America's Car-Mart - 10-Q quarterly report FY

Part I

Financial Information

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

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

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

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A – Organization and Business

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 July 31, 2005, the Company operated 80 stores located primarily in small cities throughout the South-Central United States.

B – Summary of Significant Accounting Policies

General

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended July 31, 2005 are not necessarily indicative of the results that may be expected for the year ended April 30, 2006.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended April 30, 2005.

Adjustments to Reflect Stock Split

All references to the number of shares of common stock, stock options and warrants, earnings per share amounts, exercise prices of stock options and warrants, common stock prices, and other share and per share data or amounts in this Quarterly Report on Form 10-Q have been adjusted, as necessary, to retroactively reflect the three-for-two common stock split effected in the form of a 50% stock dividend in April 2005.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount 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 period.  Actual results could differ from those estimates.

Concentration of Risk

The Company provides financing in connection with the sale of substantially all of its vehicles.  These sales are made primarily to customers residing in Arkansas, Oklahoma, Texas, Kentucky and Missouri, with approximately 60% of revenues resulting from sales to Arkansas customers.  Periodically, the Company maintains cash in financial institutions in excess of the amounts insured by the federal government.  Car-Mart’s revolving credit facilities mature in April 2006.  The Company expects that these credit facilities will be renewed or refinanced on or before the scheduled maturity dates.

Restrictions on Subsidiary Distributions/Dividends

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 July 31, 2005), and (ii) dividends equal to 75% of Car-Mart of Arkansas’ net income.  At July 31, 2005, the Company’s assets (excluding its $95.2 million equity investment in Car-Mart) consisted of $.4 million in cash, $3.1 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.

Finance Receivables, Repossessions and Charge-offs and Allowance for Credit Losses

The Company originates installment sale contracts from the sale of used vehicles at its dealerships.  Finance receivables are collateralized by vehicles sold and consist of contractually scheduled payments from installment contracts net of unearned finance charges and an allowance for credit losses.  Unearned finance charges represent the balance of interest income remaining from the total interest to be earned over the term of the related installment contract.  An account is considered delinquent when a contractually scheduled payment has not been received by the scheduled payment date.  At July 31, 2005 and 2004, 4.7% and 3.4%, respectively, of the Company’s finance receivable balances were 30 days or more past due.

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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.

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 above.  The Company expects to adopt SFAS 123R on May 1, 2006.

Reclassifications

Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2006 presentation.

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C – Finance Receivables

The Company originates installment sale contracts from the sale of used vehicles at its dealerships.  These installment sale contracts typically include interest rates ranging from 6% to 19% per annum, are collateralized by the vehicle sold and provide for payments over periods ranging from 12 to 36 months.  The components of finance receivables are as follows:

Changes in the finance receivables, net balance for the three months ended July 31, 2005 and 2004 are as follows:

Changes in the finance receivables allowance for credit losses for the three months ended July 31, 2005 and 2004 are as follows:

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D – Property and Equipment

A summary of property and equipment is as follows:

E – Accrued Liabilities

A summary of accrued liabilities is as follows:

F – Revolving Credit Facilities

A summary of revolving credit facilities is as follows:

Car-Mart has two revolving credit facilities that aggregate $39.5 million and mature in April 2006.  The facilities are collateralized by substantially all the assets of Car-Mart including finance receivables and inventory.  Interest is payable monthly under the facilities at the bank’s prime lending rate per annum (6.25% at July 31, 2005 and 5.75% at April 30, 2005).  The facilities contain various reporting and performance covenants including (i) maintenance of certain financial ratios and tests, (ii) limitations on borrowings from other sources, (iii) restrictions on certain operating activities, and (iv) limitations on the payment of dividends or distributions to the Company.  The amount available to be drawn under the facilities is a function of eligible finance receivables and inventory.  Based upon eligible finance receivables and inventory at July 31, 2005, Car-Mart could have drawn an additional $10.2 million under its facilities.

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G – Weighted Average Shares Outstanding

Weighted average shares outstanding, which are used in the calculation of basic and diluted earnings per share, are as follows:

H – Commitments and Contingencies

Litigation

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.

Related Finance Company

Car-Mart of Arkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, and as such they file separate federal and state income tax returns.  Car-Mart of Arkansas routinely sells its finance receivables to Colonial at what the Company believes to be fair market value and is able to take a tax deduction at the time of sale for the difference between the tax basis of the receivables sold and the sales price.  For tax purposes, these transactions are permissible under the provisions of the Internal Revenue Code (“IRC”) as described in the Treasury Regulations.  For financial accounting purposes, these transactions are eliminated in consolidation.  The sale of finance receivables from Car-Mart of Arkansas to Colonial provides certain legal protection for the Company’s finance receivables and, principally because of certain state apportionment characteristics of Colonial, also has the effect of reducing the Company’s overall effective tax rate by about 240 basis points.  The determination of whether or not the Company is entitled to a tax deduction at the time of sale is in part a facts and circumstances matter, and the interpretation of those facts and circumstances.  The Company believes it satisfies the material provisions of the Treasury Regulations.

Currently, the Internal Revenue Service (“IRS”) is examining the Company’s tax returns for fiscal 2002, and in particular is focusing on whether or not the Company satisfies the provisions of the Treasury Regulations which would entitle Car-Mart of Arkansas to a tax deduction at the time it sells its finance receivables to Colonial.  The Company is unable to determine at this time the amount of adjustments, if any, that may result from this examination.

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I – Supplemental Cash Flow Information

Supplemental cash flow disclosures are as follows:

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Item 2.  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 and notes thereto appearing elsewhere in this report.

Forward-looking Information

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements.  Certain information included in this Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by the Company with the Securities and Exchange Commission (as well as information included in oral statements or other written statements made or to be made by the Company or its management) contain or will contain, forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.  The words “believe,” “expect,” “anticipate,” “estimate,” “project” and similar expressions identify forward-looking statements, which speak only as of the date the statement was made.  The Company undertakes no obligation to publicly update or revise any forward-looking statements.  Such forward-looking statements are based upon management’s current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company’s future financial condition and results.  As a consequence, actual results may differ materially from those expressed in any forward-looking statements made by or on behalf of the Company as a result of various factors.  Uncertainties and risks related to such forward-looking statements include, but are not limited to, those relating to the continued availability of lines of credit for the Company’s business, the Company’s ability to underwrite and collect its finance receivables effectively, assumptions relating to unit sales and gross margins, changes in interest rates, competition, dependence on existing management, adverse economic conditions (particularly in the State of Arkansas), changes in tax laws or the administration and interpretation of such laws and changes in lending laws or regulations.  Any forward-looking statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made.

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 July 31, 2005, the Company operated 80 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 fiscal years.  Finance receivables tend to grow slightly faster than revenues.  Growth results from same store revenue growth, which includes growth in unit sales and price increases, and the addition of new stores.  Revenue growth during the three months ended July 31, 2005 (14.5%) was in line with the Company’s fiscal 2006 growth expectations of 10% to 14%.  Revenue growth in the first quarter of fiscal 2006 was assisted by a 6.3% increase in the average retail sales price.  Typically, annual price increases are in the 3% to 5% range.  The Company expects that for the entire fiscal 2006 year, its average annual retail sales price will increase about 4% to 5% over the prior fiscal year.

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%).  However, over the last two fiscal years credit losses as a percentage of sales have averaged 20.7%.  Credit losses, on a percentage basis, tend to be higher at new and developing stores than they do at mature stores (stores in existence for ten years or more).  Generally, this is the case because the store management at new and developing stores tends to be less experienced (in making credit decisions and collecting customer accounts) and the customer base is less seasoned.  Generally, older stores have more repeat customers.  On average, repeat customers are a better credit risk than non-repeat customers.  Due to the rate of the Company’s growth, the percentage of new and developing stores as a percentage of the total number of stores has been increasing over the last few years.  For the three months ended July 31, 2005, credit losses as a percentage of sales were 20.9%.  This percentage is higher than normal due to higher than normal credit losses at stores six years of age or less.  The Company intends to increase the focus of store management on credit quality and collections, particularly at those stores under six years of age, and decrease the focus on sales growth at those stores.

In addition to the experience of store management and the seasoning of the customer base, credit losses are also impacted, to some degree, by economic conditions in the markets in which the Company serves.  In recent months, energy costs have risen at a rate much faster than the general rate of inflation.  While the Company believes the most significant factor affecting credit losses is the proper execution (or the lack thereof) of its business practices, the Company also believes that higher energy and fuel costs does have a negative impact on collection results.

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 during the three months ended July 31, 2005 were 45.4%, down from 46.6% in the same period of the prior fiscal year.  The Company’s gross margins are

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based upon the cost of the vehicle purchased, with lower-priced vehicles having higher gross margin percentages.  Generally, as the Company’s average retail sales price increases, its gross margin percentage decreases.  The Company expects to maintain an average retail sales price throughout the balance of fiscal 2006 at a level comparable to the first quarter.  As such, the Company does not presently expect that its gross margin percentage will change significantly during the balance of fiscal 2006 from its current level.

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.  In fiscal 2006 and beyond, the Company expects to continue to invest in the development of its workforce.

Consolidated Operations

(Operating Statement Dollars in Thousands)

Three Months Ended July 31, 2005 vs. Three Months Ended July 31, 2004

Revenues increased $7.4 million, or 14.5%, for the three months ended July 31, 2005 as compared to the same period in the prior fiscal year.  The increase was principally the result of (i) revenue growth from stores that operated a full three months in both periods ($4.9 million, or 10.3%), (ii) revenue growth from stores opened during the three months ended July 31, 2004 or stores that opened or closed a satellite location after April 30, 2004 ($.6 million), and (iii) revenues from stores opened after July 31, 2004 ($1.8 million).

Cost of sales as a percentage of sales increased 1.2% to 54.6% for the three months ended July 31, 2005 from 53.4% in the same period of the prior fiscal year.  The increase was principally the result of selling higher-priced vehicles which have lower gross profit margin percentages.  The Company’s gross margins are based upon the cost of the vehicle purchased, with lower-priced vehicles having higher gross margin percentages.  The average price of retail vehicles sold increased 6.3% to $7,477 during the three months ended July 31, 2005 as compared to the three months ended July 31, 2004.

Selling, general and administrative expense as a percentage of sales was 17.4% for each of the three months ended July 31, 2005 and the same period of the prior fiscal year.  While these expenses as a percentage of sales were unchanged on an overall basis, professional fees increased $.5 million, or ..9% of sales, during the three months ended July 31, 2005 as compared to the same period in the prior fiscal year.  The increase was largely attributable to fees incurred in connection with completion of the Company’s fiscal 2005 audit and compliance with the Sarbanes-Oxley Act of 2002.  The Company anticipates that its future Sarbanes-Oxley Act compliance expenses will be lower than the expenses it incurred in the

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fourth quarter of the prior fiscal year and the first quarter of the current fiscal year.  The increase in professional fees was offset by a decrease, as a percentage of sales, in payroll costs.

Provision for credit losses as a percentage of sales increased 1.4%, to 20.9% for the three months ended July 31, 2005 from 19.5% in the same period of the prior fiscal year.  The increase is largely attributable to (i) a greater concentration of newer, less mature stores, and (ii) higher than normal credit losses at those less mature stores.  On a percentage basis, the Company has fewer stores over ten years of age than it had in the past.  New and developing stores tend to have higher credit losses as a percentage of sales since store management is generally less experienced and the customer base is less seasoned (not as many repeat customers who tend to be better paying customers).  Further, these new and developing stores (mostly those under six years of age) have been experiencing higher than normal credit losses.  The Company intends to increase the focus of store management on credit quality and collections, particularly at those stores under six years of age, and decrease the focus on sales growth at those stores.

Interest expense as a percentage of sales increased .4%, to .9% for the three months ended July 31, 2005 from ..5% in the same period of the prior fiscal year.  The increase was attributable to higher average borrowings during the three months ended July 31, 2005 (approximately $29 million) as compared to the same period in the prior fiscal year (approximately $22 million), and an increase in the rate charged during the three months ended July 31, 2005 (average rate charged of 6.08% per annum) as compared to the same period in the prior fiscal year (average rate charged of 4.08% per annum).  The increase in interest rates is attributable to increases in the prime interest rate of the Company’s lender as the Company’s revolving credit facilities fluctuate with the prime interest rate of its lender.

Financial Condition

The following table sets forth the major balance sheet accounts of the Company as of the dates specified (in thousands):

Historically, the growth in finance receivables on an annual basis tends to grow slightly faster than growth in revenue on an annual basis.  The Company expects the historical relationship between net finance receivables growth and revenue growth to continue in the future.  Also, historically finance receivables growth tends to be the greatest in the first fiscal quarter of each year.  This is due to the strong sales levels that typically occur in the first quarter, coupled with collection results and account charge-offs.

Inventory levels were fairly consistent between July 31, 2005 and April 30, 2005.  In general, the Company anticipates inventory levels will rise as more stores are opened and sales increase.

Property and equipment, net increased $1.4 million during the three months ended July 31, 2005 as the Company acquired real estate for three locations (one new store and the relocation of two existing stores), made improvements at several properties and purchased new computer equipment in connection with upgrading its information technology systems.

Accounts payable and accrued liabilities increased $3.6 million during the three months ended July 31, 2005.  The increase was largely due to an increase in accounts payable related to vehicle purchases ($.9 million) and an increase in cash overdraft ($1.9 million).  The timing of payment for vehicle purchases is primarily tied to when the seller presents a title for the purchased vehicle.  Cash overdraft fluctuates based upon the day of the week, as daily deposits vary by day of the week and the level of checks that are outstanding at any point in time.

Borrowings on the Company’s revolving credit facilities fluctuate based upon a number of factors including (i) net income, (ii) finance receivables growth, and (iii) capital expenditures.  Historically, income from 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.

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Liquidity and Capital Resources

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

The Company generates cash flow from net income from operations.  Most or all of this cash is used to fund finance receivables growth.  To the extent finance receivables growth exceeds net income from 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 July 31, 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.  In general, in order to preserve capital and maintain flexibility, the Company prefers to lease its store locations.  However, the Company does periodically purchase the real property where its stores are located, particularly if the Company expects to be in that location for ten years or more.

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 July 31, 2005), and (ii) dividends equal to 75% of Car-Mart of Arkansas’ net income.  At July 31, 2005, the Company’s assets (excluding its $95.2 million equity investment in Car-Mart) consisted of $.4 million in cash, $3.1 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 July 31, 2005, the Company had $.8 million of cash on hand and an additional $10.2 million of availability under its revolving credit facilities.  On a short-term basis, the Company’s principal sources of liquidity include income from 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 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 grow its finance receivables portfolio by a percentage that is slightly larger than the percentage of its revenue growth, and to 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.  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 is presently negotiating an extension of its revolving credit facilities and an increase in the maximum amount that may be borrowed.  The Company believes it will have adequate liquidity to satisfy its capital needs for the foreseeable future.

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As discussed in Note H to the financial statements, the IRS is currently examining the Company’s tax returns for fiscal 2002, and in particular is focusing on whether or not the Company satisfies the provisions of the Treasury Regulations that would entitle Car-Mart of Arkansas to a tax deduction at the time it sells its finance receivables to Colonial.  The Company is unable to determine at this time the amount of adjustments, if any, that may result from this examination.

Contractual Payment Obligations

There have been no material changes outside of the ordinary course of business in the Company’s contractual payment obligations from those reported at April 30, 2005 in the Company’s Annual Report on Form 10-K.

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.

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 would be material to investors.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted 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 to 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.

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.

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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 19.0% over the last five fiscal years), while its second and third fiscal quarters tend to have higher credit losses (averaging 20.3% over the last five fiscal years).

Item 3.  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 facilities fluctuate 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 (4.25% at July 31, 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 July 31, 2005, approximately 61% 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 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 ($163.5 million) and variable interest rate borrowings ($29.3 million), and the percentage of Arkansas originated finance receivables (61%), 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, 2005.  The calculation and table was comparable with the information provided above.

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Item 6.  Exhibits

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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Exhibit Index

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