10-Q 1 d03844e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended: Commission file number: JANUARY 31, 2003 0-14939 AMERICA'S CAR-MART, INC. (Exact name of registrant as specified in its charter) TEXAS 63-0851141 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) 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) 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 [X] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding at Title of Each Class March 5, 2003 ------------------- -------------- Common stock, par value $.01 per share 7,070,875
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS AMERICA'S CAR-MART, INC. CONSOLIDATED BALANCE SHEETS
January 31, 2003 (unaudited) April 30, 2002 ---------------- -------------- Assets: Cash and cash equivalents $ 595,561 $ 1,229,920 Income tax receivable 7,627,362 Notes and other receivables 642,835 1,457,013 Finance receivables, net 87,418,869 75,079,603 Inventory 4,740,189 3,540,538 Prepaid and other assets 249,019 251,729 Investments 278,471 252,456 Deferred tax assets, net 119,052 Property and equipment, net 4,074,314 2,626,711 Assets of discontinued operations 35,957,978 ---------------- -------------- $ 97,999,258 $ 128,142,362 ================ ============== Liabilities and stockholders' equity: Accounts payable $ 2,026,276 $ 1,984,918 Accrued liabilities 4,870,583 6,282,639 Income taxes payable 266,387 Deferred tax liabilities, net 250,648 Revolving credit facility 28,589,595 32,291,957 Other notes payable 7,500,000 Liabilities of discontinued operations 27,269,661 ---------------- -------------- 36,003,489 75,329,175 ---------------- -------------- 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; 7,004,444 issued and outstanding (6,944,325 at April 30, 2002) 70,044 69,444 Additional paid-in capital 30,116,955 31,261,985 Retained earnings 31,808,770 21,481,758 ---------------- -------------- Total stockholders' equity 61,995,769 52,813,187 ---------------- -------------- $ 97,999,258 $ 128,142,362 ================ ==============
The accompanying notes are an integral part of these consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF OPERATIONS AMERICA'S CAR-MART, INC. (UNAUDITED)
Three Months Ended Nine Months Ended January 31, January 31, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenues: Sales $ 35,730,236 $ 28,655,084 $105,477,164 $ 86,121,745 Interest income 2,569,293 2,265,420 7,197,105 7,105,314 ------------ ------------ ------------ ------------ 38,299,529 30,920,504 112,674,269 93,227,059 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 19,011,745 14,506,250 55,827,775 45,549,187 Selling, general and administrative 7,012,232 5,867,055 20,198,649 16,042,312 Provision for credit losses 6,621,280 5,887,001 19,415,277 17,509,684 Interest expense 361,206 656,354 1,366,940 2,438,761 Depreciation and amortization 74,175 51,248 209,925 208,868 Stock option based compensation 2,290,172 2,290,172 Restructuring charge 2,732,106 Write-down of investments and equipment 3,927,631 ------------ ------------ ------------ ------------ 33,080,638 29,258,080 97,018,566 90,698,721 ------------ ------------ ------------ ------------ Income from continuing operations before taxes and minority interests 5,218,891 1,662,424 15,655,703 2,528,338 Provision for income taxes 1,935,349 1,293,078 5,834,877 2,069,734 Minority interests 138,329 418,189 ------------ ------------ ------------ ------------ Income from continuing operations 3,283,542 231,017 9,820,826 40,415 Discontinued operations: Income (loss) from discontinued operations, net of taxes and minority interests 307,323 375,318 (13,275,474) Gain on sale of discontinued operations, net of tax 130,868 ------------ ------------ ------------ ------------ Income (loss) from discontinued operations 307,323 506,186 (13,275,474) ------------ ------------ ------------ ------------ Net income (loss) $ 3,283,542 $ 538,340 $ 10,327,012 $(13,235,059) ============ ============ ============ ============ Basic earnings (loss) per share: Continuing operations $ .47 $ .03 $ 1.41 $ .01 Discontinued operations .05 .07 (1.96) ------------ ------------ ------------ ------------ Total $ .47 $ .08 $ 1.48 $ (1.95) ============ ============ ============ ============ Diluted earnings (loss) per share: Continuing operations $ .42 $ .03 $ 1.25 $ .01 Discontinued operations .04 .07 (1.89) ------------ ------------ ------------ ------------ Total $ .42 $ .08 $ 1.32 $ (1.88) ============ ============ ============ ============ Weighted average number of shares outstanding: Basic 6,996,036 6,747,458 6,987,118 6,782,439 Diluted 7,794,090 7,149,145 7,846,605 7,032,625
The accompanying notes are an integral part of these consolidated financial statements. 3 CONSOLIDATED STATEMENTS OF CASH FLOWS AMERICA'S CAR-MART, INC. (UNAUDITED)
Nine Months Ended January 31, 2003 2002 ------------ ------------ Operating activities: Net income (loss) $ 10,327,012 $(13,235,059) Add: (Income) loss from discontinued operations (506,186) 13,275,474 ------------ ------------ Income from continuing operations 9,820,826 40,415 Adjustments to reconcile income from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization 209,925 208,868 Deferred income taxes 369,700 5,412,253 Provision for credit losses 100,000 Stock option based compensation 2,290,172 Write-down of investments and equipment 3,927,631 Minority interests 418,189 Changes in operating assets and liabilities: Changes in finance receivables, net: Finance receivable originations (96,096,526) (78,713,912) Finance receivable collections 60,265,397 47,759,066 Provision for credit losses 19,415,277 17,409,684 Inventory acquired in repossession 4,076,586 4,093,441 ------------ ------------ Subtotal finance receivables (12,339,266) (9,451,721) Income tax receivable 7,948,204 Notes and other receivables 814,178 (3,109,955) Inventory (1,199,651) (680,351) Prepaid and other assets 13,742 102,938 Accounts payable and accrued liabilities (1,370,698) 3,880,812 Income taxes payable 266,387 (4,987,609) ------------ ------------ Net cash provided by (used in) operating activities 4,533,347 (1,848,358) ------------ ------------ Investing activities: Purchase of property and equipment (1,668,560) (937,609) Sale of equipment 25,000 Sale of discontinued operations 6,795,000 Note collections from discontinued operations 2,078,661 1,347,340 Purchase of investments (26,015) (54,518) ------------ ------------ Net cash provided by investing activities 7,179,086 380,213 ------------ ------------ Financing activities: Exercise of stock options 664,618 48,359 Purchase and retirement of common stock (1,809,048) (1,012,537) Proceeds from (repayments of) revolving credit facility, net (3,702,362) 2,738,015 Repayments of other debt (7,500,000) (325,000) ------------ ------------ Net cash provided by (used in) financing activities (12,346,792) 1,448,837 ------------ ------------ Cash used in continuing operations (634,359) (19,308) Cash provided by (used in) discontinued operations (2,520,506) 300,098 ------------ ------------ Increase (decrease) in cash and cash equivalents (3,154,865) 280,790 Cash and cash equivalents at: Beginning of period 3,750,426 2,193,342 ------------ ------------ End of period 595,561 2,474,132 Less: Cash and cash equivalents of discontinued operations (1,775,306) ------------ ------------ Cash and cash equivalents of continuing operations $ 595,561 $ 698,826 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AMERICA'S CAR-MART, INC. A - ORGANIZATION AND BUSINESS America's Car-Mart, Inc., a Texas corporation, ("Corporate" or the "Company"), is a holding company that operates automotive dealerships through its subsidiaries that focus 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 America's Car-Mart, Inc., an Arkansas corporation, ("Car-Mart of Arkansas") and Colonial Auto Finance, Inc. ("Colonial") subsidiaries. Car-Mart of Arkansas and Colonial are collectively referred to herein as "Car-Mart". As of January 31, 2003 the Company operated 63 stores located primarily in small cities throughout the South-Central United States. The Company provides financing for substantially all of its customers, many of whom may not qualify for conventional financing as a result of limited credit histories or past credit problems. During the prior fiscal year the Company made the decision to sell all of its subsidiaries except Car-Mart, and relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. As a result of this decision, in May 2002 the Company sold its 50% interest in Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers, for $3.8 million in cash, and in July 2002 the Company sold its 80% interest in Concorde Acceptance Corporation ("Concorde"), a prime and sub-prime mortgage lender, for $3.0 million in cash. Upon the closing of the sale of Concorde, the Company had disposed of all of its discontinued operations. The operating results of (i) Concorde and (ii) Precision are included in discontinued operations in the current period up through the date of sale. Discontinued operations during the prior fiscal periods include the operating results of (i) Concorde, (ii) Precision, and (iii) Smart Choice Automotive Group, Inc. ("Smart Choice"), the Company's 70% owned subsidiary that was written-off in October 2001 (see Note K). Similarly, the assets and liabilities of Concorde and Precision are included in "Assets of discontinued operations" and "Liabilities of discontinued operations", respectively, in the accompanying consolidated balance sheet at April 30, 2002. 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 and nine month periods ended January 31, 2003 are not necessarily indicative of the results that may be expected for the year ending April 30, 2003. 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, 2002. 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 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 period. Actual results could differ from those estimates. Finance Receivables and Allowance for Credit Losses The Company originates installment sale contracts from the sale of used vehicles at its dealerships. Finance receivables 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 capitalization of the total interest to be earned over the term of the related installment contract. The Company maintains an allowance for credit losses at a level it considers sufficient to cover anticipated losses in the collection of its finance receivables. The allowance for credit losses is based primarily upon historical and recent credit loss experience, with consideration given to 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 and actual credit losses may be materially different from the recorded allowance for credit losses, the Company believes that it has given appropriate consideration to all relevant factors and reasonable assumptions in determining the allowance for credit losses. Reclassifications Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2003 presentation. 5 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 and provide for payments over periods ranging from 12 to 30 months. The components of finance receivables as of January 31, 2003 and April 30, 2002 are as follows:
January 31, April 30, 2003 2002 ------------- ------------- Finance receivables $ 115,275,685 $ 99,675,260 Less unearned finance charges (8,341,289) (7,553,048) ------------- ------------- Principal balance 106,934,396 92,122,212 Less allowance for credit losses (19,515,527) (17,042,609) ------------- ------------- Finance receivables, net $ 87,418,869 $ 75,079,603 ============= ============= Allowance as % of principal balance 18.25% 18.50% ============= =============
Changes in the finance receivables allowance for credit losses for the nine months ended January 31, 2003 and 2002 are as follows:
Nine Months Ended January 31, 2003 2002 ------------ ------------ Balance at beginning of period $ 17,042,609 $ 14,066,782 Provision for credit losses 19,415,277 17,409,684 Net charge offs (16,942,359) (15,141,513) ------------ ------------ Balance at end of period $ 19,515,527 $ 16,334,953 ============ ============
The Company's weighted average interest rate on its finance receivables for the three and nine months ended January 31, 2003 and 2002 was as follows:
Period Ended January 31, 2003 2002 ------ ------ Weighted average interest rate: Three months ended 9.4% 10.0% Nine months ended 9.2% 10.7%
6 D - PROPERTY AND EQUIPMENT A summary of property and equipment as of January 31, 2003 and April 30, 2002 is as follows:
January 31, April 30, 2003 2002 ------------ ------------ Land and buildings $ 2,339,511 $ 1,562,393 Furniture, fixtures and equipment 1,019,103 939,557 Leasehold improvements 1,921,501 1,147,597 Less accumulated depreciation and amortization (1,205,801) (1,022,836) ------------ ------------ $ 4,074,314 $ 2,626,711 ============ ============
E - ACCRUED LIABILITIES A summary of accrued liabilities as of January 31, 2003 and April 30, 2002 is as follows:
January 31, April 30, 2003 2002 ------------ ------------ Compensation $ 2,737,425 $ 2,573,579 Interest 112,388 163,211 Severance and office closing 640,602 2,519,606 Service contracts 1,115,244 1,013,035 Cash overdraft 251,553 Other 13,371 13,208 ------------ ------------ $ 4,870,583 $ 6,282,639 ============ ============
Changes in the Company's accrued severance liability from April 30, 2002 to January 31, 2003 are as follows:
Severance Liability ----------- Balance at April 30, 2002 $ 2,419,606 Less payments made (1,861,916) ----------- Balance at January 31, 2003 $ 557,690 ===========
The severance liability pertains to the Company's decision to relocate its corporate headquarters from Dallas, Texas to Bentonville, Arkansas where Car-Mart is based. The initial severance liability of $2.6 million pertained to eight Dallas based employees. Through January 31, 2003, four of such Dallas based employees had been terminated and were paid their severance pay in full. 7 F - DEBT A summary of debt as of January 31, 2003 and April 30, 2002 is as follows:
Revolving Credit Facility --------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Lender Amount Rate Maturity January 31, 2003 April 30, 2002 ------ -------- -------- -------- ---------------- -------------- Bank of Oklahoma $ 39.5 million Prime + .50% April 2004 $ 28,589,595 $ 32,291,957
Other Notes Payable --------------------------------------------------------------------------------------------------------------- Facility Interest Balance at Lender Amount Rate Maturity January 31, 2003 April 30, 2002 ------ -------- -------- -------- ---------------- -------------- Individuals/Trusts N/A 8.50% Jan 2004 $ -- $ 7,500,000
The Company's revolving credit facility is primarily collateralized by finance receivables and inventory. Interest is payable monthly and the principal balance is due at the maturity of the facility. The Company's revolving credit facility contains 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) restrictions on the payment of dividends or distributions. The amount available to be drawn under the Company's revolving credit facility is a function of eligible finance receivables. Based upon eligible finance receivables at January 31, 2003, the Company could have drawn an additional $10.9 million under such facility. 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 for the periods ended January 31, 2003 and 2002:
Three Months Ended Nine Months Ended January 31, January 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Weighted average shares outstanding-basic 6,996,036 6,747,458 6,987,118 6,782,439 Dilutive options and warrants 798,054 401,687 859,487 250,186 ---------- ---------- ---------- ---------- Weighted average shares outstanding-diluted 7,794,090 7,149,145 7,846,605 7,032,625 ========== ========== ========== ========== Antidilutive options not included 62,500 432,500 62,500 432,500 ========== ========== ========== ==========
H - COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company has become a defendant in various types of legal proceedings. Although the Company cannot determine at this time the amount of the ultimate exposure from these ordinary course of business lawsuits, if any, management, based on the advice of counsel, 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, results of operations or cash flows. I - SUPPLEMENTAL CASH FLOW INFORMATION Supplemental cash flow disclosures for the nine months ended January 31, 2003 and 2002 are as follows:
Nine Months Ended January 31, 2003 2002 ------------ ------------ Interest paid $ 1,393,580 $ 2,299,615 Income taxes paid (refunded), net (3,280,662) 5,502,331
8 J - BUSINESS SEGMENTS Operating results and other financial data are presented for the continuing operations of the Company by business segment for the three months ended January 31, 2003 and 2002. The segments include Car-Mart and Corporate operations. The Company's continuing operations and other financial data by business segment for the three months ended January 31, 2003 and 2002 are as follows (in thousands):
Three Months Ended January 31, 2003 ----------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ Revenues: Sales $ 35,730 $ 35,730 Interest income 2,561 $ 168 $ (160) 2,569 ------------ ------------ ------------ ------------ Total 38,291 168 (160) 38,299 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 19,012 19,012 Selling, general and admin. 6,596 416 7,012 Provision for credit losses 6,621 6,621 Interest expense 517 4 (160) 361 Depreciation and amortization 53 21 74 ------------ ------------ ------------ ------------ Total 32,799 441 (160) 33,080 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 5,492 $ (273) $ -- $ 5,219 ============ ============ ============ ============ Capital expenditures $ 455 $ 11 $ -- $ 466 ============ ============ ============ ============ Total assets $ 96,721 $ 64,488 $ (63,210) $ 97,999 ============ ============ ============ ============
Three Months Ended January 31, 2002 ---------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ Revenues: Sales $ 28,655 $ 28,655 Interest income 2,157 $ 189 $ (80) 2,266 ------------ ------------ ------------ ------------ Total 30,812 189 (80) 30,921 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 14,506 14,506 Selling, general and admin. 5,090 777 5,867 Provision for credit losses 5,887 5,887 Interest expense 558 179 (80) 657 Depreciation and amortization 35 17 52 Stock option based compensation 2,290 2,290 ------------ ------------ ------------ ------------ Total 26,076 3,263 (80) 29,259 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 4,736 $ (3,074) $ -- $ 1,662 ============ ============ ============ ============ Capital expenditures $ 272 $ -- $ -- $ 272 ============ ============ ============ ============ Total assets $ 77,756 $ 60,775 ============ ============
9 The Company's continuing operations and other financial data by business segment for the nine months ended January 31, 2003 and 2002 are as follows (in thousands):
Nine Months Ended January 31, 2003 ----------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ Revenues: Sales $ 105,477 $ 105,477 Interest income 7,120 $ 362 $ (285) 7,197 ------------ ------------ ------------ ------------ Total 112,597 362 (285) 112,674 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 55,828 55,828 Selling, general and admin. 18,523 1,675 20,198 Provision for credit losses 19,415 19,415 Interest expense 1,506 146 (285) 1,367 Depreciation and amortization 149 61 210 ------------ ------------ ------------ ------------ Total 95,421 1,882 (285) 97,018 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 17,176 $ (1,520) $ -- $ 15,656 ============ ============ ============ ============ Capital expenditures $ 1,556 $ 113 $ -- $ 1,669 ============ ============ ============ ============ Total assets $ 96,721 $ 64,488 $ (63,210) $ 97,999 ============ ============ ============ ============
Nine Months Ended January 31, 2002 ---------------------------------------------------------- Car-Mart Corporate Eliminations Consolidated ------------ ------------ ------------ ------------ Revenues: Sales $ 86,122 $ 86,122 Interest income 6,658 $ 705 $ (258) 7,105 ------------ ------------ ------------ ------------ Total 92,780 705 (258) 93,227 ------------ ------------ ------------ ------------ Costs and expenses: Cost of sales 45,549 45,549 Selling, general and admin. 13,811 2,231 16,042 Provision for credit losses 17,410 100 17,510 Interest expense 2,074 622 (258) 2,438 Depreciation and amortization 105 105 210 Stock option based compensation 2,290 2,290 Restructuring charge 2,732 2,732 Write-down of investments / equipment 3,928 3,928 ------------ ------------ ------------ ------------ Total 78,949 12,008 (258) 90,699 ------------ ------------ ------------ ------------ Income (loss) before taxes and minority interests $ 13,831 $ (11,303) $ -- $ 2,528 ============ ============ ============ ============ Capital expenditures $ 785 $ 153 $ -- $ 938 ============ ============ ============ ============ Total assets $ 77,756 $ 60,775 ============ ============
10 K - DISCONTINUED OPERATIONS In October 2001 the Company made the decision to sell all its subsidiaries except Car-Mart, and relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. This decision was based on management's desire to separate the highly profitable and modestly leveraged operations of Car-Mart from the operating losses or lower level of profitability and highly leveraged operations of the Company's other subsidiaries. In addition, it was management's belief that the Company's ownership of businesses in a variety of different industries may have created confusion within the investment community, possibly making it difficult for investors to analyze and properly value the Company's common stock. In May 2002 the Company sold its remaining 50% interest in Precision for $3.8 million in cash. In July 2002 the Company sold its 80% interest in Concorde for $3.0 million in cash. As a result of these two sales, the Company no longer has any discontinued operations. As a result of the Company's decision, operating results from its non Car-Mart subsidiaries have been included in discontinued operations for all periods presented. Below is a summary of the number of months each of these subsidiaries' operating results are included in discontinued operations of the Company for the three and nine months ended January 31, 2003 and 2002:
Number of Months Included in Discontinued Operations for the Month Month --------------------------------------------------------------- Company Company Three Months Ended January 31, Nine Months Ended January 31, Acquired Sold or ------------------------------ ----------------------------- Subsidiary or Formed Disposed 2003 2002 2003 2002 ---------- --------- -------- ---- ---- ---- ---- Smart Choice 12-99 10-01 -- -- -- 6 Precision 2-98 5-02 -- 3 -- 9 Concorde 6-97 7-02 -- 3 2 9
A summary of the Company's discontinued operations for the three and nine months ended January 31, 2003 and 2002 is as follows (in thousands):
Three Months Ended January 31, Nine Months Ended January 31, ------------------------------ ----------------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Revenues $ -- $ 3,388 $ 3,058 $ 100,062 Operating expenses 2,776 2,306 104,310 Write-down of Smart Choice assets, net 19,945 ---------- ---------- ---------- ---------- Income (loss) before taxes and minority interests 612 752 (24,193) Provision (benefit) for income taxes 247 283 (6,401) Minority interests (benefit) 57 94 (4,517) ---------- ---------- ---------- ---------- Income (loss) from discontinued operations $ -- $ 308 $ 375 $ (13,275) ========== ========== ========== ========== Gain on sale of discontinued operations, net $ -- $ -- $ 131 $ -- ========== ========== ========== ==========
11 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 effectively underwrite and collect its installment loans, 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 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, ("Corporate" or the "Company"), is a holding company that operates automotive dealerships through its subsidiaries that focus 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 America's Car-Mart, Inc., an Arkansas corporation, ("Car-Mart of Arkansas") and Colonial Auto Finance, Inc. ("Colonial") subsidiaries. Car-Mart of Arkansas and Colonial are collectively referred to herein as "Car-Mart". As of January 31, 2003 the Company operated 63 stores located primarily in small cities throughout the South-Central United States. The Company provides financing for substantially all of its customers, many of whom may not qualify for conventional financing as a result of limited credit histories or past credit problems. During the prior fiscal year the Company made the decision to sell all of its subsidiaries except Car-Mart, and relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. In May 2002 the Company sold its 50% interest in Precision IBC, Inc. ("Precision"), a firm specializing in the sale and rental of intermediate bulk containers, for $3.8 million in cash, and in July 2002 the Company sold its 80% interest in Concorde Acceptance Corporation ("Concorde"), a prime and sub-prime mortgage lender, for $3.0 million in cash. Upon the closing of the sale of Concorde, the Company had disposed of all of its discontinued operations. The operating results of (i) Concorde and (ii) Precision are included in discontinued operations in the current period up through the date of sale. Discontinued operations during the prior fiscal periods include the operating results of (i) Concorde, (ii) Precision, and (iii) Smart Choice Automotive Group, Inc. ("Smart Choice"), the Company's 70% owned subsidiary that was written-off in October 2001 (see Note K). 12 RESULTS OF CONTINUING OPERATIONS Operating results are presented for the continuing operations of the Company by business segment for the three and nine months ended January 31, 2003 and 2002. The segments include Car-Mart and Corporate operations. A summary of the Company's continuing operations by business segment for the three and nine months ended January 31, 2003 and 2002 is as follows: CONSOLIDATED (In Thousands)
Revenues Pretax Income (Loss) ---------------------------------------------------- ---------------------------------------------------- Three Months Ended Nine Months Ended Three Months Ended Nine Months Ended January 31, January 31, January 31, January 31, ------------------------ ------------------------ ------------------------ ------------------------ 2003 2002 2003 2002 2003 2002 2003 2002 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Car-Mart $ 38,291 $ 30,812 $ 112,597 $ 92,780 $ 5,492 $ 4,736 $ 17,176 $ 13,831 Corporate 168 189 362 705 (273) (3,074) (1,520) (11,303) Eliminations (160) (80) (285) (258) ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Consolidated $ 38,299 $ 30,921 $ 112,674 $ 93,227 $ 5,219 $ 1,662 $ 15,656 $ 2,528 ========== ========== ========== ========== ========== ========== ========== ==========
THREE MONTHS ENDED JANUARY 31, 2003 VS. THREE MONTHS ENDED JANUARY 31, 2002 Revenues increased $7.4 million, or 23.9%, for the three months ended January 31, 2003 as compared to the same period of 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 ($4.8 million, or 17.1%), (ii) revenue growth from stores opened during the three months ended January 31, 2002 or stores that added a satellite location after October 31, 2001 ($1.0 million), and (iii) revenues from stores opened after January 31, 2002 ($1.6 million). Pretax income increased $3.6 million for the three months ended January 31, 2003 as compared to the same period of the prior fiscal year. The increase was principally the result of (i) an increase in Car-Mart's pretax income ($.8 million) stemming from an increase in revenues, and (ii) a reduction in Corporate's pretax loss ($2.8 million). The pretax loss at Corporate decreased as a result of (i) the prior fiscal period including a $2.3 million non-cash charge related to stock option compensation, and (ii) a $.4 million reduction in selling, general and administrative expenses in the current fiscal period stemming from the Company's decision to relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. The stock option based compensation charge pertains to the Company's 1997 stock option plan that contained a "cashless" exercise feature. Due to such cashless feature, options granted under the plan were characterized under generally accepted accounting principles as variable options. This resulted in compensation charges to reflect changes in the market value of the Company's common stock. In order to avoid future stock option based compensation charges or credits, effective May 1, 2002 the Company rescinded the cashless exercise provisions of its 1997 Plan. NINE MONTHS ENDED JANUARY 31, 2003 VS. NINE MONTHS ENDED JANUARY 31, 2002 Revenues increased $19.4 million, or 20.9%, for the nine months ended January 31, 2003 as compared to the same period of the prior fiscal year. The increase was principally the result of (i) revenue growth from stores that operated a full nine months in both periods ($11.7 million, or 15.0%), (ii) revenue growth from stores opened during the nine months ended January 31, 2002 or stores that added a satellite location after April 30, 2001 ($4.0 million), and (iii) revenues from stores opened after January 31, 2002 ($4.1 million). Pretax income increased $13.1 million for the nine months ended January 31, 2003 as compared to the same period of the prior fiscal year. The increase was principally the result of (i) an increase in Car-Mart's pretax income ($3.3 million) stemming from an increase in revenues and lower costs and expenses as a percentage of sales, and (ii) a reduction in Corporate's pretax loss ($9.8 million). The pretax loss at Corporate decreased principally as a result of the prior fiscal period including (i) a $2.7 million restructuring charge, (ii) a $3.9 million write-down of investments and equipment, and (iii) a $2.3 million non-cash charge related to stock option compensation, with no comparable charge or write-down in the current fiscal period. Corporate's pretax loss also decreased as a result of a $.5 million reduction in selling, general and administrative expenses in the current fiscal period stemming from the Company's decision to relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. The restructuring charge pertains to severance and office closing costs related to the Company's decision to relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. The write-down of investments and equipment principally pertains to two emerging technology / Internet investments made in a prior fiscal year that were deemed to be impaired at October 31, 2001. The stock option based compensation charge pertains to the Company's 1997 stock option plan that contained a "cashless" exercise feature. Due to such cashless feature, options granted under the plan were characterized under generally accepted accounting principles as variable options. This resulted in compensation charges to reflect changes in the market value of the Company's common stock. In order to avoid future stock option based compensation charges or credits, effective May 1, 2002 the Company rescinded the cashless exercise provisions of its 1997 Plan. 13 CAR-MART (Operating Results, Dollars in Thousands)
% Change As a % of Sales -------- -------------------- Three Months Ended 2003 Three Months Ended January 31, vs January 31, 2003 2002 2002 2003 2002 -------- -------- -------- -------- -------- Revenues: Sales $ 35,730 $ 28,655 24.7% 100.0% 100.0% Interest income 2,561 2,157 18.7 7.2 7.5 -------- -------- -------- -------- Total 38,291 30,812 24.3 107.2 107.5 -------- -------- -------- -------- Costs and expenses: Cost of sales 19,012 14,506 31.1 53.2 50.6 Selling, general and admin 6,596 5,090 29.6 18.5 17.8 Provision for credit losses 6,621 5,887 12.5 18.5 20.5 Interest expense 517 558 (7.3) 1.4 2.0 Depreciation and amortization 53 35 51.4 .2 .1 -------- -------- -------- -------- Total 32,799 26,076 25.8 91.8 91.0 -------- -------- -------- -------- Pretax income $ 5,492 $ 4,736 16.0 15.4 16.5 ======== ======== ======== ======== Operating Data: Retail units sold 5,321 4,527 17.5% Average stores in operation 62.0 52.7 17.6 Average units sold per store 85.8 85.9 (.1) Average retail sales price $ 6,506 $ 6,089 6.8 Same store revenue growth 17.1% 11.2% Period End Data: Stores open 63 54 16.7% Accounts 30 days or more past due 5.2% 4.3%
THREE MONTHS ENDED JANUARY 31, 2003 VS. THREE MONTHS ENDED JANUARY 31, 2002 Revenues increased $7.5 million, or 24.3%, for the three months ended January 31, 2003 as compared to the same period of 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 ($4.8 million, or 17.1%), (ii) revenue growth from stores opened during the three months ended January 31, 2002 or stores that added a satellite location after October 31, 2001 ($1.0 million), and (iii) revenues from stores opened after January 31, 2002 ($1.6 million). Cost of sales as a percentage of sales increased 2.6% to 53.2% for the three months ended January 31, 2003 from 50.6% in the same period of the prior fiscal year. The increase was principally the result of an increase in the average retail sales price of vehicles sold. The Company utilizes a standardized pricing model in establishing the retail sales price of its vehicles. The selling price of a particular vehicle is a function of the cost of acquiring that vehicle. Pursuant to the pricing model, gross margins, on a percentage basis, are set at lower levels for vehicles with a higher cost. While the dollar amount of profit from selling a higher priced vehicle is generally greater than the dollar amount of profit from selling a lower priced vehicle, on a percentage basis, gross margins decrease as the selling price increases. Selling, general and administrative expense as a percentage of sales increased .7% to 18.5% for the three months ended January 31, 2003 from 17.8% in the same period of the prior fiscal year. The increase was principally the result of (i) changing the Company's store level staffing policy such that more associates are employed at a store for the same number of active customer accounts, (ii) creating several new management positions at Car-Mart's general office to assist in managing the Company's growing business, and (iii) higher insurance costs. Provision for credit losses as a percentage of sales decreased 2.0% to 18.5% for the three months ended January 31, 2003 from 20.5% in the same period of the prior fiscal year. The decrease was the result of lower charge-offs as a percentage of sales, a reduction in the allowance for credit losses as a percentage of the finance receivable principal balance, increased staffing at the store and general office levels, and improvements in its underwriting and collection practices (in particular, the credit application process). Around the middle of the prior fiscal year the Company began creating and filling a number of new positions at Car-Mart's general office including the position of regional account director. Regional account directors are responsible for supervising and managing store level collection personnel. As a result of the improved collections mentioned above and the Company's belief that the current results are expected to continue, the allowance for credit losses as a percentage of the finance receivable principal balance has been decreased from approximately 18.50% at April 30, 2002 to 18.25% at January 31, 2003. 14 Interest expense as a percentage of sales decreased .6% to 1.4% for the three months ended January 31, 2003 from 2.0% in the same period of the prior fiscal year. The decrease was principally the result of (i) a decrease in the prime interest rate (i.e., interest charged on the Company's revolving credit facility fluctuates with the prime interest rate), and (ii) a lower level of borrowings relative to the sales volume.
% Change As a % of Sales -------- -------------------- Nine Months Ended 2003 Nine Months Ended January 31, vs January 31, 2003 2002 2002 2003 2002 -------- -------- -------- -------- -------- Revenues: Sales $105,477 $ 86,122 22.5% 100.0% 100.0% Interest income 7,120 6,658 6.9 6.8 7.7 -------- -------- -------- -------- Total 112,597 92,780 21.4 106.8 107.7 -------- -------- -------- -------- Costs and expenses: Cost of sales 55,828 45,549 22.6 52.9 52.9 Selling, general and admin 18,523 13,811 34.1 17.6 16.0 Provision for credit losses 19,415 17,410 11.5 18.4 20.2 Interest expense 1,506 2,074 (27.4) 1.4 2.4 Depreciation and amortization 149 105 41.9 .2 .1 -------- -------- -------- -------- Total 95,421 78,949 20.9 90.5 91.6 -------- -------- -------- -------- Pretax income $ 17,176 $ 13,831 24.2 16.3 16.1 ======== ======== ======== ======== Operating Data: Retail units sold 16,130 13,642 18.2% Average stores in operation 60.5 51.7 17.0 Average units sold per store 266.8 264.0 1.0 Average retail sales price $ 6,334 $ 6,077 4.2 Same store revenue growth 15.0% 14.3% Period End Data: Stores open 63 54 16.7% Accounts 30 days or more past due 5.2% 4.3%
NINE MONTHS ENDED JANUARY 31, 2003 VS. NINE MONTHS ENDED JANUARY 31, 2002 Revenues increased $19.8 million, or 21.4%, for the nine months ended January 31, 2003 as compared to the same period of the prior fiscal year. The increase was principally the result of (i) revenue growth from stores that operated a full nine months in both periods ($11.7 million, or 15.0%), (ii) revenue growth from stores opened during the nine months ended January 31, 2002 or stores that added a satellite location after April 30, 2001 ($4.0 million), and (iii) revenues from stores opened after January 31, 2002 ($4.1 million). Cost of sales as a percentage of sales was 52.9% for each of the nine months ended January 31, 2003 and 2002. Selling, general and administrative expense as a percentage of sales increased 1.6% to 17.6% for the nine months ended January 31, 2003 from 16.0% in the same period of the prior fiscal year. The increase was principally the result of (i) changing the Company's store level staffing policy such that more associates are employed at a store for the same number of active customer accounts, (ii) creating several new management positions at Car-Mart's general office to assist in managing the Company's growing business, and (iii) higher insurance costs. Provision for credit losses as a percentage of sales decreased 1.8% to 18.4% for the nine months ended January 31, 2003 from 20.2% in the same period of the prior fiscal year. The decrease was the result of lower charge-offs as a percentage of sales, a reduction in the allowance for credit losses as a percentage of the finance receivable principal balance, increased staffing at the store and general office levels, and improvements in its underwriting and collection practices (in particular, the credit application process). Around the middle of the prior fiscal year the Company began creating and filling a number of new positions at Car-Mart's general office including the position of regional account director. Regional account directors are responsible for supervising and managing store level collection personnel. As a result of the improved collections mentioned above and the Company's belief that the current results are expected to continue, the allowance for credit losses as a percentage of the finance receivable principal balance has been decreased from approximately 18.50% at April 30, 2002 to 18.25% at January 31, 2003. Interest expense as a percentage of sales decreased 1.0% to 1.4% for the nine months ended January 31, 2003 from 2.4% in the same period of the prior fiscal year. The decrease was principally the result of (i) a decrease in the prime interest rate (i.e., interest charged on the Company's revolving credit facility fluctuates with the prime interest rate), and (ii) a lower level of borrowings relative to the sales volume. 15 CORPORATE (Dollars in Thousands)
% Change % Change -------- -------- Three Months Ended 2003 Nine Months Ended 2003 January 31, vs January 31, vs 2003 2002 2002 2003 2002 2002 -------- -------- -------- -------- -------- -------- Revenues: Interest income $ 168 $ 189 (11.1)% $ 362 $ 705 (48.7)% -------- -------- -------- -------- Total 168 189 (11.1) 362 705 (48.7) -------- -------- -------- -------- Costs and expenses: Selling, general and admin 416 777 (46.5) 1,675 2,231 (24.9) Provision for credit losses 100 NM Interest expense 4 179 (97.8) 146 622 (76.5) Depreciation and amortization 21 17 23.5 61 105 (41.9) Stock option compensation 2,290 NM 2,290 NM Restructuring charge 2,732 NM Write-down of investments / equip 3,928 NM -------- -------- -------- -------- Total 441 3,263 (86.5) 1,882 12,008 (84.3) -------- -------- -------- -------- Pretax income (loss) $ (273) $ (3,074) (91.1) $ (1,520) $(11,303) (86.6) ======== ======== ======== ========
NM - not meaningful THREE MONTHS ENDED JANUARY 31, 2003 VS. THREE MONTHS ENDED JANUARY 31, 2002 Pretax loss decreased $2.8 million, or 91.1%, for the three months ended January 31, 2003 as compared to the same period of the prior fiscal year. The decrease was principally the result of (i) a $.4 million reduction in selling, general and administrative expense, and (ii) the prior fiscal period including a $2.3 million non-cash charge related to stock option compensation, with no comparable charge or write-down in the current fiscal period. The stock option based compensation charge pertains to the Company's 1997 stock option plan that contained a "cashless" exercise feature. Due to such cashless feature, options granted under the plan were characterized under generally accepted accounting principles as variable options. This resulted in compensation charges to reflect changes in the market value of the Company's common stock. In order to avoid future stock option based compensation charges or credits, effective May 1, 2002 the Company rescinded the cashless exercise provisions of its 1997 Plan. Selling, general and administrative expense decreased $.4 million to $.4 million for the three months ended January 31, 2003 from $.8 million in the same period of the prior fiscal year. The decrease was principally the result of lower compensation and related costs resulting from the Company's decision to relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. Interest expense decreased $.2 million as a result of Corporate paying off its debt in November 2002. NINE MONTHS ENDED JANUARY 31, 2003 VS. NINE MONTHS ENDED JANUARY 31, 2002 Interest income decreased $.3 million to $.4 million for the nine months ended January 31, 2003 from $.7 million in the same period of the prior fiscal year. The decrease was principally due to a lower level of notes receivable outstanding during the nine months ended January 31, 2003 as compared to the same period of the prior fiscal year. Pretax loss decreased $9.8 million, or 86.6%, for the nine months ended January 31, 2003 as compared to the same period of the prior fiscal year. The decrease was principally the result of the prior fiscal period including (i) a $2.7 million restructuring charge, (ii) a $3.9 million write-down of investments and equipment, and (iii) a $2.3 million non-cash charge related to stock option compensation, with no comparable charge or write-down in the current fiscal period. The restructuring charge pertains to severance and office closing costs related to the Company's decision to relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. The write-down of investments and equipment principally pertains to two emerging technology / Internet investments made in a prior fiscal year that were deemed to be impaired at October 31, 2001. The stock option based compensation charge pertains to the Company's 1997 stock option plan that contained a "cashless" exercise feature. Due to such cashless feature, options granted under the plan were characterized under generally accepted accounting principles as variable options. This resulted in compensation charges to reflect changes in the market value of the Company's common stock. In order to avoid future stock option based compensation charges or credits, effective May 1, 2002 the Company rescinded the cashless exercise provisions of its 1997 Plan. 16 Selling, general and administrative expense decreased $.5 million to $1.7 million for the nine months ended January 31, 2003 from $2.2 million in the same period of the prior fiscal year. The decrease was principally the result of lower compensation and related costs resulting from the Company's decision to relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. Interest expense decreased $.5 million as a result of Corporate substantially reducing its debt. RESULTS OF DISCONTINUED OPERATIONS Operating results are presented below for the discontinued operations of the Company for the three and nine months ended January 31, 2003 and 2002. These discontinued operations include the following subsidiaries for the periods indicated:
Number of Months Included in Discontinued Operations for the Month Month --------------------------------------------------------------- Company Company Three Months Ended January 31, Nine Months Ended January 31, Acquired Sold or ------------------------------ ----------------------------- Subsidiary or Formed Disposed 2003 2002 2003 2002 ---------- --------- -------- ---- ---- ---- ---- Smart Choice 12-99 10-01 -- -- -- 6 Precision 2-98 5-02 -- 3 -- 9 Concorde 6-97 7-02 -- 3 2 9
(In Thousands) (In Thousands) Three Months Ended January 31, Nine Months Ended January 31, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Revenues $ -- $ 3,388 $ 3,058 $ 100,062 Operating expenses 2,776 2,306 104,310 Write-down of Smart Choice assets, net 19,945 ---------- ---------- ---------- ---------- Pretax income (loss) $ -- $ 612 $ 752 $ (24,193) ========== ========== ========== ==========
NINE MONTHS ENDED JANUARY 31, 2003 VS. NINE MONTHS ENDED JANUARY 31, 2002 Revenues decreased $97.0 million, or 96.9%, for the nine months ended January 31, 2003 as compared to the same period in the prior fiscal year. The decrease was principally the result of the removal of Smart Choice from the Company's discontinued operations. Effective October 31, 2001, the Company wrote-off its investment in Smart Choice and thereafter the Company ceased to include Smart Choice's operating results in its discontinued operations. In March 2002, the Company sold its investment in Smart Choice for a nominal sum. Pretax income for the Company's discontinued operations was $.8 million for the nine months ended January 31, 2003 as compared to a $(24.2) million pretax loss for the same period in the prior fiscal year. The $24.9 million improvement was principally the result of not including Smart Choice in the Company's discontinued operations during the nine months ended January 31, 2003. 17 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):
Nine Months Ended January 31, 2003 2002 -------- -------- Operating activities: Income from continuing operations $ 9,821 $ 40 Net finance receivables growth (12,339) (9,452) Write-down of investments and equipment 3,928 Stock option based compensation 2,290 Income tax receivable 7,948 Other (897) 1,346 -------- -------- Total 4,533 (1,848) -------- -------- Investing activities: Purchase of property and equipment (1,669) (937) Sale of discontinued operations 6,795 Note collections from discontinued operations 2,079 1,347 Other (26) (30) -------- -------- Total 7,179 380 -------- -------- Financing activities: Proceeds from (repayments of) revolving credit facility, net (3,702) 2,738 Repayments of other debt (7,500) (325) Purchase of common stock, net (1,144) (964) -------- -------- Total (12,346) 1,449 -------- -------- Cash used in continuing operations $ (634) $ (19) ======== ========
At January 31, 2003 the Company had (i) $.6 million of cash on hand and had an additional $10.9 million of availability on its $39.5 million revolving credit facility, and (ii) $.6 million of other receivables. On a short-term basis, the Company's principal sources of liquidity include (i) income from continuing operations, (ii) borrowings from its revolving credit facility, and (iii) other receivables. On a longer-term basis, the Company expects its principal sources of liquidity to include (i) income from continuing operations, and (ii) borrowings from a revolving credit facility. 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 in direct proportion to the expected growth in its sales levels, (ii) purchase property and equipment in connection with opening new stores and refurbishing existing stores, and, to the extent excess cash is available, (iii) reduce debt. In addition, from time to time the Company may use cash to repurchase its common stock. The Company expects to fund the majority of its growth from income generated from operations. Further, the Company expects its financial leverage ratio to decline for the foreseeable future, as net income builds equity at a faster rate than any increase in debt. The Company's revolving credit facility matures in April 2004. The Company expects that it will be able to renew or refinance its revolving credit facility on or before the scheduled maturity date. The Company believes it will have adequate liquidity to satisfy its capital needs for the foreseeable future. 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. Below is a discussion of the Company's accounting policy concerning such allowance. Other accounting policies are disclosed in Note B in this report and in Note B of the Company's consolidated financial statements which are included in its annual report on Form 10-K for the year ended April 30, 2002. 18 The Company maintains an allowance for credit losses at a level it considers sufficient to cover anticipated losses in the collection of its finance receivables. The allowance for credit losses is based primarily upon historical and recent credit loss experience, with consideration given to 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 and actual credit losses may be materially different from the recorded allowance for credit losses, the Company believes that it has given appropriate consideration to all relevant factors and reasonable assumptions in determining the allowance for credit losses. 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 around 17.4% over the last six years), while its second and third fiscal quarters tend to have higher credit losses (averaging about 19.3% over the last six 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. 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 30 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 (2.25% at January 31, 2003) 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 January 31, 2003 approximately 68% 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. The initial impact on profitability resulting from a decrease in the federal primary credit rate is 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 ($106.9 million) and variable interest rate borrowings ($28.6 million), and the percentage of Arkansas originated finance receivables (68%), remain constant during the periods, and (iv) the Company's historical collection and charge-off experience continues throughout the periods.
Year 1 Year 2 Increase (Decrease) Increase (Decrease) Increase (Decrease) in Interest Rates in Pretax Earnings in Pretax Earnings ------------------- ------------------- ------------------- (in thousands) (in thousands) +2% $ 162 $ 811 +1% 81 406 -1% (81) (406) -2% (162) (811)
A similar calculation and table was prepared as of April 30, 2002. That calculation and table was materially consistent with the information provided above. 19 ITEM 4. CONTROLS AND PROCEDURES Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 99.1 Form of Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K: During the fiscal quarter ended January 31, 2003 the Company did not file any reports on Form 8-K. 20 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICA'S CAR-MART, INC. By: /s/ Tilman J. Falgout, III -------------------------------- Tilman J. Falgout, III Chief Executive Officer (Principal Executive Officer) Dated: March 6, 2003 By: /s/ Mark D. Slusser -------------------------------- Mark D. Slusser Chief Financial Officer, Vice President Finance and Secretary (Principal Financial and Accounting Officer) 21 CERTIFICATION I, Tilman J. Falgout III, Chief Executive Officer of America's Car-Mart, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of America's Car-Mart, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 6, 2003 /s/ Tilman J. Falgout, III -------------------------------- Tilman J. Falgout, III Chief Executive Officer 22 CERTIFICATION I, Mark D. Slusser, Chief Financial Officer, Vice President Finance and Secretary of America's Car-Mart, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of America's Car-Mart, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 6, 2003 /s/ Mark D. Slusser -------------------------------- Mark D. Slusser Chief Financial Officer, Vice President Finance and Secretary 23 AMERICA'S CAR-MART, INC. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ----------- ----------- 99.1 Form of Certification Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.
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