SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

ý                                 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended:		Commission file number:
April 30, 2005		0-14939

 

AMERICA’S CAR-MART, INC.

(Exact name of registrant as specified in its charter)

 

Texas		63-0851141
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

1501 Southeast Walton Blvd., Suite 213, Bentonville, Arkansas

(Address of principal executive offices)

 

72712

(Zip Code)

 

(479) 464-9944

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $.01 per share

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 ý    No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).   Yes ý  No o

 

As of the last business day of the registrant’s most recently completed second fiscal quarter (October 29, 2004), the aggregate market value of the registrant’s common stock (based upon a closing price of $23.02) held by non-affiliates (all persons other than executive officers, directors and holder’s of 10% or more of the Registrant’s common stock) (9,525,023 shares) was $219,266,030.

 

As of July 13, 2005 there were 11,846,074 shares of the Registrant’s common stock outstanding.

 

Documents Incorporated by Reference:

 

Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders to be held in 2005 are incorporated by reference into Part III of this report, with the exception of information regarding executive officers required under Item 10 of Part III, which information is included in Part I, Item 1.

 

 

PART I

 

Forward-Looking Statements

 

This Annual Report on Form 10-K contains numerous “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements address the Company’s future objectives, plans and goals, as well as the Company’s intent, beliefs and current expectations regarding future operating performance, and can generally be identified by words such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” and other similar words or phrases.  Specific events addressed by these forward-looking statements include, but are not limited to:

 

•                                          opening new stores at the rate of 8% to 13% per year;

 

•                                          the continuation of same store revenue growth;

 

•                                          revenue growth of approximately 10% to 14% in fiscal 2006;

 

•                                          receivables growth slightly greater than revenue growth;

 

•                                          the Company’s business and growth strategies;

 

•                                          financing the majority of growth from profits; and

 

•                                          having adequate liquidity to satisfy its capital needs.

 

These forward-looking statements are based on the Company’s current estimates and assumptions and involve various risks and uncertainties.  As a result, you are cautioned that these forward-looking statements are not guarantees of future performance, and that actual results could differ materially from those projected in these forward-looking statements.  Factors that may cause actual results to differ materially from the Company’s projections include those risks described elsewhere in this report, as well as:

 

•                                          the availability of credit facilities for the Company’s business;

 

•                                          the Company’s ability to effectively underwrite and collect its loans;

 

•                                          competition;

 

•                                          dependence on existing management;

 

•                                          changes in lending laws or regulations; and

 

•                                          general economic conditions in the markets in which the Company operates, including fluctuations in employment levels.

 

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the dates on which they are made.

 

Item 1.  Business

 

Business and Organization

 

America’s Car-Mart, Inc., a Texas corporation (the “Company”), is the largest publicly held automotive retailer in the United States focused exclusively on the “Buy Here/Pay Here” segment of the used car market.  References to the Company typically include the Company’s consolidated subsidiaries.  The Company’s operations are principally conducted through its two operating subsidiaries, America’s Car-Mart, Inc., an Arkansas corporation, (“Car-Mart of Arkansas”) and Colonial Auto Finance, Inc. (“Colonial”).  Collectively, Car-Mart of Arkansas and Colonial are referred to herein as “Car-Mart.”  The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit problems.  As of April 30, 2005, the Company operated 76 stores located primarily in small cities throughout the South-Central United States.

 

In October 2001, the Company made the decision to sell all of its operating subsidiaries except Car-Mart, and relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based.  As a result of this decision, all of the Company’s other operating subsidiaries were sold and their operating results have been included in discontinued operations.  The Company sold its last remaining discontinued operation in July 2002.  Discontinued operations are described in Note O in the accompanying consolidated financial statements.

 

2

 

Business Strategy

 

In general, it is the Company’s objective to continue to expand its Buy Here/Pay Here used car operation using the same business model that has been developed by Car-Mart over the last 24 years.  This business strategy focuses on:

 

•                  Collecting Customer Accounts.  Collecting customer accounts is perhaps the single most important aspect of operating a Buy Here/Pay Here used car business and is a focal point for store level and corporate office personnel on a daily basis.  Periodically, the Company measures and monitors the collection results of its stores using internally developed delinquency and account loss standards.  Substantially all associate incentive compensation is tied directly or indirectly to collection results.  Over the last eight years, Car-Mart’s annual credit losses as a percentage of sales have been relatively stable ranging from a low of 17.0% to a high of 21.3%.  The Company believes that it can continue to be successful provided it maintains its credit losses within or below its historical credit loss range.

 

•                  Maintaining a Decentralized Operation.  The Company’s dealerships will continue to operate on a decentralized basis.  Each store is responsible for buying (with the assistance of a corporate office buyer) and selling its own vehicles, making credit decisions and collecting the loans it originates in accordance with established policies and procedures.  Most customers make their payments in person at one of the Company’s dealerships.  This decentralized structure is complemented by the oversight and involvement of corporate office management and the maintenance of centralized financial controls, including an internal compliance staff.

 

•                  Expanding Through Controlled Organic Growth.  The Company will continue to expand its operations by increasing revenues at existing dealerships and opening new dealerships.  The Company expects to open new stores at the rate of 8% to 13% per annum for the foreseeable future.  The Company currently has no plans to acquire existing dealerships of other Buy Here/Pay Here operators.

 

•                  Selling Basic Transportation.  The Company will continue to focus on selling basic and affordable transportation to its customers.  The Company generally does not sell luxury cars or sports cars.  Approximately 80% of vehicles are sold at prices ranging between $5,000 and $9,000, with an average of $7,163 in fiscal 2005.  By selling vehicles in this price range the Company is able to keep the terms of its installment sales contracts short (average of 26 months), while requiring relatively low payments.

 

•                  Operating in Smaller Communities.  The majority of the Company’s dealerships are located in cities and towns with a population of 50,000 or less.  The Company believes that by operating in smaller communities it experiences better collection results as its customers are more stable in their employment and place of residence, and are easier to locate in the event their loans become delinquent.  Further, the Company believes that operating costs, such as salaries, rent and advertising, are lower in smaller communities than in major metropolitan areas.

 

•                  Promoting from Within.  It has been the Company’s practice to attempt to hire honest and hardworking individuals to fill entry level positions, nurture and develop these associates, and attempt to fill the vast majority of its managerial positions from within the Company.  By promoting from within, the Company believes it is better able to train its associates in the Car-Mart way of doing business, maintain the Company’s unique culture and develop the loyalty of its associates.

 

•                  Cultivating Customer Relationships.  The Company believes that developing and maintaining a relationship with its customers is critical to the success of the Company.  A large percentage of sales at mature stores are made to repeat customers, and the Company estimates an additional 10% to 15% of sales result from customer referrals.  By developing a personal relationship with its customers the Company believes it is in a better position to assist a customer, and the customer is more likely to cooperate with the Company, should the customer experience financial difficulty during the term of his or her installment loan with the Company.  The Company is able to cultivate these relationships as the majority of its customers make their payments in person at one of the Company’s dealerships on a weekly or bi-weekly basis.

 

Business Strengths

 

The Company believes it possesses a number of strengths or advantages that distinguish it from most of its competitors.  These business strengths include:

 

•                  Experienced and Motivated Management.  The Company’s executive officers have an average tenure of approximately 15 years.  Several of Car-Mart’s store managers have been with the Company for more than ten years.  Each store manager is compensated, at least in part (some entirely), based upon the net income of his or her store.  A significant portion of the compensation of Car-Mart senior management is incentive based.

 

•                  Proven Business Practices.  The Company’s operations are highly structured.  While stores are operated on a decentralized basis, the Company has established policies, procedures and business practices for virtually every aspect of a store’s operation.  Detailed operating manuals are available to assist the store manager and office and collections personnel in performing their daily tasks.  As a result, each store is operated in a uniform manner.  Further, corporate office personnel monitor the stores’ operations through weekly visits and a number of daily, weekly and monthly communications and reports.

 

3

 

•                  Low Cost Operator.  The Company has structured its store and corporate office operations to minimize operating costs.  The number of associates employed at the store level is dictated by the number of active customer accounts each store services.  Associate compensation is standardized for each store position.  Other operating costs are closely monitored and scrutinized.  Technology is utilized to maximize efficiency.  The Company believes its operating costs as a percentage of revenues, or per unit sold, is among the lowest in the industry.

 

•                  Well Capitalized / Limited External Capital Required for Growth.  As of April 30, 2005, the Company’s debt to equity ratio was 0.28 to 1.0, which the Company believes is lower than the majority of its competitors.  Further, the Company believes it can fund the majority of its planned growth from net income generated from operations.  Of the external capital that may be needed to fund growth, the Company plans to draw on its existing revolving credit facilities, or renewals or replacements of those facilities.

 

•                  Significant Expansion Opportunities.  The Company generally targets smaller communities to locate its dealerships (i.e., populations from 20,000 to 50,000), but has had success in larger cities such as Tulsa, Oklahoma and Little Rock, Arkansas.  The Company believes there are numerous suitable communities within the eight states in which the Company currently operates to satisfy anticipated store growth for the next several years.  During fiscal 2006, the Company plans to add locations principally in Texas, Missouri and Tennessee.

 

Operations

 

•                  Store Organization.  Stores are operated on a decentralized basis.  Each store is responsible for the buying (with the assistance of a corporate office buyer) and selling of vehicles, making credit decisions, and servicing and collecting the installment loans it originates.  Stores also maintain their own records and make daily deposits.  Store-level financial statements are prepared by the corporate office on a monthly basis.  Depending on the number of active customer accounts, a store may have as few as two or as many as 20 associates employed at that location.  Associate positions at a large store may include a store manager, assistant store manager, manager trainee, office manager, assistant office manager, service manager, buyer, collections personnel, salesmen and lot attendants.  Stores are open Monday through Saturday from 9:00 a.m. to 6:00 p.m.  The Company has both regular and satellite stores.  Satellite stores are similar to regular stores, except that they tend to be smaller, sell fewer vehicles and their financial performance is not captured in a stand alone financial statement, but rather is included in the financial results of the sponsoring regular store.

 

•                  Store Locations and Facilities.  Below is a summary of stores opened during the fiscal years ended April 30, 2005, 2004 and 2003:

 

		Years Ended April 30,
		2005		2004		2003
Stores at beginning of year		70		64		55
New stores opened		6		7		9
Stores closed				(1	)
Stores at end of year		76		70		64

 

Below is a summary of store locations by state as of April 30, 2005, 2004 and 2003:

 

		As of April 30,
Stores by State		2005		2004		2003
Arkansas		34		32		33
Oklahoma		13		13		13
Texas		14		10		4
Kentucky		7		7		7
Missouri		6		6		5
Kansas		1		1		1
Indiana		1		1		1
Total		76		70		64

 

Stores are typically located in smaller communities.  As of April 30, 2005, approximately 75% of the Company’s stores were located in cities with populations of less than 50,000.  Stores are located on leased or owned property between one and three acres in size.  When opening a new store the Company will typically use an existing structure on the property to conduct business, or purchase a modular facility while business at the new location develops.  Store facilities typically range in size from 1,500 to 5,000 square feet.

 

4

 

•                  Purchasing.  The Company purchases vehicles primarily through wholesalers and new car dealers.  Occasionally the Company will purchase vehicles from auctions.  The majority of vehicle purchasing is performed by the Company’s buyers, although certain store managers are authorized to purchase vehicles.  On average, a buyer will purchase vehicles for three stores.  Buyers report to the store manager, or managers, for whom they buy and to a regional purchasing director.  The regional purchasing directors monitor the quantity and quality of vehicles purchased and compare the cost of similar vehicles purchased among different buyers.

 

Generally, the Company’s buyers purchase vehicles between three and ten years of age with 60,000 to 120,000 miles, and pay between $2,500 and $6,000 per vehicle.  The Company focuses on providing basic transportation to its customers.  The Company generally does not purchase sports cars or luxury cars.  Some of the more popular vehicles the Company sells include the Ford Taurus and Escort, Chevrolet Lumina and Cavalier, Dodge Neon, Pontiac Grand Am and Oldsmobile Cutlass.  The Company also sells a number of trucks.  Buyers inspect and test-drive almost every vehicle they purchase.  Buyers attempt to purchase vehicles that require little or no repair as the Company has limited facilities to repair or recondition vehicles.

 

•                  Selling, Marketing and Advertising.  Stores generally maintain an inventory of 15 to 75 vehicles depending on the maturity of the dealership.  Inventory turns over approximately 12 to 14 times each year.  Approximately 80% of vehicles are sold at prices ranging between $5,000 and $9,000, with an average of $7,163 in fiscal 2005.  Selling is done principally by the store manager, assistant manager, manager trainee or sales associate.  Sales associates are paid a commission for sales that they make in addition to an hourly wage.  Sales are made on an “as is” basis; however, customers are given an option to purchase a four month or 4,000 mile service contract for $345 which covers certain vehicle components and assemblies.  For covered components and assemblies, the Company coordinates service with third party service centers with which the Company typically has previously negotiated labor rates and mark-up percentages on parts.  The majority of the Company’s customers elect to purchase a service contract when purchasing a vehicle.

 

The Company’s objective is to offer its customers basic transportation at a fair price and treat each customer in such a manner as to earn his or her repeat business.  The Company attempts to build a positive reputation in each community where it operates and generate new business from such reputation as well as from customer referrals.  The Company estimates that approximately 10% to 15% of the Company’s sales result from customer referrals.  The Company recognizes repeat customers with silver, gold and platinum plaques representing the purchase of five, ten and 15 vehicles, respectively.  These plaques are prominently displayed at the dealership where the vehicles were purchased.  For mature dealerships, a large percentage of sales are to repeat customers.

 

The Company primarily advertises in local newspapers, on the radio and on television.  In addition, periodically the Company conducts promotional sales campaigns in order to increase sales.

 

•                  Underwriting and Finance.  The Company provides financing to substantially all of its customers who purchase a vehicle at one of its stores.  The Company only provides financing to its customers for the purchase of its vehicles, and the Company does not provide any type of financing to non-customers.  The Company’s installment sales contracts typically include down payments ranging from 0% to 17% (average of 6%), terms ranging from 12 months to 36 months (average of 26 months), and annual interest charges ranging from 6% to 19% (average of 12% at April 30, 2005). The Company requires that payments be made on a weekly, bi-weekly, semi-monthly or monthly basis to coincide with the day the customer is paid by his or her employer.  Upon the customer and the Company reaching a preliminary agreement as to financing terms, the Company obtains a credit application from the customer which includes information regarding employment, residence and credit history, personal references and a detailed budget itemizing the customer’s monthly income and expenses.  Certain information is then verified by Company personnel.  After the verification process, the store manager makes the decision to accept, reject or modify (perhaps obtain a greater down payment or require an acceptable co-buyer) the proposed transaction.  In general, the store manager attempts to assess the stability and character of the applicant.  The store manager who makes the credit decision is ultimately responsible for collecting the loan, and his or her compensation is directly related to the collection results of his or her store.

 

•                  Collections.  All of the Company’s retail installment contracts are serviced by Company personnel at the store level.  The majority of the Company’s customers make their payments in person at the store where they purchased their vehicle, although some customers send their payments through the mail.  Each store closely monitors its customer accounts using the Company’s proprietary receivables and collections software that stratifies past due accounts by the number of days past due.  The Company believes that the timely response to past due accounts is critical to its collections success.

 

The Company has established standards with respect to the percentage of accounts one and two weeks past due, the percentage of accounts three or more weeks past due, and for larger stores, one and two weeks past due, 15 to 44 days past due and 45-plus days past due (delinquency standards), and the percentage of accounts where the vehicle was repossessed or the account was charged off that month (account loss standard).  Store personnel are paid a monthly bonus based upon reaching a budgeted unit sales target at their store for the month.  This bonus is paid only if the store has met its delinquency and account loss standards for the month.

 

The Company works very hard to keep its delinquency percentages low, and not to repossess vehicles.  Accounts one day late are sent a notice in the mail.  Accounts three days late are contacted by telephone.  Notes from each telephone contact are electronically maintained in the Company’s computer system.  If a customer becomes severely delinquent in his or her payments, and management determines that timely collection of future payments is not probable, the Company will take steps to repossess the vehicle.  The Company attempts to amicably resolve payment delinquencies prior to repossessing a vehicle.

 

5

 

Periodically, the Company enters into contract modifications with its customers to extend the payment terms.  The Company only enters into a contract modification or extension if it believes such action will increase the amount of monies the Company will ultimately realize on the customer’s account.  For those vehicles that are repossessed, the majority are returned or surrendered by the customer on a voluntary basis.  Other repossessions are performed by Company personnel or third party repossession agents.  Depending on the condition of a repossessed vehicle, it is either resold on a retail basis through a Company store, or sold for cash to a wholesaler.

 

•                  New Store Openings.  The Company plans to add stores at the rate of 8% to 13% per year.  Senior management, with the assistance of the corporate office staff, makes decisions with respect to the communities in which to locate a new store and the specific sites within those communities.  New stores are typically located in the general proximity of existing stores to facilitate the corporate office’s oversight of the Company’s stores.

 

The Company’s approach with respect to new store openings is one of gradual development.  The manager in charge of a new store is normally a recently promoted associate who was an assistant manager at a larger store or a manager trainee.  The facility may be of a modular nature or an existing structure.  New stores operate with a low level of inventory and personnel.  As a result of the modest staffing level, the new store manager performs a variety of duties (i.e., selling, collecting and administrative tasks) during the early stages of his or her store’s operations.  As the store develops and the customer base grows, additional staff is hired.

 

Monthly sales levels at new stores are substantially less than sales levels at mature stores.  Over time new stores gain recognition in their communities, and a combination of customer referrals and repeat business generally facilitate strong sales growth.  Sales growth at new stores can exceed 20% per year for a number of years.  Mature stores typically experience annual sales growth, but at a lower percentage than new stores.

 

New stores are generally provided with $350,000 in capital from the corporate office during the first six to eight months of operation.  These funds are used principally to fund receivables growth.  After this six to eight month start-up period, new stores typically become cash flow positive.  That is, receivables growth is funded from store profits rather than additional capital from the corporate office.  This limitation of capital to new, as well as existing, stores serves as an important operating discipline.  Essentially, stores must be profitable in order to grow.  Typically, new stores are profitable within a few months of opening.

 

•                  Corporate Office Oversight and Management.  The corporate office, based in Bentonville, Arkansas, consists of area operations managers, regional vice presidents, regional purchasing directors, a vice president of purchasing, compliance auditors, associate and management development personnel, accounting and management information systems personnel, administrative personnel and senior management.  The corporate office monitors and oversees store operations.  The Company’s stores transmit and submit operating and financial information and reports to the corporate office on a daily, weekly and monthly basis.  This information includes cash receipts and disbursements, inventory and receivables levels, receivables agings and sales and account loss data.  The corporate office uses this information to compile Company-wide reports, plan store visits and prepare monthly financial statements.

 

Periodically, area operations managers, regional vice presidents, compliance auditors and senior management visit the Company’s stores to inspect, review and comment on operations.  Often, the corporate office assists in training new managers and other store level associates.  In addition to financial results, the corporate office uses delinquency and account loss standards and a point system to evaluate a store’s performance.

 

The Company’s store managers meet monthly on an area, regional or Company-wide basis.  At these meetings, corporate office personnel provide training and recognize achievements of store managers.  Near the end of every fiscal year the respective area operations manager, regional vice president and senior management conduct “projection” meetings with each store manager.  At these meetings the year’s results are reviewed and ranked relative to other stores, and both quantitative and qualitative goals are established for the upcoming year.  The qualitative goals may focus on staff development, effective delegation and leadership and organization skills.  Quantitatively, the Company establishes unit sales goals and, depending on the circumstances, may establish delinquency, account loss or expense goals.

 

The corporate office is also responsible for establishing policy, maintaining the Company’s management information system, conducting compliance audits, orchestrating new store openings and setting the strategic direction for the Company.

 

Industry

 

•                  Used Car Sales.  The market for used car sales in the United States is significant.  Used car retail sales typically occur through franchised new car dealerships that sell used cars or independent used car dealerships.  The Company operates in the Buy Here/Pay Here segment of the independent used car sales and finance market.  Buy Here/Pay Here dealers sell and finance used cars to individuals with limited credit histories or past credit problems.  Buy Here/Pay Here dealers typically offer their customers certain advantages over more traditional financing sources, such as broader and more flexible underwriting guidelines, flexible payment terms (including scheduling payments on a weekly or bi-weekly basis to coincide with a customer’s payday), and the ability to make payments in person, an important feature to individuals who may not have a checking account.

 

6

 

•                  Used Car Financing.  The used automobile financing industry is served by traditional lending sources such as banks, savings and loans, and captive finance subsidiaries of automobile manufacturers, as well as by independent finance companies and Buy Here/Pay Here dealers.  Despite significant opportunities, many of the traditional lending sources do not consistently provide financing to individuals with limited credit histories or past credit problems.  Management believes traditional lenders avoid this market because of its high credit risk and the associated collection efforts.

 

Competition

 

The used automotive retailing industry is highly competitive and fragmented.  The Company competes principally with other independent Buy Here/Pay Here dealers, and to a lesser degree with (i) the used vehicle retail operations of franchised automobile dealerships, (ii) independent used vehicle dealers, and (iii) individuals who sell used vehicles in private transactions.  The Company competes for both the purchase and resale of used vehicles.

 

Management believes the principal competitive factors in the sale of its used vehicles include (i) the availability of financing to consumers with limited credit histories or past credit problems, (ii) the breadth and quality of vehicle selection, (iii) pricing, (iv) the convenience of a dealership’s location, (v) the option to purchase a service contract, and (vi) customer service.  Management believes that its dealerships are competitive in each of these areas.

 

Regulation and Licensing

 

The Company’s operations are subject to various federal, state and local laws, ordinances and regulations pertaining to the sale and financing of vehicles.  Under various state laws, the Company’s dealerships must obtain a license in order to operate or relocate.  These laws also regulate advertising and sales practices.  The Company’s financing activities are subject to federal truth-in-lending and equal credit opportunity regulations as well as state and local motor vehicle finance laws, installment finance laws, usury laws and other installment sales laws.  Among other things, these laws require that the Company limit or prescribe terms of the contracts it originates, require specified disclosures to customers, restrict collection practices, limit the Company’s right to repossess and sell collateral, and prohibit discrimination against customers on the basis of certain characteristics including age, race, gender and marital status.

 

The states in which the Company operates impose limits on interest rates the Company can charge on its loans. These limits are generally based on either (i) a specified margin above the federal primary credit rate, (ii) the age of the vehicle, or (iii) a fixed rate.  Management believes the Company is in compliance in all material respects with all applicable federal, state and local laws, ordinances and regulations.  However, the adoption of additional laws, changes in the interpretation of existing laws, or the Company’s entrance into jurisdictions with more stringent regulatory requirements could have a material adverse effect on the Company’s used vehicle sales and finance business.

 

Employees

 

As of April 30, 2005, the Company, including its consolidated subsidiaries, employed approximately 715 persons full time. None of the Company’s employees are covered by a collective bargaining agreement and the Company believes that its relations with its employees are good.

 

Available Information

 

Our website is located at www.car-mart.com.  We make available on this website, free of charge, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, as well as proxy statements and other information we file with, or furnish to, the Securities and Exchange Commission (“SEC”) as soon as reasonably practicable after we electronically submit this material to the SEC.  The information contained on our website or available by hyperlink from our website is not incorporated into this Annual Report on Form 10-K or other documents we file with, or furnish to, the SEC.

 

7

 

Executive Officers of the Registrant

 

The executive officers of the Company are as follows:

 

Name		Age		Position with the Company
Tilman J. Falgout, III		56		Chairman of the Board, Chief Executive Officer, General Counsel and Director
William H. Henderson		41		Vice Chairman of the Board, President and Director
Mark D. Slusser		47		Chief Financial Officer, Vice President Finance and Secretary
Eddie L. Hight		42		Chief Operating Officer

 

Tilman J. Falgout, III has served as Chairman of the Board since May 2004, Chief Executive Officer of the Company since May 2002, General Counsel since 1995 and a director of the Company since 1992.  From 1995 until May 2002, Mr. Falgout also served as Executive Vice President of the Company.  From 1978 through June 1995, Mr. Falgout was a partner in the law firm of Stumpf & Falgout, Houston, Texas.

 

William H. Henderson has served as Vice Chairman of the Board since May 2004 and as President of the Company since May 2002.  From 1999 until May 2002, Mr. Henderson served as Chief Operating Officer of Car-Mart.  From 1992 through 1998, Mr. Henderson served as General Manager of Car-Mart.  From 1987 to 1992, Mr. Henderson primarily held the positions of District Manager and Regional Manager at Car-Mart.

 

Mark D. Slusser has served as Chief Financial Officer of the Company since 1989 and as Secretary since 1990.  From 1981 until joining the Company, Mr. Slusser held various positions with Ernst & Young LLP including Senior Manager.

 

Eddie L. Hight has served as Chief Operating Officer of the Company since May 2002.  From 1984 until May 2002, Mr. Hight held a number of positions at Car-Mart including Store Manager and Regional Manager.

 

Item 2.  Properties

 

As of April 30, 2005, the Company leased approximately 75% of its facilities, including dealerships and the Company’s corporate offices.  These facilities are located principally in the states of Arkansas, Oklahoma, Texas, Kentucky and Missouri.  The Company’s corporate offices are located in approximately 8,000 square feet of leased space in Bentonville, Arkansas.  In July 2005, the Company plans to relocate its corporate offices to approximately 12,000 square feet of leased office space in Bentonville, Arkansas.  For additional information regarding the Company’s properties, see “Contractual Payment Obligations” and “Off-Balance Sheet Arrangements” under Item 7 of Part II.

 

Item 3.  Legal Proceedings

 

In February 2001 and May 2002, the Company was added as a defendant in two similar actions which were originally filed in December 1998 against approximately 20 defendants (the “Defendants”) by Astoria Entertainment, Inc. (“Astoria”).  One action was filed in the Civil District Court for the Parish of Orleans, Louisiana (the “State Claims”) and the other was filed in the United States District Court for the Eastern District of Louisiana (the “Federal Claims”).  In these actions, Astoria alleges the Defendants conspired to eliminate Astoria from receiving one of the 15 riverboat gaming licenses that were awarded by the State of Louisiana in 1993 and 1994, at a time when a former subsidiary of the Company was involved in riverboat gaming in Louisiana.  Astoria seeks unspecified damages including lost profits.  In August 2001, the Federal court dismissed all of the Federal Claims with prejudice.  In September 2004, the state court of appeals dismissed all the State Claims.  In January 2005, the Louisiana Supreme Court reversed the state court of appeals’ dismissal of the case.  The case is currently pending in the Civil District Court for the Parish of Orleans, Louisiana.  The Company believes the State Claims are without merit and intends to vigorously contest liability in this matter.

 

In addition to the foregoing case, in the ordinary course of business, the Company has become a defendant in various types of other legal proceedings.  The Company does not expect the final outcome of any of these actions, individually or in the aggregate, to have a material adverse effect on the Company’s financial position, annual results of operations or cash flows.  However, the results of legal proceedings cannot be predicted with certainty, and an unfavorable resolution of one or more of these legal proceedings could have a material adverse effect on the Company’s financial position, annual results of operations or cash flows.

 

8

 

Item 4.  Submission of Matters to a Vote of Security Holders

 

No matters were submitted to a vote of security holders of the Company during the fourth quarter ended April 30, 2005.

 

PART II

 

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

General

 

The Company’s common stock is traded on the NASDAQ National Market under the symbol CRMT.  The following table sets forth, by fiscal quarter, the high and low closing sales prices reported by NASDAQ for the Company’s common stock for the periods indicated.

 

		Fiscal 2005						Fiscal 2004
		High			Low			High			Low
First quarter		$	21.04		$	16.95		$	12.67		$	9.92
Second quarter		23.04			19.50			22.53			12.81
Third quarter		25.46			22.33			24.92			16.17
Fourth quarter		25.23			20.39			22.86			16.70

 

As of July 11, 2005, there were approximately 1,117 stockholders of record.  This number excludes stockholders holding stock under nominee security position listings.

 

Dividend Policy

 

Since its inception the Company has paid no cash dividends on its common stock.  The Company currently intends to follow a policy of retaining earnings to finance future growth.  Payment of cash dividends in the future will be determined by the Company’s Board of Directors and will depend upon, among other things, the Company’s future earnings, operations, capital requirements and surplus, general financial condition, contractual restrictions that may exist, and such other factors as the Board of Directors may deem relevant. Colonial’s revolving credit facility prohibits dividends to the Company and Car-Mart of Arkansas’s revolving credit facility limits dividends to the Company to 75% of Car-Mart of Arkansas’s net income.  Thus, the Company is limited in the amount of cash dividends or other distributions it can make to its shareholders.

 

Stock Split

 

In March 2005, the Company’s Board of Directors declared a three-for-two common stock split, effected in the form of a 50% stock dividend, that was paid in April 2005.   All share and per share numbers and amounts in this Form 10-K have been retroactively adjusted to reflect the three-for-two common stock split.

 

Warrants

 

In January 2003, the Company issued a warrant to purchase 7,500 shares of its common stock at an exercise price of $8.69 per share to Epoch Financial Group, Inc. (“Epoch”), a firm that provides investor relations services.  In July 2003 and April 2004, the Company issued warrants to purchase 15,000 and 3,750 shares of its common stock at exercise prices of $11.83 and $18.23 per share, respectively, to Epoch.  During fiscal 2005, 2004 and 2003, the Company issued 8,943, 15,975 and 18,496 shares of its common stock, respectively, pursuant to partial exercises of the warrants held by Epoch.

 

9

 

Equity Compensation Plan Information

 

The following table provides information as of April 30, 2005 with respect to the Company’s equity compensation plans:

 

Plan Category		Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights (a)		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)			Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (excluding securities reflected in column (a)) (c)
Equity compensation plans:
Approved by security holders		370,220		$	9.68		30,533
Not approved by security holders (1)		52,500		7.18			—
Total		422,720		$	9.37		30,533

 

(1)                 For a description of equity compensation plans not approved by security holders, see “Warrants” in Note J to the Company’s financial statements included elsewhere herein.

 

Issuer Purchases of Equity Securities

 

The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of the Company’s common stock during the periods indicated:

 

Period		(a) Total Number of Shares Purchased		(b) Average Price Paid per Share			(c) Total Number of Shares Purchased as part of Publicly Announced Plans or Programs (1)		(d) Maximum Number of Shares that may yet be Purchased under the Plans or Programs (1)
February 1, 2005 to February 28, 2005		3,450		$	23.31		3,450		369,807
March 1, 2005 to March 31, 2005		—		—			—		369,807
April 1, 2005 to April 30, 2005		8,450		$	22.03		8,450		361,357

 

(1)                    In July 2000, the Company announced its latest amendment to its stock repurchase plan that was initially announced in July 1996.  The plan, as amended, authorizes the purchase of up to 9,000,000 shares of the Company’s common stock and has no expiration date.  As of April 30, 2005, the remaining number of shares that may be purchased under the plan was 361,357.

 

10

 

Item 6.  Selected Financial Data

 

The financial data set forth below was derived from the audited consolidated financial statements of the Company and should be read in conjunction with the consolidated financial statements and related notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere herein.

 

		Years Ended April 30, (In thousands, except per share amounts)
		2005			2004			2003			2002 (a)			2001
Revenues		$	204,788		$	176,184		$	154,885		$	127,924		$	106,754
Income (loss) from continuing operations		$	17,976		$	15,639		$	13,569		$	(1,136	)	$	7,362
Net income (loss)		$	17,976		$	15,804		$	14,075		$	(14,306	)	$	5,963
Diluted earnings (loss) per share – continuing operations		$	1.49		$	1.31		$	1.16		$	(.11	)	$	.61
Total assets		$	143,668		$	117,241		$	101,841		$	128,142		$	302,520
Total debt		$	29,145		$	22,534		$	25,968		$	39,792		$	41,584
Stockholders’ equity		$	103,265		$	84,577		$	65,961		$	52,813		$	58,932
Shares outstanding		11,844			11,637			10,812			10,416			10,471

 

(a)                Fiscal 2002 includes after tax charges totaling $10.7 million pertaining to (i) non-cash stock option compensation ($6.3 million), (ii) the write-down of certain emerging technology/Internet investments and equipment ($2.6 million), and (iii) severance and office closing costs in connection with the decision to relocate the Company’s corporate headquarters to Bentonville, Arkansas ($1.8 million) where Car-Mart is based.

 

11

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion should be read in conjunction with the Company’s consolidated financial statements appearing elsewhere in this annual report.

 

Overview

 

America’s Car-Mart, Inc., a Texas corporation (the “Company”), is the largest publicly held automotive retailer in the United States focused exclusively on the “Buy Here/Pay Here” segment of the used car market.  References to the Company typically include the Company’s consolidated subsidiaries.  The Company’s operations are principally conducted through its two operating subsidiaries, America’s Car-Mart, Inc., an Arkansas corporation (“Car-Mart of Arkansas”), and Colonial Auto Finance, Inc. (“Colonial”).  Collectively, Car-Mart of Arkansas and Colonial are referred to herein as “Car-Mart.”  The Company primarily sells older model used vehicles and provides financing for substantially all of its customers. Many of the Company’s customers have limited financial resources and would not qualify for conventional financing as a result of limited credit histories or past credit problems.  As of April 30, 2005, the Company operated 76 stores located primarily in small cities throughout the South-Central United States.

 

Car-Mart has been operating since 1981.  Car-Mart has grown its revenues between 13% and 21% per year over the last eight years.  Finance receivables tend to grow slightly faster than revenues.  Growth results from same store revenue growth and the addition of new stores.  Revenue growth in fiscal 2005 (16.2%) was in line with the Company’s growth expectations of 16% to 17%.  Revenue growth in fiscal 2005 was assisted by a 10.1% increase in the average retail sales price.  Typically, annual price increases are in the 3% to 5% range.  As discussed below, the more significant increase in the average retail sales price in fiscal 2005 stems from a decision in late fiscal 2004 to substantially reduce the sale of lower-priced vehicles and begin selling slightly higher-priced vehicles.  Presently, the Company expects that its average retail sales price will increase in fiscal 2006, but at a rate closer to its historical average annual price increase.  As a result, revenue growth for fiscal 2006 is presently expected to be in the 10% to 14% range.

 

The Company’s primary focus is on collections.  Each store is responsible for its own collections with supervisory involvement of the corporate office.  Over the last eight fiscal years, Car-Mart’s credit losses as a percentage of sales have ranged between approximately 17% and 21% (average of 19.3%).  Credit losses in fiscal 2005 (20.1%) were slightly higher than the Company’s average over the last eight years.  The Company believes the higher credit losses in fiscal 2005 were the result of the continuing effects of selling more lower-priced vehicles through January 2004.  In the beginning of the prior fiscal year (May 2003), the Company made the decision to sell more lower-priced vehicles as they have higher gross margin percentages and are more affordable to the Company’s customers.  However, historical data indicates that loans on lower-priced vehicles have higher charge-off experience than loans on higher-priced vehicles.  Lower-priced vehicles tend to have more mechanical difficulties that often result in a higher level of repossessions.  As a result of higher than normal charge-off experience and slower revenue growth from selling lower-priced vehicles, in February 2004 the Company decided to substantially reduce its purchase and sale of lower-priced vehicles and began purchasing and selling slightly higher-priced vehicles.  The effects of the Company’s February 2004 decision to reduce its purchase and sale of lower-priced vehicles is reflected in the lower provision for credit losses, as a percentage of sales, in fiscal 2005 (20.1%) when compared to fiscal 2004 (21.3%).

 

The Company’s gross margins as a percentage of sales have been fairly consistent from year to year.  Over the last eight years Car-Mart’s gross margins, as a percentage of sales, have ranged between approximately 44% and 48%.  Gross margins as a percentage of sales in fiscal 2005 were 46.3%, down from 47.7% in fiscal 2004.  The Company’s gross margins are set based upon the cost of the vehicle purchased with lower-priced vehicles having higher gross margin percentages.  As a result of the Company’s decision in February 2004 to shift away from the sale of lower-priced vehicles to slightly higher-priced vehicles, the Company’s gross margins, as a percentage of sales, decreased in fiscal 2005 as compared to fiscal 2004.

 

Hiring, training and retaining qualified associates are critical to the Company’s success.  The rate at which the Company adds new stores is sometimes limited by the number of trained managers the Company has at its disposal.  Excessive turnover, particularly at the Store Manager level, could impact the Company’s ability to add new stores.  In fiscal 2005, the Company added resources to train and develop personnel.  The Company expects to continue to invest in the development of its workforce in fiscal 2006 and beyond.

 

12

 

Consolidated Operations

(Operating Statement Dollars in Thousands)

 

											% Change
											2005		2004
		Years Ended April 30,									vs.		vs.		As a % of Sales
		2005			2004			2003			2004		2003		2005		2004		2003
Operating Statement:
Revenues:
Sales		$	189,343		$	163,589		$	145,014		15.7	%	12.8	%	100.0	%	100.0	%	100.0	%
Interest income and other		15,445			12,595			9,871			22.6		27.6		8.2		7.7		6.8
Total		204,788			176,184			154,885			16.2		13.8		108.2		107.7		106.8
Costs and expenses:
Cost of sales		101,770			85,510			77,073			19.0		10.9		53.7		52.3		53.1
Selling, gen and admin		34,789			29,671			27,417			17.2		8.2		18.4		18.1		18.9
Provision for credit loss		38,094			34,767			26,897			9.6		29.3		20.1		21.3		18.5
Interest expense		1,226			1,114			1,686			10.1		(33.9	)	.6		.7		1.2
Depreciation and amort		425			321			299			32.4		7.4		.2		.2		.2
Total		176,304			151,383			133,372			16.5		13.5		93.1		92.5		92.0
Pretax income		$	28,484		$	24,801		$	21,513		14.9		15.3		15.0		15.2		14.8
Operating Data:
Retail units sold		25,399			24,281			22,022			4.6	%	10.3
Average stores in operation		74.5			67.0			61.2			11.2		9.5
Average units sold per store		341			362			360			(5.9	)	.7
Average retail sales price		$	7,163		$	6,506		$	6,386		10.1		1.9
Same store revenue growth		11.8		%	9.8		%	15.5		%
Receivables average yield		10.8		%	10.3		%	9.4		%

 

2005 Compared to 2004

 

Revenues increased $28.6 million, or 16.2%, in fiscal 2005 as compared to fiscal 2004, principally as a result of (i) revenue growth from stores that operated a full twelve months in both periods ($19.3 million, or 11.8%), (ii) revenue growth from stores opened during fiscal 2004 or stores that opened or closed a satellite location during fiscal 2005 or fiscal 2004 ($4.9 million), and (iii) revenues from stores opened during fiscal 2005 ($4.4 million).

 

Revenues increased 16.2% in fiscal 2005 as compared to 13.8% in fiscal 2004.  The increase in revenue growth is attributable to a much larger increase in the average retail sales price in fiscal 2005 (10.1%) as compared to fiscal 2004 (1.9%).  As discussed in the Overview above, in February 2004 the Company made the decision to substantially reduce its purchase and sale of lower-priced vehicles and began purchasing and selling slightly higher-priced vehicles.  The Company expects that its average retail sales price will increase in fiscal 2006, but at a rate closer to its historical average annual price increase of 3% to 5%.

 

Cost of sales, as a percentage of sales, increased 1.4% to 53.7% in fiscal 2005 from 52.3% in fiscal 2004.  The increase was principally the result of the Company’s decision to (i) substantially reduce the purchase and sale of lower-priced vehicles which carry higher gross profit margin percentages, (ii) purchase slightly higher-priced vehicles for sale which carry lower gross profit margin percentages, (iii) perform repairs of more vehicles in inventory without passing on the added cost, and (iv) assist in the repair of more customers’ vehicles.

 

Selling, general and administrative expense, as a percentage of sales, increased .3% to 18.4% in fiscal 2005 from 18.1% in fiscal 2004.  The percentage increase is attributable to external costs related to compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which costs amounted to approximately $.8 million in fiscal 2005, or .4% of sales, with no corresponding amount in the prior fiscal year.  Presently, the Company expects these costs to decrease in fiscal 2006.  As a percentage of sales, compensation costs decreased slightly in fiscal 2005 as compared to fiscal 2004.  The decrease is partially the result of selling higher-priced vehicles.  Selling higher-priced vehicles increases sales without necessarily increasing compensation expense.  The Company does expect to incur more costs in its Information Technology Department in fiscal 2006 to strengthen its controls and improve the efficiency of the Company’s operations.

 

Provision for credit losses, as a percentage of sales, decreased 1.2% to 20.1% in fiscal 2005 from 21.3% in fiscal 2004.  The decrease was primarily the result of lower charge-offs as a percentage of sales.  As discussed in the Overview section above, the Company believes it is experiencing the positive effects on credit losses of its February 2004 decision to reduce the purchase and sale of lower-priced vehicles.  Historically, loans on lower-priced vehicles have had higher charge-off experience than loans on higher-priced vehicles.  Also, in comparison to the prior fiscal year, the Company believes that it has become more selective in approving credit in connection with the sale of its vehicles.

 

13

 

The Company believes the slightly tighter credit standard could be a factor in reducing credit losses as a percentage of sales in the future.

 

Interest expense, as a percentage of sales, decreased .1% to .6% in fiscal 2005 from .7% in fiscal 2004.  The decrease was principally the result of a lower level of borrowings relative to the sales volume of the Company.

 

2004 Compared to 2003

 

Revenues increased $21.3 million, or 13.8%, in fiscal 2004 as compared to fiscal 2003 principally as a result of (i) revenue growth from stores that operated a full twelve months in both periods ($12.3 million, or 9.8%), (ii) revenue growth from stores opened during fiscal 2003 or stores that opened or closed a satellite location during fiscal 2004 or fiscal 2003 ($5.1 million), and (iii) revenues from stores opened during fiscal 2004 ($3.9 million).

 

Same store revenue growth slowed to 9.8% in fiscal 2004 from 15.5% in fiscal 2003 principally as a result of a smaller increase in the average retail sales price in fiscal 2004 (1.9%) as compared to fiscal 2003 (4.2%), and more conservative underwriting practices beginning in the fourth quarter of fiscal 2004.  The slowing of growth in the average retail sales price stems from a decision at the beginning of fiscal 2004 to sell a higher percentage of lower-priced vehicles.  Although lower-priced vehicles have higher gross margin percentages, and are more affordable than higher-priced vehicles, selling lower-priced vehicles has a negative impact on revenue growth, and, as discussed below, loans on lower-priced vehicles have higher charge-off experience than loans on higher-priced vehicles.  As a result of the negative impact on revenue growth and the higher charge-off experience, during the fourth quarter of fiscal 2004 the Company decided to substantially reduce its purchase and sale of lower-priced vehicles and began purchasing and selling slightly higher-priced vehicles.

 

Revenue growth slowed to 13.8% in fiscal 2004 as compared to 21.1% in fiscal 2003 principally as a result of (i) the lower same store revenue growth discussed above, (ii) fewer new lot openings in fiscal 2004 (seven new lots opened, one satellite lot closed) as compared to fiscal 2003 (nine new lots opened), and (iii) the timing of new lot openings in fiscal 2004 as compared to fiscal 2003 (lot openings in fiscal 2004 occurred later in the year as compared to fiscal 2003).

 

Cost of sales, as a percentage of sales, decreased to 52.3% in fiscal 2004 as compared to 53.1% in fiscal 2003.  The decrease was principally the result of (i) selling a higher percentage of lower-priced vehicles during the first nine months of fiscal 2004 (lower-priced vehicles have higher gross margin percentages than higher-priced vehicles), (ii) the Company’s decision in late December 2003 to raise prices by about $200, or 3%, on most of the vehicles it sells, and (iii) encouraging store managers to more closely adhere to the Company’s pricing matrix and not to use their discretionary authority to discount the sales price of vehicles.

 

Selling, general and administrative expense, as a percentage of sales, decreased to 18.1% in fiscal 2004 as compared to 18.9% in fiscal 2003.  The decrease was principally the result of (i) lower compensation expense at its Irving, Texas office in connection with the relocation of the Company’s principal headquarters from Irving, Texas to Bentonville, Arkansas during fiscal 2003, and (ii) lower compensation expense in connection with a change in the senior management bonus program, partially offset by higher insurance and advertising costs.

 

Provision for credit losses, as a percentage of sales, increased to 21.3% in fiscal 2004 as compared to 18.5% in fiscal 2003.  The increase was primarily the result of higher charge-offs as a percentage of sales and an increase of the Company’s allowance for credit losses as a percentage of finance receivable principal balances.  As discussed above, the Company believes the increase in charge-offs was partially attributable to a decision at the beginning of fiscal 2004 to sell a higher percentage of lower-priced vehicles.  Lower-priced vehicles have higher margins on a percentage basis and are more affordable to the Company’s customers.  However, historical data indicates that loans on lower-priced vehicles have higher charge-off experience than loans on higher-priced vehicles.  As a result of the negative impact on revenue growth (as discussed above) and higher than normal charge-off experience, during the fourth quarter of fiscal 2004, the Company decided to substantially reduce its purchase and sale of lower-priced vehicles and began purchasing and selling slightly higher-priced vehicles.

 

In February 2004, the Company formally adopted additional delinquency standards for its larger stores.  The additional delinquency standards prescribe the percentage of accounts at larger stores that can be 21 to 30 days past due, 31 to 60 days past due and over 60 days past due.  Previously, the Company only had delinquency standards for accounts one and two weeks past due and three or more weeks past due.  As a result of the tightening of its delinquency standards, at April 30, 2004, the percentage of accounts over 30 days past due had been reduced to 3.0%, from 3.9% at April 30, 2003.  The Company believes that in the long run the adoption of the additional delinquency standards will assist the Company in reducing charge-offs, as well as maintaining the percentage of accounts over 30 days past due at historically lower levels.  With the additional delinquency standards, store managers and collection personnel are motivated (monthly store team bonuses are tied to meeting delinquency and account loss standards) to address severely past due accounts on a more timely basis, which management believes will result in fewer accounts being charged-off.

 

As a result of the higher charge-offs discussed above, the Company determined it was necessary to increase its overall allowance for credit losses.  During fiscal 2004, the Company increased its allowance for credit losses by 120 basis points, from 18.25% of finance receivable principal balances at April 30, 2003, to 19.45% of finance receivable principal balances at April 30, 2004.

 

14

 

Interest expense, as a percentage of sales, decreased to .7% in fiscal 2004 as compared to 1.2% in fiscal 2003.  The decrease was principally the result of (i) a decrease in the rate charged on the Company’s revolving credit facility (the rate was reduced by 50 basis points in November 2003), and (ii) a lower level of borrowings relative to the sales volume of the Company.

 

Financial Condition

 

The following table sets forth the major balance sheet accounts of the Company at April 30, 2005, 2004 and 2003 (in thousands):

 

		April 30,
		2005			2004			2003
Assets:
Finance receivables, net		$	123,099		$	103,684		$	91,359
Inventory		7,985			5,975			4,056
Property and equipment, net		11,305			5,557			4,479
Liabilities:
Accounts payable and accrued liabilities		8,819			7,668			8,749
Revolving credit facilities		29,145			22,534			25,968

 

Historically, finance receivables tend to grow slightly faster than revenue growth.  This is due to a gradually increasing average term necessitated by increases in the average retail sales price.  In fiscal 2005, finance receivables, net grew 18.7% as compared to revenue growth of 16.2%.  In fiscal 2004, finance receivables, net grew 13.5% as compared to revenue growth of 13.8%.  The Company expects the historical relationship between net finance receivable growth and revenue growth to continue in the future.

 

In fiscal 2005, inventory grew by 33.6% as compared to revenue growth of 16.2%.  Inventory grew at a faster pace than revenues as a result of the Company’s decision to (i) increase the level of inventory it carries at many of its stores to facilitate sales growth, and (ii) increase the average inventory cost per unit in a conscious effort to sell a slightly higher-priced vehicle.  In fiscal 2005, the average retail sales price increased 10.1% over fiscal 2004.  Inventory increased $1.9 million during fiscal 2004 as the Company made the decision to carry more inventories per store, and late in fiscal 2004 the Company made the decision to begin selling slightly higher-priced vehicles.

 

Property and equipment, net increased $5.7 million in fiscal 2005 as the Company purchased real estate for a number of new stores and relocated some existing stores to purchased property.  The Company also refurbished and expanded a number of existing stores to facilitate revenue growth.  In fiscal 2004, property and equipment, net only increased by $1.1 million as many new store openings were located on leased property.

 

Accounts payable and accrued liabilities have been fairly consistent from year to year.

 

Borrowings on the Company’s revolving credit facilities fluctuate primarily based upon a number of factors including (i) net income, (ii) finance receivables growth, and (iii) capital expenditures.  Historically, income from continuing operations has funded the majority of finance receivables growth and borrowings from its credit facilities have been used to purchase capital assets.  The level of stock repurchases also affects the Company’s borrowings under its revolving credit facilities.

 

15

 

Liquidity and Capital Resources

 

The following table sets forth certain historical information with respect to the Company’s statements of cash flows (in thousands):

 

		Years Ended April 30,
		2005			2004			2003
Operating activities:
Income from continuing operations		$	17,976		$	15,639		$	13,569
Provision for credit losses		38,094			34,766			26,897
Finance receivable originations		(173,446		)	(151,380		)	(131,447		)
Finance receivable collections		105,973			97,367			82,646
Inventory		7,954			5,003			5,110
Income tax and other receivables		(14		)	300			8,845
Other		1,949			2,295			2,243
Total		(1,514		)	3,990			7,863
Investing activities:
Purchase of property and equipment		(6,174		)	(1,399		)	(2,168		)
Note collections from discontinued operations								2,079
Sale of discontinued operations								6,795
Total		(6,174		)	(1,399		)	6,706
Financing activities:
Revolving credit facility, net		6,611			(3,434		)	(6,323		)
Repayment of other debt								(7,500		)
Purchase of common stock		(531		)	(1,646		)	(2,689		)
Exercise of stock options and warrants		939			2,584			1,497
Total		7,019			(2,496		)	(15,015		)
Cash provided by (used in) continuing operations		$	(669	)	$	95		$	(446	)

 

The Company generates cash flow from income from continuing operations.  Most or all of this cash is used to fund finance receivables growth.  To the extent finance receivables growth exceeds income from continuing operations, generally the Company increases its borrowings under its revolving credit facilities.  The majority of the Company’s growth is self-funded.

 

The Company has had a tendency to lease the majority of the properties where its stores are located.  As of April 30, 2005, the Company leased approximately 75% of its store properties.  The Company expects to continue to lease the majority of the properties where its stores are located.

 

Car-Mart’s revolving credit facilities limit distributions from Car-Mart to the Company beyond (i) the repayment of an intercompany loan ($10.0 million at April 30, 2005), and (ii) dividends equal to 75% of Car-Mart of Arkansas’ net income.  At April 30, 2005, the Company’s assets (excluding its $90.4 million equity investment in Car-Mart) consisted of $.1 million in cash, $3.2 million in other assets and a $10.0 million receivable from Car-Mart.  Thus, the Company is limited in the amount of dividends or other distributions it can make to its shareholders without the consent of Car-Mart’s lender.  Beginning in February 2003, Car-Mart assumed substantially all of the operating costs of the Company.

 

At April 30, 2005, the Company had $.5 million of cash on hand and an additional $10.4 million of availability under its revolving credit facilities.  On a short-term basis, the Company’s principal sources of liquidity include income from continuing operations and borrowings from its revolving credit facilities.  On a longer-term basis, the Company expects its principal sources of liquidity to consist of income from continuing operations and borrowings from revolving credit facilities.  Further, while the Company has no present plans to issue debt or equity securities, the Company believes, if necessary, it could raise additional capital through the issuance of such securities.

 

The Company expects to use cash to (i) grow its finance receivables portfolio by a percentage that is slightly larger than the percentage that its revenues grow, (ii) purchase property and equipment of approximately $3 to $5 million in the next twelve months in connection with opening new stores and refurbishing existing stores, and (iii) to the extent excess cash is available, reduce debt.  In addition, from time to time the Company may use cash to repurchase its common stock.

 

The Company’s revolving credit facilities mature in April 2006.  The Company expects that it will be able to renew or refinance its revolving credit facilities on or before the date they mature.  The Company believes it will have adequate liquidity to satisfy its capital needs for the foreseeable future.

 

16

 

Contractual Payment Obligations

 

The following is a summary of the Company’s contractual obligations as of April 30, 2005, including renewal periods under operating leases that are reasonably assured (in thousands):

 

		Payments Due by Period
Contractual Obligations		Total			Less Than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
Debt		$	29,145		$	—		$	29,145		$	—		$	—
Operating leases		23,020			2,081			3,779			3,556			13,604
Total		$	52,165		$	2,081		$	32,924		$	3,556		$	13,604

 

The $23.0 million of lease commitments includes $7.3 million of non-cancelable lease commitments under the primary lease terms, and $15.7 million of lease commitments for renewal periods at the Company’s option that are reasonably assured.

 

Off-Balance Sheet Arrangements

 

The Company has entered into operating leases for approximately 75% of its store and office facilities.  Generally these leases are for periods of three to five years and usually contain multiple renewal options.  The Company uses leasing arrangements to maintain flexibility in its store locations and to preserve capital.  The Company expects to continue to lease the majority of its store and office facilities under arrangements substantially consistent with the past.  For the years ended April 30, 2005, 2004 and 2003 rent expense for all operating leases amounted to approximately $2.1 million, $1.9 million and $1.8 million, respectively.

 

Other than its operating leases, the Company is not a party to any off-balance sheet arrangement that management believes is reasonably likely to have a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Policies

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires the Company to make estimates and assumptions in determining the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from the Company’s estimates.  The Company believes the most significant estimate made in the preparation of the accompanying consolidated financial statements relates to the determination of its allowance for credit losses, which is discussed below.  The Company’s accounting policies are discussed in Note B in the accompanying consolidated financial statements.

 

The Company maintains an allowance for credit losses on an aggregate basis at a level it considers sufficient to cover estimated losses in the collection of its finance receivables.  The allowance for credit losses is based primarily upon historical credit loss experience, with consideration given to recent credit loss trends and changes in loan characteristics (i.e., average amount financed and term), delinquency levels, collateral values, economic conditions and underwriting and collection practices.  The allowance for credit losses is periodically reviewed by management with any changes reflected in current operations.  Although it is at least reasonably possible that events or circumstances could occur in the future that are not presently foreseen which could cause actual credit losses to be materially different from the recorded allowance for credit losses, the Company believes that it has given appropriate consideration to all relevant factors and has made reasonable assumptions in determining the allowance for credit losses.

 

Recent Accounting Pronouncement

 

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS 123R”), which is a revision of SFAS 123.  SFAS 123R supersedes APB Opinion No. 25.  Generally, the approach in SFAS 123R is similar to the approach described in SFAS 123, except that SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values.  Pro forma disclosure is no longer an alternative under SFAS 123R.  SFAS 123R was originally issued with implementation required for interim and annual periods beginning after June 15, 2005.  On April 15, 2005, the Securities and Exchange Commission delayed the required effective date of SFAS 123R to the beginning of the first fiscal year that begins after June 15, 2005.

 

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The Company is evaluating the requirements of SFAS 123R.  The Company has not yet determined the method of adoption or the effect of adopting SFAS 123R, and it has not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.  The Company expects to adopt SFAS 123R on May 1, 2006.

 

Seasonality

 

The Company’s automobile sales and finance business is seasonal in nature.  The Company’s third fiscal quarter (November through January) is historically the slowest period for car and truck sales.  Many of the Company’s operating expenses such as administrative personnel, rent and insurance are fixed and cannot be reduced during periods of decreased sales.  Conversely, the Company’s fourth fiscal quarter (February through April) is historically the busiest time for car and truck sales as many of the Company’s customers use income tax refunds as a down payment on the purchase of a vehicle.  Further, the Company experiences seasonal fluctuations in its finance receivable credit losses.  As a percentage of sales, the Company’s first and fourth fiscal quarters tend to have lower credit losses (averaging 18.1% over the last eight years), while its second and third fiscal quarters tend to have higher credit losses (averaging 19.9% over the last eight years).

 

Impact of Inflation

 

Inflation has not historically been a significant factor impacting the Company’s results.

 

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Item 7A.  Quantitative and Qualitative Disclosures about Market Risk

 

The Company is exposed to market risk on its financial instruments from changes in interest rates.  In particular, the Company has exposure to changes in the federal primary credit rate and the prime interest rate of its lender.  The Company does not use financial instruments for trading purposes or to manage interest rate risk.  The Company’s earnings are impacted by its net interest income, which is the difference between the income earned on interest-bearing assets and the interest paid on interest-bearing notes payable.  As described below, a decrease in market interest rates would generally have an adverse effect on the Company’s profitability.

 

The Company’s financial instruments consist of fixed rate finance receivables and variable rate notes payable.  The Company’s finance receivables generally bear interest at fixed rates ranging from 6% to 19%.  These finance receivables generally have remaining maturities from one to 36 months.  The Company’s borrowings contain variable interest rates that fluctuate with market interest rates (i.e., the rate charged on the Company’s revolving credit facility fluctuates with the prime interest rate of its lender).  However, interest rates charged on finance receivables originated in the State of Arkansas are limited to the federal primary credit rate (3.75% at April 30, 2005) plus 5.0%.  Typically, the Company charges interest on its Arkansas loans at or near the maximum rate allowed by law.  Thus, while the interest rates charged on the Company’s loans do not fluctuate once established, new loans originated in Arkansas are set at a spread above the federal primary credit rate which does fluctuate.  At April 30, 2005, approximately 62% of the Company’s finance receivables were originated in Arkansas.  Assuming that this percentage is held constant for future loan originations, the long-term effect of decreases in the federal primary credit rate would generally have a negative effect on the profitability of the Company.  This is the case because the amount of interest income lost on Arkansas originated loans would likely exceed the amount of interest expense saved on the Company’s variable rate borrowings (assuming the prime interest rate of its lender decreases by the same percentage as the decrease in the federal primary credit rate).  The initial impact on profitability resulting from a decrease in the federal primary credit rate and the rate charged on its variable interest rate borrowings would be positive, as the immediate interest expense savings would outweigh the loss of interest income on new loan originations.  However, as the amount of new loans originated at the lower interest rate increases to an amount in excess of the amount of variable interest rate borrowings, the effect on profitability would become negative.

 

The table below illustrates the estimated impact that hypothetical changes in the federal primary credit rate would have on the Company’s continuing pretax earnings.  The calculations assume (i) the increase or decrease in the federal primary credit rate remains in effect for two years, (ii) the increase or decrease in the federal primary credit rate results in a like increase or decrease in the rate charged on the Company’s variable rate borrowings, (iii) the principal amount of finance receivables ($152.4 million) and variable interest rate borrowings ($29.1 million), and the percentage of Arkansas originated finance receivables (62%), remain constant during the periods, and (iv) the Company’s historical collection and charge-off experience continues throughout the periods.

 

 

A similar calculation and table was prepared at April 30, 2004.  The calculation and table were materially consistent with the information provided above.

 

Item 8.  Financial Statements and Supplementary Data

 

The following financial statements and accountant’s report are included in Item 8 of this report:

 

	Report of Independent Registered Public Accounting Firm
	Consolidated Balance Sheets as of April 30, 2005 and 2004
	Consolidated Statements of Operations for the years ended April 30, 2005, 2004 and 2003
	Consolidated Statements of Cash Flows for the years ended April 30, 2005, 2004 and 2003
	Consolidated Statements of Stockholders’ Equity for the years ended April 30, 2005, 2004 and 2003
	Notes to Consolidated Financial Statements

 

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Report of Independent Registered Public Accounting Firm

 

Stockholders and Board of Directors

America’s Car-Mart, Inc.

 

We have audited the accompanying consolidated balance sheets of America’s Car-Mart, Inc. (a Texas corporation) as of April 30, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2005.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits 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.  Our audits included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of America’s Car-Mart, Inc. as of April 30, 2005 and 2004, and the results of its consolidated operations and its consolidated cash flows for the three years then ended in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of America’s Car-Mart, Inc.’s internal control over financial reporting as of April 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 12, 2005 (included in Item 9A), expressed an unqualified opinion with respect to management’s assessment of internal control and an adverse opinion with respect to the Company’s effective operation of internal control over financial reporting as of April 30, 2005.

 

/s/ Grant Thornton LLP
Dallas, Texas
July 12, 2005

 

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Consolidated Balance Sheets

America’s Car-Mart, Inc.

 

		April 30, 2005			April 30, 2004
Assets:
Cash and cash equivalents		$	459,177		$	1,128,349
Other receivables		524,046			509,752
Finance receivables, net		123,098,966			103,683,660
Inventory		7,985,959			5,975,292
Prepaid expenses and other assets		295,452			387,641
Property and equipment, net		11,304,658			5,556,757
		$	143,668,258		$	117,241,451
Liabilities and stockholders’ equity:
Accounts payable		$	2,796,086		$	2,122,927
Accrued liabilities		6,023,291			5,544,988
Income taxes payable		451,714			845,044
Deferred tax liabilities, net		1,986,696			1,616,896
Revolving credit facilities		29,145,090			22,534,120
Total liabilities		40,402,877			32,663,975
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01 per share, 1,000,000 shares authorized; none issued or outstanding
Common stock, par value $.01 per share, 50,000,000 shares authorized; 11,843,738 issued and outstanding (11,636,762 at April 30, 2004)		118,437			116,368
Additional paid-in capital		33,809,445			33,099,975
Retained earnings		69,337,499			51,361,133
Total stockholders’ equity		103,265,381			84,577,476
		$	143,668,258		$	117,241,451

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Consolidated Statements of Operations

America’s Car-Mart, Inc.

 

		Years Ended April 30,
		2005			2004			2003
Revenues:
Sales		$	189,343,473		$	163,589,076		$	145,014,142
Interest and other income		15,444,975			12,594,611			9,870,805
		204,788,448			176,183,687			154,884,947
Costs and expenses:
Cost of sales		101,769,671			85,510,497			77,073,294
Selling, general and administrative		34,788,123			29,670,849			27,417,225
Provision for credit losses		38,093,729			34,766,496			26,896,608
Interest expense		1,226,957			1,113,840			1,685,774
Depreciation and amortization		425,624			321,053			299,203
		176,304,104			151,382,735			133,372,104
Income from continuing operations before taxes		28,484,344			24,800,952			21,512,843
Provision for income taxes		10,507,978			9,161,506			7,944,100
Income from continuing operations		17,976,366			15,639,446			13,568,743
Discontinued operations:
Income from discontinued operations, net of taxes and minority interests					165,000			375,318
Gain on sale of discontinued operations, net of taxes								130,868
Income from discontinued operations					165,000			506,186
Net income		$	17,976,366		$	15,804,446		$	14,074,929
Basic earnings per share:
Continuing operations		$	1.53		$	1.38		$	1.29
Discontinued operations					.02			.05
Total		$	1.53		$	1.40		$	1.34
Diluted earnings per share:
Continuing operations		$	1.49		$	1.31		$	1.16
Discontinued operations					.01			.04
Total		$	1.49		$	1.32		$	1.20
Weighted average number of shares outstanding:
Basic		11,737,398			11,318,946			10,523,988
Diluted		12,026,745			11,945,139			11,743,116

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Consolidated Statements of Cash Flows

America’s Car-Mart, Inc.

 

		Years Ended April 30,
		2005			2004			2003
Operating activities:
Net income		$	17,976,366		$	15,804,446		$	14,074,929
Less: Income from discontinued operations					165,000			506,186
Income from continuing operations		17,976,366			15,639,446			13,568,743
Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities:
Provision for credit losses		38,093,729			34,766,496			26,896,608
Depreciation and amortization		425,624			321,053			299,203
Deferred income taxes		369,800			454,192			1,281,756
Changes in operating assets and liabilities:
Finance receivable originations		(173,446,050		)	(151,379,959		)	(131,447,487		)
Finance receivable collections		105,972,843			97,366,670			82,645,614
Income tax and other receivables		(14,294		)	299,936			8,844,959
Inventory		7,953,505			5,002,803			5,110,444
Prepaid expenses and other assets		92,189			41,373			182,250
Accounts payable and accrued liabilities		1,151,462			(1,080,870		)	481,228
Income taxes payable		(89,330		)	2,559,044
Net cash provided by (used in) operating activities		(1,514,156		)	3,990,184			7,863,318
Investing activities:
Purchase of property and equipment		(6,173,525		)	(1,398,678		)	(2,167,703		)
Note collections from discontinued operations								2,078,661
Sale of discontinued operations								6,795,000
Net cash provided by (used in) investing activities		(6,173,525		)	(1,398,678		)	6,705,958
Financing activities:
Exercise of stock options and warrants		939,175			2,583,517			1,497,119
Purchase of common stock		(531,636		)	(1,646,360		)	(2,688,792		)
Proceeds from (repayments of) revolving credit facility, net		6,610,970			(3,434,100		)	(6,323,737		)
Repayments of other debt								(7,500,000		)
Net cash provided by (used in) financing activities		7,018,509			(2,496,943		)	(15,015,410		)
Cash provided by (used in) continuing operations		(669,172		)	94,563			(446,134		)
Cash provided by (used in) discontinued operations					250,000			(2,520,506		)
Increase (decrease) in cash and cash equivalents		(669,172		)	344,563			(2,966,640		)
Cash and cash equivalents at:  Beginning of period		1,128,349			783,786			3,750,426
End of period		$	459,177		$	1,128,349		$	783,786

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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