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

Part I

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 October 31, 2004, the Company operated 76 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 and six month periods ended October 31, 2004 are not necessarily indicative of the results that may be expected for the year ended April 30, 2005. 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, 2004.

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 63% of sales made to customers residing in Arkansas. Periodically, the Company maintains cash in financial institutions in excess of the amounts insured by the federal government. The Company’s revolving credit facility matures in April 2006. The Company expects that it will be able to renew or refinance such credit facility on or before the scheduled maturity date.

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 consist of contractually scheduled payments from installment contracts net of unearned finance charges and an allowance for credit losses. Unearned finance charges represent the initial amounts of interest income expected to be earned over the terms of the installment contracts less the amount of interest income already earned on such contracts. An account is considered delinquent when a contractually scheduled payment has not been received by the scheduled payment date. At October 31, 2004, 3.5% of the Company’s finance receivable balances were over 30 days past due.

The Company takes steps to repossess a vehicle when the customer becomes severely delinquent in his or her payments, and management determines that timely collection of future payments is not probable. Accounts are charged-off after the expiration of a statutory notice period for repossessed accounts, or when management determines that timely collection of future payments is not probable for accounts where the Company has been unable to repossess the vehicle.

The Company maintains an allowance for credit losses 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 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, underwriting and collection practices, and management’s expectations of future credit losses. 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.

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Stock Option Plan

The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations. As such, compensation expense is only recorded on the date of grant if the market price on such date exceeds the exercise price. Since the exercise price of options granted has been equal to the market price on the date of grant, no compensation expense has been recorded. Had the Company determined compensation cost on the date of grant based upon the fair value of its stock options under Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation,” the Company’s pro forma net income and earnings per share would be as follows using the Black-Scholes option-pricing model with the assumptions detailed below. For purposes of this table, the estimated weighted average fair value of options granted using the Black-Scholes option-pricing model was $12.50 and $8.68 per share for the six months ended October 31, 2004 and 2003, respectively.

Related Party Transactions

During the six months ended October 31, 2003, the Company paid Dynamic Enterprises, Inc. (“Dynamic”) approximately $18,750 per month for the lease of six dealership locations. A former director of the Company was also an officer of Dynamic during this period.

Reclassifications

Certain prior year amounts in the accompanying financial statements have been reclassified to conform to the fiscal 2005 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 allowance for credit losses for the six months ended October 31, 2004 and 2003 are as follows:

D – Property and Equipment

A summary of property and equipment is as follows:

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E – Accrued Liabilities

A summary of accrued liabilities is as follows:

F – Revolving Credit Facility

A summary of revolving credit facility is as follows:

The Company’s revolving credit facility is collateralized by substantially all the assets of the Company including finance receivables and inventory. Interest is payable monthly and the principal balance is due at the maturity of the facility. Interest is charged at the bank’s prime lending rate per annum (4.75% and 4.00% at October 31, 2004 and April 30, 2004, respectively). 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, with a maximum amount available of $39.5 million. Based upon eligible finance receivables at October 31, 2004, the Company could have drawn an additional $13.0 million under the facility.

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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

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 twenty 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 fifteen 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. Astoria has since filed an appeal with the Louisiana Supreme Court. 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.

I – Supplemental Cash Flow Information

Supplemental cash flow disclosures are as follows:

J – Discontinued Operations

In October 2001 the Company made the decision to sell all of its operating subsidiaries except Car-Mart, and relocate its corporate headquarters to Bentonville, Arkansas where Car-Mart is based. As a result of the Company’s decision, operating results from its non Car-Mart operating subsidiaries have been reclassified to discontinued operations for all periods presented. Discontinued operations for the six months ended October 31, 2003 reflect a negotiated settlement of monies due the Company from a former subsidiary of the Company that had been previously written-off. The settlement received was $250,000 ($165,000 net of income taxes).

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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 installment loans 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 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 October 31, 2004, the Company operated 76 stores located primarily in small cities throughout the South-Central United States.

Car-Mart has been operating since 1981. Car-Mart has grown its revenues between 13% and 21% per year over the last seven years. Finance receivables tend to grow slightly faster than revenues. Growth results from same store revenue growth and the addition of new stores. Revenue growth in the first six months of fiscal 2005 (17%) is in line with the Company’s fiscal 2005 growth expectations of 16-17%. Revenue growth in the first six months of fiscal 2005, as compared to the same period in the prior fiscal year, was assisted by an 11% increase in the average retail sales price. Typically, annual price increases are in the 3-5% range. As discussed below, the more significant increase in the average retail sales price in the current period stems from a decision in February 2004 to substantially reduce the sale of lower-priced vehicles and begin selling slightly higher-priced vehicles.

The Company’s primary focus is on collections. Each store handles its own collections with supervisory involvement of the corporate office. Over the last seven years Car-Mart’s credit losses as a percentage of sales have ranged between approximately 17% and 21% (average of 19.1%). Credit losses in the first six months of fiscal 2005 (19.9%) were slightly higher than the Company’s average over the last seven years. The Company believes the higher credit losses in this period were the result of the continuing effects of selling more lower-priced vehicles through January 2004. In the beginning of the prior fiscal year (May 2003), the Company made the decision to sell more lower-priced vehicles as they have higher gross margin percentages and are more affordable to the Company’s customers. However, historical data indicates that loans on lower-priced vehicles have higher charge-off experience than loans on higher-priced vehicles. Lower-priced vehicles tend to have more mechanical difficulties that often result in a higher level of repossessions. As a result of higher than normal charge-off experience and slower revenue growth from selling lower-priced vehicles, in February 2004 the Company decided to substantially reduce its purchase and sale of lower-priced vehicles and began purchasing and selling slightly higher-priced vehicles. The effects of the Company’s February 2004 decision to reduce its purchase and sale of lower-priced vehicles is reflected in the lower provision for credit losses as a percentage of sales for the three months ended October 31, 2004 (20.3%) when compared to the three months ended October 31, 2003 (21.3%).

The Company’s gross margins as a percentage of sales have been fairly consistent from year to year. Over the last seven years Car-Mart’s gross margins as a percentage of sales have ranged between approximately 44% and 48%. Gross margins as a percentage of sales in the first six months of fiscal 2005 were 46.2%, down from 47.7% in the same period of the prior fiscal year. The Company’s gross margins are set based upon the cost of the vehicle purchased with lower-priced vehicles having higher gross margin percentages. As a result of the Company’s

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decision in February 2004 to shift away from the sale of lower-priced vehicles to slightly higher-priced vehicles, the Company’s gross margins, as a percentage of sales, decreased in the first six months of fiscal 2005 as compared to the same period in fiscal 2004.

Hiring, training, and retaining qualified associates are a continuing focus for the Company. The rate at which the Company adds new stores is sometimes limited by the number of trained managers the Company has at its disposal. In fiscal 2005, the Company intends to add resources to increase its ability to train new store managers and corporate office management personnel.

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Consolidated Operations

(Operating Statement Dollars in Thousands)

Three Months Ended October 31, 2004 vs. Three Months Ended October 31, 2003

Revenues increased $7.2 million, or 16.6%, for the three months ended October 31, 2004 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 ($4.2 million, or 10.3%), (ii) revenue growth from stores opened during the three months ended October 31, 2003 or stores that opened or closed a satellite location after July 31, 2003 ($.1 million), and (iii) revenues from stores opened after October 31, 2003 ($2.9 million).

Cost of sales as a percentage of sales increased 1.5% to 54.2% for the three months ended October 31, 2004 from 52.7% in the same period of the prior fiscal year.  The increase was principally the result of the Company’s decision to (i) substantially reduce the purchase and sale of lower-priced vehicles which carry higher gross profit margin percentages, (ii) purchase slightly higher-priced vehicles for sale which carry lower gross profit margin percentages, and (iii) perform repairs of more vehicles in inventory without passing on the added cost.

Selling, general and administrative expense as a percentage of sales increased .2% to 17.9% for the three months ended October 31, 2004 from 17.7% in the same period of the prior fiscal year.  The increase was principally the result of an increase in advertising.

Provision for credit losses as a percentage of sales decreased 1.0%, to 20.3% for the three months ended October 31, 2004 from 21.3% in the same period of the prior fiscal year.  The decrease was primarily the result of lower charge-offs as a percentage of sales.  As discussed in the Overview section above, the Company believes it is beginning to see the positive effects on credit losses of its February 2004 decision to reduce the purchase and sale of lower-priced vehicles.  Historically, loans on lower-priced vehicles have had higher charge-off experience than loans on higher-priced vehicles.  Also, in the most recent quarter, the Company believes that it has become more selective in approving credit in connection with the sale of vehicles.  The Company believes the slightly tighter credit standard is likely to be a factor in reducing credit losses as a percentage of sales in the future.

Interest expense as a percentage of sales decreased to .6% for the three months ended October 31, 2004 from .8% in the same period of the prior fiscal year.  The decrease was principally the result of a lower level of borrowings relative to the sales volume of the Company.

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Consolidated Operations

(Operating Statement Dollars in Thousands)

Six Months Ended October 31, 2004 vs. Six Months Ended October 31, 2003

Revenues increased $14.7 million, or 17.0%, for the six months ended October 31, 2004 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 six months in both periods ($9.4 million, or 11.5%), (ii) revenue growth from stores opened during the six months ended October 31, 2003 or stores that opened or closed a satellite location after April 30, 2003 ($.4 million), and (iii) revenues from stores opened after October 31, 2003 ($4.9 million).

Cost of sales as a percentage of sales increased 1.5% to 53.8% for the six months ended October 31, 2004 from 52.3% in the same period of the prior fiscal year.  The increase was principally the result of the Company’s decision to (i) substantially reduce the purchase and sale of lower-priced vehicles which carry higher gross profit margin percentages, (ii) purchase slightly higher-priced vehicles for sale which carry lower gross profit margin percentages, (iii) perform repairs of more vehicles in inventory without passing on the added cost, and (iv) assist in the repair of more customers’ vehicles.

Selling, general and administrative expense as a percentage of sales decreased .3% to 17.6% for the six months ended October 31, 2004 from 17.9% in the same period of the prior fiscal year.  The decrease was principally the result of lower compensation expense as a percentage of sales, partially offset by an increase in advertising costs.  While compensation expense has increased in the current period on a dollar basis, it has decreased as a percentage of sales.  The decrease in compensation expense, as a percentage of sales, is partially the result of selling higher-priced vehicles.  Selling higher-priced vehicles increases sales without necessarily increasing compensation expense.

Provision for credit losses as a percentage of sales decreased .3%, to 19.9% for the six months ended October 31, 2004 from 20.2% in the same period of the prior fiscal year.  The decrease was primarily the result of lower charge-offs as a percentage of sales.  As discussed in the Overview section above, the Company believes it is beginning to see the positive effects on credit losses of its February 2004 decision to reduce the purchase and sale of lower-priced vehicles.  Historically, loans on lower-priced vehicles have had higher charge-off experience than loans on higher-priced vehicles.  Also, in the most recent quarter, the Company believes that it has become more selective in approving credit in connection with the sale of vehicles.  The Company believes the slightly tighter credit standard is likely to be a factor in reducing credit losses as a percentage of sales in the future.

Interest expense as a percentage of sales decreased to .5% for the six months ended October 31, 2004 from .8% in the same period of the prior fiscal year.  The decrease was principally the result of a lower level of borrowings relative to the sales volume of the Company.

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

At October 31, 2004 the Company had $.6 million of cash on hand and an additional $13.0 million of availability under its $39.5 million revolving credit facility.

On a short-term basis, the Company’s principal sources of liquidity include income from continuing operations and borrowings from its revolving credit facility.  On a longer-term basis, the Company expects its principal sources of liquidity to consist of income from continuing operations and 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 slightly faster than the percentage that its sales grow, (ii) purchase property and equipment of approximately $3-4 million in the next twelve months primarily in connection with opening new stores and relocating and refurbishing existing stores, and (iii) to the extent excess cash is available, reduce debt.  In addition, from time to time the Company may use cash to repurchase its common stock.

The Company’s revolving credit facility matures in April 2006.  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.

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, 2004 in the Company’s Annual Report on Form 10-K.

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Off-Balance Sheet Arrangements

The Company has entered into operating leases for approximately 80% 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 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 is material to investors.

Critical Accounting Policies

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

The Company maintains an allowance for credit losses 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 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, underwriting and collection practices, and management’s expectations of future credit losses.  Judgment is necessary to determine the proper weight to place on certain quantitative and non-quantitative information such as changes in underwriting and collection practices, economic conditions and credit loss trends.  Further, there is no certainty that future credit losses will resemble historical credit losses.  Consequently, it is at least reasonably possible that actual credit losses could be materially different from the recorded allowance for credit losses if future conditions are materially different from the future conditions assumed by the Company, or if management improperly weights current credit loss information.

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 17.9% over the last seven years), while its second and third fiscal quarters tend to have higher credit losses (averaging 19.7% over the last seven years).

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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 contains a variable interest rate that fluctuates 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 (2.50% at October 31, 2004) 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 October 31, 2004, approximately 63% of the Company’s finance receivables were originated in Arkansas.  Assuming that this percentage is held constant for future loan originations, the long-term effect of decreases in the federal primary credit rate would generally have a negative effect on the profitability of the Company.  This is the case because the amount of interest income lost on Arkansas originated loans would likely exceed the amount of interest expense saved on the Company’s variable rate borrowings (assuming the prime interest rate of its lender decreases by the same percentage as the decrease in the federal primary credit rate).  The initial impact on profitability resulting from a decrease in the federal primary credit rate and the rate charged on its variable interest rate borrowings would be positive, as the immediate interest expense savings would outweigh the loss of interest income on new loan originations.  However, as the amount of new loans originated at the lower interest rate increases to an amount in excess of the amount of variable interest rate borrowings, the effect on profitability would become negative.

The table below illustrates the estimated impact that hypothetical changes in the federal primary credit rate would have on the Company’s continuing pretax earnings.  The calculations assume (i) the increase or decrease in the federal primary credit rate remains in effect for two years, (ii) the increase or decrease in the federal primary credit rate results in a like increase or decrease in the rate charged on the Company’s variable rate borrowings, (iii) the principal amount of finance receivables ($143.3 million) and variable interest rate borrowings ($26.5 million), and the percentage of Arkansas originated finance receivables (63%), remain constant during the periods, and (iv) the Company’s historical collection and charge-off experience continues throughout the periods.

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

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 as of the end of the period covered by this quarterly report on Form 10-Q, 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 over financial reporting that occurred during the second quarter of fiscal 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company is currently undergoing a comprehensive effort to comply with Section 404 of the Sarbanes-Oxley Act of 2002.  Compliance is required as of our year-end of April 30, 2005.  This effort includes documenting, evaluating the design and testing the effectiveness of our internal controls.  During this process, we expect to make improvements in the design and operation of our internal controls including further formalization of policies and procedures, improved segregation of duties and additional monitoring controls.

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PART II

Item 1.  Legal Proceedings

In February 2001 and May 2002, the Company was added as a defendant in two similar actions which were originally filed in December 1998 against approximately twenty 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 fifteen 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.  Astoria has since filed an appeal with the Louisiana Supreme Court.  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.

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

The Company’s 2004 annual meeting was held on September 29, 2004.  The record date for such meeting was August 20, 2004 on which date there were a total of 7,804,457 shares of common stock outstanding and entitled to vote.  At the meeting the Company’s shareholders approved the election of directors as follows:

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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