UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2008 Commission File Number 000-50421
CONN'S, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 06-1672840
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) 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 a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of
the Exchange Act. (Check One):
Large accelerated filer [ ] Accelerated filer [ x ] Non-accelerated filer [ ]
smaller reporting company [ ] (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [ x ]
FIndicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 24, 2008:
Class Outstanding
-------------------------------------- ----------------------------
Common stock, $.01 par value per share 22,435,745
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements...........................................................................1
-------
Consolidated Balance Sheets as of January 31, 2008 and October 31, 2008........................1
Consolidated Statements of Operations for the three and nine months ended
October 31, 2007 and 2008..................................................................2
Consolidated Statement of Stockholders' Equity for the nine months ended
October 31, 2008...........................................................................3
Consolidated Statements of Cash Flows for the nine months ended
October 31, 2007 and 2008..................................................................4
Notes to Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
------- and Results of Operations.................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................34
-------
Item 4. Controls and Procedures.......................................................................34
-------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................35
-------
Item 1A. Risk Factors..................................................................................35
--------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................35
-------
Item 4. Submission of Matters to a Vote of Security Holders...........................................35
-------
Item 5. Other Information.............................................................................35
-------
Item 6. Exhibits......................................................................................35
-------
SIGNATURE ............................................................................................36
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
January 31, October 31,
Assets 2008 2008
------------------------------------
Current assets (unaudited)
Cash and cash equivalents $ 11,015 $ 4,283
Accounts receivable (net of allowance of $606 and $2,113,
respectively) 33,139 77,213
Interests in securitized assets 178,150 162,189
Inventories 81,495 106,339
Deferred income taxes 2,619 10,800
Prepaid expenses and other assets 4,449 7,698
---------------- ----------------
Total current assets 310,867 368,522
Non-current deferred income tax asset - 1,841
Non-current accounts receivable
(net of allowance of $353 and $1,208, respectively) 2,961 31,384
Property and equipment
Land 8,011 7,682
Buildings 13,626 14,585
Equipment and fixtures 17,950 20,847
Transportation equipment 2,741 2,582
Leasehold improvements 74,120 81,116
---------------- ----------------
Subtotal 116,448 126,812
Less accumulated depreciation (57,195) (63,622)
---------------- ----------------
Total property and equipment, net 59,253 63,190
Goodwill, net 9,617 9,617
Debt issuance costs and other assets, net 154 2,490
---------------- ----------------
Total assets $ 382,852 $ 477,044
================ ================
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt $ 102 $ 15
Accounts payable 28,179 62,229
Accrued compensation and related expenses 9,748 9,498
Accrued expenses 21,487 28,980
Income taxes payable 600 1,662
Deferred revenues and allowances 16,949 19,419
---------------- ----------------
Total current liabilities 77,065 121,803
Long-term debt 17 33,413
Non-current deferred income tax liability 131 -
Deferred gains on sales of property 1,221 1,095
Stockholders' equity
Preferred stock ($0.01 par value, 1,000,000 shares authorized;
none issued or outstanding) - -
Common stock ($0.01 par value, 40,000,000 shares authorized;
24,098,171 and 24,158,950 shares issued at
January 31, 2008 and October 31, 2008, respectively) 241 242
Additional paid-in capital 99,514 102,762
Retained earnings 241,734 254,800
Treasury stock, at cost, 1,723,205 and 1,723,205 shares,
respectively (37,071) (37,071)
---------------- ----------------
Total stockholders' equity 304,418 320,733
---------------- ----------------
Total liabilities and stockholders' equity $ 382,852 $ 477,044
================ ================
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------------ ------------------------------------
2007 2008 2007 2008
---------------- ---------------- ------------------------------------
Revenues
Product sales $ 155,657 $ 160,253 $ 486,089 $ 515,404
Service maintenance agreement commissions, net 8,336 8,547 26,688 28,428
Service revenues 6,059 5,129 17,641 15,809
---------------- ---------------- ---------------- ----------------
Total net sales 170,052 173,929 530,418 559,641
---------------- ---------------- ---------------- ----------------
Finance charges and other 23,299 25,567 72,176 81,224
Net decrease in fair value (3,985) (15,750) (4,391) (20,029)
---------------- ---------------- ---------------- ----------------
Total finance charges and other 19,314 9,817 67,785 61,195
---------------- ---------------- ---------------- ----------------
Total revenues 189,366 183,746 598,203 620,836
Cost and expenses
Cost of goods sold, including warehousing
and occupancy costs 118,191 127,007 367,882 402,852
Cost of parts sold, including warehousing
and occupancy costs 2,273 2,479 6,296 7,073
Selling, general and administrative expense 61,912 62,361 183,204 185,629
Provision for bad debts 582 2,802 1,490 3,394
---------------- ---------------- ---------------- ----------------
Total cost and expenses 182,958 194,649 558,872 598,948
---------------- ---------------- ---------------- ----------------
Operating income (loss) 6,408 (10,903) 39,331 21,888
Interest (income) expense, net (110) 468 (601) 368
Other (income) expense, net (34) (4) (920) 102
---------------- ---------------- ---------------- ----------------
Income (loss) before income taxes 6,552 (11,367) 40,852 21,418
Provision for (benefit from) income taxes 2,531 (3,625) 14,228 8,352
---------------- ---------------- ---------------- ----------------
Net income $ 4,021 $ (7,742) $ 26,624 $ 13,066
================ ================ ================ ================
Earnings (loss) per share
Basic $ 0.17 $ (0.35) $ 1.14 $ 0.58
Diluted $ 0.17 $ (0.35) $ 1.11 $ 0.58
Average common shares outstanding
Basic 23,077 22,422 23,375 22,404
Diluted 23,550 22,422 23,907 22,604
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended October 31, 2008
(unaudited)
(in thousands, except descriptive shares)
Common Stock Additional
-------------------------- Paid-in Retained Treasury
Shares Amount Capital Earnings Stock Total
---------- ----------- ----------- ----------- ------------ -----------
Balance January 31, 2008 24,098 $ 241 $ 99,514 $ 241,734 $ (37,071) $ 304,418
Exercise of options to acquire
shares of common stock,
incl. tax benefit 48 1 603 604
Issuance of shares of common
stock under Employee
Stock Purchase Plan 13 180 180
Stock-based compensation 2,465 2,465
Net income 13,066 13,066
---------- ----------- ----------- ----------- ------------ -----------
Balance October 31, 2008 24,159 $ 242 $ 102,762 $ 254,800 $ (37,071) $ 320,733
========== =========== =========== =========== ============ ===========
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
Nine Months Ended
October 31,
------------------------------------
2007 2008
---------------- ----------------
Cash flows from operating activities
Net income $ 26,624 $ 13,066
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation 9,421 9,462
Accretion, net (545) (234)
Provision for bad debts 1,490 3,394
Stock-based compensation 1,819 2,465
Discounts on promotional credit 5,057 4,254
Gains recognized on sales of receivables (20,967) (17,090)
Decrease in fair value of securitized assets due to assumption changes 4,995 20,270
Provision for deferred income taxes (788) (9,276)
(Gains) / losses from sales of property and equipment (920) 77
Changes in operating assets and liabilities:
Accounts receivable (23,271) (66,051)
Inventory (10,368) (24,844)
Prepaid expenses and other assets 674 (3,249)
Accounts payable (10,436) 34,050
Accrued expenses 3,200 7,243
Income taxes payable (1,173) 185
Deferred revenue and allowances 3,578 2,984
---------------- ----------------
Net cash used in operating activities (11,610) (23,294)
---------------- ----------------
Cash flows from investing activities
Purchases of property and equipment (12,043) (14,971)
Proceeds from sales of property 8,897 212
---------------- ----------------
Net cash used in investing activities (3,146) (14,759)
---------------- ----------------
Cash flows from financing activities
Proceeds from stock issued under employee benefit plans 2,053 745
Purchases of treasury stock (20,740) -
Excess tax benefits from stock-based compensation 2 39
Borrowings under lines of credit 5,200 95,334
Payments on lines of credit (5,200) (61,934)
Increase in debt issuance costs - (2,772)
Payment of promissory notes (84) (91)
---------------- ----------------
Net cash provided by (used in) financing activities (18,769) 31,321
---------------- ----------------
Net change in cash (33,525) (6,732)
Cash and cash equivalents
Beginning of the year 56,570 11,015
---------------- ----------------
End of period $ 23,045 $ 4,283
================ ================
See notes to consolidated financial statements.
4
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
October 31, 2008
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States 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 for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three and nine month
periods ended October 31, 2008, are not necessarily indicative of the results
that may be expected for the fiscal year ending January 31, 2009. The financial
statements should be read in conjunction with the Company's (as defined below)
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K filed on March 27, 2008.
The Company's operations for the three and nine month periods ended October
31, 2008 were negatively impacted by Hurricanes Gustav and Ike that affected
certain of its market areas during the three months ended October 31, 2008. The
Company's net sales were negatively impacted as a result of 144 store-days lost
and Selling, general and administrative expenses were impacted by storm related
expenses of approximately $1.3 million, net of estimated insurance proceeds. In
addition to the 144 store-days lost, net sales were impacted by reduced sales
before and after each of the storms as customers in the affected market areas
were impacted by evacuations, delays in returning to their homes after the
storms passed and time spent preparing for the arrival of the storms and
clean-up after the storms passed. Additionally, due to the impact of the storms
on its credit customers, the performance of the credit portfolio was negatively
impacted, resulting in higher net credit losses. The Company's effective tax
rates for the periods presented were also affected because taxes for the state
of Texas are recorded based on gross margin, instead of Income (loss) before
income taxes.
The Company's balance sheet at January 31, 2008, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial presentation. Please see the
Company's Form 10-K for the fiscal year ended January 31, 2008, for a complete
presentation of the audited financial statements at that date, together with all
required footnotes, and for a complete presentation and explanation of the
components and presentations of the financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and all of its wholly-owned subsidiaries (the
Company). All material intercompany transactions and balances have been
eliminated in consolidation.
The Company enters into securitization transactions to sell certain retail
installment and revolving customer receivables and retains servicing
responsibilities and subordinated interests. These securitization transactions
are accounted for as sales in accordance with Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, as amended by SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, because the Company has relinquished
control of the receivables. Additionally, the Company has transferred the
receivables to a qualifying special purpose entity (QSPE). Accordingly, neither
the transferred receivables nor the accounts of the QSPE are included in the
consolidated financial statements of the Company. The Company's retained
interest in the transferred receivables is valued under the requirements of SFAS
No. 159, The Fair Value Option for Financial Assets and Liabilities, and SFAS
No. 157, Fair Value Measurements. On February 1, 2007, the Company elected the
fair value option because it believes that the fair value option provides a more
easily understood presentation for financial statement users. Prior to this
election, the Company had valued and reported its Interests in securitized
assets at fair value, though most changes in the fair value were recorded in
Other comprehensive income. The fair value option simplifies the treatment of
changes in the fair value of the asset, by reflecting all changes in the fair
value of its Interests in securitized assets in current earnings, in Finance
charges and other.
5
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. See the discussion under Note 2 regarding the changes in the inputs
used in the Company's valuation of its Interests in securitized assets.
Goodwill. The Company performs an assessment annually testing for the
impairment of goodwill, or at any other time when impairment indicators exist.
While the current market conditions have caused the Company's market
capitalization to fall below its book value, the Company does not believe an
indicator of impairment exists and will perform its annual impairment test in
the fourth quarter of fiscal 2009.
Earnings Per Share. In accordance with SFAS No. 128, Earnings per Share,
the Company calculates basic earnings per share by dividing net income (loss) by
the weighted average number of common shares outstanding. Diluted earnings per
share include the dilutive effects of any stock options granted, as calculated
under the treasury-stock method. Anti-dilutive stock options are not used in
calculating diluted EPS. Due to the net loss incurred for the three months ended
October 31, 2008, no stock options were included in the computation of diluted
loss per share. 209,706 anti-dilutive stock options were excluded from the
calculation of diluted EPS for the quarter. The following table sets forth the
shares outstanding for the earnings per share calculations:
Three Months Ended
October 31,
-----------------------------------
2007 2008
---------------- ---------------
Common stock outstanding, net of treasury stock, beginning of period 23,464,538 22,410,400
Weighted average common stock issued in stock option exercises 1,100 10,076
Weighted average common stock issued to employee stock purchase plan 1,109 1,512
Weighted average number of restricted shares forfeited (1,141) -
Less: Weighted average treasury shares purchased (389,056) -
---------------- ---------------
Shares used in computing basic earnings per share 23,076,550 22,421,988
Dilutive effect of stock options, net of assumed repurchase of treasury stock 473,808 -
---------------- ---------------
Shares used in computing diluted earnings per share 23,550,358 22,421,988
================ ===============
Nine Months Ended
October 31,
-----------------------------------
2007 2008
---------------- ---------------
Common stock outstanding, net of treasury stock, beginning of period 23,641,522 22,374,966
Weighted average common stock issued in stock option exercises 85,344 23,022
Weighted average common stock issued to employee stock purchase plan 4,180 6,002
Weighted average number of restricted shares forfeited (385) -
Less: Weighted average treasury shares purchased (355,389) -
---------------- ---------------
Shares used in computing basic earnings per share 23,375,272 22,403,990
Dilutive effect of stock options, net of assumed repurchase of treasury stock 532,176 200,379
---------------- ---------------
Shares used in computing diluted earnings per share 23,907,448 22,604,369
================ ===============
Non-cash items on statement of cash flows. During the nine months ended
October 31, 2008, the Company sold a warehouse facility under a seller-financed
arrangement for $1.4 million in exchange for a note receivable from the buyer.
The gain of approximately $0.1 million on the transaction has been deferred and
will be recognized as payments are received on the note receivable.
Reclassifications. Certain reclassifications have been made in the prior
year's financial statements to conform to the current year's presentation. In
order to present the Company's results on a basis that is more comparable with
others in its industry, the Company reclassified advertising expense of $7.2
million and $22.1 million for the three and nine months ended October 31, 2007,
respectively, that was previously included in costs of goods sold, to selling,
general and administrative expense.
6
2. Interests in Securitized Assets
The Company estimates the fair value of its Interests in securitized assets
using a discounted cash flow model with most of the inputs used being
unobservable inputs. The primary unobservable inputs, which are derived
principally from the Company's historical experience, with input from its
investment bankers and financial advisors, include the estimated portfolio
yield, credit loss rate, discount rate, payment rate and delinquency rate and
reflect the Company's judgments about the assumptions market participants would
use in determining fair value. In determining the cost of borrowings, the
Company uses current actual borrowing rates, and adjusts them, as appropriate,
using interest rate futures data from market sources to project interest rates
over time. Changes in the inputs over time, including varying credit portfolio
performance, market interest rate changes, market participant risk premiums
required, or a shift in the mix of funding sources, could result in significant
volatility in the fair value of the Interest in securitized assets, and thus the
earnings of the Company.
For the three and nine months ended October 31, 2008, Finance charges and
other included a non-cash decrease in the fair value our Interests in
securitized assets of $15.7 million and $20.0 million, respectively, reflecting
primarily a higher risk premium included in the discount rate inputs during the
quarters ended April 30, 2008 and October 31, 2008, resulting from the
volatility in the financial markets. During the quarters ended April 30, 2008
and October 31, 2008, returns required by market participants on many
investments increased significantly as a result of continued volatility in the
financial markets. Though the Company does not anticipate any significant
variation in the underlying economics or expected cash flow performance of the
securitized credit portfolio, it increased the risk premium included in the
discount rate input used in the determination of the fair value of its Interests
in securitized assets to reflect the higher estimated risk premium it believes a
market participant would require if purchasing the asset. Based on a review of
the changes in market risk premiums during the three months ended April 30,
2008, and discussions with its investment bankers and financial advisors, the
Company estimated that a market participant would require approximately a 300
basis point increase in the required risk premium. After its review for the
three months ended October 31, 2008, the Company estimated that a market
participant would require an additional 700 basis point increase in the required
risk premium. As a result, the Company increased the weighted average discount
rate input from 16.5% at January 31, 2008, to 25.7% at October 31, 2008, after
reflecting a 77 basis point decrease in the risk-free interest rate included in
the discount rate input. Additionally, as a result of the impact of general
economic conditions on other consumer credit portfolios and the impact of the
Hurricanes Gustav and Ike on its expected net charge-off rate, the Company
increased the weighted average net charge-off rate input that it expects a
market participant would use from 3.25% to 4.00%. These changes, along with
other input changes, contributed to the decrease in fair value for the three and
nine month periods ended October 31, 2008 (see reconciliation of the balance of
Interests in securitized assets below). The changes in fair value resulted in a
charge to Income (loss) before income taxes of $15.7 million and $20.0 million,
a charge to net income of $10.2 million, and $13.0 million, and reduced basic
and diluted earnings per share by $0.46, and $0.57 for the three and nine months
ended October 31, 2008, respectively.
The increase in the discount rate has the effect of deferring income to
future periods - not permanently reducing securitization income or the earnings
of the Company, assuming no significant variation in the future cash flow
performance of the securitized credit portfolio. The deferred earnings will be
recognized in future periods as interest income on the Interests in securitized
assets as the actual cash flows on the receivables are realized. If a market
participant were to require a return on investment that is 100 basis points
higher than estimated in the Company's calculation, the fair value of its
interests in securitized assets would be decreased by an additional $1.5 million
as of October 31, 2008. The Company will continue to monitor financial market
conditions and, each quarter, as it reassesses the inputs used may adjust its
inputs up or down, including the risk premiums a market participant will use. As
the financial markets and general economic conditions have continued to
experience a high-level of volatility, the Company will likely be required to
record additional non-cash gains and losses in future periods, until such time
as financial market and general economic conditions stabilize.
7
The following is a reconciliation of the beginning and ending balances of
the Interests in securitized assets and the beginning and ending balances of the
servicing liability for the three months ended October 31, 2007 and 2008 (in
thousands):
Three Months Ended
October 31,
------------------------------------
2007 2008
---------------- ----------------
Reconciliation of Interests in Securitized Assets:
--------------------------------------------------
Balance of Interests in securitized assets at beginning of period $ 166,130 $ 177,648
Amounts recorded in Finance charges and other:
Gains (losses) associated with change in portfolio balances 117 (45)
---------------- ----------------
Changes in fair value due to input changes:
Fair value increase (decrease) due to changes in portfolio yield 17 (672)
Fair value increase (decrease) due to lower (higher) projected
interest rates 267 310
Fair value increase (decrease) due to changes in funding mix (492) (2,749)
Fair value increase (decrease) due to changes in weighted loss rate - (3,767)
Fair value increase (decrease) due to changes in risk-free interest rate
component of the discount rate 1,367 1,671
Fair value decrease due to higher risk premium included in discount rate (5,034) (11,252)
Other changes (242) 553
---------------- ----------------
Net change in fair value due to input changes (4,117) (15,906)
---------------- ----------------
Net Gains (Losses) included in Finance charges and other (a) (4,000) (15,951)
Change in balance of subordinated security and equity interest due to
transfers of receivables 3,106 492
---------------- ----------------
Balance of Interests in securitized assets at end of period $ 165,236 $ 162,189
================ ================
Reconciliation of Servicing Liability:
--------------------------------------
Balance of servicing liability at beginning of period $ 1,111 $ 1,279
Amounts recorded in Finance charges and other:
Increase (decrease) associated with changes in portfolio balances 19 (134)
Increase (decrease) due to changes in discount rate (14) (46)
Other changes (20) (21)
---------------- ----------------
Net change included in Finance charges and other (b) (15) (201)
Balance of servicing liability at end of period $ 1,096 $ 1,078
================ ================
Net increase (decrease) in fair value included
in Finance charges and other (a) - (b) $ (3,985) $ (15,750)
================ ================
8
The following is a reconciliation of the beginning and ending balances of
the Interests in securitized assets and the beginning and ending balances of the
servicing liability for the nine months ended October 31, 2007 and 2008 (in
thousands):
Nine Months Ended
October 31,
------------------------------------
2007 2008
---------------- ----------------
Reconciliation of Interests in Securitized Assets:
--------------------------------------------------
Balance of Interests in securitized assets at beginning of period $ 136,848 $ 178,150
Amounts recorded in Finance charges and other:
Gains associated with increase in portfolio balances 648 122
---------------- ----------------
Changes in fair value due to input changes:
Fair value increase (decrease) due to changes in portfolio yield 221 (1,488)
Fair value increase (decrease) due to lower (higher) projected
interest rates 464 187
Fair value increase (decrease) due to changes in funding mix (1,689) (1,496)
Fair value increase (decrease) due to changes in weighted loss rate - (3,767)
Fair value increase (decrease) due to changes in risk-free interest rate
component of the discount rate 1,771 1,433
Fair value decrease due to higher risk premium included in discount rate (5,034) (16,380)
Other changes (728) 1,241
---------------- ----------------
Net change in fair value due to input changes (4,995) (20,270)
---------------- ----------------
Net Gains (Losses) included in Finance charges and other (a) (4,347) (20,148)
Change in balance of subordinated security and equity interest due to
transfers of receivables 32,735 4,187
---------------- ----------------
Balance of Interests in securitized assets at end of period $ 165,236 $ 162,189
================ ================
Reconciliation of Servicing Liability:
--------------------------------------
Balance of servicing liability at beginning of period $ 1,052 $ 1,197
Amounts recorded in Finance charges and other:
Increase (decrease) associated with changes in portfolio balances 65 (48)
Increase (decrease) due to changes in the discount rate (12) (66)
Other changes (9) (5)
---------------- ----------------
Net change included in Finance charges and other (b) 44 (119)
Balance of servicing liability at end of period $ 1,096 $ 1,078
================ ================
Net increase (decrease) in fair value included
in Finance charges and other (a) - (b) $ (4,391) $ (20,029)
================ ================
9
3. Supplemental Disclosure of Revenue
The following is a summary of the classification of the amounts included as
Finance charges and other for the three and nine months ended October 31, 2007
and 2008 (in thousands):
Three Months ended Nine Months ended
October 31, October 31,
--------------------------- ---------------------------
2007 2008 2007 2008
------------ ------------ ------------ ------------
Securitization income:
Servicing fees received $ 6,156 $ 6,602 $ 17,934 $ 19,462
Gains on sale of receivables, net 6,198 1,682 20,967 17,090
Change in fair value of securitized assets (4,117) (15,906) (4,995) (20,270)
Interest earned on retained interests 5,878 8,470 16,547 23,387
------------ ------------ ------------ ------------
Total securitization income 14,115 848 50,453 39,669
Insurance commissions 5,114 4,396 15,948 15,336
Interest income from receivables not sold and other 85 4,573 1,384 6,190
------------ ------------ ------------ ------------
Finance charges and other $ 19,314 $ 9,817 $ 67,785 $ 61,195
============ ============ ============ ============
4. Supplemental Disclosure Regarding Managed Receivables
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Total Principal Amount of Principal Amount 60 Days
Receivables or More Past Due (1)
--------------------------- --------------------------
January 31, October 31, January 31, October 31,
2008 2008 2008 2008
------------ ------------ ----------- -----------
Total receivables managed $ 654,867 $ 706,210 $ 49,778 $ 57,337
Less receivables sold 645,862 616,636 47,778 55,477
------------ ------------ ----------- -----------
Receivables not sold 9,005 89,574 $ 2,000 $ 1,860
=========== ===========
Less non-current accounts receivable, net (2,961) (31,384)
Non-customer receivables 27,095 19,023
------------ ------------
Total accounts receivable, net $ 33,139 $ 77,213
============ ============
(1) Amounts are based on end of period balances. The principal amount 60 days or
more past due relative to total receivables managed is not necessarily
indicative of relative balances expected at other times during the year due to
seasonal fluctuations in delinquency.
10
Average Balances Net Credit Charge-offs (1)
-------------------------- --------------------------
Three Months Ended Three Months Ended
October 31, October 31,
-------------------------- --------------------------
2007 2008 2007 2008
----------- ----------- ----------- -----------
Total receivables managed $ 612,877 $ 702,444 $ 4,863 $ 5,947
Less receivables sold 585,672 644,447 4,548 5,749
----------- ----------- ----------- -----------
Receivables not sold (2) $ 27,205 $ 57,997 $ 315 $ 198
=========== =========== =========== ===========
Average Balances Net Credit Charge-offs (1)
-------------------------- --------------------------
Nine Months Ended Nine Months Ended
October 31, October 31,
-------------------------- --------------------------
2007 2008 2007 2008
----------- ----------- ----------- -----------
Total receivables managed $ 594,535 $ 682,209 $ 12,237 $ 16,039
Less receivables sold 585,104 653,735 11,552 15,474
----------- ----------- ----------- -----------
Receivables not sold (2) $ 9,431 $ 28,474 $ 685 $ 565
=========== =========== =========== ===========
(1) Amounts represent total credit charge-offs, net of recoveries, on total
receivables.
(2) Increase in receivables not sold due to new revolving credit facility
allowing for retention of more receivables on the Company's balance sheet.
Charge-off levels will lag the balance growth.
5. Debt and Letters of Credit
On August 14, 2008, the Company entered into a $210 million asset-based
revolving credit facility that provides funding based on a borrowing base
calculation that includes accounts receivable and inventory. The new facility,
which replaced the Company's $100 million revolving credit facility, matures in
August 2011 and bears interest at LIBOR plus a spread ranging from 225 basis
points to 275 basis points, based on a fixed charge coverage ratio. The spread
will be 225 basis points for the first six months under the facility, and then
will be subject to adjustment as discussed above. In addition to the fixed
charge coverage ratio, the new revolving credit facility includes a leverage
ratio requirement, a minimum receivables cash recovery percentage requirement, a
net capital expenditures limit and combined portfolio performance covenants.
Debt consisted of the following at the period ends (in thousands):
January 31, October 31,
2008 2008
------------- ------------
Revolving credit facility for $210 million maturing in August 2011 $ - $ 33,400
Revolving credit facility for $100 million that was replaced in August 2008 - -
Unsecured revolving line of credit for $10 million maturing in September 2009 - -
Other long-term debt 119 28
------------- ------------
Total debt 119 33,428
Less current portion of debt (102) (15)
------------- ------------
Long-term debt $ 17 $ 33,413
============= ============
The Company's revolving credit facility provides it the ability to utilize
letters of credit to secure its obligations as the servicer under its QSPE's
asset-backed securitization program, deductibles under the Company's property
and casualty insurance programs and international product purchases, among other
acceptable uses. At October 31, 2008, the Company had outstanding letters of
credit of $22.3 million under this facility. The maximum potential amount of
future payments under these letter of credit facilities is considered to be the
aggregate face amount of each letter of credit commitment, which totals $22.3
million as of October 31, 2008. As of October 31, 2008, the Company had
approximately $53.2 million under its revolving credit facility, net of standby
letters of credit issued, and $10.0 million under its unsecured bank line of
credit immediately available for general corporate purposes.
11
6. Contingencies
Legal Proceedings. The Company is involved in routine litigation incidental
to its business from time to time. Currently, the Company does not expect the
outcome of any of this routine litigation to have a material affect on its
financial condition, results of operations or cash flows. However, the results
of these proceedings cannot be predicted with certainty, and changes in facts
and circumstances could impact the Company's estimate of reserves for
litigation.
Service Maintenance Agreement Obligations. The Company sells service
maintenance agreements that extend the period of covered warranty service on the
products the Company sells. For certain of the service maintenance agreements
sold, the Company is the obligor for payment of qualifying claims. The Company
is responsible for administering the program, including setting the pricing of
the agreements sold and paying the claims. The typical term for these agreements
is between 12 and 36 months. The pricing is set based on historical claims
experience and expectations about future claims. While the Company is unable to
estimate maximum potential claim exposure, it has a history of overall
profitability upon the ultimate resolution of agreements sold. The revenues
related to the agreements sold are deferred at the time of sale and recorded in
revenues in the statement of operations over the life of the agreements. The
amounts of service maintenance agreement revenue deferred at January 31, 2008
and October 31, 2008 are $6.6 million and $7.2 million, respectively, and are
included in Deferred revenue and allowances in the accompanying consolidated
balance sheets.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This report contains forward-looking statements. We sometimes use words
such as "believe," "may," "will," "estimate," "continue," "anticipate,"
"intend," "expect," "project" and similar expressions, as they relate to us, our
management and our industry, to identify forward-looking statements.
Forward-looking statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends and other future
events. We have based our forward-looking statements largely on our current
expectations and projections about future events and financial trends affecting
our business. Actual results may differ materially. Some of the risks,
uncertainties and assumptions about us that may cause actual results to differ
from these forward-looking statements include, but are not limited to:
o the success of our growth strategy and plans regarding opening new
stores and entering adjacent and new markets, including our plans to
continue expanding in existing markets;
o our ability to open and profitably operate new stores in existing,
adjacent and new geographic markets;
o our intention to update, relocate or expand existing stores;
o our ability to introduce additional product categories;
o our ability to obtain capital for required capital expenditures and
costs related to the opening of new stores or to update, relocate or
expand existing stores;
o our cash flows from operations, borrowings from our revolving line of
credit and proceeds from securitizations to fund our operations, debt
repayment and expansion;
o our ability and our QSPE's ability to obtain additional funding for
the purpose of funding the receivables generated by us, including
limitations on the ability of our QSPE to obtain financing through its
commercial paper-based funding sources and its ability to maintain the
current credit rating issued by a recognized statistical rating
organization;
o the cost of any renewed or replacement credit facilities;
o the effect of rising interest rates that could increase our cost of
borrowing or reduce securitization income;
o the effect of rising interest rates on sub-prime mortgage borrowers
that could impair our customers' ability to make payments on
outstanding credit accounts;
o our inability to make customer financing programs available that allow
consumers to purchase products at levels that can support our growth;
o the potential for deterioration in the delinquency status of the sold
or owned credit portfolios or higher than historical net charge-offs
in the portfolios could adversely impact earnings;
o technological and market developments, growth trends and projected
sales in the home appliance and consumer electronics industry,
including, with respect to digital products, Blu-ray and DVD players,
HDTV, GPS devices, home networking devices and other new products, and
our ability to capitalize on such growth;
o the potential for price erosion or lower unit sales that could result
in declines in revenues;
13
o the effect of changes in oil and gas prices that could adversely
affect our customers' shopping decisions and patterns, as well as the
cost of our delivery and service operations and our cost of products,
if vendors pass on their additional fuel costs through increased
pricing for products;
o the ability to attract and retain qualified personnel;
o both short-term and long-term impact of adverse weather conditions
(e.g. hurricanes) that could result in volatility in our revenues and
increased expenses and casualty losses;
o changes in laws and regulations and/or interest, premium and
commission rates allowed by regulators on our credit, credit insurance
and service maintenance agreements as allowed by those laws and
regulations;
o our relationships with key suppliers;
o the adequacy of our distribution and information systems and
management experience to support our expansion plans;
o changes in the assumptions used in the valuation of our interests in
securitized assets at fair value;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o changes in our stock price;
o the potential for market share erosion that could result in reduced
revenues;
o the accuracy of our expectations regarding the similarity or
dissimilarity of our existing markets as compared to new markets we
enter;
o general economic conditions in the regions in which we operate; and
o the outcome of litigation affecting our business.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under "Risk Factors" in our Form
10-K filed with the Securities Exchange Commission on March 27, 2008. In light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this report might not happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
All forward-looking statements attributable to us, or to persons acting on
our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
We intend for the following discussion and analysis to provide you with a
better understanding of our financial condition and performance in the indicated
periods, including an analysis of those key factors that contributed to our
financial condition and performance and that are, or are expected to be, the key
"drivers" of our business.
We are a specialty retailer with 76 retail locations in Texas, Louisiana
and Oklahoma, that sells home appliances, including refrigerators, freezers,
washers, dryers, dishwashers and ranges, a variety of consumer electronics,
including LCD, plasma and DLP televisions, camcorders, digital cameras, Blu-ray
and DVD players, video game equipment, MP3 players and home theater products,
lawn and garden products, mattresses and furniture. We also sell home office
equipment, including computers and computer accessories and continue to
introduce additional product categories for the home and consumer entertainment,
such as GPS devices, to help increase same store sales and to respond to our
customers' product needs. We require our sales associates to be knowledgeable of
all of our products, but to specialize in certain specific product categories.
14
Unlike many of our competitors, we provide flexible in-house credit options
for our customers. In the last three years, we financed, on average,
approximately 59% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets reflected in Finance charges and other in the income
statement. As part of our asset-backed securitization facility, we have created
a qualifying special purpose entity, which we refer to as the QSPE or the
Issuer, to purchase customer receivables from us and issue medium-term and
variable funding notes secured by the receivables to third parties to finance
its acquisition of the receivables. We transfer receivables, consisting of
retail installment and revolving account receivables extended to our customers,
to the issuer in exchange for cash and subordinated securities. In August 2008,
we entered into an asset-based revolving credit facility to provide financing
for a portion of our receivables, as well as other working capital needs. As a
result of the completion of the revolving credit facility, we began retaining a
larger portion of the accounts receivables we generate on our balance sheet, as
opposed to transferring them to our QSPE. As such, as compared to the net
interest earnings of our QSPE, which are recorded based on fair value as
securitization income in Finance charges and other, for the receivables we
retain we began reporting interest income on the receivables as earned, which is
included in Finance charges and other, a Provision for bad debts based on future
expected write-offs of the receivables and Interest expense as incurred,
beginning in the quarter ended October 31, 2008.
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements, under
which we are the primary obligor, to protect the customers after the original
manufacturer's warranty or service maintenance agreement has expired.
Our business is moderately seasonal, with a slightly greater share of our
revenues, pretax and net income realized during the quarter ending January 31,
due primarily to the holiday selling season.
Executive Overview
This narrative is intended to provide an executive level overview of our
operations for the three and nine months ended October 31, 2008. A detailed
explanation of the changes in our operations for these periods as compared to
the prior year is included under Results of Operations. As explained in that
section, our financial performance for the quarter was significantly impacted by
Hurricanes Gustav and Ike. The hurricanes negatively impacted sales in the month
of September 2008 and negatively affected credit portfolio performance for the
quarter. Additionally, we incurred approximately $1.3 million of expenses
directly related to the hurricanes, net of estimated insurance proceeds. Some of
the more specific items impacting our operating and pretax income (loss) were:
o For the three months ended October 31, 2008, Total net sales increased 2.3%
and, as a result of a higher non-cash fair value adjustment in the current
year period as compared to the prior year, Finance charges and other
decreased 49.2%, yielding a decrease in Total revenues of 3.0%. Although
same store sales were positive during the months of August and October,
primarily as a result of 144 store-days lost due to Hurricanes Gustav and
Ike, same store sales during the period decreased 5.8%. Total revenues
increased 3.8% on a Total net sales increase of 5.5% and, as a result of a
higher non-cash fair value adjustment in the current year period as
compared to the prior year, Finance charges and other decreased 9.7% for
the nine months ended October 31, 2008. Same store sales decreased 2.0% for
the nine months ended October 31, 2008, primarily as a result of the 144
store-days lost due to Hurricanes Gustav and Ike.
15
o The addition of stores in our existing Houston, Dallas/Fort Worth, San
Antonio and South Texas markets and a new store in Oklahoma had a positive
impact on our revenues. We achieved approximately $14.1 million and $40.6
million of increases in product sales and service maintenance agreement
commissions for the three and nine months ended October 31, 2008,
respectively, from the twelve new stores that were opened in these markets
after February 1, 2007. During November 2008, we opened one new store in
the Dallas/Fort Worth market and one new store in the Oklahoma market,
completing our store opening plans for the current fiscal year.
o Deferred interest and "same as cash" plans continue to be an important part
of our sales promotion plans and are utilized to provide a wide variety of
financing to enable us to appeal to a broader customer base. For the three
and nine months ended October 31, 2008, $33.2 million, or 20.7%, and $114.0
million, or 22.1%, respectively, of our product sales were financed by
deferred interest and "same as cash" plans. For the comparable periods in
the prior year, product sales financed by deferred interest and "same as
cash" sales were $44.7 million, or 28.7% and $132.9 million, or 27.3%. Our
promotional credit programs (same as cash and deferred interest programs),
which require monthly payments, are reserved for our highest credit quality
customers, thereby reducing the overall risk in the portfolio, and are used
primarily to finance sales of our highest margin products. We expect to
continue to offer extended term promotional credit in the future.
o Our gross margin decreased from 36.4% to 29.5% for the three months ended
October 31, 2008, and from 37.4% to 34.0% for the nine months ended October
31, 2008, when compared to the same period in the prior year. The decline
resulted primarily due to the higher non-cash fair value adjustments
recorded in the current year periods, as compared to the prior year
periods, accounting for 430 basis points and 160 basis points of the
declines in the three and nine month periods ended October 31, 2008,
respectively. The reduction in product gross margins from 24.1% to 20.7%,
and 24.3% to 21.8% for the three and nine months ended October 31, 2007 and
2008, respectively, accounted for the majority of the remainder of the
decline. The product gross margins were negatively impacted by a highly
price competitive retail market.
o Finance charges and other decreased 49.2% and 9.7% for the three and nine
months ended October 31, 2008, respectively, due to an increase in the
non-cash fair value adjustment that reduced our Interest in securitized
assets in the current year periods, as compared to the prior year periods.
Finance charges and other benefited as we began growing the portfolio of
new customer receivables retained by us and not transferred to our QSPE. As
a result, Interest income and other increased $4.5 million and $4.8 million
for the three and nine months ended October 31, 2008, respectively, while
Securitization income declined primarily due to an increase in the non-cash
fair value adjustment that reduced our Interest in securitized assets in
the current year periods, as compared to the prior year periods, and
reduced Gains on sales of receivables, since fewer new customer receivables
were transferred to the QSPE in the current year periods. The decrease in
fair value of our Interests in securitized assets was primarily a result of
an increase in the estimated risk premium expected by a market participant
included in the discount rate input and an increase in the weighted average
net charge-off rate input a market participant would use in the discounted
cash flow model used to determine the fair value of our interests in
securitized assets. The risk premium included in the discount rate input
was increased due to the continued volatility in the financial markets
during the period and is not related to the performance of the credit
portfolio or our credit collection operations.
o During the three months ended October 31, 2008, Selling, general and
administrative (SG&A) expense increased as a percent of revenues to 33.9%
from 32.7% in the prior year period, primarily due to the negative impact
of the fair value adjustments on Total revenues, with 200 basis points of
the increase resulting from the negative impact of the fair value
adjustments on Total revenues. Additionally, as a result of Hurricanes
Gustav and Ike, we incurred $1.3 million in expenses related to relocating
and housing our employees, as well as damages to our facilities, accounting
for 70 basis points of the increase in SG&A as a percentage of Total
revenues. Despite the impact of the hurricanes and the fair value
adjustments, SG&A expense decreased as a percent of revenues during the
nine months ended October 31, 2008 to 29.9% from 30.6% in the prior year
period, with the fair value adjustments and hurricane expenses negatively
impacting the change is SG&A as a percentage of revenues by approximately
90 basis points. The improvements in SG&A expenses have been driven largely
by lower compensation costs in absolute dollars and as a percent of
revenues as compared to the prior year, as well as reduced advertising
expenditures as a percent of revenues. Additionally, reductions in certain
store operating expenses, including repairs and maintenance and janitorial
services contributed to the improvement. Partially offsetting these
improvements were increases in utilities, credit data processing and
hurricane-related expenses.
16
o The Provision for bad debts increased to $2.8 million and $3.4 million for
the three and nine months ended October 31, 2008, from $0.6 million and
$1.5 million for the three and nine months ended October 31, 2007. This
increase is due to an increase in the balance of customer receivables
retained on our balance sheet as expected after the completion of our
asset-based revolving credit facility in August 2008, and is not the result
of higher actual or expected net credit charge-offs on the retained
receivables. As opposed to our interest in the customer receivables
transferred to the QSPE, which we account for at fair value, we are
required to record a reserve for estimated future net credit losses for
receivables retained on our balance sheet, which we estimated based on our
historical loss trends.
o Net interest (income) expense has changed from reflecting net interest
income in the prior year periods to net interest expense in the current
year periods, due primarily to the increase in customer receivables
retained on our balance sheet. As a result, we have used previously
invested cash balances and borrowings under our revolving credit facility
to fund the growth in customer receivables retained.
o The provision (benefit) for income taxes for the three and nine months
ended October 31, 2008, was impacted primarily by the change in pre-tax
income (loss) and the impact on the effective rate of the fact that taxes
for the state of Texas are recorded based on gross margin, instead of
Income (loss) before taxes.
Operational Changes and Resulting Outlook
We have completed our store opening plans for the current fiscal year,
having opened seven new and three replacement stores, with two of the new stores
opened during the month of November 2008. We have additional sites under
consideration for future development and continue to evaluate our store opening
plans for future years, in light of capital availability.
During the month of September 2008, two hurricanes, Gustav and Ike, made
landfall along the Louisiana and Texas coastlines, respectively. As a result of
the storms, our stores in the affected markets were closed for a total of 144
store-days during the month of September, not including the days before and
after the storms when customers in the affected areas prepared to evacuate and
then completed clean-up and repairs to their properties upon return from their
evacuation. We believe we benefited from sales of replacement products to storm
victims during the month of October, and expect this benefit to continue, though
we are not able to quantify the amount or timing of these future sales. The
impact on our customers also affected the performance of the credit portfolio
during the current quarter and is expected to continue to impact future
performance for a period of time, though we believe we have already experienced
the worst affects. We believe we are better prepared to address the impacts of
the hurricanes on the credit portfolio performance since we did not experience
the loss of collection personnel we experienced after Hurricane Rita, three
years ago. In fact, we lost very few employees upon our return to the corporate
office after the hurricanes and, within days after Hurricane Ike made landfall,
we initiated a recruiting campaign in the Beaumont, Texas, market and were
successful in attracting a large number of new employees. Additionally, we have
benefited from our decision to open a second collection site in San Antonio,
Texas, which was not affected by either of the storms. The storms resulted in
various direct and indirect costs that impacted our operating results for the
period just ended. Direct costs included expenses to relocate, feed and house
our employees, damages to our facilities and inventory and expenses to operate
our stores on generators while electric utilities were being restored. Total
direct costs incurred, net of estimated insurance proceeds, approximated $1.3
million. Indirect expenses incurred, which are difficult to measure and we feel
had a greater impact than the direct costs incurred, include reduced
productivity as we relocated our corporate office personnel and utilized
personnel at other facilities to participate in the relocation process, among
other items.
While we have benefited recently from our operations being concentrated in
the Texas, Louisiana and Oklahoma region, recent turmoil in the national
economy, including instability in the financial markets, declining consumer
confidence and falling oil prices will present significant challenges to our
operations in the coming quarters. Specifically, future sales volumes, gross
profit margins and credit portfolio performance could be negatively impacted,
and thus impact our overall profitability. As a result, while we will strive to
grow our market share, maintain consistent credit portfolio performance and
reduce expenses, we will also work to maintain our access to the liquidity
necessary to maintain our operations through these challenging times.
17
The consumer electronics industry depends on new products to drive same
store sales increases. Typically, these new products, such as high-definition
televisions, Blu-ray and DVD players, digital cameras, MP3 players and GPS
devices are introduced at relatively high price points that are then gradually
reduced as the product becomes mainstream. To sustain positive same store sales
growth, unit sales must increase at a rate greater than the decline in product
prices. The affordability of the product helps drive the unit sales growth.
However, as a result of relatively short product life cycles in the consumer
electronics industry, which limit the amount of time available for sales volume
to increase, combined with rapid price erosion in the industry, retailers are
challenged to maintain overall gross margin levels and positive same store
sales. This has historically been our experience, and we continue to adjust our
marketing strategies to address this challenge through the introduction of new
product categories and new products within our existing categories. Over the
past year, our gross margins have been negatively impacted by price competition
on flat panel televisions. As a result, our product gross margins began
declining in the second quarter of fiscal year 2008.
Application of Critical Accounting Policies
In applying the accounting policies that we use to prepare our consolidated
financial statements, we necessarily make accounting estimates that affect our
reported amounts of assets, liabilities, revenues and expenses. Some of these
accounting estimates require us to make assumptions about matters that are
highly uncertain at the time we make the accounting estimates. We base these
assumptions and the resulting estimates on authoritative pronouncements,
historical information, advice of experts and other factors that we believe to
be reasonable under the circumstances, and we evaluate these assumptions and
estimates on an ongoing basis. We could reasonably use different accounting
estimates, and changes in our accounting estimates could occur from period to
period, with the result in each case being a material change in the financial
statement presentation of our financial condition or results of operations. We
refer to accounting estimates of this type as "critical accounting estimates."
We believe that the critical accounting estimates discussed below are among
those most important to an understanding of our consolidated financial
statements as of October 31, 2008.
Transfers of Financial Assets. We transfer certain customer receivables to
a QSPE that issues asset-backed securities to third-party lenders using these
accounts as collateral, and we continue to service these accounts after the
transfer. We recognize the sale of these accounts when we relinquish control of
the transferred financial asset in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
as amended by SFAS No. 155, Accounting for Certain Hybrid Financial Instruments.
As we transfer the accounts we record an asset representing the fair value of
our interest in the cash flows of the QSPE, which is the difference between the
interest earned on customer accounts and the cost associated with financing and
servicing the transferred accounts, including an estimate of future net credit
losses associated with the transferred accounts, plus our retained interest in
the transferred receivables, discounted using a return that we estimate would be
expected by a third-party investor. We recognize the income from our interest in
these transferred accounts as gains on the transfer of the asset, interest
income and servicing fees. This income is recorded as Finance charges and other
in our consolidated statements of operations. Additionally, changes in the fair
value of our interest are recorded in Finance charges and other. We value our
interest in the cash flows of the QSPE at fair value under the provisions of
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, and SFAS No. 157, Fair Value Measurements.
We estimate the fair value of our Interests in securitized assets using a
discounted cash flow model with most of the inputs used being unobservable
inputs. The primary unobservable inputs, which are derived principally from our
historical experience, with input from our investment bankers and financial
advisors, include the estimated portfolio yield, net credit loss rate, discount
rate, payment rate and delinquency rate and reflect our judgments about the
assumptions market participants would use in determining fair value. In
determining the cost of borrowings, we use current actual borrowing rates, and
adjust them, as appropriate, using interest rate futures data from market
sources to project interest rates over time. Changes in the assumptions over
time, including varying credit portfolio performance, market interest rate
changes, market participant risk premiums required, or a shift in the mix of
funding sources, could result in significant volatility in the fair value of the
Interest in securitized assets, and thus our earnings.
18
During the three months and nine months ended October 31, 2008, risk
premiums required by market participants on many investments increased as a
result of continued volatility in the financial markets. Though we do not
anticipate any significant variation in the underlying economics or expected
cash flow performance of our securitized credit portfolio, we increased the risk
premium included in the discount rate assumption used in the determination of
the fair value of our interests in securitized assets to reflect the higher
expected risk premiums included in investment returns we believe a market
participant would require if purchasing our interests. Based on a review of the
changes in market risk premiums during the three months ended April 30, 2008,
and discussions with our investment bankers and financial advisors, we estimated
that a market participant would require an approximately 300 basis point
increase in the required risk premium. After our review for the three months
ended October 31, 2008, we estimated that a market participant would require an
additional 700 basis point increase in the required risk premium. As a result,
we increased the weighted average discount rate assumption from 16.5% at January
31, 2008, to 25.7% at October 31, 2008, after reflecting a 77 basis point
decrease in the risk-free interest rate included in the discount rate
assumption. The increase in the discount rate has the effect of deferring income
to future periods, but not permanently reducing securitization income or our
earnings, assuming no significant variation in the future cash flow performance
of the securitized credit portfolio. If a market participant were to require a
risk premium that is 100 basis points higher than we estimated in the fair value
calculation, the fair value of our Interests in securitized assets would be
decreased by an additional $1.5 million as of October 31, 2008. If we had
assumed a 10.0% reduction in net interest spread (which might be caused by
rising interest rates or reductions in rates charged on the accounts
transferred), our Interests in securitized assets and Finance charges and other
would have been reduced by $5.9 million as of October 31, 2008. If the
assumption used for estimating credit losses was increased by 0.5%, the impact
to Finance charges and other would have been a reduction in revenues and pretax
income of $2.2 million as of October 31, 2008.
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the customer takes possession of the product. Such
revenues are recognized net of any adjustments for sales incentive offers such
as discounts, coupons, rebates, or other free products or services and discounts
of promotional credit sales that will extend beyond one year. We sell service
maintenance agreements and credit insurance contracts on behalf of unrelated
third parties. For contracts where the third parties are the obligors on the
contract, commissions are recognized in revenues at the time of sale, and in the
case of retrospective commissions, at the time that they are earned. Where we
sell service maintenance renewal agreements in which we are deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
service maintenance agreements are renewal contracts that provide our customers
protection against product repair costs arising after the expiration of the
manufacturer's warranty and the third party obligor contracts. These agreements
typically range from 12 months to 36 months. These agreements are separate units
of accounting under Emerging Issues Task Force No. 00-21, Revenue Arrangements
with Multiple Deliverables. The amount of service maintenance agreement revenue
deferred at October 31, 2008, and January 31, 2008, is $7.2 million and $6.6
million, respectively, and is included in Deferred revenues and allowances in
the accompanying consolidated balance sheets.
Vendor Allowances. We receive funds from vendors for price protection,
product rebates (earned upon purchase or sale of product), marketing and
training and promotion programs which are recorded on the accrual basis as a
reduction to the related product cost or advertising expense according to the
nature of the program. We accrue rebates based on the satisfaction of terms of
the program and sales of qualifying products even though funds may not be
received until the end of a quarter or year. If the programs are related to
product purchases, the allowances, credits or payments are recorded as a
reduction of product cost; if the programs are related to product sales, the
allowances, credits or payments are recorded as a reduction of cost of goods
sold; if the programs are related to promotion or marketing of the product, the
allowances, credits, or payments are recorded as a reduction of advertising
expense in the period in which the expense is incurred.
Share-Based Compensation. In December 2004, SFAS No. 123R, Share-Based
Payment, was issued. Under the requirements of this statement we measure the
cost of employee services received in exchange for an award of equity
instruments, typically stock options, based on the grant-date fair value of the
award, and record that cost over the period during which the employee is
required to provide service in exchange for the award. The grant-date fair value
is based on our best estimate of key assumptions, including expected time period
over which the options will remain outstanding and expected stock price
volatility at the date of grant. Additionally, we must estimate expected
forfeitures for each stock option grant and adjust the recorded compensation
expense accordingly.
19
Accounting for Leases. The accounting for leases is governed primarily by
SFAS No. 13, Accounting for Leases. As required by the standard, we analyze each
lease, at its inception and any subsequent renewal, to determine whether it
should be accounted for as an operating lease or a capital lease. Additionally,
monthly lease expense for each operating lease is calculated as the average of
all payments required under the minimum lease term, including rent escalations.
Generally, the minimum lease term begins with the date we take possession of the
property and ends on the last day of the minimum lease term, and includes all
rent holidays, but excludes renewal terms that are at our option. Any tenant
improvement allowances received are deferred and amortized into income as a
reduction of lease expense on a straight line basis over the minimum lease term.
The amortization of leasehold improvements is computed on a straight line basis
over the shorter of the remaining lease term or the estimated useful life of the
improvements. For transactions that qualify for treatment as a sale-leaseback,
any gain or loss is deferred and amortized as rent expense on a straight-line
basis over the minimum lease term. Any deferred gain would be included in
Deferred gain on sale of property and any deferred loss would be included in
Other assets on the consolidated balance sheets.
Goodwill. We perform an assessment annually testing for the impairment of
goodwill, or at any other time when impairment indicators exist. While the
current market conditions have caused our market capitalization to fall below
our book value, we do not believe an indicator of impairment exists and will
perform our annual impairment test in the fourth quarter of fiscal 2009.
Receivables Not Sold. Certain receivables are carried on the Company's
balance sheet in Accounts receivable. Such receivables are recorded net of an
allowance for doubtful accounts, which is calculated based on historical losses.
Typically, a receivable is considered delinquent if a payment has not been
received on the scheduled due date. Generally, an account that is delinquent
more than 120 days and for which no payment has been received in the past seven
months will be charged-off against the allowance and interest accrued subsequent
to the last payment will be reversed. Interest income is accrued using the Rule
of 78's method for installment contracts and the simple interest method for
revolving charge accounts. Typically, interest income is accrued until the
contract or account is paid off or charged-off. Interest income is recognized on
our "same as cash" promotion accounts based on our historical experience related
to customers that fail to satisfy the requirements of the interest-free
programs. The Company has a secured interest in the merchandise financed by
these receivables and therefore has the opportunity to recover a portion of the
charged-off value.
20
Results of Operations
The following table sets forth certain statement of operations information
as a percentage of total revenues for the periods indicated:
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------------- --------------------------
2007 2008 2007 2008
----------- ------------ ----------- -----------
Revenues:
Product sales 82.2% 87.2% 81.3% 83.0%
Service maintenance agreement commissions (net) 4.4 4.7 4.5 4.6
Service revenues 3.2 2.8 2.9 2.5
----------- ------------ ----------- -----------
Total net sales 89.8 94.7 88.7 90.1
Finance charges and other 12.3 13.9 12.1 13.1
Net increase (decrease) in fair value (2.1) (8.6) (0.7) (3.2)
----------- ------------ ----------- -----------
Total finance charges and other 10.2 5.3 11.3 9.9
----------- ------------ ----------- -----------
Total revenues 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of goods sold, including
warehousing and occupancy cost 62.4 69.1 61.5 64.9
Cost of parts sold, including
warehousing and occupancy cost 1.2 1.4 1.0 1.1
Selling, general and administrative expense 32.7 33.9 30.6 29.9
Provision for bad debts 0.3 1.5 0.2 0.6
----------- ------------ ----------- -----------
Total costs and expenses 96.6 105.9 93.3 96.5
----------- ------------ ----------- -----------
Operating income 3.4 (5.9) 6.7 3.5
Interest (income) expense, net (0.1) 0.3 (0.1) 0.1
Other (income) / expense, net 0.0 (0.0) (0.1) 0.0
----------- ------------ ----------- -----------
Income before income taxes 3.5 (6.2) 6.9 3.4
Provision for income taxes 1.4 (2.0) 2.4 1.3
----------- ------------ ----------- -----------
Net income 2.1% (4.2)% 4.5% 2.1%
=========== ============ =========== ===========
Same store sales growth is calculated by comparing the reported sales by
store for all stores that were open throughout a period, to reported sales by
store for all stores that were open throughout the prior year period. Sales from
closed stores, if any, are removed from each period. Sales from relocated stores
have been included in each period because each store was relocated within the
same general geographic market. Sales from expanded stores have been included in
each period.
The presentation of gross margins may not be comparable to other retailers
since we include the cost of our in-home delivery service as part of Selling,
general and administrative expense. Similarly, we include the cost related to
operating our purchasing function in Selling, general and administrative
expense. It is our understanding that other retailers may include such costs as
part of their cost of goods sold.
Three Months Ended October 31, 2008 Compared to Three Months Ended October 31,
2007
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Net sales $ 173.9 $ 170.0 3.9 2.3
--------------------------------------------------------------------------------
Finance charges and other 25.5 23.3 2.2 9.4
--------------------------------------------------------------------------------
Net decrease in fair value (15.7) (4.0) (11.7) N/A
--------------------------------------------------------------------------------
Total Revenues $ 183.7 $ 189.4 (5.7) 3.0
--------------------------------------------------------------------------------
21
The $3.9 million increase in net sales was impacted significantly by
Hurricanes Gustav and Ike, which resulted in 144 store-days lost during the
three months ended October 31, 2008. The change in net sales was made up of the
following:
o a $14.1 million increase generated by eleven retail locations that
were not open for the three months in each period; and
o a $9.5 million same store sales decrease of 5.8%, driven primarily by
the impact of the hurricanes discussed above, as evidenced by our
positive same store sales results in the months of August and October;
o a $0.3 million increase resulted from a decrease in discounts on
extended-term promotional credit sales (those with terms longer than
12 months).
o a $1.0 million decrease resulted from a decrease in service revenues.
The components of the $3.9 million increase in net sales were a $4.6
million increase in Product sales and partially offset by a $0.7 million
decrease in service maintenance agreement commissions and service revenues. The
$4.6 million increase in product sales resulted from the following:
o approximately $6.1 million increase attributable to increases in total
unit sales, due primarily to increased sales in consumer electronics
and the benefit of hurricane-related sales of generators and related
equipment, and
o approximately $1.5 million decrease attributable to an overall
decrease in the average unit price. The increase was due primarily to
a decline in price points in general, particularly in the consumer
electronics, lawn and garden and track categories, as the average
price of televisions in general declined, increased sales of
generators and equipment as a result of the hurricanes negatively
impacted the lawn and garden average price point, and a change in the
mix of products in the track, as well as lower average prices for
laptop computers, resulted in a drop in the average price point.
The $0.7 million decrease in service maintenance agreement commissions and
service revenues was driven by lower service revenues, partially offset by
increased sales of service maintenance agreements due to higher product sales.
The following table presents the makeup of net sales by product category in
each quarter, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
22
Three Months Ended October 31,
--------------------------------------------------------
2007 2008
-------------------------- -------------------------- Percent
Category Amount Percent Amount Percent Change
----------- ----------- ----------- ----------- -----------
Consumer electronics $ 55,572 32.7% $ 58,337 33.6% 5.0% (1)
Home appliances 54,214 31.8 53,075 30.5 (2.1) (2)
Track 22,132 13.0 22,649 13.0 2.3 (3)
Furniture and mattresses 13,922 8.2 14,465 8.3 3.9 (4)
Lawn and garden 5,450 3.2 7,724 4.5 41.7 (5)
Delivery 3,090 1.8 2,874 1.7 (7.0) (6)
Other 1,277 0.8 1,129 0.6 (11.6)
----------- ----------- ----------- -----------
Total product sales 155,657 91.5 160,253 92.2 3.0
Service maintenance agreement
commissions 8,336 4.9 8,547 4.9 2.5 (7)
Service revenues 6,059 3.6 5,130 2.9 (15.3) (8)
----------- ----------- ----------- -----------
Total net sales $ 170,052 100.0% $ 173,930 100.0% 2.3%
=========== =========== =========== ===========
(1) This increase is due to continued consumer interest in LCD televisions
and higher home theater sales, which offset declines in projection and
plasma televisions.
(2) The home appliance category decreased slightly on lower cooking and
refrigeration sales and offset by an increase in laundry sales, as the
appliance market in general showed continued weakness. Appliances
sales benefited during the month of October 2008, from replacement
sales to victims of Hurricane Ike.
(3) The increase in track sales (consisting largely of computers, computer
peripherals, video game equipment, portable electronics and small
appliances) is driven primarily by higher laptop computer, DVD player,
GPS device and accessory sales partially offset by lower desktop
computer, video game equipment and MP3 player sales.
(4) This increase is due to higher furniture sales driven by the impact of
additional vendors and product offerings.
(5) This category was impacted by increased sales of generators and
related items in the markets affected by Hurricane Ike.
(6) This decrease was due to a reduction in the total number of
deliveries, primarily as customers take advantage of the ability to
carry out smaller flat-panel televisions.
(7) This increase is due to the increase in product sales.
(8) This decrease is driven by a decrease in the number of warranty
service calls performed by our technicians.
Change
--------------------------------------------------------------------------------
(Dollars in Thousands) 2008 2007 $ %
--------------------------------------------------------------------------------
Securitization income (including fair
value adjustment) $ 848 $14,115 (13,267) (94.0)
--------------------------------------------------------------------------------
Insurance commissions 4,396 5,114 (718) (14.0)
--------------------------------------------------------------------------------
Interest income and other 4,573 85 4,488 NM
--------------------------------------------------------------------------------
Finance charges and other $ 9,817 $19,314 (9,497) (49.2)
--------------------------------------------------------------------------------
The decline in Securitization income resulted primarily from an $11.8
million increase in the non-cash fair value adjustment to reduce our Interests
in securitized assets. Additionally, as a result of the completion of our new
revolving credit facility, we are retaining certain new customer receivables
generated on our balance sheet and not transferring them to the QSPE. As a
result of the reduced transfer of receivables to the QSPE, Gains on sales of
receivables included in Securitization income has declined to $1.7 million for
the three months ended October 31, 2008, from $6.2 million for the three months
ended October 31, 2007. Because of the higher average balance of receivables
held by the QSPE, as compared to the same period in the prior year, and
increases in the discount rate assumption used in our fair value calculation,
Interest earned on our retained interest included in Securitization income has
increased to $8.5 million for the three months ended October 31, 2008, from $5.9
million in the prior year. Insurance commissions have declined due to lower
retrospective commissions, which were negatively impacted by higher claims
filings due to Hurricanes Gustav and Ike, and lower interest earnings on funds
held by the insurance company for the payment of claims. Interest income and
other increased $4.5 million due to an increase in new customer receivables
generated that are being held on-balance sheet to a balance of $89.6 million at
October 31, 2008, from $9.0 million in the prior year. The following table
provides key portfolio performance information for the three months ended
October 31, 2008 and 2007:
23
2008 2007
------------------------------------------ ------------
ABS (a) ABL (b) Total Total
------------ ------------ ------------ ------------
Interest income and fees (1) $ 28,929 $ 4,149 $ 33,078 $ 29,658
Net charge-offs (5,749) - (5,749) (4,548)
Borrowing costs (6,426) - (6,426) (6,630)
------------ ------------ ------------ ------------
Amounts included in Finance charges and other 16,754 4,149 20,903 18,480
------------ ------------ ------------ ------------
Net charge-offs in Provision for bad debts - (198) (198) (315)
Borrowing costs in Interest expense - (260) (260) -
------------ ------------ ------------ ------------
Net portfolio yield (c) $ 16,754 $ 3,691 $ 20,445 $ 18,165
============ ============ ============ ============
Average portfolio balance (2) $ 644,447 $ 57,997 $ 702,444 $ 612,877
Portfolio yield % annualized (1) / (2) 18.0% 28.6% 18.8% 19.4%
Net charge-off % (annualized) 3.6% 1.4% 3.4% 3.2%
(a) Off balance sheet portfolio owned by the QSPE and serviced by the
Company
(b) On balance sheet portfolio. Charge-off levels will lag the balance
growth.
(c) Consistent with securitization income, exclusive of the fair value
adjustments, for the ABS facility.
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Cost of goods sold $ 127.0 $ 118.2 8.8 7.4
--------------------------------------------------------------------------------
As a percent of net product sales 79.3% 75.9% 3.4
--------------------------------------------------------------------------------
Cost of goods sold increased as a percent of net product sales from the 2007
period to the 2008 period due to pricing pressures in retailing in general.
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Cost of service parts sold $ 2.5 $ 2.3 0.2 9.8
--------------------------------------------------------------------------------
As a percent of service revenues 48.3% 37.3% 11.0
--------------------------------------------------------------------------------
This increase was due primarily to a 16.7% increase in parts sales.
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Selling, general and administrative expense $ 62.3 $ 61.9 0.4 0.6
--------------------------------------------------------------------------------
As a percent of total revenues 33.9% 32.7% 1.2
--------------------------------------------------------------------------------
The increase in SG&A expense was largely attributable to the addition of
new stores and the expenses of approximately $1.3 million, net of estimated
insurance proceeds, that we incurred related to the two hurricanes that occurred
during the quarter. The increase in our SG&A expense as a percent of revenues
was largely driven by the negative impact of the fair value adjustment on total
revenues, with 200 basis points of the increase resulting from the negative
impact of the fair value adjustments on Total revenues and 70 basis points of
the increase being due to the hurricane-related expenses. Our SG&A expense as a
percent of revenues was benefited by lower compensation costs in absolute
dollars and as a percent of revenues as compared to the prior year, as well as
reduced advertising expense as a percent of revenues. Additionally, reductions
in certain store operating expenses, including repairs and maintenance and
janitorial services were realized. Partially offsetting these improvements were
increases in utilities, management information systems and stock-based
compensation expenses.
24
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Provision for bad debts $ 2.8 $ 0.6 2.2 381.4
--------------------------------------------------------------------------------
As a percent of total revenues 1.53% .31% 1.22
--------------------------------------------------------------------------------
The provision for bad debts on non-credit portfolio receivables and credit
portfolio receivables retained by us and not eligible to be transferred to the
QSPE increased primarily as a result of increased balances of receivables
retained by us. See the notes to the financial statements for information
regarding the performance of the credit portfolio.
Change
--------------------------------------------------------------------------------
(Dollars in Thousands) 2008 2007 $ %
--------------------------------------------------------------------------------
Interest (income) expense, net $ 468 $ (110) 578 N/A
--------------------------------------------------------------------------------
The increase in net interest expense was a result of interest incurred on
our new revolving credit facility. In addition, there was a decrease in interest
income from invested funds due to lower balances of invested cash and lower
interest rates earned on amounts invested.
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (3.6) $ 2.5 (6.1) (244)
--------------------------------------------------------------------------------
As a percent of income (loss) before
income taxes 31.9% 38.6% NA
--------------------------------------------------------------------------------
Due to the large non-cash fair value adjustment reducing our Interests in
securitized assets, we reported a Loss before income taxes for the three months
ended October 31, 2008, resulting in a tax benefit recorded in the current year,
as opposed to a Provision for income taxes in Income before income taxes in the
prior year. Also, due to the fact that taxes for the state of Texas are recorded
based on gross margin, instead of Income (loss) before taxes, it partially
offsets the Benefit for income taxes recorded based on the Loss before income
taxes, resulting in a lower effective tax rate.
Nine Months Ended October 31, 2008 Compared to Nine Months Ended October 31,
2007
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Net sales $ 559.6 $ 530.4 29.2 5.5
--------------------------------------------------------------------------------
Finance charges and other 81.2 72.2 9.0 12.5
--------------------------------------------------------------------------------
Net decrease in fair value (20.0) (4.4) (15.6) N/A
--------------------------------------------------------------------------------
Total Revenues $ 620.8 $ 598.2 22.6 3.8
--------------------------------------------------------------------------------
The $29.2 million increase in net sales was impacted by Hurricanes Gustav
and Ike, which resulted in 144 store-days lost during the nine months ended
October 31, 2008. The change in net sales was made up of the following:
o a $40.6 million increase generated by twelve retail locations that
were not open for the nine months in each period;
o a $10.4 million same store sales decrease of 2.0%, driven by the
impact of the hurricanes discussed above and weakness in appliance
sales;
o a $0.8 million increase resulted from a decrease in discounts on
extended-term promotional credit sales (those with terms longer than
12 months); and
o a $1.8 million decrease resulted from a decrease in service revenues.
The components of the $29.2 million increase in net sales were a $29.3
million increase in Product sales and a $1.7 million increase in service
maintenance agreement commissions, partially offset by a $1.8 million decrease
in service revenues. The $29.3 million increase in product sales resulted from
the following:
25
o approximately $29.1 million increase attributable to an overall
increase in the average unit price. The increase was due primarily to
a change in the mix of product sales, driven by an increase in the
consumer electronics category, which has the highest average price
point of any category, as a percentage of total product sales.
Additionally, there were category price point increases as a result of
a shift to higher-priced high-efficiency laundry items and increases
in price points on furniture and mattresses, partially offset by a
decline in the average price points on lawn and garden, and
o approximately $0.2 million increase attributable to increases in total
unit sales, due primarily to solid growth in consumer electronics.
The $0.2 million increase in service maintenance agreement commissions and
service revenues was driven by increased sales of service maintenance
agreements, consistent with higher product sales, partially offset by lower
service revenues.
The following table presents the makeup of net sales by product category,
including service maintenance agreement commissions and service revenues,
expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Nine Months Ended October 31,
--------------------------------------------------------
2007 2008
-------------------------- -------------------------- Percent
Category Amount Percent Amount Percent Change
---------- ----------- ----------- ----------- -----------
Consumer electronics $ 168,456 31.8% $ 195,169 34.9% 15.9% (1)
Home appliances 172,651 32.5 169,179 30.2 (2.0) (2)
Track 64,240 12.1 68,916 12.3 7.3 (3)
Furniture and mattresses 47,124 8.9 48,736 8.7 3.4 (4)
Lawn and garden 20,161 3.8 20,427 3.7 1.3 (5)
Delivery 9,454 1.8 9,220 1.6 (2.5) (6)
Other 4,003 0.8 3,757 0.7 (6.1)
---------- ----------- ----------- -----------
Total product sales 486,089 91.7 515,404 92.1 6.0
Service maintenance agreement
commissions 26,688 5.0 28,428 5.1 6.5 (7)
Service revenues 17,641 3.3 15,810 2.8 (10.4) (8)
---------- ----------- ----------- -----------
Total net sales $ 530,418 100.0% $ 559,642 100.0% 5.5%
========== =========== =========== ===========
----------------------------------
(1) This increase is due to continued consumer interest in LCD televisions,
which offset declines in projection and plasma televisions.
(2) The home appliance category declined primarily due to lower refrigeration
sales, as, the appliance market in general showed continued weakness.
(3) The increase in track sales (consisting largely of computers, computer
peripherals, video game equipment, portable electronics and small
appliances) is driven primarily by increased DVD sales, laptop computer
sales, and the addition of GPS devices, partially offset by declines in
camcorder, camera and desktop computer.
(4) This increase is due to store expansion and a change in our furniture and
mattresses merchandising driven by the multi-vendor strategy implemented
during the prior year.
(5) This category was impacted by increased sales of generators and related
items to customers in the markets affected by Hurricane Ike.
(6) This decrease was due to a reduction in the total number of deliveries,
primarily as customers take advantage of the ability to carry out smaller
flat-panel televisions.
(7) This increase is due to the increase in product sales.
(8) This decrease is driven by a decrease in the number of warranty service
calls performed by our technicians.
26
Change
--------------------------------------------------------------------------------
(Dollars in Thousands) 2008 2007 $ %
--------------------------------------------------------------------------------
Securitization income (including fair
value adjustment) $39,669 $50,453 (10,784) (21.4)
--------------------------------------------------------------------------------
Insurance commissions 15,336 15,948 (612) (3.8)
--------------------------------------------------------------------------------
Interest income and other 6,190 1,384 4,806 N/A
--------------------------------------------------------------------------------
Finance charges and other $61,195 $67,785 (6,590) (9.7)
--------------------------------------------------------------------------------
The decline in Securitization income resulted primarily from a $15.3
million increase in the non-cash fair value adjustment to reduce our Interests
in securitized assets. Additionally, as a result of the completion of our new
revolving credit facility, we are retaining certain new customer receivables
generated on our balance sheet and not transferring them to the QSPE. As a
result of the reduced transfer of receivables to the QSPE, Gains on sales of
receivables included in Securitization income has declined to $17.1 million for
the nine months ended October 31, 2008, from $21.0 million for the nine months
ended October 31, 2007. Because of the higher average balance of receivables
held by the QSPE, as compared to the same period in the prior year, and
increases in the discount rate assumption used in our fair value calculation,
Interest earned on our retained interest included in Securitization income has
increased to $23.4 million for the nine months ended October 31, 2008, from
$16.5 million in the prior year. Insurance commissions have declined due to
lower retrospective commissions, which were negatively impacted by higher claims
filings due to Hurricanes Gustav and Ike, and lower interest earnings on funds
held by the insurance company for the payment of claims. Interest income and
other increased $4.8 million due to an increase in new customer receivables
generated that are being held on-balance sheet to a balance of $89.6 million at
October 31, 2008, from $9.0 million in the prior year. The following table
provides key portfolio performance information for the nine months ended October
31, 2008 and 2007:
2008 2007
------------------------------------------ ------------
ABS (a) ABL (b) Total Total
------------ ------------ ------------ ------------
Interest income and fees (1) $ 92,690 $ 4,629 $ 97,319 $ 86,869
Net charge-offs (15,474) - (15,474) (11,552)
Borrowing costs (17,277) - (17,277) (19,105)
------------ ------------ ------------ ------------
Amounts included in Finance charges and other 59,939 4,629 64,568 56,212
------------ ------------ ------------ ------------
Net charge-offs in Provision for bad debts - (565) (565) (685)
Borrowing costs in Interest expense - (260) (260) -
------------ ------------ ------------ ------------
Net portfolio yield (c) $ 59,939 $ 3,804 $ 63,743 $ 55,527
============ ============ ============ ============
Average portfolio balance (2) $ 653,735 $ 28,474 $ 682,209 $ 594,535
Portfolio yield % annualized (1) / (2) 18.9% 21.7% 19.0% 19.5%
Net charge-off % (annualized) 3.2% 2.6% 3.1% 2.7%
(a) Off balance sheet portfolio owned by the QSPE and serviced by the Company
(b) On balance sheet portfolio. Charge-off levels will lag the balance growth.
(c) Consistent with securitization income, exclusive of the fair value
adjustments, for the ABS facility.
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Cost of goods sold $ 402.9 $ 367.9 35.0 9.5
--------------------------------------------------------------------------------
As a percent of net product sales 78.2% 75.7% 2.5
--------------------------------------------------------------------------------
Cost of goods sold increased as a percent of net product sales from the
2007 period to the 2008 period due to pricing pressures in retailing in general.
27
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Cost of service parts sold $ 7.1 $ 6.2 .9 13.2
--------------------------------------------------------------------------------
As a percent of service revenues 47.7% 35.4% 12.3
--------------------------------------------------------------------------------
This increase was due primarily to a 21.8% increase in parts sales.
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Selling, general and administrative expense $ 185.6 $ 183.2 2.4 1.3
--------------------------------------------------------------------------------
As a percent of total revenues 29.9% 30.6% (0.7)
--------------------------------------------------------------------------------
The increase in SG&A expense was largely attributable to the addition of
new stores and the expenses of approximately $1.3 million, net of estimated
insurance proceeds, that we incurred related to the two hurricanes that occurred
during the period. The decrease in our SG&A expense as a percent of revenues was
negatively affected by the negative impact of the fair value adjustment on total
revenues, with the decrease shown above being reduced by 70 basis points due to
the negative impact of the fair value adjustments on Total revenues and another
20 basis points due to the hurricane-related expenses. The improvement in our
SG&A expense as a percent of revenues was largely driven by lower compensation
costs in absolute dollars and as a percent of revenues as compared to the prior
year, as well as reduced advertising expense as a percent of revenues.
Additionally, reductions in certain store operating expenses, including repairs
and maintenance and janitorial services contributed to the improvement.
Partially offsetting these improvements were increases in utilities, management
information systems and stock-based compensation expenses.
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Provision for bad debts $ 3.4 $ 1.5 1.9 127.8
--------------------------------------------------------------------------------
As a percent of total revenues .53% .25% 0.28
--------------------------------------------------------------------------------
The provision for bad debts on non-credit portfolio receivables and credit
portfolio receivables retained by us and not eligible to be transferred to the
QSPE increased primarily as a result of increased balances of receivables
retained by us. See the notes to the financial statements for information
regarding the performance of the credit portfolio.
Change
--------------------------------------------------------------------------------
(Dollars in Thousands) 2008 2007 $ %
--------------------------------------------------------------------------------
Interest (income) expense, net $ 368 $ (601) 969 (161.2)
--------------------------------------------------------------------------------
The increase in net interest expense was a result of interest incurred on
our new revolving credit facility. In addition, there was a decrease in interest
income from invested funds due to lower balances of invested cash and lower
interest rates earned on amounts invested.
Change
--------------------------------------------------------------------------------
(Dollars in Thousands) 2008 2007 $ %
--------------------------------------------------------------------------------
Other (income)/expense, net $ 106 $ (920) 1,026 (111.1)
--------------------------------------------------------------------------------
During the period ended October 31, 2007, there were gains recognized on
the sale of two of the Company's store locations. There were approximately $1.2
million of gains realized, but not recognized, in the period ended October 31,
2007, on transactions qualifying for sale-leaseback accounting that were
deferred and are being amortized as a reduction of rent expense on a
straight-line basis over the minimum lease terms.
28
Change
--------------------------------------------------------------------------------
(Dollars in Millions) 2008 2007 $ %
--------------------------------------------------------------------------------
Provision for income taxes $ 8.4 $ 14.2 5.8 41.3
--------------------------------------------------------------------------------
As a percent of income before income taxes 39.0% 34.1% N/A
--------------------------------------------------------------------------------
Due to the large non-cash fair value adjustment reducing our Interests in
securitized assets this period, and the fact that taxes for the state of Texas
are recorded based on gross margin, instead of Income before taxes, the
effective rate was higher during the 2008 period as we did not receive a benefit
for taxes for the state of Texas on the non-cash fair value adjustment.
Liquidity and Capital Resources
Current Activities
We require capital to finance our growth as we add new stores and markets
to our operations, which in turn requires additional working capital for
increased receivables and inventory. We have historically financed our
operations through a combination of cash flow generated from operations and
external borrowings, including primarily bank debt, extended terms provided by
our vendors for inventory purchases, acquisition of inventory under consignment
arrangements and transfers of receivables to our asset-backed securitization
facilities.
As of October 31, 2008, we had $53.2 million under our revolving credit
facility, net of standby letters of credit issued, and $10.0 million under our
unsecured bank line of credit immediately available to us for general corporate
purposes, $18.5 million under extended vendor terms for purchases of inventory
and $18.0 million in commitments available to our QSPE for the transfer of
receivables. In addition to the $53.2 million currently available under the
revolving credit facility, an additional $101.1 million will become available as
we grow the balance of new receivables retained by us and when there is growth
in total eligible inventory balances. The principal payments received on
receivables held by the QSPE, which averaged approximately $30 million per month
during the three months ended October 31, 2008, will also be available each
month to fund transfers of new receivables.
On August 14, 2008, we executed a $210 million revolving credit facility
that provides funding based on a borrowing base calculation that includes
accounts receivable and inventory. The new facility, which replaced our $100
million revolving credit facility, matures in August 2011 and bears interest at
LIBOR plus a spread ranging from 225 basis points to 275 basis points, based on
a fixed charge coverage ratio. The spread will be 225 basis points for the first
six months under the new loan agreement, and then will be subject to adjustment
as discussed above. Additionally, the new loan agreement includes an accordion
feature allowing for future expansion of the committed amount up to $350
million. In conjunction with completing this financing arrangement, our QSPE
amended certain of its borrowing agreements to provide for the existence of the
new revolving credit facility and adjust certain terms of its borrowing
arrangements to current market requirements, including reducing the advance rate
on its variable funding note facility from a maximum of 85% to a maximum of 76%.
As a result of completing the new revolving credit facility, a larger portion of
the accounts receivable we generate will be retained by us and not sold to the
QSPE, and as such will be included in our consolidated balance sheet.
29
A summary of the significant financial covenants that govern our revolving
credit facility compared to our actual compliance status at October 31, 2008, is
presented below:
Required
Minimum/
Actual Maximum
--------------- ---------------
Fixed charge coverage ratio must exceed required minimum 1.76 to 1.00 1.30 to 1.00
Leverage ratio must be lower than required maximum 2.06 to 1.00 3.50 to 1.00
Cash recovery percentage must exceed required minimum 5.14% 4.75%
Capital expenditures, net must be lower than required maximum $21.6 million $22.0 million
Note: All terms in the above table are defined by the revolving credit
facility and may or may not agree directly to the financial statement
captions in this document. The covenants are calculated on a trailing four
quarter basis.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our
revolving credit facility and unsecured credit line, extended vendor terms for
purchases of inventory, acquisition of inventory under consignment arrangements
and cash flows from the QSPE's asset-backed securitization program will be
sufficient to fund our operations, store expansion and updating activities and
capital programs for at least 12 months. However, there are several factors that
could decrease cash provided by operating activities, including:
o reduced demand or margins for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional
activities;
o changes in inventory requirements based on longer delivery times of
the manufacturers or other requirements which would negatively impact
our delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under
our current QSPE's asset-backed securitization program as a result of
changes in performance or types of receivables transferred
(promotional versus non-promotional and primary versus secondary
portfolio), or as a result of a change in the mix of funding sources
available to the QSPE, requiring higher collateral levels, or
limitations on the ability of the QSPE to obtain financing through its
commercial paper-based funding sources;
o reduced availability under our revolving credit facility as a result
of borrowing base requirements and the impact on the borrowing base
calculation of changes in the performance of the receivables financed
by that facility,
o reductions in the capacity or inability to expand the capacity
available for financing our receivables portfolio under existing or
replacement QSPE asset-backed securitization programs or a requirement
that we retain a higher percentage of the credit portfolio under such
programs;
o increases in program costs (interest and administrative fees relative
to our receivables portfolio associated with the funding of our
receivables);
o increases in personnel costs or other costs for us to stay competitive
in our markets; and
30
o the inability of our QSPE to get its current variable funding note
facility renewed at its annual maturity date.
If necessary, in addition to available cash balances, cash flow from
operations and borrowing capacity under our revolving facilities, additional
cash to fund our growth and increases in receivables balances could be obtained
by:
o reducing capital expenditures for new store openings,
o taking advantage of longer payment terms and financing available for
inventory purchases,
o utilizing other sources for providing financing to our customers,
o negotiating to expand the capacity available under existing credit
facilities, and
o accessing new debt or equity markets.
During the nine months ended October 31, 2008, net cash used in operating
activities increased to $23.3 million in the nine months ended October 31, 2008,
from $11.6 million used in operating activities in the nine months ended October
31, 2007. Operating cash flows for the current period were impacted primarily by
the increased retention of customer accounts receivable on our consolidated
balance sheet and increased inventories to support newly opened stores,
partially offset by an increase in accounts payable balances, due to the timing
of inventory purchases and taking advantage of payment terms available from our
vendors, and the deferrals of certain state sales tax and federal tax deposits
granted as a result of Hurricane Ike. Prior to the quarter ended October 31,
2008, virtually all customer accounts receivable were transferred to and funded
by our QSPE, resulting in the net cash flow activity from these transactions
being reported in cash flows from operating activities. However, the cash flow
presentation is different for customer accounts receivable retained by us and
financed through our revolving credit facility, with the increase in the
Accounts receivable balance being reflected as a use of cash in cash flows from
operating activities, and borrowings on our revolving credit facility being
reflected in cash flows from financing activities. As a result, we expect, as we
continue to grow the balance of customer accounts receivable retained by us,
that we will typically report cash flows "used" in operating activities, with
the funding for this activity provided by our revolving credit facility
resulting in us reporting cash "provided" by financing activities.
As noted above, we offer promotional credit programs to certain customers
that provide for "same as cash" or deferred interest interest-free periods of
varying terms, generally three, six, 12, 18, 24 and 36 months, and require
monthly payments beginning in the month after the sale. The various "same as
cash" promotional accounts and deferred interest program accounts are eligible
for securitization up to the limits provided for in our securitization
agreements. This limit is currently 30.0% of eligible securitized receivables.
If we exceed this 30.0% limit, we would be required to use some of our other
capital resources to carry the unfunded balances of the receivables for the
promotional period. The percentage of eligible securitized receivables
represented by promotional receivables was 22.5% and 18.1%, as of October 31,
2007 and 2008, respectively. There is no limitation on the amount of deferred
interest program accounts that can be carried as collateral under the revolving
credit facility. The percentage of all managed receivables represented by
promotional receivables was 16.9% as of October 31, 2008. The weighted average
promotional period was 14.8 months and 16.2 months for all promotional
receivables outstanding as of October 31, 2007 and 2008, respectively. The
weighted average remaining term on those same promotional receivables was 10.7
months and 11.1 months as of October 31, 2007 and 2008, respectively. While
overall these promotional receivables have a much shorter weighted average term
than non-promotional receivables, we receive less income on these receivables,
resulting in a reduction of the net interest margin on those receivables.
Net cash used in investing activities increased by $11.7 million, from $3.1
million used in the fiscal 2008 period to $14.8 million used in the fiscal 2009
period. The net increase in cash used in investing activities resulted primarily
from a decline in proceeds from sales of property and equipment as compared to
the same period in the prior fiscal year, and increased purchases of property
and equipment in the current year period. The cash expended for property and
equipment was used primarily for construction of new stores and the reformatting
of existing stores to better support our current product mix.
31
Net cash from financing activities increased by $50.1 million from $18.8
million used during the nine months ended October 31, 2007, to $31.3 million
provided during the nine months ended October 31, 2008, as we suspended our
stock repurchase program in the current fiscal period and increased borrowings
under our revolving credit facility to fund the new customer receivables
generated and retained on our balance sheet.
In its regularly scheduled meeting on August 24, 2006, our Board of
Directors authorized the repurchase of up to $50 million of our common stock,
dependent on market conditions and the price of the stock. Through October 31,
2008, we had spent $37.1 million under this authorization to acquire 1,723,205
shares of our common stock, though there were no shares repurchased during the
nine months ended October 31, 2008, and our Board of Directors has terminated
the repurchase program.
Off-Balance Sheet Financing Arrangements
Since we extend credit in connection with a large portion of our retail,
service maintenance and credit insurance sales, we have created a qualified
special purpose entity, which we refer to as the QSPE or the issuer, to purchase
customer receivables from us and to issue medium-term and variable funding notes
secured by the receivables to third parties to obtain cash for these purchases.
We transfer receivables, consisting of retail installment contracts and
revolving accounts extended to our customers, to the issuer in exchange for cash
and subordinated, unsecured promissory notes. To finance its acquisition of
these receivables, the issuer has issued the notes and bonds described below to
third parties. The unsecured promissory notes issued to us are subordinate to
these third party notes and bonds.
At October 31, 2008, the issuer had issued two series of notes and bonds:
the 2002 Series A variable funding note with a total availability of $300
million and three classes of 2006 Series A bonds with an aggregate amount
outstanding of $150 million, of which $6.0 million was required to be placed in
a restricted cash account for the benefit of the bondholders. The 2002 Series A
variable funding note is composed of a $100 million 364-day tranche, and a $200
million tranche that matures in 2012. The issuer recently completed an extension
of the maturity date on the 364-day commitment to August 13, 2009. In
conjunction with the renewal, the cost of borrowings under this $300 million
facility increased and now bear interest at the commercial paper rate plus 250
basis points, in most instances. If the net portfolio yield, as defined by
agreements, falls below 5.0%, then the issuer may be required to fund additions
to the cash reserves in the restricted cash accounts. The net portfolio yield
was 6.9% at October 31, 2008. Private institutional investors, primarily
insurance companies, purchased the 2006 Series A bonds at a weighted fixed rate
of 5.75%. The weighted average interest on the variable funding note during the
month of October 2008 was 6.30%.
We continue to service the transferred accounts for the QSPE, and we
receive a monthly servicing fee, so long as we act as servicer, in an amount
equal to .25% multiplied by the average aggregate principal amount of
receivables serviced, including the amount of average aggregate defaulted
receivables. The issuer records revenues equal to the interest charged to the
customer on the receivables less losses, the cost of funds, the program
administration fees paid in connection with either the 2002 Series A, or 2006
Series A bond holders, the servicing fee and additional earnings to the extent
they are available.
Currently the 2002 Series A variable funding note permits the issuer to
borrow funds up to $300 million to purchase receivables from us or make
principal payments on other bonds, thereby functioning as a "basket" to
accumulate receivables. As issuer borrowings under the 2002 Series A variable
funding note approach the total commitment, the issuer is required to request an
increase in the 2002 Series A amount or issue a new series of bonds and use the
proceeds to pay down the then outstanding balance of the 2002 Series A variable
funding note, so that the basket will once again become available to accumulate
new receivables or meet other obligations required under the transaction
documents. As of October 31, 2008, borrowings under the 2002 Series A variable
funding note were $282.0 million.
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the 2002 Series A note
and 2006 Series A bonds due to its inability to collect the transferred customer
accounts, the issuer could not pay the subordinated notes it has issued to us in
partial payment for transferred customer accounts, and the 2006 Series A bond
holders could claim the balance in its $6.0 million restricted cash account. We
are also contingently liable under a $20.0 million letter of credit that secures
the performance of our obligations or services under the servicing agreement as
it relates to the transferred assets that are part of the asset-backed
securitization facility.
32
The issuer is subject to certain affirmative and negative covenants
contained in the transaction documents governing the 2002 Series A variable
funding note and 2006 Series A bonds, including covenants that restrict, subject
to specified exceptions: the incurrence of non-permitted indebtedness and other
obligations and the granting of additional liens; mergers, acquisitions,
investments and disposition of assets; and the use of proceeds of the program.
The issuer also makes representations and warranties relating to compliance with
certain laws, payment of taxes, maintenance of its separate legal entity,
preservation of its existence, protection of collateral and financial reporting.
In addition, the program requires the issuer to maintain a minimum net worth.
A summary of the significant financial covenants that govern the 2002
Series A variable funding note compared to actual compliance status at October
31, 2008, is presented below:
Required
Minimum/
As reported Maximum
--------------- ---------------
Issuer interest must exceed required minimum $76.3 million $79.9 million
Gross loss rate must be lower than required maximum (a) 4.6% 10.0%
Serviced portfolio gross loss rate must be lower than required maximum (b) 4.3% 10.0%
Net portfolio yield must exceed required minimum (a) 6.9% 2.0%
Serviced portfolio net portfolio yield must exceed required minimum (b) 8.0% 2.0%
Payment rate must exceed required minimum (a) 6.5% 3.0%
Serviced portfolio payment rate must exceed required minimum (a) 5.14% 4.75%
Consolidated net worth must exceed required minimum $330.5 million $227.8 million
(a) - Calculated for those receivables transferred to the QSPE.
(b) - Calculated for the total of receivables transferred to the QSPE and
those retained by the Company.
Note: All terms in the above table are defined by the asset backed
securitization program and may or may not agree directly to the financial
statement captions in this document.
As indicated in the table above, the minimum issuer interest requirement
was not satisfied as of October 31, 2008. The minimum issuer interest
requirement is calculated based on information that is not available until after
the end of the month. Upon determining the new minimum issuer interest
requirement, the Issuer deposited the collateral necessary to satisfy the
required minimum. This deficiency was cured within the time periods provided and
does not limit the Issuer's ability to meet its obligations, including funding
the transfer of future receivables created by us. As a result, the occurrence of
this deficiency did not result in any unscheduled amortization requirements for
the 2002 Series A or 2006 Series A Notes.
Events of default under the 2002 Series A variable funding note and the
2006 Series A bonds, subject to grace periods and notice provisions in some
circumstances, include, among others: failure of the issuer to pay principal,
interest or fees; violation by the issuer of any of its covenants or agreements;
inaccuracy of any representation or warranty made by the issuer; certain
servicer defaults; failure of the trustee to have a valid and perfected first
priority security interest in the collateral; default under or acceleration of
certain other indebtedness; bankruptcy and insolvency events; failure to
maintain certain loss ratios and portfolio yield; change of control provisions
and certain other events pertaining to us. The issuer's obligations under the
program are secured by the receivables and proceeds.
33
Securitization Facilities
We finance most of our customer receivables through asset-backed securitization
facilities
|-------------------------------|
| 2002 Series A Note |
| $300 million Commitment |
|--->| Credit Rating: P1/A1 |
| | Bank Commercial Paper Conduits|
| | |
| |--------------------------------
|
-------------------->---------------- |
| Qualifying | |
| Retail | | Special Purpose|<---|
| Sales | | Entity | |
| Entity | | ("QSPE") | |
------------<------------------------ |
|
| |-------------------------------|
| | 2006 Series A Bonds |
| | $150 million |
| | Private Institutional |
|--->| Investors |
| Class A: $90 mm (Aa3) |
| Class B: $43.3 mm (Baa2) |
| Class C: $16.7 mm (Ba2) |
|-------------------------------|
Both the revolving credit facility and the asset-backed securitization
program are significant factors relative to our ongoing liquidity and our
ability to meet the cash needs associated with the growth of our business. Our
inability to use either of these programs because of a failure to comply with
their covenants would adversely affect our continued growth. Funding of current
and future receivables under the QSPE's asset-backed securitization program can
be adversely affected if we exceed certain predetermined levels of re-aged
receivables, size of the secondary portfolio, the amount of promotional
receivables, write-offs, bankruptcies or other ineligible receivable amounts. If
the funding under the QSPE's asset-backed securitization program was reduced or
terminated, we would have to draw down our revolving credit facility more
quickly than we have estimated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates under our revolving credit facility are variable and are
determined, at our option, as the base rate, which is the prime rate plus the
base rate margin, which ranges from 0.25% to 0.75%, or LIBOR plus the LIBOR
margin, which ranges from 2.25% to 2.75%. Interest rates under our QSPE's
variable funding note facility are variable and are determined based on the
commercial paper rate plus a spread of 2.50%. Accordingly, changes in the prime
rate, the commercial paper rate or LIBOR, which are affected by changes in
interest rates generally, will affect the interest rate on, and therefore our
costs under, these credit facilities. We are also exposed to interest rate risk
through the interest only strip we receive from our sales of receivables to the
QSPE, due to rate variability under the QSPE's variable funding note discussed
above. Since January 31, 2008, our interest rate sensitivity has increased on
the interest only strip as the variable rate portion of the QSPE's debt has
increased from $278.0 million, or 59.4% of its total debt, to $282.0 million, or
65.3% of its total debt. As a result, a 100 basis point increase in interest
rates on the variable rate debt would increase borrowing costs $2.8 million over
a 12-month period, based on the balance outstanding at October 31, 2008. Our
revolving credit facility also has variable interest rates and at October 31,
2008 we had $33.4 million outstanding. As a result, a 100 basis point increase
in interest rates on the variable rate debt would increase borrowing costs $0.3
million over a 12-month period, based on the balance outstanding at October 31,
2008.
Item 4. Controls and Procedures
Based on management's evaluation (with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the
period covered by this report, our CEO and CFO have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
34
For the quarter ended October 31, 2008, there have been no changes in our
internal controls over financial reporting (as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934) that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to our business from time
to time. Currently, we do not expect the outcome of any of this routine
litigation to have a material affect on our financial condition, results of
operations or cash flows. However, the results of these proceedings cannot be
predicted with certainty, and changes in facts and circumstances could impact
our estimate of reserves for litigation.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended January 31, 2008, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 25, 2006, we announced that our Board of Directors had authorized
a common stock repurchase program, permitting us to purchase, from time to time,
in the open market and in privately negotiated transactions, up to an aggregate
of $50.0 million of our common stock, dependent on market conditions and the
price of the stock. No repurchases were made during the quarter ended October
31, 2008, and our Board of Directors has terminated the repurchase program.
There is approximately $13 million remaining for future purchases under the
originally authorized program. In August 2008, we entered into a revolving
credit facility that restricts our ability to complete repurchases of our stock
or declare and make dividend distributions based on required availability under
the loan agreement at the time of the proposed payment, projected availability
for the six-month period succeeding that date and approval of the lenders and is
limited to an aggregate amount over the term of the facility of $50 million.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors since we last provided
disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule
14A.
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are
listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated
herein by reference.
35
SIGNATURE
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.
CONN'S, INC.
By: /s/ Michael J. Poppe
------------------------------------
Michael J. Poppe
Chief Financial Officer
(Principal Financial Officer and
duly authorized to sign this report
on behalf of the registrant)
Date: November 26, 2008
36
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2 Agreement and Plan of Merger dated January 15, 2003, by and among
Conn's, Inc., Conn Appliances, Inc. and Conn's Merger Sub, Inc.
(incorporated herein by reference to Exhibit 2 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on September 23, 2003).
3.1 Certificate of Incorporation of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.1 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
3.1.1 Certificate of Amendment to the Certificate of Incorporation of
Conn's, Inc. dated June 3, 2004 (incorporated herein by reference to
Exhibit 3.1.1 to Conn's, Inc. Form 10-Q for the quarterly period ended
April 30, 2004 (File No. 000-50421) as filed with the Securities and
Exchange Commission on June 7, 2004).
3.2 Amended and Restated Bylaws of Conn's, Inc. effective as of June 3,
2008 (incorporated herein by reference to Exhibit 3.2.3 to Conn's,
Inc. Form 10-Q for the quarterly period ended April 30, 2008 (File No.
000-50421) as filed with the Securities and Exchange Commission on
June 4, 2008).
4.1 Specimen of certificate for shares of Conn's, Inc.'s common stock
(incorporated herein by reference to Exhibit 4.1 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on October 29, 2003).
10.1 Amended and Restated 2003 Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 10.1 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).t
10.1.1 Amendment to the Conn's, Inc. Amended and Restated 2003 Incentive
Stock Option Plan (incorporated herein by reference to Exhibit 10.1.1
to Conn's Form 10-Q for the quarterly period ended April 30, 2004
(File No. 000-50421) as filed with the Securities and Exchange
Commission on June 7, 2004).t
10.1.2 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.1.2 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Securities and
Exchange Commission on April 5, 2005).t
10.2 2003 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.2 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046)as filed with the Securities and
Exchange Commission on September 23, 2003).t
10.2.1 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.2.1 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Securities and
Exchange Commission on April 5, 2005).t
10.3 Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 10.3 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).t
10.4 Conn's 401(k) Retirement Savings Plan (incorporated herein by
reference to Exhibit 10.4 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).t
37
10.5 Shopping Center Lease Agreement dated May 3, 2000, by and between
Beaumont Development Group, L.P., f/k/a Fiesta Mart, Inc., as Lessor,
and CAI, L.P., as Lessee, for the property located at 3295 College
Street, Suite A, Beaumont, Texas (incorporated herein by reference to
Exhibit 10.5 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
10.5.1 First Amendment to Shopping Center Lease Agreement dated September 11,
2001, by and among Beaumont Development Group, L.P., f/k/a Fiesta
Mart, Inc., as Lessor, and CAI, L.P., as Lessee, for the property
located at 3295 College Street, Suite A, Beaumont, Texas (incorporated
herein by reference to Exhibit 10.5.1 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).
10.6 Industrial Real Estate Lease dated June 16, 2000, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.6.1 First Renewal of Lease dated November 24, 2004, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6.1 to Conn's,
Inc. Form 10-K for the annual period ended January 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
April 5, 2005).
10.7 Lease Agreement dated December 5, 2000, by and between Prologis
Development Services, Inc., f/k/a The Northwestern Mutual Life
Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.7.1 Lease Amendment No. 1 dated November 2, 2001, by and between Prologis
Development Services, Inc., f/k/a The Northwestern Mutual Life
Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7.1 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.8 Lease Agreement dated June 24, 2005, by and between Cabot Properties,
Inc. as Lessor, and CAI, L.P., as Lessee, for the property located at
1132 Valwood Parkway, Carrollton, Texas (incorporated herein by
reference to Exhibit 99.1 to Conn's, Inc. Current Report on Form 8-K
(file no. 000-50421) as filed with the Securities and Exchange
Commission on June 29, 2005).
10.9 Loan and Security Agreement dated August 14, 2008, by and among
Conn's, Inc. and the Borrowers thereunder, the Lenders party thereto,
Bank of America, N.A, a national banking association, as
Administrative Agent and Joint Book Runner for the Lenders, referred
to as Agent, JPMorgan Chase Bank, National Association, as Syndication
Agent and Joint Book Runner for the Lenders, and Capital One, N.A., as
Co-Documentation Agent (incorporated herein by reference to Exhibit
99.1 to Conn's Inc. Current Report on Form 8-K (File No. 000-50421) as
filed with the Securities and Exchange Commission on August 20,2008).
10.9.1 Intercreditor Agreement dated August 14, 2008, by and among Bank of
America, N.A., as the ABL Agent, Wells Fargo Bank, National
Association, as Securitization Trustee, Conn Appliances, Inc. as the
Initial Servicer, Conn Credit Corporation, Inc., as a borrower, Conn
Credit I, L.P., as a borrower and Bank of America, N.A., as Collateral
Agent (incorporated herein by reference to Exhibit 99.5 to Conn's Inc.
Current Report on Form 8-K (File No. 000-50421) as filed with the
Securities and Exchange Commission on August 20,2008).
38
10.10 Receivables Purchase Agreement dated September 1, 2002, by and among
Conn Funding II, L.P., as Purchaser, Conn Appliances, Inc. and CAI,
L.P., collectively as Originator and Seller, and Conn Funding I, L.P.,
as Initial Seller (incorporated herein by reference to Exhibit 10.10
to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.10.1 First Amendment to Receivables Purchase Agreement dated August 1,
2006, by and among Conn Funding II, L.P., as Purchaser, Conn
Appliances, Inc. and CAI, L.P., collectively as Originator and Seller
(incorporated herein by reference to Exhibit 10.10.1 to Conn's, Inc.
Form 10-Q for the quarterly period ended July 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
September 15, 2006).
10.11 Base Indenture dated September 1, 2002, by and between Conn Funding
II, L.P., as Issuer, and Wells Fargo Bank Minnesota, National
Association, as Trustee (incorporated herein by reference to Exhibit
10.11 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.11.1 First Supplemental Indenture dated October 29, 2004 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on November 4,
2004).
10.11.2 Second Supplemental Indenture dated August 1, 2006 by and between Conn
Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on August 23,
2006).
10.11.3 Fourth Supplemental Indenture dated August 14, 2008 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.4 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on August 20,
2008).
10.12 Amended and Restated Series 2002-A Supplement dated September 10,
2007, by and between Conn Funding II, L.P., as Issuer, and Wells Fargo
Bank, National Association, as Trustee (incorporated herein by
reference to Exhibit 99.2 to Conn's, Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on September 11, 2007).
10.12.1 Supplement No. 1 to Amended and Restated Series 2002-A Supplement
dated August 14, 2008, by and between Conn Funding II, L.P., as
Issuer, and Wells Fargo Bank, National Association, as Trustee
(incorporated herein by reference to Exhibit 99.2 to Conn's, Inc.
Current Report on Form 8-K (File No. 000-50421) as filed with the
Securities and Exchange Commission on August 20, 2008).
10.12.2 Amended and Restated Note Purchase Agreement dated September 10, 2007
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference to
Exhibit 99.3 to Conn's, Inc. Current Report on Form 8-K (File No.
000-50421) as filed with the Securities and Exchange Commission on
September 11, 2007).
10.12.3 Second Amended and Restated Note Purchase Agreement dated August 14,
2008 by and between Conn Funding II, L.P., as Issuer, and Wells Fargo
Bank, National Association, as Trustee (incorporated herein by
reference to Exhibit 99.3 to Conn's, Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on August 20, 2008).
10.12.4 Amendment No. 1 to Second Amended and Restated Note Purchase Agreement
dated August 28, 2008 by and between Conn Funding II, L.P., as Issuer,
and Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.12.4 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2008 (File No. 000-50421) as filed
with the Securities and Exchange Commission on August 28, 2008).
39
10.13 Servicing Agreement dated September 1, 2002, by and among Conn Funding
II, L.P., as Issuer, CAI, L.P., as Servicer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.14 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.13.1 First Amendment to Servicing Agreement dated June 24, 2005, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.1 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2005 (File No. 000-50421) as filed
with the Securities and Exchange Commission on August 30, 2005).
10.13.2 Second Amendment to Servicing Agreement dated November 28, 2005, by
and among Conn Funding II, L.P., as 10.14.2 Issuer, CAI, L.P., as
Servicer, and Wells Fargo Bank, National Association, as Trustee
(incorporated herein by reference to Exhibit 10.14.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
December 1, 2005).
10.13.3 Third Amendment to Servicing Agreement dated May 16, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.3 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on September 15, 2006).
10.13.4 Fourth Amendment to Servicing Agreement dated August 1, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.4 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on September 15, 2006).
10.14 Form of Executive Employment Agreement (incorporated herein by
reference to Exhibit 10.15 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on October 29, 2003).t
10.14.1 First Amendment to Executive Employment Agreement between Conn's, Inc.
and Thomas J. Frank, Sr., Approved by the stockholders May 26, 2005
(incorporated herein by reference to Exhibit 10.15.1 to Conn's, Inc.
Form 10-Q for the quarterly period ended July 31, 2005 (file No.
000-50421) as filed with the Securities and Exchange Commission on
August 30, 2005).t
10.15 Form of Indemnification Agreement (incorporated herein by reference to
Exhibit 10.16 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).t
10.16 Description of Compensation Payable to Non-Employee Directors
(incorporated herein by reference to Form 8-K (file no. 000-50421)
filed with the Securities and Exchange Commission on June 2, 2005).t
40
10.17 Dealer Agreement between Conn Appliances, Inc. and Voyager Service
Programs, Inc. effective as of January 1, 1998 (incorporated herein by
reference to Exhibit 10.19 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.17.1 Amendment #1 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.17.2 Amendment #2 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.2 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.17.3 Amendment #3 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.3 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.17.4 Amendment #4 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.4 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.17.5 Amendment #5 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of April 7, 2007 (incorporated herein by
reference to Exhibit 10.18.5 to Conn's, Inc. Form 10-Q for the
quarterly period ended July 31, 2007 (File No. 000-50421) as filed
with the Securities and Exchange Commission on August 30, 2007).
10.18 Service Expense Reimbursement Agreement between Affiliates Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager Property
and Casualty Insurance Company effective July 1, 1998 (incorporated
herein by reference to Exhibit 10.20 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI, L.P., Affiliates Insurance Agency, Inc., American Bankers
Life Assurance Company of Florida, Voyager Property & Casualty
Insurance Company, American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company of Florida and American Bankers
General Agency, Inc. effective July 1, 2005 (incorporated herein by
reference to Exhibit 10.20.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.19 Service Expense Reimbursement Agreement between CAI Credit Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager Property
and Casualty Insurance Company effective July 1, 1998 (incorporated
herein by reference to Exhibit 10.21 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
41
10.19.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI Credit Insurance Agency, Inc., American Bankers Life
Assurance Company of Florida, Voyager Property & Casualty Insurance
Company, American Bankers Life Assurance Company of Florida, American
Bankers Insurance Company of Florida, American Reliable Insurance
Company, and American Bankers General Agency, Inc. effective July 1,
2005 (incorporated herein by reference to Exhibit 10.21.1 to Conn's,
Inc. Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
10.20 Consolidated Addendum and Amendment to Service Expense Reimbursement
Agreements by and among Certain Member Companies of Assurant
Solutions, CAI Credit Insurance Agency, Inc. and Affiliates Insurance
Agency, Inc. effective April 1, 2004 (incorporated herein by reference
to Exhibit 10.22 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2006 (File No. 000-50421) as filed with the Securities and
Exchange Commission on March 30, 2006).
10.21 Series 2006-A Supplement to Base Indenture, dated August 1, 2006, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference to
Exhibit 10.23 to Conn's, Inc. Form 10-Q for the quarterly period ended
July 31, 2006 (File No. 000-50421) as filed with the Securities and
Exchange Commission on September 15, 2006).
11.1 Statement re: computation of earnings per share is included under Note
1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (incorporated herein by reference to
Exhibit 21 to Conn's, Inc. Form 10-Q for the quarterly period ended
July 31, 2007 (File No. 000-50421) as filed with the Securities and
Exchange Commission on August 30, 2007).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
(filed herewith).
42
32.1 Section 1350 Certification (Chief Executive Officer and Chief
Financial Officer) (furnished herewith).
99.1 Subcertification by Executive Vice-Chairman of the Board in support of
Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
99.2 Subcertification by Chief Operating Officer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.3 Subcertification by President - Retail Division in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.4 Subcertification by President - Credit Division in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.5 Subcertification by Treasurer in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.6 Subcertification by Secretary in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.7 Subcertification of Executive Vice-Chairman of the Board, Chief
Operating Officer, Treasurer and Secretary in support of Section 1350
Certifications (Chief Executive Officer and Chief Financial Officer)
(furnished herewith).
t Management contract or compensatory plan or arrangement.
43