Monday, August 08, 2005
Collections on loans during 1995-1997 were only around 55%. Ouch. Debt increased by about 75%. Equity is lower, fewer shares. Most of the preferred stock was converted.
11/15/04: They made a presentation to institutional investors. This contains an excellent example of how their business model works from a dealer's perspective. Same business model for 32 years. IPO in 1992. UK and Canada in 1996. Completed 8 bank financed securitizations from 1999 to 2002 (all repaid). Developed propreitary CAPS system during late 1990s. Winding down CA and UK business in 2002-2003. Completed private placement for increased warehouse facility in Aug 2004. Why do they need a warehouse?
The declining dealer number (from 1,729 to 789) was supposedly due to CACC terminating dealers not meeting return on capital numbers. In the short term, dealer count is increasing. Loans per active dealer increased until 2003, and is now decreasing again.
The spread between forcasted collections and advance rate dropped during 1995-1997 and is slowly increasing again, supposedly due to CAPS system. The ability to forecast collections is the biggest source of risk.
Liquidity: $76 million available on $135 million revolver (renewed 6/04, expires 6/06). $160 million of $200 available on warehouse facility.
12/9/04: New CFO promoted from within, but not a long-termer.
12/16/04: Banks amended, restated credit agreement (at the request of the Company). Borrowing limits set as a fairly complex formula based on advances, principal balance, hedging reserve. Minimum equity is $210 million plus the sum of 80% of consolidated earnings for the quarter.
12/20/04: Regulation FD of some questions and answers from apparently a conference call. These are definitely worth reading. Comparable sales dropped 6.8% over 2003.
1/25/05: Modifications to stated bank terms, looks the same.
1/26/05: Another Regulation FD: Again, worth reading.
2/11/05: Revised bank terms, this time it's significant, defining collection numbers (actual collections less than 75% of forecast), net yield, and advance ratio.
3/2/2005: Stock options previously approved by shareholders.
3/10/2005: They incorrectly accounted for income tax in previous periods in foreign subsidiaries. This causes net income to decrease in 2003 and 2004 by roughly $2.5 million each year. Loan originations grew 20% in Q4. 10-K delayed. SOX material weakness identified.
3/30/05: 2004 year results. Q4 diluted earnings down to 19 cents (from 22) due to increase in provision, accounting policy change in Q1 of 2004, larger SOX related SG&A, sales/marketing expense (more sales people, bigger convention), partially offset by finance charge increases and foreign exchange.
Full year earnings of 90 cents (vs 60). Collection results generally matched forecasts. Active dealers increasedd 32.6%, although per-dealer volume decreased 8.1%.
The company adds a non-GAAP measure of profit not involving a dart board, no surprise that it results in larger earnings. It does make sense what they do, except for removing non-recurring charges (which itself is a small item). The big difference is that they do a DCF of their loan portfolio to value it.
4/4/05: Bonus and stock option plan for Sr Mgmt based on performance. A bit cryptic for my tastes.
4/11/05: Auditors say Company should account for loans differently (current method dates back to IPO in 1992). Oh, and by the way, we're probably going to be de-listed from NASDAQ.
4/12/05: 8-K/A, Exact same document except with a different date of issue.
4/12/05: Explanation to shareholders of the situation. Definitely worth reading.
4/13/05: More Reg FD questions and answers. Why did they use a 29% discount rate in a DCF example??? This exagerates the difference between calculation methods and is totally unrealistic.
4/15/05: Not able to file 10-K in time. This makes it in violation of loan covenants. Got waiver, expires on April 22. Seeking SEC guidance on accounting for loans.
4/22/05: New waiver, expires May 31.
4/28/05: Same issue, same deadline.
4/29/05: The Company got bored, needed to file another 8-K. Added an amendment to the waiver. Removed guidance requirement.
5/3/05: Q1 results... at least some of them. Loan origination up 4%, 32% jump in active dealers, loan origination per dealer dropped 18%.
CAPS access fee increased to $599. Advance rates increased by 1.5%. Offering guaranteed asset protection waiver and insurance product ("GAP") to consumers, covers the difference between loan balance and insurance payout. These things will offset some un-stated cause(s) of lower revenues in the future. Investors are supposed to be calmed by this?
Actual payments are matching forecasts fairly well based on their detailed table.
April 11 they had received a de-listing notice from NASDAQ. Hearing is May 5.
Company has waivers on all 3 debt facilities regarding late 10-K filing.
5/9/05: Regulation FD Q&A. Good, tough questions (except for #4, which is still good and the answer is worth reading). They're losing to the competition based on price, although they believe the competitors will not make money at these prices (which is entirely likely). In the mid-1990s, they wrote bad loans, but recovered (unlike most others) due to a number of issues. In early 2000s, they had trouble getting loans. But that's gone now... and not surprisingly, competition has increased (as others also get loans). They have their CAPS system and methods in place to limit narrowed spreads, but it seems [to me] that business is likely to deteriorate. When it does, and if they manage to struggle well through it, then I figure it would be a good time to invest.
5/27/05: NASDAQ let them go on for a while (obviously not very long since they're on the Pink Sheets now).
6/14/05: More Regulation FD Q&A. 20% of the monthly CAPS fees were paid by inactive dealers (bad). "GAP" business as 10% in Q1. Some tap dancing around the un-stated cause red-flag I mentioned earlier. It's seems like just a big deterioration in the business. All the more reason to wait this one out.
6/30/05: Del. and Tou. auditors dismissed, probably just as they were about to say something bad.
6/30/05 again: SEC responds. Method of accounting must be changed to a servicer of loans generated by dealers and a lender to those dealers, rather than an originator of consumer loans. This will take a long time to correct. Company plans to ask for an extension from NASDAQ (I think I know how that turns out). And then there's the debt covenants....
7/14/05: Del. and Tou. response to the SEC. Nothing surprising.
7/20/05: Regulation FD Q&A.
Deloitte provided the Company with advice on how to account for its core business that Deloitte itself now says was inaccurate. We relied on this advice to our detriment and are now engaged in a costly process to file corrected statements. For these and other reasons, the Audit Committee lost confidence in Deloitte’s ability to perform their required duties.That's why they're called Toilette and Douche.
Our previous GAAP accounting was complex. We did our best to provide additional disclosures to help shareholders understand the Company’s results, however we are not confident our explanations were easily understood. If we end up with GAAP accounting that is simple and matches the economics of the business, it will be worth the effort.Especially if the stock price drops enough.
7/26/05: Results for Q2. Loan origination grew 6.4%. Active dealers grew 36.2% year-over-year. The increase was due to no longer requiring the $9,850 enrollment fee.
Prospective dealer-partners choosing this option instead agree to allow the Company to keep 50% of the first accelerated dealer holdback payment. This payment, called Portfolio Profit Express, is generally paid to dealer-partners after 100 loans have been originated and assigned to the Company. While the Company will lose enrollment fee revenue on those dealer-partners choosing this option and not reaching 100 loans or otherwise qualifying for a Portfolio Profit Express payment, the Company will realize higher per dealer-partner enrollment fee revenue from those dealer-partners choosing this option and qualifying for a Portfolio Profit Express payment. Based on the historical average of Portfolio Profit Express payments, the Company expects average enrollment fee revenue per dealer-partner for those dealer-partners electing the new option and reaching 100 loans will be approximately $15,000 — $20,000. Approximately 50% of the dealer-partners that enrolled during the second quarter took advantage of this new enrollment option.Forecasted collection rates for 2003 and 2004 increased, meaning they suddenly expect to receive more of the nominal amount.
You can see from the spread table what they were talking about earlier in the un-stated cause red flag. And collection rates did increase over their projections for 2003 and 2004... according to the table.
The parts of the balance sheet they show looks OK, although it's not the least bit detailed and doesn't show equity. Debt increased along with their increasing loans.
New auditors: Grant Thornton.
7/29/05: Late filing causing covenant violations. Waived again, this time till Dec 15.
Why is this stock still trading at $13.50?!?! These people have no fear.
Conclusions: This is a good company, I believe that. Their collections forecasts have been pretty accurate. Their accounting got royally messed up, thanks to D&T. Competition may get severe for a couple of years or more and the whole industry might take a beating. That may have something to do with why NICK has been dropping lately, I don't know. A good, cheap stock price might be in the future. It's not all that cheap right now, considering they've just been delisted, have truly major accounting problems, and have violated covenants.