any installment contract the Company purchases.
The Company charges-off receivables when an individual account has become more than 120 days contractually delinquent. In the event of a repossession the charge-off will occur in the month in which the vehicle was repossessed.
Consumer automobile finance installment contracts are included in finance receivables and are detailed as follows:
2004 2003
------------- ------------
Finance receivables, gross contract $ 151,082,036 $132,316,816
Less:
Unearned interest (36,135,832) (31,610,003)
------------- ------------
Finance receivables, net of unearned interest 114,946,204 100,706,813
Dealer discounts (15,377,582) (12,394,089)
Allowance for credit losses (5,787,764) (5,428,681)
------------- ------------
Finance receivables, net $ 93,780,858 $ 82,884,043
============= ============
|
The terms of the receivables range from 12 to 66 months and bear a weighted average effective interest rate of 24% for both 2004 and 2003.
Direct consumer loans are also included in finance receivables and are detailed as follows:
2004 2003
------------- ------------
Direct loans, gross contract $ 4,572,030 $ 4,357,032
Less:
Unearned interest (932,038) (886,837)
------------- ------------
Finance receivables, net of unearned interest 3,639,992 3,470,195
Allowance for credit losses (184,334) (176,126)
------------- ------------
Finance receivables, net $ 3,455,658 $ 3,294,069
============= ============
|
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. FINANCE RECEIVABLES (CONTINUED)
The terms of the receivables range from 6 to 48 months and bear a weighted average effective interest rate of 25% for both 2004 and 2003, respectively.
The following table sets forth a reconciliation of the changes in dealer discount for the years ended March 31:
2004 2003
----------- -----------
Balance at beginning of year $12,394,089 $11,259,898
Discounts acquired on new volume 12,019,745 10,534,472
Losses absorbed (7,867,889) (8,401,071)
Recoveries 1,153,505 1,068,556
Dealer discounts accreted (2,321,868) (2,067,766)
----------- -----------
Balance at end of year $15,377,582 $12,394,089
=========== ===========
Dealer discounts as a percent of gross indirect
contracts 10.18% 9.37%
=========== ===========
|
The following table sets forth a reconciliation of the changes in the allowance for credit losses on consumer automobile finance installment contracts for the years ended March 31:
2004 2003
----------- -----------
Balance at beginning of year $ 5,428,681 $ 4,105,174
Current year provision 1,805,038 1,911,855
Losses absorbed (1,445,955) (588,348)
----------- -----------
Balance at end of year $ 5,787,764 $ 5,428,681
=========== ===========
Allowance as a percent of gross indirect contracts 3.83% 4.10%
=========== ===========
|
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. FINANCE RECEIVABLES (CONTINUED)
The following table sets forth a reconciliation of the changes in the allowance for credit losses on direct loans for the years ended March 31:
2004 2003
-------- ---------
Balance at beginning of year $176,126 $ 200,612
Current year provision 298,649 302,004
Losses absorbed (176,367) (208,802)
Recoveries 29,714 29,372
Accreted to income (143,788) (147,060)
-------- ---------
Balance at end of year $184,334 $ 176,126
======== =========
Allowance as a percent of gross direct loan
receivables 4.03% 4.04%
======== =========
|
4. PROPERTY AND EQUIPMENT
Property and equipment as of March 31, 2004 and 2003 is summarized as follows:
ACCUMULATED NET BOOK
COST DEPRECIATION VALUE
---------- ------------ ----------
2004
Automobiles $ 362,287 $ 157,317 $ 204,970
Equipment 572,915 426,064 146,851
Furniture and fixtures 289,062 157,496 131,566
Leasehold improvements 277,875 195,700 82,175
---------- ------------ ----------
$1,502,139 $ 936,577 $ 565,562
========== ============ ==========
2003
Automobiles $ 285,680 $ 146,312 $ 139,368
Equipment 515,210 373,457 141,753
Furniture and fixtures 234,828 130,672 104,156
Leasehold improvements 274,025 191,706 82,319
---------- ------------ ----------
$1,309,743 $ 842,147 $ 467,596
========== ============ ==========
|
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. LINE OF CREDIT
The Company has a $75 million Line of Credit facility (the Line) which expires on November 30, 2004. The Company may borrow the lesser of the $75 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 million. Pledged as collateral for this credit facility are all of the assets of Nicholas Financial, Inc. As of March 31, 2004 the outstanding amount of the credit facility was approximately $67.5 million and the amount available under the line of credit was approximately $7.5 million. As of March 31, 2004, the Company was in full compliance with all debt covenants.
6. NOTES PAYABLE -- RELATED PARTY
Notes payable to shareholders, directors and individuals related thereto at March 31:
The Company has unsecured notes totaling $681,530 and $808,610 at March 31, 2004 and 2003, respectively. For fiscal year 2004, the notes bear a variable interest rate equal to the average cost of borrowed funds for the Company plus twenty-five basis points (5.98% at March 31, 2004). The interest rate is recalculated every three months. For fiscal year 2003, the notes had a fixed interest rate of 8.87%. The notes are due upon 30-day demand.
The company incurred interest expense on the above notes of approximately $83,000 and $62,000 for the years ended March 31, 2004 and 2003, respectively.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. DERIVATIVES AND HEDGING
The Company is party to interest rate swap agreements which are derivative instruments. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk, such as interest rate risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of the future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
The Company has entered into interest rate swap agreements that effectively convert a portion of its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest rate changes on future interest expense. At March 31, 2004, $50,000,000 of the Company's borrowings have been designated as the hedged items to interest rate swap agreements. Under the swap agreements, the Company received an average variable rate of 3.41% and paid an average fixed rate of 5.93% during the year ended March 31, 2004. A loss of $1,711,393 related to the fair value of the swaps at March 31, 2004 has been recorded in the caption derivatives on the balance sheet. Accumulated other comprehensive loss at March 31, 2004 in the amount of $1,065,342 represents the after-tax effect of the derivative losses. Amounts of net losses on derivative instruments expected to be reclassified from comprehensive income to earnings in the next 12 months are not expected to be material. The Company has also entered into two forward locking swaps disclosed in the table below.
Fixed
Rate
Notional Of
Date Entered Effective Date Amount Interest Maturity Date
----------------- --------------- ------------- -------- -------------
May 17, 2000 May 17, 2000 $ 10,000,000 6.87% May 17, 2004
October 5,
October 5, 2001 October 5, 2001 10,000,000 3.85% 2004
June 28, 2002 June 28, 2002 10,000,000 3.83% July 2, 2005
January 6, 2003 April 2, 2003 10,000,000 3.35% April 2, 2007
January 31, 2003 August 1, 2003 10,000,000 3.20% August 2, 2006
February 26, 2003 May 17, 2004 10,000,000 3.91% May 19, 2008
October 5,
March 11, 2004 October 5, 2004 10,000,000 3.64% 2009
|
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. DERIVATIVES AND HEDGING (CONTINUED)
The Company has also entered into various interest rate option agreements with maturities through May 17, 2004.
The Company utilizes the above noted interest rate swaps to manage its interest rate exposure. The swaps effectively convert a portion of the Company's floating rate debt to a fixed rate, more closely matching the interest rate characteristics of the Company's finance receivables. There has historically been no ineffectiveness associated with the Company's hedges.
The following table reconciles net income with comprehensive income for the years ended March 31, 2004 and 2003.
2004 2003
---------- ----------
Net Income $5,212,678 $4,281,394
Mark to market - interest rate swaps (net of tax) 337,003 (677,020)
---------- ----------
Comprehensive income $5,549,681 $3,604,374
========== ==========
|
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
The provision for income taxes reflects an effective U.S tax rate, which differs from the corporate tax rate (34%) for the following reasons:
2004 2003
---------- ----------
Provision for income taxes at federal statutory rate $2,852,485 $2,324,778
Increase resulting from:
State income taxes, net of federal benefit 343,373 258,686
Other (18,875) (27,276)
---------- ----------
$3,176,983 $2,556,188
========== ==========
|
The Company's deferred tax assets consist of the following as of March 31:
2004 2003
---------- ----------
Allowance for credit losses not currently deductible for tax purposes $2,685,501 $1,379,024
Derivatives 646,051 817,135
Other items 22,650 60,349
---------- ----------
$3,354,202 $2,256,508
========== ==========
|
Nicholas Financial - Canada has income tax loss carryforward balances of approximately $302,000 (2003 -- $318,000) which are available to reduce future taxable income. The related deferred tax asset, more likely than not, will not be realized and is offset entirely by a valuation allowance. The tax loss carryforwards are the result of the Company's annual Canadian operating expenses not deductible for U.S tax purposes. The Company has no operations in Canada, does not expect to have such operations and therefore does not create any revenue to offset these income tax loss carryforwards.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS
The Company has an employee stock incentive plan (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 374,534 shares are available for future granting at March 31, 2004. Options currently granted by the Company generally vest over a five-year period.
The fair value method uses the Black-Scholes option-pricing model to determine compensation expense associated with the Company's options. The follow 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:
YEAR ENDED
MARCH 31,
2004 2003
---------- ----------
Net income as reported $5,212,678 $4,281,394
Basic earnings per share as reported $ 1.03 $ 0.86
Fully diluted earnings per share as reported $ 0.96 $ 0.81
Stock based employee compensation cost
under the Fair Value Method, net of tax $ 44,320 $ 69,932
Pro forma net income $5,168,358 $4,211,462
Pro forma basic earnings per share $ 1.02 $ 0.84
Pro forma fully diluted earnings per share $ 0.95 $ 0.79
|
The effects of applying SFAS 123 for pro-forma disclosures are not likely to be representative of the effects on reported net income for future years.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2004 were: expected volatility of 32%, dividend yield of 1.61%, risk free interest rate of 3.75% and expected life of 7 years.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. STOCK OPTIONS (CONTINUED)
2004 2003
---------------------- ---------------------
WEIGHTED WEIGHTED
OPTIONS AVERAGE OPTIONS AVERAGE
& EXERCISE & EXERCISE
WARRANTS PRICE WARRANTS PRICE
-------- -------- -------- --------
Outstanding -- beginning of year 590,266 $ 2.21 653,866 $ 2.26
Granted 62,000 7.99 - -
Exercised (79,267) 2.16 (21,667) 2.20
Canceled/expired (7,533) 3.36 (41,933) 2.90
-------- --------
Outstanding -- end of year 565,466 2.83 590,266 2.21
======== ========
Exercisable at end of year 447,067 $ 2.07 490,776 $ 2.03
======== ========
Weighted-average fair value of options
granted during the year $ 1.35 -
|
CURRENTLY EXERCISABLE
WEIGHTED ---------------------
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
SHARES PRICE LIFE SHARES PRICE
------- -------- ----------- ------- --------
$1.00 TO 1.99 260,200 $ 1.70 4.19 years 260,200 $ 1.70
2.00 TO 2.99 170,466 2.45 5.71 years 154,066 2.42
3.00 TO 3.99 72,800 3.36 7.32 years 32,801 3.39
6.00 TO 6.99 28,000 6.64 9.35 years - -
9.00 TO 9.99 34,000 9.10 9.87 years - -
------- -------- ---------- ------- --------
TOTAL 565,466 $ 2.83 5.65 years 447,067 $ 2.07
======= =======
|
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement plan under which all employees are eligible to participate. Employee contributions are voluntary and subject to Internal Revenue Service limitations. The Company matches, based on annually determined factors, employee contributions provided the employee completes certain levels of service annually. For the years ended March 31, 2004 and 2003, the Company recorded expenses of approximately $126,000 and $68,000, respectively, related to this plan. All employees who were eligible under the plan received a profit sharing contribution based on their total compensation in relation to the total compensation of all eligible employees. For the years ended March 31, 2004 and 2003, the Company recorded expenses of $0 and $139,000, respectively, related to this plan.
11. COMMITMENTS AND CONTINGENCIES
The Company leases its corporate and branch offices under operating lease agreements which provide for annual minimum rental payments as follows:
Year ending March 31:
---------------------
2005 $ 499,997
2006 326,996
2007 200,636
2008 22,517
----------
$1,050,146
==========
|
Rent expense for the years ended March 31, 2004 and 2003 was approximately $661,000 and $503,000, respectively.
On April 8, 2004, the defendant in a deficiency action brought by the Company under the Ohio Uniform Commercial Code, filed a counterclaim in Cleveland Municipal Court, Cuyahoga County, Ohio, on behalf of a putative class of all persons who purchased motor vehicles pursuant to retail installment sales agreements later assigned to the Company, which motor vehicles were subsequently repossessed in Ohio by the Company or its agents. The Company believes the material allegations of the counterclaim are substantially without merit and intends to vigorously defend the counterclaim. No assurances can be given, however, with respect to the outcome of the counterclaim, and an adverse result could have a material adverse effect on the Company's financial condition.
Nicholas Financial, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. SEGMENT INFORMATION
The segments presented have been identified based on the difference in the products and services of the Company's two wholly owned subsidiaries. Internal financial results for each subsidiary are presented to and reviewed by the senior management of the Company. Substantially all of the Company's operations are in the United States. The industry segments are as follows:
COMPUTER
APPLICATION
GENERAL SOFTWARE AND
FINANCING SUPPORT CORPORATE TOTAL
------------ ------------ --------- ------------
2004
Interest income and sales $ 25,236,638 $ 263,847 - $ 25,500,485
Operating income (loss) before income
taxes 8,350,407 50,445 (11,191) 8,389,661
Interest expense 3,851,924 - - 3,851,924
Income tax expense 3,157,941 19,042 - 3,176,983
Identifiable assets 102,961,157 261,795 500 103,223,452
Net capital expenditures 308,091 - - 308,091
Depreciation 210,125 - - 210,125
2003
Interest income and sales $ 22,048,535 $ 328,340 - $ 22,376,875
Operating income (loss) before income
taxes 6,845,591 (8,009) - 6,837,582
Interest expense 3,936,042 - - 3,936,042
Income tax expense 2,559,212 (3,024) - 2,556,188
Identifiable assets 89,772,818 262,735 1,375 90,036,928
Net capital expenditures 287,004 - - 287,004
Depreciation 190,257 - - 190,257
|
13. SUBSEQUENT EVENTS
In late May and early June 2004, the Company closed the sale of 1,400,000 shares of its common stock at a public offering price of $8.00 per share. The net proceeds of the offerings, approximately $9.8 million, was 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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
Based on their evaluation, as of the end of the period covered by this annual report of the effectiveness of the Company's disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer have each concluded that the Company's disclosure controls and procedures are effective and sufficient to ensure that the Company records, processes, summarizes, and reports information required to be disclosed by the Company in its periodic reports filed under the Securities Exchange Act within the time periods specified by the Securities and Exchange Commission's rules and forms.
Subsequent to the date of their evaluation, there have not been any significant changes in the Company's internal controls or in other factors to the Company's knowledge that could significantly affect these controls, including any corrective action with regard to significant deficiencies and material weaknesses. The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The information set forth under the caption "Proposal 1: Election of Directors" in the Proxy Statement and Information Circular, dated on or about July 8, 2004, for the 2004 Annual General Meeting of Members of the Company to be held August 5, 2004 (the "Proxy Statement"), the information set forth under the caption "Executive Officers and Compensation" in the Proxy Statement, and the information set forth under the caption "Section 16 (a) Beneficial Ownership Reporting Compliance" in the Proxy Statement are incorporated herein by reference.
The Company has adopted a code of ethics applicable to our principal executive officers, principal financial officer, principal accounting officer and persons performing similar functions. The text of this code of ethics is filed as Exhibit 14 to this annual report. We intend to post notice of any waiver from, or amendment to, any provision of our code of ethics on our web site.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Officers and Compensation" in the Proxy Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS, MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information set forth under the caption "Voting Shares and Ownership of Management and Principal Holders" in the Proxy Statement is incorporated herein by reference.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information, as of March 31, 2004, with respect to compensation plans under which equity securities of the Company are authorized for issuance:
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF
SECURITIES TO BE WEIGHTED - NUMBER OF SECURITIES
ISSUED UPON AVERAGE EXERCISE REMAINING AVAILABLE FOR
EXERCISE OF PRICE OF FUTURE ISSUANCE UNDER
OUTSTANDING OUTSTANDING EQUITY COMPENSATION
OPTIONS, OPTIONS, PLANS (EXCLUDING
WARRANTS AND WARRANTS AND SECURITIES REFLECTED IN
PLAN CATEGORY RIGHTS RIGHTS COLUMN (a)
--------------------- ---------------- ---------------- ------------------------
(a) (b) (c)
---------------- ---------------- ------------------------
Equity
Compensation
Plans Approved by
Security Holders 565,466 $ 2.83 374,534
Equity Compensation
Plans Not Approved by
Security Holders None Not Applicable None
------- ---------------- -------
TOTAL 565,466 $ 2.83 374,534
======= ================ =======
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT NO. EXHIBIT DESCRIPTION
----------- --------------------------------------------------------------
3 Memorandum and Articles, as amended, of Nicholas Financial,
Inc.
4 Form of Common Stock Certificate
10.1 Amended and Restated Loan and Security Agreement, dated August
1, 2000 (1)
10.2 Amendment No. 1 to Loan Agreement, dated March 16, 2001 (2)
10.3 Amendment No. 2 to Loan Agreement, dated July 31, 2001 (3)
10.4 Amendment No. 3 to Loan Agreement, dated June 27, 2002 (4)
10.5 Employee Stock Option Plan (5)
10.6 Non-Employee Director Stock Option Plan (6)
10.7 Employment Contract, dated November 22, 1999, between Nicholas
Financial, Inc. and Ralph Finkenbrink, Senior Vice President
of Finance (7)
10.8 Employment Contract, dated March 16, 2001, between Nicholas
Financial, Inc. and Peter L. Vosotas, President and Chief
Executive Officer (8)
10.9 Form of Dealer Agreement and Schedule thereto listing dealers
that are parties to such agreements (9)
10.10 ISDA Master Agreement, dated as of March 30, 1999, between
Bank of America National Trust and Savings Association and
Nicholas Financial, Inc. (including Schedule thereto) (10)
10.11 Form of Letter Agreement (confirming terms and conditions of
Swap Transaction under the Master Agreement referred to in
Exhibit 10.10 above) and Schedule thereto listing variable
terms of outstanding Swap Transactions (11)
14 Code of Ethics for CEO and Senior Financial Officers
21 Subsidiaries of Nicholas Financial, Inc.
23.1 Consent of Dixon Hughes PLLC
23.2 Consent of Ernst & Young LLP
24 Powers of Attorney (included on signature page hereto)
31.1 Certification of President and CEO
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
32.2 Written Statement of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
(1) Incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
|
(2) Incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
(3) Incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
(4) Incorporated by reference to Exhibit 10.4 to the Company's
Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
(5) Incorporated by reference to Exhibit 4 to the Company's Form
S-8 filed with the SEC on June 30, 1999 (SEC File. No.
333-81967).
(6) Incorporated by reference to Exhibit 4 to the Company's Form
S-8 filed with the SEC on June 30, 1999 (SEC File. No.
333-81961).
(7) Incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
(8) Incorporated by reference to Exhibit 10.8 to the Company's
Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
(9) Incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-2 (Reg. No. 333-113215) filed
with the SEC on March 2, 2004.
(10) Incorporated by reference to Exhibit 10.10 to Amendment No. 2
to the Company's Registration Statement on Form S-2 (Reg. No.
333-113215) filed with the SEC on April 7, 2004.
(11) Incorporated by reference to Exhibit 10.11 to Amendment No. 2
to the Company's Registration Statement on Form S-2 (Reg. No.
333-113215) filed with the SEC on April 7, 2004.
|
(b) Reports on Form 8-K
On March 4, 2004, the Company filed a current report on Form 8-K announcing that at a meeting held on March 3, 2004, the audit committee of the Board of Directors of the Company approved the engagement of Dixon Hughes PLLC, the successor in the merger of the Company's current independent auditors, Crisp Hughes Evans LLP, and the firm of Dixon Odom PLLC, as its independent auditors effective with the successful merger of the two firms. On March 1, 2004, the audit committee of the Board of Directors was notified that the merger of the two firms was completed and that the firm of Crisp Hughes Evans LLP would no longer be providing audit services. On the same Form 8-K the Company announced that the Company has established March 8, 2004 as the record date for its semi-annual cash dividend of $.05 cents per share with a payment date of March 22, 2004.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth under the caption "Appointment of Auditors" in the Proxy Statement is incorporated herein by reference.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
NICHOLAS FINANCIAL, INC.
Dated: June 29, 2004
By: /s/ Peter L. Vosotas
Peter L. Vosotas
Chairman, Chief Executive Officer
and President
|
KNOW ALL MEN BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Peter L. Vosotas and Ralph T. Finkenbrink, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this report, and to file the same, with all exhibits thereto, and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agents or either of them, or their substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Peter L. Vosotas Chairman of the Board, Chief
Peter L. Vosotas Executive Officer, President and June 29, 2004
Director
/s/ Ralph T. Finkenbrink Sr. Vice President - Finance June 29, 2004
Ralph T. Finkenbrink Chief Financial Officer and Director
/s/ Stephen Bragin Director June 29, 2004
Stephen Bragin
/s/ Alton R. Neal Director June 29, 2004
Alton R. Neal
|
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- --------------------------------------------------------------
3 Memorandum and Articles, as amended, of Nicholas Financial,
Inc.
4 Form of Common Stock Certificate
10.1 Amended and Restated Loan and Security Agreement, dated August
1, 2000*
10.2 Amendment No. 1 to Loan Agreement, dated March 16, 2001*
10.3 Amendment No. 2 to Loan Agreement, dated July 31, 2001*
10.4 Amendment No. 3 to Loan Agreement, dated June 27, 2002*
10.5 Employee Stock Option Plan*
10.6 Non-Employee Director Stock Option Plan*
10.7 Employment Contract, dated November 22, 1999, between Nicholas
Financial, Inc. and Ralph Finkenbrink, Senior Vice President
of Finance*
10.8 Employment Contract, dated March 16, 2001, between Nicholas
Financial, Inc. and Peter L. Vosotas, President and Chief
Executive Officer*
10.9 Form of Dealer Agreement and Schedule thereto listing dealers
that are parties to such agreements*
10.10 ISDA Master Agreement, dated as of March 30, 1999, between
Bank of America National Trust and Savings Association and
Nicholas Financial, Inc. (including Schedule thereto)*
10.11 Form of Letter Agreement (confirming terms and conditions of
Swap Transaction under the Master Agreement referred to in
Exhibit 10.10 above) and Schedule thereto listing variable
terms of outstanding Swap Transactions*
14 Code of Ethics for CEO and Senior Financial Officers
21 Subsidiaries of Nicholas Financial, Inc.
23.1 Consent of Dixon Hughes PLLC
23.2 Consent of Ernst & Young LLP
24 Powers of Attorney (included on signature page hereto)
31.1 Certification of President and CEO
31.2 Certification of Chief Financial Officer
32.1 Written Statement of the Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
32.2 Written Statement of the Chief Financial Officer Pursuant to
18 U.S.C. Section 1350
|
EXHIBIT 3
NUMBER
CANADA
PROVINCE OF BRITISH COLUMBIA 312561
[LOGO]
PROVINCE OF BRITISH COLUMBIA
Ministry of Consumer and Corporate Affairs
REGISTRAR OF COMPANIES
COMPANY ACT
Certificate of Incorporation
I HEREBY CERTIFY THAT
NICHOLAS DATA SERVICES LTD.
HAS THIS DAY BEEN INCORPORATED UNDER THE COMPANY ACT
[SEAL] GIVEN UNDER MY HAND AND SEAL OF OFFICE
AT VICTORIA, BRITISH COLUMBIA,
THIS 28TH DAY OF JULY, 1986
/s/ F. A. Butler
F. A. BUTLER
ASST. DEPUTY REGISTRAR OF COMPANIES
|
I HEREBY CERTIFY THAT THESE ARE
COPIES OF DOCUMENTS FILED WITH
THE REGISTRAR OF COMPANIES ON
JUL 28 1986 19-----
/s/ [ILLEGIBLE]
------------------------------------
REGISTRAR OF COMPANIES
FOR THE PROVINCE OF BRITISH COLUMBIA
|
FORM 1 (Section 5)
COMPANY ACT
MEMORANDUM
I wish to be formed into a company with limited liability under the Company Act in pursuance of this memorandum.
1. The name of the company is "NICHOLAS DATA SERVICES LTD."
2. The authorized capital of the company consists of 25,000,000 shares divided into 20,000,000 Common shares without par value and 5,000,000 Preference shares without par value.
3. I agree to take the number and kind of shares in the company set opposite
my name.
--------------------------------------------------------------------------------
Full Name, Resident Address and Number and Kind of Shares
Occupation of Subscriber taken by Subscriber
--------------------------------------------------------------------------------
Ten (10) Common shares
without par value
/s/ Elizabeth A. Watkins
----------------------------
ELIZABETH A. WATKINS
103 - 1470 Pennyfarthing Drive
Vancouver, B. C.
Barrister and Solicitor
TOTAL SHARES TAKEN: Ten (10) Common shares
without par value
--------------------------------------------------------------------------------
DATED this 24th day of July, 1986.
|
ARTICLES
of
NICHOLAS DATA SERVICES LTD.
TABLE OF CONTENTS
PART ARTICLE SUBJECT
1 INTERPRETATION
1.1. Definition
Construction of Words
1.2. Definitions same as Company Act
1.3. Interpretation Act Rules of Construction apply
2 SHARES
2.1. Member entitled to Certificate
2.2. Replacement of Lost or Defaced Certificate
2.3. Execution of Certificates
2.4. Recognition of Trusts
3 ISSUE OF SHARES
3.1. Directors Authorized
3.2. Conditions of Allotment
3.3. Commissions and Brokerage
3.4. Conditions of Issue
4 SHARE REGISTERS
4.1. Registers of Members, Transfers and Allotments
4.2. Branch Registers of Members
4.3. Closing of Register of Members
5 TRANSFER AND TRANSMISSION OF SHARES
5.1. Transfer of Shares
5.2. Execution of Instrument of Transfer
5.3. Enquiry as to Title not Required
5.4. Submission of Instruments of Transfer
5.5. Transfer Fee
5.6. Personal Representative Recognized on Death
5.7. Death or Bankruptcy
5.8. Persons in Representative Capacity
6 ALTERATION OF CAPITAL
6.1. Increase of Authorized Capital
6.2. Other Capital Alterations
6.3. Creation, Variation and Abrogation of Special Rights and
Restrictions
6.4. Consent of Class Required
6.5. Special Rights of Conversion
6.6. Class Meetings of Members
WORRALL SCOTT AND PAGE 1
PART ARTICLE SUBJECT
7 PURCHASE AND REDEMPTION OF SHARES
7.1. Company Authorized to Purchase or Redeem its Shares
7.2. Selection of Shares to be Redeemed
7.3. Purchased or Redeemed Shares Not Voted
8 BORROWING POWERS
8.1. Powers of Directors
8.2. Special Rights Attached to and Negotiability of Debt Obligations
8.3. Register of Debentureholders
8.4. Execution of Debt Obligations
8.5. Register of Indebtedness
9 GENERAL MEETINGS
9.1. Annual General Meetings
9.2. Waiver of Annual General Meeting
9.3. Classification of General Meetings
9.4. Calling of Meetings
9.5. Advance Notice for Election of Directors
9.6. Notice of General Meeting
9.7. Waiver or Reduction of Notice
9.8. Notice of Special Business at General Meeting
10 PROCEEDINGS AT GENERAL MEETINGS
10.1. Special Business
10.2. Requirement of Quorum
10.3. Quorum
10.4. Lack of Quorum
10.5. Chairman
10.6. Alternate Chairman
10.7. Adjournments
10.8. Resolutions Need Not Be Seconded
10.9. Decisions by Show of Hands or Poll
10.10. Casting Vote
10.11. Manner of Taking Poll
10.12. Retention of Ballots Cast on a Poll
10.13. Casting of Votes
10.14. Ordinary Resolution Sufficient
11 VOTES OF MEMBERS
11.1. Number of Votes Per Share or Member
11.2. Votes of Persons in Representative Capacity
11.3. Representative of a Corporate Member
11.4. Votes by Joint Holders
11.5. Votes by Committee for a Member
11.6. Appointment of Proxyholders
11.7. Execution of Form of Proxy
11.8. Deposit of Proxy
11.9. Validity of Proxy Note
11.10. Revocation of Proxy
WORRALL SCOTT AND PAGE 2
PART ARTICLE SUBJECT
12 DIRECTORS
12.1. Number of Directors
12.2. Remuneration and Expenses of Directors
12.3. Qualification of Directors
13 ELECTION OF DIRECTORS
13.1. Election at Annual General Meetings
13.2. Eligibility of Retiring Director
13.3. Continuance of Directors
13.4. Election of Less than Required Number of Directors
13.5. Filling a Casual Vacancy
13.6. Additional Directors
13.7. Alternate Directors
13.8. Termination of Directorship
13.9. Removal of Directors
14 POWERS OF DUTIES OF DIRECTORS
14.1. Management of Affairs and Business
14.2. Appointment of Attorney
15 DISCLOSURE OF INTEREST OF DIRECTORS
15.1. Disclosure of Conflicting Interest
15.2. Voting and Quorum re Proposed Contract
15.3. Director May Hold Office or Place of Profit with Company
15.4. Director Acting in Professional Capacity
15.5. Director Receiving Remuneration from Other Interests
16 PROCEEDINGS OF DIRECTORS
16.1. Chairman and Alternate
16.2. Meetings - Procedure
16.3. Meetings by Conference Telephone
16.4. Notice of Meeting
16.5. Waiver of Notice of Meetings
16.6. Quorum
16.7. Continuing Directors may Act During Vacancy
16.8. Validity of Acts of Directors
16.9. Resolution in Writing Effective
17 EXECUTIVE AND OTHER COMMITTEES
17.1. Appointment of Executive Committee
17.2. Appointment of Committees
17.3. Procedure at Meetings
18 OFFICERS
18.1. President and Secretary Required
18.2. Persons Holding More Than One Office and Remuneration
18.3. Disclosure of Conflicting Interest
WORRALL SCOTT AND PAGE 3
PART ARTICLE SUBJECT
19 INDEMNITY AND PROTECTION OF DIRECTORS, OFFICERS AND EMPLOYEES
19.1. Indemnification of Directors
19.2. Indemnification of Officers, Employees, Agents
19.3. Indemnification not invalidated by non-compliance
19.4. Company may Purchase Insurance
20 DIVIDENDS AND RESERVES
20.1. Declaration of Dividends
20.2. Declared Dividend Date
20.3. Proportionate to Number of Shares Held
20.4. Reserves
20.5. Receipts from Joint Holders
20.6. No Interest on Dividends
20.7. Payment of Dividends
20.8. Capitalization of Undistributed Surplus
21 DOCUMENTS, RECORDS AND REPORTS
21.1. Documents to be Kept
21.2. Accounts to be Kept
21.3. Inspection of Accounts
21.4. Financial Statements and Reports for General Meeting
21.5. Financial Statements and Reports for Members
22 NOTICES
22.1. Method of Giving Notice
22.2. Notice to Joint Holder
22.3. Notice to Personal Representative
22.4. Persons to Receive Notice
23 RECORD DATES
23.1. Record Date
23.2. No Closure of Register of Members
24 SEAL
24.1. Affixation of Seal to Documents
24.2. Reproduction of Seal
24.3. Official Seal for Other Jurisdictions
25 MECHANICAL REPRODUCTION OF SIGNATURES
25.1. Instruments may be Mechanically Signed
25.2. Definition of Instruments
26 PROHIBITIONS
26.1. Number of Members and No Securities to be Offered to the Public
26.2. Restriction on Transfer of Shares
WORRALL SCOTT AND PAGE 4
PROVINCE OF BRITISH COLUMBIA
COMPANY ACT
ARTICLES
OF
NICHOLAS DATA SERVICES LTD.
PART I
INTERPRETATION
1.1. In these Articles, unless there is something in the subject or context inconsistent therewith:
"Board" and "the Directors" or "the directors" mean the Directors, sole Director or alternate Director of the Company for the time being.
"Company Act" means the Company Act of the Province of British Columbia as from time to time enacted and all amendments thereto and statutory modifications thereof and includes the regulations made pursuant thereto.
"seal" means the common seal of the Company.
"month" means calendar month.
"registered owner" or "registered holder" when used with respect to a share in the authorized capital of the Company means the person registered in the register of members in respect of such share.
"personal representative" shall include executors, administrators, trustees in bankruptcy and duly constituted representatives in lunacy.
Expressions referring to writing shall be construed as including references to printing, lithography, typewriting, photography and other modes of representing or reproducing words in a visible form.
Words importing the singular include the plural and vice versa; and words importing male persons include female persons and words importing persons shall include corporations.
1.2. The meaning of any words or phrases defined in the Company Act shall, if not inconsistent with the subject or context, bear the same meaning in these Articles.
1.3. The Rules of Construction contained in the Interpretation Act shall apply, mutatis mutandis, to the interpretation of these Articles.
PART 2
SHARES AND SHARE CERTIFICATES
2.1. Every member is entitled, without charge, to one certificate representing the share or shares of each class held by him; provided that, in respect of a share or shares held jointly by several persons, the Company shall not be bound to issue more than one certificate, and delivery of a certificate for a share to the first named of several joint registered holders or to his duly authorized agent shall be sufficient delivery to all; and provided further that the Company shall not be bound to issue certificates representing redeemable shares, if such shares are to be redeemed within one month of the date on which they were allotted. Any share certificate may be sent through the mail by registered prepaid mail to the member entitled thereto, and neither the Company nor any transfer agent shall be liable for any loss occasioned to the member owing to any such share certificate so sent being lost in the mail or stolen.
2.2. If a share certificate
(i) is worn out or defaced, the Directors shall, upon production to them of the said certificate and upon such other terms, if any, as they may think fit, order the said certificate to be cancelled and shall issue a new certificate in lieu thereof;
WORRALL SCOTT AND PAGE 5
(ii) is lost, stolen or destroyed, then, upon proof thereof to the
satisfaction of the Directors and upon such indemnity, if any, as
the Directors deem adequate being given, a new share certificate in
lieu thereof shall be issued to the person entitled to such lost,
stolen or destroyed certificate; or
|
(iii) represents more than one share and the registered owner thereof surrenders it to the Company with a written request that the Company issue in his name two or more certificates each representing a specified number of shares and in the aggregate representing the same number of shares as the certificate so surrendered and, upon payment of an amount determined from time to time by the Directors, the Company shall cancel the certificate so surrendered and issue in lieu thereof certificates in accordance with such request.
2.3. Every share certificate shall be signed manually by at least one officer or Director of the Company, or by or on behalf of a registrar, branch registrar, transfer agent or branch transfer agent of the Company and any additional signatures may be printed, lithographed, engraved or otherwise mechanically reproduced in accordance with these Articles.
2.4. Except as required by law, statute or these Articles, no person shall be recognized by the Company as holding any share upon any trust, and the Company shall not be bound by or compelled in any way to recognize (even when having notice thereof) any equitable, contingent, future or partial interest in any share or in any fractional part of a share or (except only as by law, statute or these Articles provided or as ordered by a court of competent jurisdiction) any other rights in respect of any share except an absolute right to the entirety thereof in its registered holder.
PART 3
ISSUE OF SHARES
3.1. Subject to Article 3.2 and to any direction to the contrary contained in a resolution passed at a general meeting authorizing any increase or alteration of capital, the shares shall be under the control of the Directors who may, subject to the rights of the registered holders of the shares of the Company for the time being issued, issue, allot, sell or otherwise dispose of, and/or grant options on or otherwise deal in, shares authorized but not outstanding at such times, to such persons (including Directors), in such manner, upon such terms and conditions, and at such price or for such consideration, as they, in their absolute discretion, may determine.
3.2. If the Company is, or becomes, a company which is not a reporting company and the Directors are required by the Company Act before allotting any shares to offer them pro rata to the members, the Directors shall, before allotting any shares, comply with the applicable provisions of the Company Act.
3.3. Subject to the provisions of the Company Act, the Company, or the Directors on behalf of the Company, may pay a commission or allow a discount to any person in consideration of his subscribing or agreeing to subscribe, whether absolutely or conditionally, for any shares, debentures, share rights, warrants or debenture stock in the Company, or procuring or agreeing to procure subscriptions, whether absolutely or conditionally, for any such shares, debentures, share rights, warrants or debenture stock, provided that, if the Company is not a specially limited company, the rate of the commission and discount shall not in the aggregate exceed 25 per centum of the amount of the subscription price of such shares, and if the Company is a specially limited company, the rate of the commission and discount shall not in the aggregate exceed 98 per centum of the amount of the subscription price of such shares, debentures, share rights, warrants or debenture stock. The Company may also pay such brokerage as may be lawful.
3.4. No share may be issued until it is fully paid and the Company shall have received the full consideration therefor in cash, property or past services actually performed for the Company. The value of the property or services for the purposes of this Article shall be the value determined by the Directors by resolution to be, in all circumstances of the transaction, the fair market value thereof.
WORRALL SCOTT AND PAGE 6
PART 4
SHARE REGISTERS
4.1. The Company shall keep or cause to be kept a register of members, a register of transfers and a register of allotments within British Columbia, all as required by the Company Act, and may combine one or more of such registers. If the Company's capital shall consist of more than one class of shares, a separate register of members, register of transfers and register of allotments may be kept in respect of each class of shares. The Directors on behalf of the Company may appoint a trust company to keep the register of members, register of transfers and register of allotments or, if there is more than one class of shares, the Directors may appoint a trust company, which need not be the same trust company, to keep the register of members, the register of transfers and the register of allotments for each class of shares. The Directors on behalf of the Company may also appoint one or more trust companies, including the trust company which keeps the said registers of its shares or of a class thereof, as transfer agent for its shares or such class thereof, as the case may be, and the same or another trust company or companies as registrar for its shares or such class thereof, as the case may be. The Directors may terminate the appointment of any such trust company at any time and may appoint another trust company in its place.
4.2. Unless prohibited by the Company Act, the Company may keep or cause to be kept one or more branch registers of members at such place or places as the Directors may from time to time deter mine.
4.3. The Company may at any time close its register of members upon resolution of the Directors.
PART 5
TRANSFER AND TRANSMISSION OF SHARES
5.1. Subject to the provisions of the Memorandum and of these Articles that may be applicable, any member may transfer any of his shares by instrument in writing executed by or on behalf of such member and delivered to the Company or its transfer agent. The instrument of transfer of any share of the Company shall be in the form, if any, on the back of the Company's share certificates or in such other form as the Directors may from time to time approve. Except to the extent that the Company Act may otherwise provide, the transferor shall be deemed to remain the holder of the shares until the name of the transferee is entered in the register of members or a branch register of members thereof.
5.2. The signature of the registered holder of any shares, or of his duly authorized attorney, upon an authorized instrument of transfer shall constitute a complete and sufficient authority to the Company, its directors, officers and agents to register, in the name of the transferee as named in the instrument of transfer, the number of shares specified therein or, if no number is specified, all the shares of the registered holder represented by share certificates deposited with the instrument of transfer. If no transferee is named in the instrument of transfer, the instrument of transfer shall constitute a complete and sufficient authority to the Company, its directors, officers and agents to register, in the name of the person in whose behalf any certificate for the shares to be transferred is deposited with the Company for the purpose of having the transfer registered, the number of shares specified in the instrument of transfer or, if no number is specified, all the shares represented by all share certificates deposited with the instrument of transfer.
5.3. Neither the Company nor any Director, officer or agent thereof shall be bound to inquire into the title of the person named in the form of transfer as transferee, or, if no person is named therein as transferee, of the person on whose behalf the certificate is deposited with the Company for the purpose of having the transfer registered or be liable to any claim by such registered holder or by any intermediate holder of the certificate or of any of the shares represented thereby or any interest therein for registering the transfer, and the transfer, when registered, shall confer upon the person in whose name the shares have been registered a valid title to such shares.
WORRALL SCOTT AND PAGE 7
5.4. Every instrument of transfer shall be executed by the transferor and left at the registered office of the Company or at the office of its transfer agent or registrar for registration together with the share certificate for the shares to be transferred and such other evidence, if any, as the Directors or the transfer agent or registrar may require to prove the title of the transferor or his right to transfer the shares and the right of the transferee to have the transfer registered. All instruments of transfer where the transfer is registered shall be retained by the Company or its transfer agent or registrar and any instrument of transfer, where the transfer is not registered, shall be returned to the person depositing the same together with the share certificate which accompanied the same when tendered for registration.
5.5. There shall be paid to the Company in respect of the registration of any transfer such sum, if any, as the Directors may from time to time determine.
5.6. In the case of the death of a member, the survivor or survivors where the deceased was a joint registered holder, and the legal personal representative of the deceased where he was the sole holder, shall be the only persons recognized by the Company as having any title to his interest in the shares. Before recognizing any legal personal representative the Directors may require him to obtain a grant of probate or letters of administration in British Columbia.
5.7. Upon the death or bankruptcy of a member, his personal representative or trustee in bankruptcy, although not a member, shall have the same rights, privileges and obligations that attach to the shares formerly held by the deceased or bankrupt member if the documents required by the Company Act shall have been deposited at the Company's registered office.
5.8. Any person becoming entitled to a share in consequence of the death or bankruptcy of a member shall, upon such documents and evidence being produced to the Company as the Company Act requires or who becomes entitled to a share as a result of an order of a Court of competent jurisdiction or a statute has the right either to be registered as a member in his representative capacity in respect of such share, or, if he is a personal representative, instead of being registered himself, to make such transfer of the share as the deceased or bankrupt person could have made; but the Directors shall, as regards a transfer by a personal representative or trustee in bankruptcy, have the same right, if any, to decline or suspend registration of a transferee as they would have in the case of a transfer of a share by the deceased or bankrupt person before the death or bankruptcy.
PART 6
ALTERATION OF CAPITAL
6.1. The Company may by ordinary resolution filed with the Registrar amend its Memorandum to increase the authorized capital of the Company by:
(i) creating shares with par value or shares without par value, or both;
(ii) increasing the number of shares with par value or shares without par value, or both; or
(iii) increasing the par value of a class of shares with par value, if no shares of that class are issued.
All new shares shall be subject to the same provisions with reference to transfers, transmissions and otherwise as the existing shares of the Company.
6.2. The Company may by special resolution alter its Memorandum to subdivide, consolidate, change from shares with par value to shares without par value, or from shares without par value to shares with par value, or change the designation of, all or any of its shares but only to such extent, in such manner and with such consents of members holding a class of shares which is the subject of or affected by such alteration, as the Company Act provides.
6.3. The Company may alter its Memorandum or these Articles
(i) by special resolution, to create, define and attach special rights or restrictions to any shares, and
WORRALL SCOTT AND PAGE 8
(ii) by special resolution and by otherwise complying with any applicable provision of its Memorandum or these Articles, to vary or abrogate any special rights and restrictions attached to any shares
and in each case by filing a certified copy of such resolution with the Registrar but no right or special right attached to any issued shares shall be prejudiced or interfered with unless all members holding shares of each class whose right or special right is so prejudiced or interfered with consent thereto in writing, or unless a resolution consenting thereto is passed at a separate class meeting of the holders of the shares of each such class by a majority of three-fourths, or such greater majority as may be specified by the special rights attached to the class of shares, of the issued shares of such class.
6.4. Notwithstanding such consent in writing or such resolution, no such alteration shall be valid as to any part of the issued shares of any class unless the holders of the rest of the issued shares of such class either all consent thereto in writing or consent thereto by a resolution passed by the votes of members holding three-fourths of the rest of such shares.
6.5. If the Company is or becomes a reporting company, no resolution to create, vary or abrogate any special right of conversion attaching to any class of shares shall be submitted to any meeting of members unless, if so required by the Company Act, the Superintendent of Brokers shall have consented to the resolution.
6.6. Unless these Articles otherwise provide, the provisions of these Articles relating to general meetings shall apply, with the necessary changes and so far as they are applicable, to a class meeting of members holding a particular class of shares but the quorum at a class meeting shall be one person holding or representing by proxy one-third of the shares affected.
PART 7
PURCHASE AND REDEMPTION OF SHARES
7.1. Subject to the special rights and restrictions attached to any class of shares, the Company may, by a resolution of the Directors and in compliance with the Company Act, purchase any of its shares at the price and upon the terms specified in such resolution or redeem any class of its shares in accordance with the special rights and restrictions attaching thereto. No such purchase or redemption shall be made if the Company is insolvent at the time of the proposed purchase or redemption or if the proposed purchase or redemption would render the Company insolvent. Unless the shares are to be purchased through a stock exchange or the Company is purchasing the shares from dissenting members pursuant to the requirements of the Company Act, the Company shall make its offer to purchase pro rata to every member who holds shares of the class or kind, as the case may be, to be purchased.
7.2. If the Company proposes at its option to redeem some but not all of the shares of any class, the Directors may, subject to the special rights and restrictions attached to such class of shares, decide the manner in which the shares to be redeemed shall be selected.
7.3. Subject to the provisions of the Company Act, any shares purchased or redeemed by the Company may be sold or issued by it, but, while such shares are held by the Company, it shall not exercise any vote in respect of these shares.
PART 8
BORROWING POWERS
8.1. The Directors may from time to time on behalf of the Company
(i) borrow money in such manner and amount, on such security, from such sources and upon such terms and conditions as they think fit,
WORRALL SCOTT AND PAGE 9
(ii) issue bonds, debentures, and other debt obligations either outright
or as security for any liability or obligation of the Company or any
other person, and
|
(iii) mortgage, charge, whether by way of specific or floating charge, or give other security on the undertaking, or on the whole or any part of the property and assets, of the Company (both present and future).
8.2. Any bonds, debentures or other debt obligations of the Company may be issued at a discount, premium or otherwise, and with any special privileges as to redemption, surrender, drawing, allotment of or conversion into or exchange for shares or other securities, attending and voting at general meetings of the Company, appointment of Directors or otherwise and may by their terms be assignable free from any equities between the Company and the person to whom they were issued or any subsequent holder thereof, all as the Directors may determine.
8.3. The Company shall keep or cause to be kept within the Province of British Columbia in accordance with the Company Act a register of its debentures and a register of debentureholders, which registers may be combined, and, subject to the provisions of the Company Act, may keep or cause to be kept one or more branch registers of its debentureholders at such place or places as the Directors may from time to time determine and the Directors may by resolution, regulation or otherwise make such provisions as they think fit respecting the keeping of such branch registers.
8.4. Every bond, debenture or other debt obligation of the Company shall be signed manually by at least one Director or officer of the Company or by or on behalf of a trustee, registrar, branch registrar, transfer agent or branch transfer agent for the bond, debenture or other debt obligation appointed by the Company or under any instrument under which the bond, debenture or other debt obligation is issued and any additional signatures may be printed or otherwise mechanically reproduced thereon and, in such event, a bond, debenture or other debt obligation so signed is as valid as if signed manually notwithstanding that any person whose signature is so printed or mechanically reproduced shall have ceased to hold the office that he is stated on such bond, debenture or other debt obligation to hold at the date of the issue thereof.
8.5. The Company shall keep or cause to be kept a register of its indebtedness to every Director or officer of the Company or an associate of any of them in accordance with the provisions of the Company Act.
PART 9
GENERAL MEETINGS
9.1. Subject to any extensions of time permitted pursuant to the Company Act, the first annual general meeting of the Company shall be held within fifteen months from the date of incorporation and thereafter an annual general meeting shall be held once in every calendar year at such time (not being more than thirteen months after the holding of the last preceding annual general meeting) and place as may be determined by the Directors.
9.2. If the Company is, or becomes, a company which is not a reporting company and all the members entitled to attend and vote at an annual general meeting consent in writing to all the business which is required or desired to be transacted at the meeting, the meeting need not be held.
9.3. All general meetings other than annual general meetings are herein referred to as and may be called extraordinary general meetings.
9.4. The Directors may, whenever they think fit, convene an extraordinary general meeting. An extraordinary general meeting, if requisitioned in accordance with the Company Act, shall be convened by the Directors or, if not convened by the Directors, may be convened by the requisitionists as provided in the Company Act.
WORRALL SCOTT AND PAGE 10
9.5. If the Company is or becomes a reporting company, advance notice of any general meeting at which Directors are to be elected shall be published in the manner required by the Company Act.
9.6. A notice convening a general meeting specifying the place, the day, and the hour of the meeting, and, in case of special business, the general nature of that business, shall be given as provided in the Company Act and in the manner hereinafter in these Articles mentioned, or in such other manner (if any) as may be prescribed by ordinary resolution, whether previous notice thereof has been given or not, to such persons as are entitled by law or under these Articles to receive such notice from the Company. Accidental omission to give notice of a meeting to, or the non-receipt of notice of a meeting, by any member shall not invalidate the proceedings at that meeting.
9.7. All the members of the Company entitled to attend and vote at a general meeting may, by unanimous consent in writing given before, during or after the meeting, or if they are present at the meeting by a unanimous vote, waive or reduce the period of notice of such meeting and an entry in the minute book of such waiver or reduction shall be sufficient evidence of the due convening of the meeting.
9.8. Except as otherwise provided by the Company Act, where any special business at a general meeting includes considering, approving, ratifying, adopting or authorizing any document or the execution thereof or the giving of effect thereto, the notice convening the meeting shall, with respect to such document, be sufficient if it states that a copy of the document or proposed document is or will be available for inspection by members at the registered office or records office of the Company or at some other place in British Columbia designated in the notice during usual business hours up to the date of such general meeting.
PART 10
PROCEEDINGS AT GENERAL MEETINGS
10.1. All business shall be deemed special business which is transacted at
(i) an extraordinary general meeting other than the conduct of and voting at, such meeting; and
(ii) an annual general meeting, with the exception of the conduct of, and voting at, such meeting, the consideration of the financial statement and of the respective reports of the Directors and Auditor, fixing or changing the number of directors, approval of a motion to elect two or more directors by a single resolution, the election of Directors, the appointment of the Auditor, the fixing of the remuneration of the Auditor and such other business as by these Articles of the Company Act may be transacted at a general meeting without prior notice thereof being given to the members or any business which is brought under consideration by the report of the Directors.
10.2. No business, other than election of the chairman or the adjournment of the meeting, shall be transacted at any general meeting unless a quorum of members, entitled to attend and vote, is present at the commencement of the meeting, but the quorum need not be present throughout the meeting.
10.3. Save as herein otherwise provided, a quorum shall be two members or proxyholders representing two members, or one member and a proxyholder representing another member. The Directors, the Secretary or, in his absence, an Assistant Secretary, and the solicitor of the Company shall be entitled to attend at any general meeting but no such person shall be counted in the quorum or be entitled to vote at any general meeting unless he shall be a member or proxyholder entitled to vote thereat.
10.4. If within half an hour from the time appointed for a general meeting a quorum is not present, the meeting, if convened upon the requisition of members, shall be dissolved. In any other case it shall stand adjourned to the same day in the next week, at the same time and place, and, if at the adjourned meeting a quorum is not present within half an hour from the time appointed for the meeting, the person or persons present and being, or representing by proxy, a member or members entitled to attend and vote at the meeting shall be a quorum.
WORRALL SCOTT AND PAGE 11
10.5. The Chairman of the Board, if any, or in his absence the President of the Company or in his absence a Vice-President of the Company, if any, shall be entitled to preside as chairman at every general meeting of the Company.
10.6. If at any general meeting neither the Chairman of the Board nor President nor a Vice-President is present within fifteen minutes after the time appointed for holding the meeting or is willing to act as chairman, the Directors present shall choose some one of their number to be chairman or if all the Directors present decline to take the chair or shall fail to so choose or if no Director be present, the members present shall choose some other person in attendance, who need not be a member, to be chairman.
10.7. The chairman may and shall, if so directed by the meeting, adjourn the meeting from time to time and from place to place, but no business shall be transacted at any adjourned meeting other than the business left unfinished at the meeting from which the adjournment took place. When a meeting is adjourned for thirty days or more, notice, but not advance notice, of the adjourned meeting shall be given as in the case of an original meeting. Save as aforesaid, it shall not be necessary to give any notice of an adjourned meeting or of the business to be transacted at an adjourned meeting.
10.8. No motion proposed at a general meeting need be seconded and the chairman may propose or second a motion.
10.9. Subject to the provisions of the Company Act, at any general meeting a resolution put to the vote of the meeting shall be decided on a show of hands, unless (before or on the declaration of the result of the show of hands) a poll is directed by the chairman or demanded by at least one member entitled to vote who is present in person or by proxy. The chairman shall declare to the meeting the decision on every question in accordance with the result of the show of hands or the poll, and such decision shall be entered in the book of proceedings of the Company. A declaration by the chairman that a resolution has been carried, or carried unanimously, or by a particular majority, or lost or not carried by a particular majority and an entry to that effect in the book of the proceedings of the Company shall be conclusive evidence of the fact, without proof of the number or proportion of the votes recorded in favour of, or against, that resolution.
10.10. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting at which the show of hands takes place or at which the poll is demanded shall be entitled to a casting vote in addition to the vote or votes to which he may be entitled as a member or proxyholder and this provision shall apply notwithstanding the Chairman is interested in the subject matter of the resolution.
10.11. No poll may be demanded on the election of a chairman. A poll demanded on a question of adjournment shall be taken forthwith. A poll demanded on any other question shall be taken as soon as, in the opinion of the chairman, is reasonably convenient, but in no event later than seven days after the meeting and at such time and place and in such manner as the chairman of the meeting directs. The result of the poll shall be deemed to be the resolution of and passed at the meeting upon which the poll was demanded. Any business other than that upon which the poll has been demanded may be proceeded with pending the taking of the poll. A demand for a poll may be withdrawn. In any dispute as to the admission or rejection of a vote the decision of the chairman made in good faith shall be final and conclusive.
10.12. Every ballot cast upon a poll and every proxy appointing a proxyholder who casts a ballot upon a poll shall be retained by the Secretary for such period and be subject to such inspection as the Company Act may provide.
10.13. On a poll a person entitled to cast more than one vote need not, if he votes, use all his votes or cast all the votes he uses in the same way.
10.14. Unless the Company Act, the Memorandum or these Articles otherwise provide, any action to be taken by a resolution of the members may be taken by an ordinary resolution.
WORRALL SCOTT AND PAGE 12
PART 11
VOTES OF MEMBERS
11.1. Subject to any special voting rights or restrictions attached to any class of shares and the restrictions on joint registered holders of shares, on a show of hands every member who is present in person and entitled to vote thereat shall have one vote and on a poll every member shall have one vote for each share of which he is the registered holder and may exercise such vote either in person or by proxy- holder.
11.2. Any person who is not registered as a member but is entitled to vote at any general meeting in respect of a share, may vote the share in the same manner as if he were a member; but, unless the Directors have previously admitted his right to vote at that meeting in respect of the share, he shall satisfy the Directors of his right to vote the share before the time for holding the meeting, or adjourned meeting, as the case may be, at which he proposes to vote.
11.3. Any corporation not being a subsidiary which is a member of the Company may by resolution of its directors or other governing body authorize such person as it thinks fit to act as its representative at any general meeting or class meeting. The person so authorized shall be entitled to exercise in respect of and at such meeting the same powers on behalf of the corporation which he represents as that corporation could exercise if it were an individual member of the Company personally present, including, without limitation, the right, unless restricted by such resolution, to appoint a proxyholder to represent such corporation, and shall be counted for the purpose of forming a quorum if present at the meeting. Evidence of the appointment of any such representative may be sent to the Company by written instrument, telegram, telex or any method of transmitting legibly recorded messages. Notwithstanding the foregoing, a corporation being a member may appoint a proxyholder.
11.4. In the case of joint registered holders of a share the vote of the senior who exercises a vote, whether in person or by proxyholder, shall be accepted to the exclusion of the votes of the other joint registered holders; and for this purpose seniority shall be determined by the order in which the names stand in the register of members. Several legal personal representatives of a deceased member whose shares are registered in his sole name shall for the purpose of this Article be deemed joint registered holders.
11.5. A member of unsound mind entitled to attend and vote, in respect of whom an order has been made by any court having jurisdiction, may vote, whether on a show of hands or on a poll, by his committee, curator bonis, or other person in the nature of a committee or curator bonis appointed by that court, and any such committee, curator bonis, or other person may appoint a proxyholder.
11.6. A member holding more than one share in respect of which he is entitled to vote shall be entitled to appoint one or more (but not more than five) proxyholders to attend, act and vote for him on the same occasion. If such member should appoint more than one proxyholder for the same occasion he shall specify the number of shares each proxyholder shall be entitled to vote. A member may also appoint one or more alternate proxyholders to act in the place and stead of an absent proxyholder.
11.7. A form of proxy shall be in writing under the hand of the appointor or of his attorney duly authorized in writing, or, if the appointor is a corporation, either under the seal of the corporation or under the hand of a duly authorized officer or attorney. A proxyholder need not be a member of the Company.
11.8. A form of proxy and the power of attorney or other authority, if any, under which it is signed or a notarially certified copy thereof shall be deposited at the registered office of the Company or at such other place as is specified for that purpose in the notice convening the meeting, not less than 48 hours (excluding Saturdays, Sundays and holidays) before the time for holding the meeting or such other time and place as is specified in the notice calling the meeting. In addition to any other method of depositing proxies provided for in these Articles, the Directors may from time to time by resolution make regulations relating to the depositing of proxies at any place or places and fixing the time or times for depositing the proxies not exceeding 48 hours (excluding Saturdays, Sundays and holidays) preceding the meeting or adjourned meeting specified in the notice calling a meeting of members and providing for particulars of
WORRALL SCOTT AND PAGE 13
such proxies to be sent to the Company or any agent of the Company in writing or by letter, telegram, telex or any method of transmitting legibly recorded messages so as to arrive before the commencement of the meeting or adjourned meeting at the office of the Company or of any agent of the Company appointed for the purpose of receiving such particulars and providing that proxies so deposited as required by this Part and votes given in accordance with such regulations shall be valid and shall be counted.
11.9. A vote given in accordance with the terms of a proxy is valid notwithstanding the previous death or incapacity of the member giving the proxy or the revocation of the proxy or of the authority under which the form of proxy was executed or the transfer of the share in respect of which the proxy is given, provided that no notification in writing of such death, incapacity, revocation or transfer shall have been received at the registered office of the Company or by the chairman of the meeting or adjourned meeting for which the proxy was given before the vote is taken.
11.10. Every proxy may be revoked by an instrument in writing
(i) executed by the member giving the same or by his attorney authorized in writing or, where the member is a corporation, by a duly authorized officer or attorney of the corporation; and
(ii) delivered either at the registered office of the Company at any time up to and including the last business day preceding the day of the meeting, or any adjournment thereof at which the proxy is to be used, or to the chairman of the meeting on the day of the meeting or any adjournment thereof before any vote in respect of which the proxy is to be used shall have been taken.
or in any other manner provided by law.
PART 12
DIRECTORS
12.1. The subscribers to the Memorandum of the Company are the first Directors. The Directors to succeed the first Directors may be appointed in writing by a majority of the subscribers to the Memorandum or at a meeting of the subscribers, or if not so appointed, they shall be elected by the members entitled to vote on the election of Directors and the number of Directors shall be the same as the number of Directors so appointed or elected. The number of directors, excluding additional Directors, may be fixed or changed from time to time by ordinary resolution, whether previous notice thereof has been given or not, but notwithstanding anything contained in these Articles the number of Directors shall never be less than one or, if the Company is or becomes a reporting company, less than three.
12.2. The remuneration of the Directors as such may from time to time be determined by the Directors or, if the Directors shall so decide, by the members. Such remuneration may be in addition to any salary or other remuneration paid to any officer or employee of the Company as such who is also a Director. The Directors shall be repaid such reasonable travelling, hotel and other expenses as they incur in and about the business of the Company and if any Director shall perform any professional or other services for the Company that in the opinion of the Directors are outside the ordinary duties of a Director or shall otherwise be specially occupied in or about the Company's business, he may be paid a remuneration to be fixed by the Board, or, at the option of such Director, by the Company in general meeting, and such remuneration may be either in addition to, or in substitution for any other remuneration that he may be entitled to receive. The Directors on behalf of the Company, unless otherwise determined by ordinary resolution, may pay a gratuity or pension or allowance on retirement to any Director who has held any salaried office or place of profit with the Company or to his spouse or dependants and may make contributions to any fund and pay premiums for the purchase or provision of any such gratuity, pension or allowance.
12.3. A Director shall not be required to hold a share in the capital of the Company as qualification for his office but shall be qualified as required by the Company Act, to become or act as a Director.
WORRALL SCOTT AND PAGE 14
PART 13
ELECTION AND REMOVAL OF DIRECTORS
13.1. At each annual general meeting of the Company all the Directors shall retire and the members shall elect a Board of Directors consisting of the number of Directors for the time being fixed pursuant to these Articles. If the Company is, or becomes, a company that is not a reporting company and the business to be transacted at any annual general meeting is consented to in writing by all the members who are entitled to attend and vote thereat such annual general meeting shall be deemed for the purpose of this Part to have been held on such written consent becoming effective.
13.2. A retiring Director shall be eligible for re-election.
13.3. Where the Company fails to hold an annual general meeting in accordance with the Company Act, the Directors then in office shall be deemed to have been elected or appointed as Directors on the last day on which the annual general meeting could have been held pursuant to these Articles and they may hold office until other Directors are appointed or elected or until the day on which the next annual general meeting is held.
13.4. If at any general meeting at which there should be an election of Directors, the places of any of the retiring Directors are not filled by such election, such of the retiring Directors who are not re-elected as may be requested by the newly-elected Directors shall, if willing to do so, continue in office to complete the number of Directors for the time being fixed pursuant to these Articles until further new Directors are elected at a general meeting convened for the purpose. If any such election or continuance of Directors does not result in the election or continuance of the number of Directors for the time being fixed pursuant to these Articles such number shall be fixed at the number of Directors actually elected or continued in office.
13.5. Any casual vacancy occurring in the Board of Directors may be filled by the remaining Directors or Director.
13.6. Between successive annual general meetings the Directors shall have power to appoint one or more additional Directors but not more than one-third of the number of Directors fixed pursuant to these Articles and in effect at the last general meeting at which Directors were elected. Any Director so appointed shall hold office only until the next following annual general meeting of the Company, but shall be eligible for election at such meeting and so long as he is an additional Director the number of Directors shall be increased accordingly.
13.7. Any Director may by instrument in writing delivered to the Company appoint any person to be his alternate to act in his place at meetings of the Directors at which he is not present unless the Directors shall have reasonably disapproved the appointment of such person as an alternate Director and shall have given notice to that effect to the Director appointing the alternate Director within a reasonable time after delivery of such instrument to the Company. Every such alternate shall be entitled to notice of meetings of the Directors and to attend and vote as a Director at a meeting at which the person appointing him is not personally present, and, if he is a Director, to have a separate vote on behalf of the Director he is representing in addition to his own vote. A Director may at any time by instrument, telegram, telex or any method of transmitting legibly recorded messages delivered to the Company revoke the appointment of an alternate appointed by him. The remuneration payable to such an alternate shall be payable out of the remuneration of the Director appointing him.
13.8. The office of Director shall be vacated if the Director:
(i) resigns his office by notice in writing delivered to the registered office of the Company; or
(ii) is convicted of an indictable offence and the other Directors shall have resolved to remove him; or
(iii) ceases to be qualified to act as a Director pursuant to the Company Act.
WORRALL SCOTT AND PAGE 15
13.9. The Company may by special resolution remove any Director before the expiration of his period of office, and may by an ordinary resolution appoint another person in his stead.
PART 14
POWERS AND DUTIES OF DIRECTORS
14.1. The Directors shall manage, or supervise the management of, the affairs and business of the Company and shall have the authority to exercise all such powers of the Company as are not, by the Company Act or by the Memorandum or these Articles, required to be exercised by the Company in general meeting.
14.2. The Directors may from time to time by power of attorney or other instrument under the seal, appoint any person to be the attorney of the Company for such purposes, and with such powers, authorities and discretions (not exceeding those vested in or exercisable by the Directors under these Articles and excepting the powers of the Directors relating to the constitution of the Board and of any of its committees and the appointment or removal of officers and the power to declare dividends) and for such period, with such remuneration and subject to such conditions as the Directors may think fit, and any such appointment may be made in favour of any of the Directors or any of the members of the Company or in favour of any corporation, or of any of the members, directors, nominees or managers of any corporation, firm or joint venture and any such power of attorney may contain such provisions for the protection or convenience of persons dealing with such attorney as the Directors think fit. Any such attorney may be authorized by the Directors to sub-delegate all or any of the powers, authorities and discretions for the time being vested in him.
PART 15
DISCLOSURE OF INTEREST OF DIRECTORS
15.1. A Director who is, in any way, directly or indirectly interested in an existing or proposed contract or transaction with the Company or who holds any office or possesses any property whereby, directly or indirectly, a duty or interest might be created to conflict with his duty or interest as a Director shall declare the nature and extent of his interest in such contract or transaction or of the conflict or potential conflict with his duty and interest as a Director, as the case may be, in accordance with the provisions of the Company Act.
15.2. A Director shall not vote in respect of any such contract or transaction with the Company in which he is interested and if he shall do so his vote shall not be counted, but he shall be counted in the quorum present at the meeting at which such vote is taken. Subject to the provisions of the Company Act, the foregoing prohibitions shall not apply to
(i) any such contract or transaction relating to a loan to the Company, which a Director or a specified corporation or a specified firm in which he has an interest has guaranteed or joined in guaranteeing the repayment of the loan or any part of the loan;
(ii) any contract or transaction made or to be made with, or for the benefit of a holding corporation or a subsidiary corporation of which a Director is a director;
(iii) any contract by a Director to subscribe for or underwrite shares or debentures to be issued by the Company or a subsidiary of the Company, or any contract, arrangement or transaction in which a Director is, directly or indirectly, interested if all the other Directors are also, directly or indirectly interested in the contract, arrangement or transaction;
(iv) determining the remuneration of the Directors;
WORRALL SCOTT AND PAGE 16
(v) purchasing and maintaining insurance to cover Directors against
liability incurred by them as Directors; or
(vi) the indemnification of any Director by the Company.
|
These exceptions may from time to time be suspended or amended to any extent approved by the Company in general meeting and permitted by the Company Act, either generally or in respect of any particular contract or transaction or for any particular period.
15.3. A Director may hold any office or place of profit with the Company (other than the office of auditor of the Company) in conjunction with his office of Director for such period and on such terms (as to remuneration or otherwise) as the Directors may determine and no Director or intended Director shall be disqualified by his office from contracting with the Company either with regard to this tenure of any such other office or place of profit or as vendor, purchaser or otherwise, and, subject to compliance with the provisions of the Company Act, no contract or transaction entered into by or on behalf of the Company in which a Director is in any way interested shall be liable to be voided by reason thereof.
15.4. Subject to compliance with the provisions of the Company Act, a Director or his firm may act in a professional capacity for the Company (except as auditor of the Company) and he or his firm shall be entitled to remuneration for professional services as if he were not a Director.
15.5. A Director may be or become a director or other officer or employee of, or otherwise interested in, any corporation or firm in which the Company may be interested as a shareholder or otherwise, and, subject to compliance with the provisions of the Company Act, such Director shall not be accountable to the Company for any remuneration or other benefits received by him as director, officer or employee of, or from his interest in, such other corporation or firm, unless the Company in general meeting otherwise directs.
PART 16
PROCEEDINGS OF DIRECTORS
16.1. The Chairman of the Board, if any, or in his absence, the President shall preside as chairman at every meeting of the Directors, or if there is no Chairman of the Board or neither the Chairman of the Board nor the President is present within fifteen minutes of the time appointed for holding the meeting or is willing to act as chairman, or, if the Chairman of the Board, if any, and the President have advised the Secretary that they will not be present at the meeting, the Directors present shall choose one of their number to be chairman of the meeting.
16.2. The Directors may meet together for the dispatch of business, adjourn and otherwise regulate their meetings, as they think fit. Questions arising at any meeting shall be decided by a majority of votes. In case of an equality of votes the chairman shall not have a second or casting vote. Meetings of the Board held at regular intervals may be held at such place, at such time and upon such notice (if any) as the Board may by resolution from time to time determine.
16.3. A Director may participate in a meeting of the Board or of any committee of the Directors by means of conference telephones or other communications facilities by means of which all Directors participating in the meeting can hear each other and provided that all such Directors agree to such participation. A Director participating in a meeting in accordance with this Article shall be deemed to be present at the meeting and to have so agreed and shall be counted in the quorum therefor and be entitled to speak and vote thereat.
16.4. A Director may, and the Secretary or an Assistant Secretary upon request of a Director shall, call a meeting of the Board at any time. Reasonable notice of such meeting specifying the place, day and hour of such meeting shall be given by mail, postage prepaid, addressed to each of the Directors and alternate Directors at his address as it appears on the books of the Company or by leaving it at his usual business or residential address or by telephone, telegram, telex, or any method of transmitting legibly
WORRALL SCOTT AND PAGE 17
recorded messages. It shall not be necessary to give notice of a meeting of Directors to any Director or alternate Director (i) who is at the time not in the Province of British Columbia or (ii) if such meeting is to be held immediately following a general meeting at which such Director shall have been elected or is the meeting of Directors at which such Director is appointed.
16.5. Any Director of the Company may file with the Secretary a document executed by him waiving notice of any past, present or future meeting or meetings of the Directors being, or required to have been, sent to him and may at any time withdraw such waiver with respect to meetings held thereafter. After filing such waiver with respect to future meetings and until such waiver is withdrawn no notice need be given to such Director and, unless the Director otherwise requires in writing to the Secretary, to his alternate Director of any meeting of Directors and all meetings of the Directors so held shall be deemed not to be improperly called or constituted by reason of notice not having been given to such Director or alternate Director.
16.6. The quorum necessary for the transaction of the business of the Directors may be fixed by the Directors and if not so fixed shall be a majority of the Directors or, if the number of Directors is fixed at one, shall be one Director.
16.7. The continuing Directors may act notwithstanding any vacancy in their body, but, if and so long as their number is reduced below the number fixed pursuant to these Articles as the necessary quorum of Directors, the continuing Directors may act for the purpose of increasing the number of Directors to that number, or of summoning a general meeting of the Company, but for no other purpose.
16.8. Subject to the provisions of the Company Act, all acts done by any meeting of the Directors or of a committee of Directors, or by any person acting as a Director, shall, notwithstanding that it be afterwards discovered that there was some defect in the qualification, election or appointment of any such Directors or of the members of such committee or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly elected or appointed and was qualified to be a Director.
16.9. A resolution consented to in writing, whether by document, telegram, telex or any method of transmitting legibly recorded messages or other means, by all of the Directors or their alternates shall be as valid and effectual as if it had been passed at a meeting of the Directors duly called and held. Such resolution may be in two or more counterparts which together shall be deemed to constitute one resolution in writing. Such resolution shall be filed with the minutes of the proceedings of the Directors and shall be effective on the date stated thereon or on the latest date stated on any counterpart.
PART 17
EXECUTIVE AND OTHER COMMITTEES
17.1. The Directors may by resolution appoint an Executive Committee to consist of such member or members of their body as they think fit, which Committee shall have, and may exercise during the intervals between the meetings of the Board, all the powers vested in the Board except the power to fill vacancies in the Board, the power to change the membership of, or fill vacancies in, said Committee or any other committee of the Board and such other powers, if any, as may be specified in the resolution. The said Committee shall keep regular minutes of its transactions and shall cause them to be recorded in books kept for that purpose, and shall report the same to the Board of Directors at such times as the Board of Directors may from time to time require. The Board shall have the power at any time to revoke or override the authority given to or acts done by the Executive Committee except as to acts done before such revocation or overriding and to terminate the appointment or change the membership of such Committee and to fill vacancies in it. The Executive Committee may make rules for the conduct of its business and may appoint such assistants as it may deem necessary. A majority of the members of said Committee shall constitute a quorum thereof.
WORRALL SCOTT AND PAGE 18
17.2. The Directors may by resolution appoint one or more committees consisting of such member or members of their body as they think fit and may delegate to any such committee between meetings of the Board such powers of the Board (except the power to fill vacancies in the Board and the power to change the membership of or fill vacancies in any committee of the Board and the power to appoint or remove officers appointed by the Board) subject to such conditions as may be prescribed in such resolution, and all committees so appointed shall keep regular minutes of their transactions and shall cause them to be recorded in books kept for that purpose, and shall report the same to the Board of Directors at such times as the Board of Directors may from time to time require. The Directors shall also have power at any time to revoke or override any authority given to or acts to be done by any such committees except as to acts done before such revocation or overriding and to terminate the appointment or change the membership of a committee and to fill vacancies in it. Committees may make rules for the conduct of their business and may appoint such assistants as they may deem necessary. A majority of the members of a committee shall constitute a quorum thereof.
17.3. The Executive Committee and any other committee may meet and adjourn as it thinks proper. Questions arising at any meeting shall be determined by a majority of votes of the members of the committee present, and in case of an equality of votes the chairman shall not have a second or casting vote. A resolution approved in writing by all the members of the Executive Committee or any other committee shall be as valid and effective as if it had been passed at a meeting of such Committee duly called and constituted. Such resolution may be in two or more counterparts which together shall be deemed to constitute one resolution in writing. Such resolution shall be filed with the minutes of the proceedings of the committee and shall be effective on the date stated thereon or on the latest date stated in any counterpart.
PART 18
OFFICERS
18.1. The Directors shall, from time to time, appoint a President and a Secretary and such other officers, if any, as the Directors shall determine and the Directors may, at any time, terminate any such appointment. No officer shall be appointed unless he is qualified in accordance with the provisions of the Company Act.
18.2. One person may hold more than one of such offices except that the offices of President and Secretary must be held by different persons unless the Company has only one member. Any person appointed as the Chairman of the Board, the President or the Managing Director shall be a Director. The other officers need not be Directors. The remuneration of the officers of the Company as such and their terms and conditions of their tenure of office or employment shall from time to time be determined by the Directors; such remuneration may be by way of salary, fees, wages, commission or participation in profits or any other means or all of these modes and an officer may in addition to such remuneration be entitled to receive after he ceases to hold such office or leaves the employment of the Company a pension or gratuity. The Directors may decide what functions and duties each officer shall perform and may entrust to and confer upon him any of the powers exercisable by them upon such terms and conditions and with such restrictions as they think fit and may from time to time revoke, withdraw, alter or vary all or any of such functions, duties and powers. The Secretary shall, inter alia, perform the functions of the Secretary specified in the Company Act.
18.3. Every officer of the Company who holds any office or possesses any property whereby, whether directly or indirectly, duties or interests might be created in conflict with his duties or interests as an officer of the Company shall, in writing, disclose to the President the fact and the nature, character and extent of the conflict.
WORRALL SCOTT AND PAGE 19
PART 19
INDEMNITY AND PROTECTION OF DIRECTORS, OFFICERS AND EMPLOYEES
19.1. Subject to the provisions of the Company Act, the Directors shall cause the Company to indemnify a Director or former Director of the Company and the Directors may cause the Company to indemnify a director or former director of a corporation of which the Company is or was a shareholder and the heirs and personal representatives of any such person against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him or them including an amount paid to settle an action or satisfy a judgment in a civil, criminal or administrative action or proceeding to which he is or they are made a party by reason of his being or having been a Director of the Company or a director of such corporation, including any action brought by the Company or any such corporation. Each Director of the Company on being elected or appointed shall be deemed to have contracted with the Company on the terms of the foregoing indemnity.
19.2. Subject to the provisions of the Company Act, the Directors may cause the Company to indemnify any officer, employee or agent of the Company or of a corporation of which the Company is or was a shareholder (notwithstanding that he is also a Director) and his heirs and personal representatives against all costs, charges and expenses whatsoever incurred by him or them and resulting from his acting as an officer, employee or agent of the Company or such corporation. In addition, the Company shall indemnify the Secretary or an Assistant Secretary of the Company (if he shall not be a full time employee of the Company and notwithstanding that he is also a Director) and his respective heirs and legal representatives against all costs, charges and expenses whatsoever incurred by him or them and arising out of the functions assigned to the Secretary by the Company Act or these Articles and each such Secretary and Assistant Secretary shall on being appointed be deemed to have contracted with the Company on the terms of the foregoing indemnity.
19.3. The failure of a Director or officer of the Company to comply with the provisions of the Company Act or of the Memorandum or these Articles shall not invalidate any indemnity to which he is entitled under this Part.
19.4. The Directors may cause the Company to purchase and maintain insurance for the benefit of any person who is or was serving as a Director, officer, employee or agent of the Company or as a director, officer, employee or agent or any corporation of which the Company is or was a shareholder and his heirs or personal representatives against any liability incurred by him as such Director, director, officer, employee or agent.
PART 20
DIVIDENDS AND RESERVE
20.1. The Directors may from time to time declare and authorize payment of such dividends, if any, as they may deem advisable and need not give notice of such declaration to any member. No dividend shall be paid otherwise than out of funds and/or assets properly available for the payment of dividends and a declaration by the Directors as to the amount of such funds or assets available for dividends shall be conclusive. The Company may pay any such dividend wholly or in part by the distribution of specific assets and in particular by paid up shares, bonds, debentures or other securities of the Company or any other corporation or in any one or more such ways as may be authorized by the Company or the Directors and where any difficulty arises with regard to such a distribution the Directors may settle the same as they think expedient, and in particular may fix the value for distribution of such specific assets or any part thereof, and may determine that cash payments in substitution for all or any part of the specific assets to which any members are entitled shall be made to any members on the basis of the
WORRALL SCOTT AND PAGE 20
value so fixed in order to adjust the rights of all parties and may vest any such specific assets in trustees for the persons entitled to the dividend as may seem expedient to the Directors.
20.2. Any dividend declared on shares of any class by the Directors may be made payable on such date as is fixed by the Directors.
20.3. Subject to the rights of members (if any) holding shares with special rights as to dividends, all dividends on shares of any class shall be declared and paid according to the number of such shares held.
20.4. The Directors may, before declaring any dividend, set aside out of the funds properly available for the payment of dividends such sums as they think proper as a reserve or reserves, which shall, at the discretion of the Directors, be applicable for meeting contingencies, or for equalizing dividends, or for any other purpose to which such funds of the Company may be properly applied, and pending such application may, at the like discretion, either be employed in the business of the Company or be invested in such investments as the Directors may from time to time think fit. The Directors may also, without placing the same in reserve, carry forward such funds, which they think prudent not to divide.
20.5. If several persons are registered as joint holders of any share, any one of them may give an effective receipt for any dividend, bonuses or other moneys payable in respect of the share.
20.6. No dividend shall bear interest against the Company. Where the dividend to which a member is entitled includes a fraction of a cent, such fraction shall be disregarded in making payment thereof and such payment shall be deemed to be payment in full.
20.7. Any dividend, bonuses or other moneys payable in cash in respect of shares may be paid by cheque or warrant sent through the post directed to the registered address of the holder, or in the case of joint holders, to the registered address of that one of the joint holders who is first named on the register, or to such person and to such address as the holder or joint holders may direct in writing. Every such cheque or warrant shall be made payable to the order of the person to whom it is sent. The mailing of such cheque or warrant shall, to the extent of the sum represented thereby (plus the amount of any tax required by law to be deducted) discharge all liability for the dividend, unless such cheque or warrant shall not be paid on presentation or the amount of tax so deducted shall not be paid to the appropriate taxing authority.
20.8. Notwithstanding anything contained in these Articles the Directors may from time to time capitalize any undistributed surplus on hand of the Company and may from time to time issue as fully paid and non-assessable any unissued shares, or any bonds, debentures or debt obligations of the Company as a dividend representing such undistributed surplus on hand or any part thereof.
PART 21
DOCUMENTS, RECORDS AND REPORTS
21.1. The Company shall keep at its records office or at such other place as the Company Act may permit, the documents, copies, registers, minutes, and records which the Company is required by the Company Act to keep at its records office or such other place, as the case may be.
21.2. The Company shall cause to be kept proper books of account and accounting records in respect of all financial and other transactions of the Company in order properly to record the financial affairs and condition of the Company and to comply with the Company Act.
21.3. Unless the Directors determine otherwise, or unless otherwise determined by an ordinary resolution, no member of the Company shall be entitled to inspect the accounting records of the Company.
21.4. The Directors shall from time to time at the expense of the Company cause to be prepared and laid before the Company in general meeting such financial statements and reports as are required by the Company Act.
WORRALL SCOTT AND PAGE 21
21.5. Every member shall be entitled to be furnished once gratis on demand with a copy of the latest annual financial statement of the Company and, if so required by the Company Act, a copy of each such annual financial statement and interim financial statement shall be mailed to each member.
PART 22
NOTICES
22.1. A notice, statement or report may be given or delivered by the Company to any member either by delivery to him personally or by sending it by mail to him to his address as recorded in the register of members. Where a notice, statement or report is sent by mail, service or delivery of the notice, statement or report shall be deemed to be effected by properly addressing, prepaying and mailing the notice, statement or report and to have been given on the day, Saturdays, Sundays and holidays excepted, following the date of mailing. A certificate signed by the Secretary or other officer of the Company or of any other corporation acting in that behalf for the Company that the letter, envelope or wrapper containing the notice, statement or report was so addressed, prepaid and mailed shall be conclusive evidence thereof.
22.2. A notice, statement or report may be given or delivered by the Company to the joint holders of a share by giving the notice to the joint holder first named in the register of members in respect of the share.
22.3. A notice, statement or report may be given or delivered by the Company to the persons entitled to a share in consequence of the death, bankruptcy or incapacity of a member by sending it through the mail prepaid addressed to them by name or by the title of representatives of the deceased or incapacitated person or trustee of the bankrupt, or by any like description, at the address (if any) supplied to the Company for the purpose by the persons claiming to be so entitled, or (until such address has been so supplied) by giving the notice in manner in which the same might have been given if the death, bankruptcy or incapacity had not occurred.
22.4. Notice of every general meeting or meeting of members holding a class of shares shall be given in a manner hereinbefore authorized to every member holding at the time of the issue of the notice or the date fixed for determining the members entitled to such notice, whichever is the earlier, shares which confer the right to notice of and to attend and vote at any such meeting. No other person except the auditor of the Company and the Directors of the Company shall be entitled to receive notices of any such meeting.
PART 23
RECORD DATES
23.1. The Directors may fix in advance a date, which shall not be more than the maximum number of days permitted by the Company Act preceding the date of any meeting of members or any class thereof or of the payment of any dividend or of the proposed taking of any other proper action requiring the determination of members as the record date for the determination of the members entitled to notice of, or to attend and vote at, any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend or for any other proper purpose and, in such case, notwithstanding anything elsewhere contained in these Articles, only members of record on the date so fixed shall be deemed to be members for the purposes aforesaid.
23.2. Where no record date is so fixed for the determination of members as provided in the preceding Article the date on which the notice is mailed or on which the resolution declaring the dividend is adopted, as the case may be, shall be the record date for such determination.
WORRALL SCOTT AND PAGE 22
PART 24
SEAL
24.1. The Directors may provide a seal for the Company and, if they do so, shall provide for the safe custody of the seal which shall not be affixed to any instrument except in the presence of the following persons, namely,
(i) any two Directors, or
(ii) one of the Chairman of the Board, the President, the Managing Director, a Director and a Vice-President together with one of the Secretary, the Treasurer, the Secretary-Treasurer, an Assistant Secretary, an Assistant Treasurer and an Assistant Secretary- Treasurer, or
(iii) if the Company shall have only one member, the President or the Secretary, or
(iv) such person or persons as the Directors may from time to time by resolution appoint
and the said Directors, officers, person or persons in whose presence the seal is so affixed to an instrument shall sign such instrument. For the purpose of certifying under seal true copies of any document or resolution the seal may be affixed in the presence of any one of the foregoing persons.
24.2. To enable the seal of the Company to be affixed to any bonds, debentures, share certificates, or other securities of the Company, whether in definitive or interim form, on which facsimiles of any of the signatures of the Directors or officers of the Company are, in accordance with the Company Act and/or these Articles, printed or otherwise mechanically reproduced there may be delivered to the firm or company employed to engrave, lithograph or print such definitive or interim bonds, debentures, share certificates or other securities one or more unmounted dies reproducing the Company's seal and the Chairman of the Board, the President, the Managing Director or a Vice-President and the Secretary, Treasurer, Secretary-Treasurer, an Assistant Secretary, an Assistant Treasurer or an Assistant Secretary-Treasurer may by a document authorize such firm or company to cause the Company's seal to be affixed to such definitive or interim bonds, debentures, share certificates or other securities by the use of such dies. Bonds, debentures, share certificates or other securities to which the Company's seal has been so affixed shall for all purposes be deemed to be under and to bear the Company's seal lawfully affixed thereto.
24.3. The Company may have for use in any other province, state, territory or country an official seal which shall have on its face the name of the province, state, territory or country where it is to be used and all of the powers conferred by the Company Act with respect thereto may be exercised by the Directors or by a duly authorized agent of the Company.
PART 25
MECHANICAL REPRODUCTIONS OF SIGNATURES
25.1. The signature of any officer, Director, registrar, branch registrar, transfer agent or branch transfer agent of the Company, unless otherwise required by the Company Act or by these Articles, may, if authorized by the Directors, be printed, lithographed, engraved or otherwise mechanically reproduced upon all instruments executed or issued by the Company or any officer thereof; and any instrument on which the signature of any such person is so reproduced shall be deemed to have been manually signed by such person whose signature is so reproduced and shall be as valid to all intents and purposes as if such instrument had been signed manually, and notwithstanding that the person whose signature is so reproduced may have ceased to hold the office that he is stated on such instrument to hold at the date of the delivery or issue of such instrument.
25.2. The term "instrument" as used in Article 25.1. shall include deeds, mortgages, hypothecs, charges, conveyances, transfers and assignments of property, real or personal, agreements, releases, receipts and discharges for the payment of money or other obligations, shares and share warrants of the Company, bonds, debentures and other debt obligations of the Company, and all paper writings.
WORRALL SCOTT AND PAGE 23
PART 26
PROHIBITIONS
26.1. If the Company is, or becomes, a company which is not a reporting company, (i) the number of members for the time being of the Company, exclusive of persons who are for the time being in the employment of the Company and continue to be members after the termination of such employment, shall not exceed 50, and (ii) no securities issued by the Company shall be offered for sale to the public nor shall the public be invited to subscribe therefore.
26.2 If the Company is, or becomes a company which is not a reporting company, or a reporting company but does not have any of its securities listed for trading on any stock exchange wheresoever situate, or a reporting company and has not with respect to any of its securities filed a prospectus with the Superintendent of Brokers or any similar securities regulatory body and obtained a receipt therefore, then no shares shall be transferred without the previous consent of the Directors expressed by a resolution of the Board and the Directors shall not be required to give any reason for refusing to any such proposed transfer.
PART 27
PREFERENCE SHARES
27.1 The Preference Shares without par value may be issued from time to time in one (1) or more series and shall as a class have attached thereto the following preferences, rights, conditions, restrictions, limitations and prohibitions;
(i) Each series of Preference Shares shall consist of such number of Preference Shares as may, before the issue thereof, be determined by the Directors of the Company.
(ii) The Directors may, by resolution ("Directors' Resolution") duly passed before the issuance of Preference Shares of any series alter the Memorandum to fix the number of Preference Shares in, and determine the designation of the Preference Shares of, each series and alter the Memorandum or Articles to create, define and attach special rights or restrictions to the Preference Shares of each series, subject to the special rights or restrictions attached to all Preference Shares and subject to the provisions of the Company Act.
(iii) The Preference Shares of any series may have attached thereto such
special rights or restrictions as may be determined by Directors'
Resolution with respect to each series including (as examples only),
without in any way limiting the generality of the foregoing, special
rights or restrictions concerning (i) the rate or amount of
dividends, whether cumulative or non-cumulative, the currency or
currencies of payment, the date or dates and place or places of
payment and the date or dates from which such dividends are to
accrue, (ii) the right to receive notice of or to attend or to vote
at any meeting of members of the Company, (iii) the right to convert
or exchange Preference Shares into Common Shares or other shares,
bonds, debentures, securities, or otherwise, (iv) the right of the
Company to redeem or to purchase Preference Shares, (v) obligations
with respect to sinking funds or funds for purchase or redemption of
Preference Shares, rights of retraction or share purchase plans,
(vi) restrictions upon the
WORRALL SCOTT AND PAGE 24
payment of dividends on, or retirement of, any other shares of the Company or of any subsidiary of the Company, (vii) restrictions upon the redemption or purchase of any other shares of the Company or of any subsidiary of the Company, (viii) the exercise by the Company of any election open to it to make any payments of corporation, income or other taxes, (ix) the subdivision, consolidation or reclassification of any shares of the Company, (x) restrictions upon borrowing by the Company or by any subsidiary of the Company or the issue by the Company of any Preference Shares in addition to the Preference Shares of any series at any time outstanding, (xi) restrictions upon the reduction of capital by the Company or by any subsidiary of the Company, (xii) restrictions upon the retirement of notes, bonds or debentures or other indebtedness of the Company or of any subsidiary of the Company, (xiii) limitations or restrictions upon or regulations concerning the conduct of the business of the Company or the investment of its funds, (xiv) the holding of meetings of the holders of the Preference Shares of any series, (xv) restrictions upon the creation or issuance of any other shares or securities of the Company, and (xvi) the right of holders of the Preference Shares to convert or exchange the shares of any class of the Company into or for any other securities of the Company or into or for shares or securities of any other company.
(iv) The holders of the Preference Shares shall not as such be entitled to vote at any meetings of shareholders of the Company but shall be entitled to notice of meetings of shareholders called for the purpose of authorizing the dissolution of the Company or the sale of its undertaking or a substantial part thereof or the creation of any class or classes of shares ranking in priority to the Preference Shares.
(v) (a) In the event of any distribution of assets or property of the Company among its shareholders, as such, other than by way of dividend or by way of redemption or purchase from cancellation of Preference Shares of the Company whenever created, but including, without limitation, any distribution of assets or property of the Company resulting from any repayment of capital to shareholders upon a decrease in issued capital of the Company (except as aforesaid) or upon the winding up or other liquidation or dissolution of the Company or rateably among its shareholders as a condition precedent to the liquidation or dissolution, no assets or property of the Company shall be distributed to the holders of the Company ranking junior to the Preference Shares until there has been paid to the holders of the Preference Shares an amount equal to the redemption price of such Preference Shares plus a sum equal to all unpaid dividends accrued thereon to the date of distribution (which for such purpose shall be calculated as if the dividends on the Preference Shares were accruing for the period from the expiration of the last quarterly dividend period for which dividends have been paid in full up to such date of distribution): for all purposes of these provisions the redemption price of the Preference Shares shall mean the amount paid up thereon plus the premium, if any, payable on redemption of Preference Shares, and shares of the Company ranking junior to the Preference Shares shall mean all shares of any class of shares (including Common Shares of the Company) ranking junior to the Preference Shares as to dividends and distribution of assets and property of the Company;
WORRALL SCOTT AND PAGE 25
(b) If upon any distribution of the assets and property of the
Company among its shareholders, as such, the assets and
property of the Company are insufficient to permit payment in
full to the holders of Preference Shares of the sum
distributable to them as aforesaid then the entire assets and
property of the Company shall be distributed rateably among
the holders of the Preference Shares then outstanding
according to their respective rights; and
(c) After payment in full to the holders of Preference Shares of
the sums distributable to them as aforesaid they shall not
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have the right to receive anything further in the distribution of assets and property of the Company and the remaining assets and property of the Company shall be distributed to the holders of shares of the Company ranking junior to the Preference Shares according to their respective rights.
(vi) No dividends shall at any time be declared or paid on or set apart for any shares of the Company ranking junior to the Preference Shares (including, without limitation, the Common Shares) nor shall the Company redeem or purchase for cancellation any Preference Shares less than the total number of Preference Shares then outstanding or any shares of the Company ranking junior to the Preference Shares unless all accrued dividends on the Preference Shares then outstanding have been declared and paid or provided for, to and including the last dividend payable on the Preference Shares immediately prior to the date of Declaration or payment or setting apart for payment of dividends or redemption or purchase for cancellation, as the case may be.
(vii) Subject to the provisions hereof and, in particular, the provisions of clause (vi) hereof, the Company may at any time or from time to time, purchase Preference Shares for cancellation:
(a) on the open market;
(b) with the consent of the holders of the Preference Shares; or
(c) pursuant to tenders received by the Company upon request for tenders addressed to all of the holders of the Preference Shares, the whole or any part of the Preference Shares at the lowest price which, in the opinion of the Directors, such shares are obtainable. If any such purchase for cancellation is made by tender the Company shall afford to every holder of Preference Shares the opportunity of tendering such shares for purchase for cancellation as aforesaid; the Company shall accept only the lowest tenders; if two or more shareholders submit tenders at the same price which the Company is prepared to accept, but which in number are in excess of the number of shares which the Company is prepared to purchase for cancellation, then the shares to be purchased shall be selected by the Company on a pro rata basis (disregarding fractions) according to the number of shares offered in such tender.
WORRALL SCOTT AND PAGE 26
(viii)(a) Any amendment to the Articles of the Company to delete or vary any preference, right, condition, restriction, limitation or prohibition attaching to the Preference Shares or to create any special shares ranking in priority to or on a parity with the Preference Shares, in addition to the authorization by a Special Resolution, shall be authorized by at least three-quarters (3/4) of the votes cast at a meeting of the holders of Preference Shares duly called for that purpose.
(b) The formalities to be observed in respect of the giving of notice of any meeting of the holders of Preference Shares (including any meeting of the holders of any series of Preference Shares) and the conduct of any such meeting shall be those from time to time prescribed in the Articles of the Company in respect of meetings of shareholders, and upon every poll taken at any such meeting (or adjourned meeting) each holder of Preference Shares (or any series of Preference Shares, as the case may be) shall be entitled to one (1) vote in respect of each Preference Share held by him; provided that:
1. No such meeting shall be held upon less than twenty-one
(21) days' written notice thereof.
2. If at any such meeting the holders of less than fifty percent (50%) of the outstanding Preference Shares, as the case may be, are present or represented by proxy within half an hour after the time fixed for such meeting, then the meeting shall be adjourned to such date (being not more than twenty-one (21) days later) and to such time and place as may be fixed and announced by the Chairman of the meeting and at least ten (10) days' written notice shall be given to such adjourned meeting (which notice may but need not specify the purpose for which the meeting was originally called); at such adjourned meeting the holders of the Preference Shares (or series of Preference Shares, as the case may be) present or represented by proxy may transact the business for which the meeting was originally called.
(ix) The Common Shares shall be subject to the foregoing preferences, rights, conditions, restrictions, limitations and prohibitions attaching to the Preference Shares and shall be subject to such further and additional preferences, rights, conditions, restrictions, limitations and prohibitions, as may be determined by the Directors of the Company for each series of Preference Shares prior to the issue thereof.
WORRALL SCOTT AND PAGE 27
Full Name(s), Resident Address(es) and Occupation(s) of Subscriber(s)
Signature: /s/ Elizabeth A. Watkins
------------------------
Name: ELIZABETH A. WATKINS
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Resident Address: 103 - 1470 Pennyfarthing Drive
Vancouver, B. C.
Occupation : Barrister and Solicitor
Signature:___________________________________________________
Name:________________________________________________________
Resident Address:____________________________________________
Occupation:__________________________________________________
DATED the 24th day of July ,1986.
WORRALL SCOTT AND PAGE
.
.
.
INCORPORATED IN THE PROVINCE OF BRITISH COLUMBIA
(IMAGE)
NUMBER NICHOLAS FINANCIAL, INC. SHARES
CUSIP 65373J 20 9
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THIS CERTIFIES THAT
is the registered holder of
FULLY PAID AND NON-ASSESSABLE COMMON SHARES WITHOUT PAR VALUE
in the Capital of the above named Company subject to the Memorandum and Articles of the Company transferable on the books of the Company by the registered holder in person or by Attorney duly authorized in writing upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent and Registrar of the Company.
IN WITNESS WHEREOF the Company has caused this certificate to be signed on its behalf by the facsimile signatures of its duly authorized officers at Vancouver, British Columbia.
DATED
/s/ Peter L. Vosotas COUNTERSIGNED AND REGISTERED
President COMPUTERSHARE TRUST COMPANY OF CANADA VANCOUVER
TRANSFER AGENT AND REGISTRAR
/s/ Ralph Finkenbrink By SPECIMEN
-----------------------------------
Secretary Authorized Officer
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The Shares represented by this certificate are transferable at the offices of Computershare Trust Company of Canada, Vancouver, B.C.
Exhibit 14
CODE OF ETHICS
Nicholas Financial, Inc. (hereinafter referred to as "Nicholas Financial, Inc." or the "Company") requires ethical conduct in the practice of financial management in all aspects of business activities.
The Nicholas Financial, Inc. Code of Ethical Conduct for Financial Managers applies to all senior officers serving in a financial role. The Chief Executive Officer, Chief Financial Officer and Controller, as well as certain other senior financial officers, hold an elevated role in corporate governance and are expected to act in accordance with the highest standards of personal and professional integrity, to comply with all applicable laws, rules, and regulations, to preserve and protect shareholders' interests, and to abide by the Nicholas Financial, Inc. Code of Business Conduct and Ethics and other policies and procedures adopted by Nicholas Financial, Inc. that govern the conduct of its employees. This Code of Ethical Conduct is intended to supplement the Nicholas Financial, Inc. Code of Business Conduct and Ethics.
As the Chief Executive Officer, Chief Financial Officer, Controller, or other senior financial officer, I certify to you that I adhere to and advocate the following principles governing my professional and ethical conduct in the fulfillment of my responsibilities. I agree to:
a. Comply with the Company's internal policies and procedures;
b. Act at all times in accordance with the Company's Code of Business Conduct and Ethics which has been provided to me and with which I will comply;
c. Engage in and promote honesty, integrity and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
d. Provide accurate, complete, objective, timely and understandable financial disclosures in regards to internal reports as well as documents filed or submitted to the Securities and Exchange Commission, any governmental, private or public regulatory agency, or used in public communications;
e. Comply with applicable federal, state, provincial, and/or local governmental laws, rules and regulations, as well as appropriate private and public regulatory agencies;
f. Respect the confidentiality of information acquired in the course of performing my work responsibilities except when authorized or otherwise legally obligated to disclose such information;
g. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting or omitting material facts or allowing my independent judgment to be compromised;
h. Avoid using confidential information acquired in the course of performing my job responsibilities for personal advantage;
i. Use and control assets and other resources employed or entrusted to my supervision in a responsible manner;
j. Keep abreast of emerging financial issues and/or skills relevant to shareholders and other constituents and share such knowledge with my peers;
k. Promptly report any possible violation of this Code to the Nominating and Corporate Governance Committee of the Nicholas Financial, Inc. Corp. Board of Directors;
l. Proactively promote ethical behavior as a responsible partner among peers in my work environment and community.
EX-21 Subsidiaries of the registrant Nicholas Financial, Inc.
State or Province of Incorporation Subsidiary Ownership % or Organization
Nicholas Financial, Inc. Florida 100%
Nicholas Data Services, Inc. Florida 100%
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement on Forms S-8 (No. 333-81961 and No. 333-81967) pertaining to the Nicholas Financial, Inc. Employee Stock Option Plan of Nicholas Financial, Inc. of our report dated May 21, 2004, (except for note 13 as to which the date is June 8, 2004) with respect to the consolidated financial statements of Nicholas Financial, Inc. and subsidiaries included in its Annual Report (Form 10-KSB) for the year ended March 31, 2004, filed with the Securities and Exchange Commission.
/s/ Dixon Hughes PLLC |
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 333-81961 and Form S-8 No. 333-81967) pertaining to the Nicholas Financial, Inc. Employee Stock Option Plan and the Nicholas Financial, Inc. Non-Employee Director Stock Option Plan of our report dated June 9, 2003, with respect to the consolidated financial statements of Nicholas Financial, Inc. and subsidiaries included in its Annual Report (Form 10-KSB) for the year ended March 31, 2004.
/s/ Ernst & Young LLP
Atlanta, Georgia
June 25, 2004
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Exhibit 31.1
CERTIFICATION
I, Peter L. Vosotas, certify that:
1. I have reviewed this annual report on Form 10-KSB of Nicholas Financial, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: June 29, 2004 /s/ Peter L. Vosotas
________________________________
Peter L. Vosotas
President & CEO
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Exhibit 31.2
CERTIFICATION
I, Ralph T. Finkenbrink certify that:
1. I have reviewed this annual report on Form 10-KSB of Nicholas Financial, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: June 29, 2004 /s/ Ralph T. Finkenbrink
________________________________
Ralph T. Finkenbrink
Senior Vice President
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EXHIBIT 32.1
WRITTEN STATEMENT OF THE CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, I, the undersigned Chief Executive Officer of Nicholas Financial, Inc. (the "Company"), hereby certify, based on my knowledge, that the Annual Report on Form 10-KSB of the Company for the year ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Peter L. Vosotas __________________________________ Peter L. Vosotas Chief Executive Officer June 29, 2004 |
EXHIBIT 32.2
WRITTEN STATEMENT OF THE CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
Solely for the purposes of complying with 19 U.S.C. Section 1350, I, the undersigned Chief Financial Officer of Nicholas Financial, Inc. (the "Company"), hereby certify, based on my knowledge, that the Annual Report on Form 10-KSB of the Company for the year ended March 31, 2004 (the "Report") fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Ralph T. Finkenbrink ______________________________________ Ralph T. Finkenbrink Chief Financial Officer June 29, 2004 |