a5978787.htm
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 April 30, 2009
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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]   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 [   ]
(Do not check if a smaller reporting company)
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 ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 1, 2009:

    Class
  
Outstanding
Common stock, $.01 par value per share
  
22,452,045

 
TABLE OF CONTENTS
     
     
Page No.
     
1
     
 
1
     
   
 
2
     
   
 
3
     
   
 
4
     
 
5
     
 
 
15
     
31
     
32
     
 
     
32
     
32
     
33
     
33
     
33
     
33
     
     
 
34
 
 
           
           
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
Assets
  
January 31,
2009
    
April 30,
2009
  
Current assets
        
(unaudited)
  
Cash and cash equivalents
  $ 11,798     $ 6,941  
Other accounts receivable, net of allowance of $60 and $60, respectively
    32,878       19,007  
Customer accounts receivable, net of allowance of $2,338 and $3,038, respectively
    61,125       84,960  
Interests in securitized assets
    176,543       170,602  
Inventories
    95,971       90,979  
Deferred income taxes
    13,354       13,910  
Prepaid expenses and other assets
    5,933       5,754  
      Total current assets
    397,602       392,153  
Long-term portion of customer accounts receivable, net of
                
allowance of $1,575 and $1,877, respectively
    41,172       52,498  
Property and equipment
                
Land
    7,682       7,682  
Buildings
    12,011       12,157  
Equipment and fixtures
    21,670       22,026  
Transportation equipment
    2,646       2,528  
Leasehold improvements
    83,361       86,602  
      Subtotal
    127,370       130,995  
Less accumulated depreciation
    (64,819 )     (67,946 )
         Total property and equipment, net
    62,551       63,049  
Goodwill, net
    9,617       9,617  
Non-current deferred income tax asset
    2,035       3,254  
Other assets, net
    3,652       3,564  
       Total assets
  $ 516,629     $ 524,135  
Liabilities and Stockholders' Equity
                
Current liabilities
                
Current portion of long-term debt
  $ 5     $ 4  
Accounts payable
    57,809       56,807  
Accrued compensation and related expenses
    11,473       7,586  
Accrued expenses
    23,703       23,625  
Income taxes payable
    4,334       8,518  
Deferred revenues and allowances
    21,207       20,488  
      Total current liabilities
    118,531       117,028  
Long-term debt
    62,912       59,712  
Deferred gains on sales of property
    1,036       991  
Fair value of interest rate swaps
    -       125  
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; 24,167,445 and 24,175,251 shares issued at January 31, 2009 and April 30, 2009, respectively)
     242       242  
Additional paid-in capital
    103,553       104,242  
Accumulated other comprehensive income (loss)
    -       (81 )
Retained earnings
    267,426       278,947  
Treasury stock, at cost, 1,723,205 and 1,723,205 shares, respectively
     (37,071 )     (37,071 )
      Total stockholders' equity
    334,150       346,279  
         Total liabilities and stockholders' equity
  $ 516,629     $ 524,135  

See notes to consolidated financial statements.
 
1
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
             
   
Three Months Ended
April 30,
  
   
2008
    
2009
  
             
             
Revenues
            
Product sales
  $
179,910
     $
184,817
  
Service maintenance agreement commissions, net
   
9,970
      
9,790
  
Service revenues
   
5,192
      
5,544
  
 
               
Total net sales
   
195,072
      
200,151
  
                 
Finance charges and other
    
26,552
      
29,785
  
Net increase (decrease) in fair value
   
(3,067
)
    
1,390
  
                 
Total finance charges and other
   
23,485
      
31,175
  
                 
Total revenues
   
218,557
      
231,326
  
                 
Cost and expenses
                
Cost of goods sold, including warehousing and occupancy costs
   
139,058
      
145,870
  
Cost of parts sold, including warehousing and occupancy costs
   
2,330
      
2,587
  
Selling, general and administrative expense
   
60,368
      
62,625
  
Provision for bad debts
   
259
      
1,395
  
 
               
Total cost and expenses
   
202,015
      
212,477
  
 
               
Operating income
   
16,542
      
18,849
  
Interest (income) expense, net
   
(15
)
    
586
  
Other income, net
   
(23
)
    
(8
)
 
               
Income before income taxes
    
16,580
      
18,271
  
                 
Total provision for income taxes
    
5,984
      
6,750
  
                 
Net income
  $
10,596
     $
11,521
  
                 
Earnings per share
                
Basic
  $
0.47
     $
0.51
  
Diluted
  $
0.47
     $
0.51
  
Average common shares outstanding
                
Basic
   
22,382
      
22,447
  
Diluted
   
22,560
      
22,689
  
                 
 
See notes to consolidated financial statements.
 
2
 
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
  
Three Months Ended April 30, 2009
  
(unaudited)
  
(in thousands, except descriptive shares)
  
                                           
               
Other
                    
         
Additional
    
Comprehensive
                   
   
Common Stock
    
Paid-in
    
Income
    
Retained
    
Treasury
        
   
Shares
    
Amount
    
Capital
    
(Loss)
    
Earnings
    
Stock
    
Total
  
                                           
Balance January 31, 2009
    24,167     $ 242     $ 103,553     $ -     $ 267,426     $ (37,071 )   $ 334,150  
                                                         
Issuance of shares of common
                                                        
stock under Employee
                                                        
Stock Purchase Plan
    8               59                               59  
           
 
                                          
Stock-based compensation
                    630                               630  
                                                         
Comprehensive Income:
                                                        
                                                         
Net Income
                                    11,521               11,521  
                                                         
Adjustment of fair value of
                                                        
interest rate swaps,
                                                        
net of tax of $44
                            (81 )                     (81 )
Total comprehensive income
                                                     11,440  
                                                         
Balance April 30, 2009
    24,175     $ 242     $ 104,242     $ (81 )   $ 278,947     $ (37,071 )   $ 346,279  
                                                         
                                                         
 
See notes to consolidated financial statements.
3
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
 
   
Three Months Ended
April 30,
  
   
2008
    
2009
  
             
Cash flows from operating activities
            
Net income
   $ 10,596     $ 11,521  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation   
     3,164       3,291  
Amortization / (Accretion), net  
     (228 )     243  
Provision for bad debts  
     259       1,395  
Stock-based compensation
     837       630  
Discounts on promotional credit
     1,674       750  
(Gains) losses on interest in securitized assets
     (6,830 )     169  
(Increase) decrease in fair value of securitized assets
     3,067       (1,390 )
Provision for deferred income taxes  
     (2,701 )     (855 )
Gains from sales of property and equipment  
     (23 )     (8 )
Changes in operating assets and liabilities:
                
Customer accounts receivable
    (1,758 )     (37,139 )
Other accounts receivable
     1,509       13,877  
Interest in securitized assets
     13,013       6,749  
Inventory  
     (8,318 )     4,992  
Prepaid expenses and other assets   
     476       179  
Accounts payable  
     15,622       (1,002 )
Accrued expenses  
     886       (3,965 )
Income taxes payable  
     7,020       3,308  
Deferred revenue and allowances
    1,273       (524 )
Net cash provided by operating activities
    39,538       2,221  
Cash flows from investing activities
                
Purchases of property and equipment
     (5,373 )     (3,800 )
Proceeds from sales of property
     32       19  
Net cash used in investing activities
    (5,341 )     (3,781 )
Cash flows from financing activities
                
Proceeds from stock issued under employee benefit plans
     271       59  
Borrowings under lines of credit.
     600       82,489  
Payments on lines of credit
     (600 )     (85,689 )
Increase in deferred financing costs
     -       (155 )
Payment of promissory notes
     (29 )     (1 )
Net cash provided by (used in) financing activities
    242       (3,297 )
Net change in cash
     34,439       (4,857 )
Cash and cash equivalents
                
Beginning of the year
     11,015       11,798  
End of period
  $ 45,454     $ 6,941  
                 
Supplemental disclosure of non-cash activity
                
Cash interest received from interests in securitized assets
   $ 7,062     $ 12,034  
Cash proceeds from new securitizations
     109,218       45,138  
Cash flows from servicing fees
     6,454       6,627  
                 

See notes to consolidated financial statements.
 
4
 
Conn’s , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
April 30, 2009

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 month period ended April 30, 2009, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2010.  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 26, 2009.
 
The Company’s balance sheet at January 31, 2009, 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, 2009, 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 eligible 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. 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. 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.

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. The Company performed its annual assessment in the fourth quarter of fiscal 2009 and determined that no impairment existed. While the current market conditions have caused the Company’s market capitalization to fall below its book value, the Company does not believe any indicators of impairment have occurred since the assessment was performed.

Earnings Per Share. In accordance with SFAS No. 128, Earnings per Share, the Company calculates basic earnings per share by dividing net income 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. The weighted average number of anti-dilutive stock options not included in calculating diluted EPS was 1.1 million and 1.5 million for the three months ended April 30, 2008 and 2009, respectively.

5
 
   
Three Months Ended
  
   
April 30,
  
   
2008
    
2009
  
             
Common stock outstanding, net of treasury stock, beginning of period  
     22,374,966       22,444,240  
Weighted average common stock issued in stock option exercises
    5,989       -  
Weighted average common stock issued to employee stock purchase plan
    1,522       2,719  
Shares used in computing basic earnings per share
    22,382,477       22,446,959  
Dilutive effect of stock options, net of assumed repurchase of treasury stock
    177,640       242,204  
Shares used in computing diluted earnings per share
    22,560,117       22,689,163  
 
Adoption of New Accounting Pronouncements. On February 1, 2009, the Company was required to adopt SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. FAS 161 only impacts disclosure requirements and therefore will not have an impact on the Company’s financial position, financial performance or cash flows. The required disclosures have been included in Note 5 to the financial statements.

2.  Fair Value of 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 and payment 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 months ended April 30, 2009, Finance charges and other included a non-cash increase in the fair value our Interests in securitized assets of $1.4 million, reflecting primarily a lower risk premium included in the discount rate inputs during the quarter ended April 30, 2009. Based on a review of the changes in market risk premiums during the three months ended April 30, 2009, and discussions with its investment bankers and financial advisors, the Company estimated that a market participant would require a risk premium that was approximately 250 basis points less than was previously utilized. As a result, the Company decreased the weighted average discount rate input from 30.0% at January 31, 2009, to 27.4% at April 30, 2009, after reflecting a 2 basis point decrease in the risk-free interest rate included in the discount rate input. These changes, along with other input changes, contributed to the increase in fair value for the three month period ended April 30, 2009 (see reconciliation of the balance of Interests in securitized assets below). The changes in fair value resulted in an increase in Income before income taxes of $1.4 million, an increase in net income of $0.9 million, and increased basic and diluted earnings per share by $0.04, for the three months ended April 30, 2009.

If a market participant were to require a return on investment that is 10% higher than estimated in the Company’s calculation, the fair value of its interests in securitized assets would be decreased by $4.0 million as of April 30, 2009. 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 fluctuate the Company will likely be required to record additional non-cash gains and losses in future periods.

6
 
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 April 30, 2008 and 2009 (in thousands):
 
   
April 30,
  
   
2008
    
2009
  
Reconciliation of Interests in Securitized Assets:
            
             
Balance of Interests in securitized assets at beginning of period
  $ 178,150     $ 176,543  
                 
Amounts recorded in Finance charges and other:
                
Gains associated with change in portfolio balances
    152       265  
Changes in fair value due to input changes:
                
 Fair value decrease due to changes in portfolio yield
    (697 )     (7 )
 Fair value increase due to lower projected interest rates
    913       457  
 Fair value increase (decrease) due to changes in funding mix
    1,055       (2,686 )
 Fair value increase due to changes in risk-free interest rate
                
     component of the discount rate
    448       11  
 Fair value increase (decrease) due to changes in risk premium
                
      included in discount rate
    (5,128 )     3,667  
 Other changes
    197       (436 )
 Net change in fair value due to input changes
    (3,212 )     1,006  
                 
 Net Gains (Losses) included in Finance charges and other (a)
    (3,060 )     1,271  
                 
Change in balance of subordinated security and equity interest due to
                
transfers and collection of receivables
    (6,190 )     (7,212 )
                 
Balance of Interests in securitized assets at end of period
  $ 168,900     $ 170,602  
                 
Reconciliation of Servicing Liability:
                
                 
Balance of servicing liability at beginning of period
  $ 1,197     $ 1,157  
                 
Amounts recorded in Finance charges and other:
                
 Increase (decrease) associated with changes in portfolio balances
    34       (101 )
 Increase (decrease) due to changes in discount rate
    (19 )     17  
 Other changes
    (8 )     (35 )
 Net change included in Finance charges and other (b)
    7       (119 )
                 
Balance of servicing liability at end of period
  $ 1,204     $ 1,038  
                 
Net increase (decrease) in fair value included
                
in Finance charges and other (a) - (b)
  $ (3,067 )   $ 1,390  
                 

 
7
 
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 months ended April 30, 2008 and 2009 (in thousands):
 
   
Three Months ended
  
   
April 30,
  
   
2008
    
2009
  
             
Securitization income:
            
Servicing fees received
   $ 6,454     $ 6,627  
Gains (losses) on sale of receivables, net
    6,830       (169 )
Change in fair value of securitized assets
    (3,067 )     1,390  
Interest earned on retained interests
     7,062       12,034  
Total securitization income
     17,279       19,882  
Insurance commissions
     5,296       4,670  
Interest income from receivables not sold and other
     910       6,623  
Finance charges and other
   $ 23,485     $ 31,175  
                 
 
4.  Interests in Securitized Receivables

The Company has an agreement to sell customer receivables.  As part of this agreement, the Company sells eligible retail installment contracts and revolving receivable accounts to a QSPE that pledges the transferred accounts to a trustee for the benefit of investors. The following table summarizes the availability of funding under the Company’s securitization program at April 30, 2009 (in thousands):
 
   
Capacity
    
Utilized
    
Available
  
2002 Series A
  $ 300,000     $ 246,000     $ 54,000  
2006 Series A – Class A
    90,000       90,000       -  
2006 Series A – Class B
    43,333       43,333       -  
2006 Series A – Class C
    16,667       16,667       -  
Total
  $ 450,000     $ 396,000     $ 54,000  
 
The 2002 Series A program functions as a credit facility to fund the initial transfer of eligible receivables. When the facility approaches a predetermined amount, the QSPE (Issuer) is required to seek financing to pay down the outstanding balance in the 2002 Series A variable funding note. The amount paid down on the facility then becomes available to fund the transfer of new receivables or to meet required principal payments on other series as they become due. The new financing could be in the form of additional notes, bonds or other instruments as the market and transaction documents might allow. The 2002 Series A program is divided into two tranches: a $100 million 364-day tranche that matures in August 2009, and a $200 million tranche that is renewable annually, at our option, until September 2012. The 2006 Series A program, which was consummated in August 2006, is non-amortizing for the first four years and officially matures in April 2017. However, it is expected that the principal payments, which begin in September 2010, will retire the bonds prior to that date.

The agreement contains certain covenants requiring the maintenance of various financial ratios and receivables performance standards. As part of the securitization program, the Company and Issuer arranged for the issuance of a stand-by letter of credit in the amount of $20.0 million to provide assurance to the trustee on behalf of the bondholders that funds collected monthly by the Company, as servicer, will be remitted as required under the base indenture and other related documents. The letter of credit expires in August 2011, and the maximum potential amount of future payments is the face amount of the letter of credit. The letter of credit is callable, at the option of the trustee, if the Company, as servicer, fails to make the required monthly payments of the cash collected to the trustee.

8
Through its retail sales activities, the Company generates customer retail installment contracts and revolving receivable accounts. The Company enters into securitization transactions to sell eligible accounts to the QSPE. In these securitizations, the Company retains servicing responsibilities and subordinated interests. The Company receives annual servicing fees and other benefits approximating 4.0% of the outstanding balance and rights to future cash flows arising after the investors in the securities issued by or on behalf of the QSPE have received from the trustee all contractually required principal and interest amounts. The Company records a servicing liability related to the servicing obligations (See Note 2). The investors and the securitization trustee have no recourse to the Company’s other assets for failure of the individual customers of the Company and the QSPE to pay when due. The Company’s retained interests are subordinate to the investors’ interests, and would not be paid if the Issuer is unable to repay the amounts due under the 2002 Series A and 2006 Series A programs. Their value is subject to credit, prepayment, and interest rate risks on the transferred financial assets.

The fair values of the Company’s interest in securitized assets were as follows (in thousands):
             
   
January 31,
    
April 30,
  
   
2009
    
2009
  
Interest-only strip
  $ 31,958     $ 28,954  
Subordinated securities
    144,585       141,648  
Total fair value of interests in securitized assets
  $ 176,543     $ 170,602  
                 
The table below summarizes valuation assumptions used for each period presented:
             
   
January 31,
    
April 30,
  
   
2009
    
2009
  
Net interest spread
            
Primary installment
     14.5 %     14.7 %
Primary revolving
     14.5 %     14.7 %
Secondary installment
     14.1 %     13.9 %
Expected losses
                
Primary installment
     3.4 %     3.5 %
Primary revolving
     3.4 %     3.5 %
Secondary installment
     5.5 %     5.3 %
Projected expense
                
Primary installment
     3.9 %     4.0 %
Primary revolving
     3.9 %     4.0 %
Secondary installment
     3.9 %     4.0 %
Discount rates
                
Primary installment
     29.2 %     26.7 %
Primary revolving
     29.2 %     26.7 %
Secondary installment
     33.2 %     30.7 %
                 
 
9
At April 30, 2009, key economic assumptions and the sensitivity of the current fair value of the interests in securitized assets to immediate 10% and 20% adverse changes in those assumptions are as follows (dollars in thousands):
                   
   
Primary
    
Primary
    
Secondary
  
   
Portfolio
    
Portfolio
    
Portfolio
  
   
Installment
    
Revolving
    
Installment
  
Fair value of interest in securitized assets
   $ 126,747     $ 9,517     $ 34,338  
                         
Expected weighted average life
  
1.2 years
    
1.1 years
    
1.8 years
  
                         
Net interest spread assumption
     14.7 %     14.7 %     13.9 %
Impact on fair value of 10% adverse change
   $ 4,190     $ 315     $ 1,449  
Impact on fair value of 20% adverse change
   $ 8,261     $ 620     $ 2,848  
Expected losses assumptions
     3.5 %     3.5 %     5.3 %
Impact on fair value of 10% adverse change
   $ 1,009     $ 76     $ 558  
Impact on fair value of 20% adverse change
   $ 2,012     $ 151     $ 1,108  
Projected expense assumption
     4.0 %     4.0 %     4.0 %
Impact on fair value of 10% adverse change
   $ 1,125     $ 84     $ 433  
Impact on fair value of 20% adverse change
   $ 2,251     $ 169     $ 867  
Discount rate assumption
     26.7 %     26.7 %     30.7 %
Impact on fair value of 10% adverse change
   $ 2,780     $ 209     $ 1,035  
Impact on fair value of 20% adverse change
   $ 5,429     $ 408     $ 2,012  
                         
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of the variation in a particular assumption on the fair value of the interest-only strip is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (i.e. increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.

10
The following tables present quantitative information about the receivables portfolios managed by the Company (in thousands):

   
Total Principal Amount of
    
Principal Amount Over
    
Principal Amount
  
   
Receivables
    
60 Days Past Due (1)
    
Reaged (1)
  
   
January 31,
    
April 30,
    
January 31,
    
April 30,
    
January 31,
    
April 30,
  
   
2009
    
2009
    
2009
    
2009
    
2009
    
2009
  
Primary portfolio:
                                    
            Installment
   $ 551,838     $ 546,774     $ 33,126     $ 31,145     $ 88,224     $ 85,979  
            Revolving
     38,084       32,681       2,027       1,858       2,401       2,254  
Subtotal
     589,922       579,455       35,153       33,003       90,625       88,233  
Secondary portfolio:
                                                
            Installment
     163,591       155,097       19,988       17,908       50,537       49,673  
Total receivables managed
     753,513       734,552       55,141       50,911       141,162       137,906  
Less receivables sold
     645,715       589,687       52,214       47,184       131,893       127,736  
Receivables not sold
     107,798       144,865     $ 2,927     $ 3,727     $ 9,269     $ 10,170  
Allowance for uncollectible accounts
     (3,913 )     (4,915 )                                
Allowances for promotional credit programs
     (1,588 )     (2,492 )                                
Current portion of customer accounts
                                                
receivable, net
     61,125       84,960                                  
Long-term customer accounts
                                                
receivable, net
   $ 41,172     $ 52,498                                  
 
   
Average Balances
    
Net Credit Charge-offs (2)
  
   
Three Months Ended
    
Three Months Ended
  
   
April 30,
    
April 30,
  
   
2008
    
2009
    
2008
    
2009
  
Primary portfolio:
                        
            Installment
   $
466,483
     $
547,980
              
            Revolving
    
47,151
      
35,291
              
Subtotal
    
513,634
      
583,271
     $
3,588
     $
3,916
  
Secondary portfolio:
                                
            Installment
    
148,237
      
159,270
      
1,748
      
1,689
  
Total receivables managed
    
661,871
      
742,541
      
5,336
      
5,605
  
Less receivables sold
    
652,959
      
615,761
      
5,181
      
5,249
  
Receivables not sold
   $
8,912
     $
126,780
     $
155
     $
356
  
 
(1)
  
Amounts are based on end of period balances and accounts could be represented in both the past due and reaged columns shown above.

(2)
  
Amounts represent total credit charge-offs, net of recoveries, on total receivables.

11

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 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. 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,
    
April 30,
  
   
2009
    
2009
  
             
Revolving credit facility for $210 million maturing in August 2011
  $ 62,900     $ 59,700  
Unsecured revolving line of credit for $10 million maturing in September 2009
    -       -  
Other long-term debt
    17       16  
Total debt
    62,917       59,716  
Less current portion of debt
    5       4  
Long-term debt
  $ 62,912     $ 59,712  
 
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 April 30, 2009, the Company had outstanding letters of credit of $21.7 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 $21.7 million as of April 30, 2009.  As of April 30, 2009, the Company had additional borrowing capacity of approximately $63.3 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.

The Company held interest rate swaps with notional amounts totaling $30.0 million as of April 30, 2009, with terms extending through April 2011 for the purpose of hedging against variable interest rate risk related to the variability of cash flows in the interest payments on a portion of its variable-rate debt, based on changes in the benchmark one-month LIBOR interest rate. Changes in the cash flows of the interest rate swaps are expected to exactly offset the changes in cash flows (changes in base interest rate payments) attributable to fluctuations in the LIBOR interest rate.  For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.  For information on the location and amounts of derivative fair values in the statement of operation, see the tables presented below (in thousands):

12
 
 
Fair Values of Derivative Instruments
  
                 
 
Liability Derivatives
  
 
January 31, 2009
  
April 30, 2009
  
 
Balance
      
Balance
      
 
Sheet
  
Fair
  
Sheet
  
Fair
  
 
Location
  
Value
  
Location
  
Value
  
Derivatives designated as
                
hedging instruments under
                
Statement 133
                
Interest rate contracts
Other liabilities
   $ -  
Other liabilities
   $ 125  
                     
Total derivatives designated
                    
as hedging instruments
                    
under Statement 133
     $ -       $ 125