| AMERICAS CARMART INC Item 1A Risk Factors Car-Mart is subject to various risks, including the risks described below |
| Car-Mart’s business, operating results, and financial condition could be materially and adversely affected by any of these risks |
| Additional risks not presently known to the Company or that Car-Mart currently deems immaterial may also impair the business and its operations |
| 10 _________________________________________________________________ Risks Related to the Used Automotive Retail and Finance Industry The Company may have a higher risk of delinquency and default than traditional lenders because it loans money to credit-impaired borrowers |
| Substantially all of Car-Mart’s automobile contracts involve loans made to individuals with impaired or limited credit histories, or higher debt-to-income ratios than permitted by traditional lenders |
| Loans made to borrowers who are restricted in their ability to obtain financing from traditional lenders generally entail a higher risk of delinquency, default and repossession, and higher losses than loans made to borrowers with better credit |
| Delinquency interrupts the flow of projected interest income and repayment of principal from a loan, and a default can ultimately lead to a loss if the net realizable value of the automobile securing the loan is insufficient to cover the principal and interest due on the loan or the vehicle cannot be recovered |
| Car-Mart’s profitability depends, in part, upon its ability to properly evaluate the credit worthiness of non-prime borrowers and efficiently service such loans |
| Although the Company believes that its underwriting criteria and collection methods enable it to manage the higher risks inherent in loans made to non-prime borrowers, no assurance can be given that such criteria or methods will afford adequate protection against such risks |
| If the Company experiences higher losses than anticipated, its financial condition, results of operations and business prospects would be materially and adversely affected |
| A decrease in market interest rates would likely have an adverse effect on the Company’s profitability |
| 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 |
| The Company’s finance receivables generally bear interest at fixed rates ranging from 6prca to 19prca while its revolving notes payable contain variable interest rates that fluctuate with market interest rates |
| However, interest rates charged on finance receivables originated in the State of Arkansas are limited to the federal primary credit rate plus 5prca |
| Typically, the Company charges interest on its Arkansas loans at or near the maximum rate allowed by law |
| Thus, while the interest rates charged on the Company’s loans do not fluctuate once established, new loans originated in Arkansas are set at a spread above the federal primary credit rate which does fluctuate |
| At April 30, 2006, approximately 59prca 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 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 Company’s allowance for credit losses may not be sufficient to cover actual credit losses which could adversely affect its financial condition and operating results |
| From time to time, the Company has to recognize losses resulting from the inability of certain borrowers to repay loans and the insufficient realizable value of the collateral securing loans |
| The Company maintains an allowance for credit losses in an attempt to cover credit losses inherent in its loan portfolio |
| Additional credit losses will likely occur in the future and may occur at a rate greater than the Company has experienced to date |
| The allowance for credit losses is based primarily upon historical credit loss experience, with consideration given to delinquency levels, collateral values, economic conditions and underwriting and collection practices |
| This evaluation is inherently subjective as it requires estimates of material factors that may be susceptible to significant change |
| If the Company’s assumptions and judgments prove to be incorrect, its current allowance may not be sufficient and adjustments may be necessary to allow for different economic conditions or adverse developments in its loan portfolio |
| 11 _________________________________________________________________ A reduction in the availability or access to sources of inventory would adversely affect the Company’s business by increasing the costs of vehicles purchased |
| Car-Mart acquires vehicles primarily through wholesalers, new car dealers and from auctions |
| There can be no assurance that sufficient inventory will continue to be available to the Company or will be available at comparable costs |
| Any reduction in the availability of inventory or increases in the cost of vehicles would adversely affect gross profit percentages as the Company focuses on keeping payments affordable to its customer base |
| The Company could have to absorb cost increases |
| The used automotive retailing industry is highly competitive and fragmented |
| The Company competes principally with other independent Buy Here/Pay Here dealers, and to a lesser degree with (i) the used vehicle retail operations of franchised automobile dealerships, (ii) independent used vehicle dealers, and (iii) individuals who sell used vehicles in private transactions |
| The Company competes for both the purchase and resale of used vehicles |
| The Company’s competitors may sell the same or similar makes of vehicles that Car-Mart offers in the same or similar markets at competitive prices |
| Increased competition in the market, including new entrants to the market, could result in increased wholesale costs for used vehicles and lower-than-expected vehicle sales and margins |
| Further, if any of Car-Mart’s competitors seek to gain or retain market share by reducing prices for used vehicles, the Company would likely reduce its prices in order to remain competitive, which may result in a decrease in its sales and profitability and require a change in its operating strategies |
| An economic slowdown will have adverse consequences for the used automotive industry and may have greater consequences for the non-prime segment of the industry |
| In the normal course of business, the used automotive retail industry is subject to changes in regional US economic conditions, including, but not limited to, interest rates, gasoline prices, inflation, personal discretionary spending levels, and consumer sentiment about the economy in general |
| Any significant changes in economic conditions could adversely affect consumer demand and/or increase costs, resulting in lower profitability for the Company |
| Due to the Company’s focus on non-prime borrowers, its actual rate of delinquencies, repossessions and credit losses on loans could be higher under adverse economic conditions than those experienced in the automotive retail finance industry in general |
| The used automotive industry operates in a highly regulated environment |
| The used automotive industry is subject to a wide range of federal, state, and local laws and regulations, such as local licensing requirements and laws regarding advertising, vehicle sales, financing, and employment practices |
| Facilities and operations are also subject to federal, state, and local laws and regulations relating to environmental protection and human health and safety |
| The violation of these laws and regulations could result in administrative, civil, or criminal penalties against the Company, or in a cease and desist order |
| As a result, the Company has incurred, and will continue to incur, capital and operating expenditures, and other costs in complying with these laws and regulations |
| Further, over the past several years, private plaintiffs and federal, state, and local regulatory and law enforcement authorities have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale of motor vehicles |
| Inclement weather can adversely impact the Company’s operating results |
| The occurrence of weather events, such as rain, snow, wind, storms, hurricanes, or other natural disasters, adversely affecting consumer traffic at Car-Mart’s automotive dealerships, could negatively impact the Company’s operating results |
| 12 _________________________________________________________________ Risks Related to the Company The Company’s business is geographically concentrated; therefore, the Company’s results of operations may be adversely affected by unfavorable conditions in its local markets |
| The Company’s performance is subject to local economic, competitive, and other conditions prevailing in the nine states where Car-Mart operates |
| 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 58prca of revenues resulting from sales to Arkansas customers |
| The Company’s current results of operations depend substantially on general economic conditions and consumer spending habits in these local markets |
| Car-Mart’s success depends upon the continued contributions of its management teams |
| The Company is dependent upon the continued contributions of its management teams and other key employees |
| Since the Company maintains a decentralized operation in which each store is responsible for buying and selling its own vehicles, making credit decisions and collecting loans it originates, the key employees at each store are important factors in the Company’s ability to implement its business strategy |
| Consequently, the loss of the services of key employees could have a material adverse effect on the Company’s results of operations |
| In addition, as Car-Mart opens new lots, the Company will need to hire additional personnel |
| The market for qualified employees in the industry and in the regions in which Car-Mart operates is highly competitive and may subject the Company to increased labor costs during periods of low unemployment |
| The Company’s business is dependent upon the efficient operation of its information systems |
| Car-Mart relies on its information systems to effectively manage its sales, inventory, consumer financing, and customer information |
| The failure of the Company’s information systems to perform as designed or the failure to maintain and continually enhance or protect the integrity of these systems could disrupt the Company’s business, impact sales and profitability, or expose the Company to customer or third-party claims |
| Changes in the availability or cost of capital and working capital financing could adversely affect the Company’s growth and business strategies |
| The Company generates cash from income from continuing operations |
| The cash is primarily used to fund finance receivables growth, which have historically grown slightly faster than revenues |
| To the extent finance receivables growth exceeds income from continuing operations, generally the Company increases its borrowings under its revolving credit facilities to provide the cash necessary to make loans |
| On a long-term basis, the Company expects its principal sources of liquidity to consist of income from continuing operations and borrowings under revolving credit facilities and/or fixed interest term loans |
| Any adverse changes in the Company’s ability to borrow under revolving credit facilities or fixed interest term loans, or any increase in the cost of such borrowings, would likely have a negative impact on the Company’s ability to finance receivables growth which would adversely affect the Company’s growth and business strategies |
| Further, Car-Mart’s current credit facilities contain various reporting and performance covenants |
| Any failure by the Company to comply with these covenants could have a material adverse effect on the Company’s ability to implement its business strategy |
| 13 _________________________________________________________________ The Company’s growth is dependent upon the availability of suitable lot sites |
| The Company expects to open new stores at the rate of 8prca to 14prca per year for the foreseeable future |
| The inability to acquire suitable real estate, either through lease or purchase, at favorable terms could limit the expansion of the Company’s lot base and could have a material adverse effect on the Company’s expansion strategy and future operating results |
| Car-Mart’s business is subject to seasonal fluctuations |
| The Company’s third fiscal quarter (November through January) is historically the slowest period for car and truck sales |
| Conversely, the Company’s first and fourth fiscal quarters (May through July and February through April) are historically the busiest times for car and truck sales |
| Therefore, Car-Mart generally realizes a higher proportion of its revenue and operating profit during the first and fourth fiscal quarters |
| If conditions arise that impair vehicle sales during the first or fourth fiscal quarters, the adverse effect on the Company’s revenues and operating profit for the year could be disproportionately large |
| An unfavorable determination by the Internal Revenue Service in connection with a pending tax audit could have a material adverse effect on the Company’s financial results and condition |
| Car-Mart of Arkansas and Colonial do not meet the affiliation standard for filing consolidated income tax returns, 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 |
| These types of transactions, based upon facts and circumstances, have been 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, and a deferred tax liability has been recorded for this timing difference |
| 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 state income tax rate by approximately 240 basis points |
| The actual interpretation of the Regulations is in part a facts and circumstances matter |
| The Company believes it satisfies the material provisions of the Regulations |
| Failure to satisfy those provisions could result in the loss of a tax deduction at the time the receivables are sold, and have the effect of increasing the Company’s overall effective income tax rate as well as the timing of required tax payments |
| Currently, the Internal Revenue Service (“IRS”) is examining the Company’s tax returns for fiscal 2002 and certain items in subsequent years, 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 |
| The assessment of a tax deficiency by the IRS could have a material adverse effect on the Company’s results of operations and financial condition, at least in the near term, if the Company were ultimately unsuccessful in contesting any such deficiency |