Edgar Filing: CONNS INC

a6408727.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 July 31, 2010

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 [ ]	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 ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 24, 2010:

Class		Outstanding
Common stock, $.01 par value per share		22,489,638

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements		1

	Consolidated Balance Sheets as of January 31, 2010 and July 31, 2010		1

	Consolidated Statements of Operations for the three and six months ended
	July 31, 2009 and 2010		2

	Consolidated Statement of Stockholders’ Equity for the six months ended
	July 31, 2010		3

	Consolidated Statements of Cash Flows for the six months ended
	July 31, 2009 and 2010		4

	Notes to Consolidated Financial Statements		5

Item 2.	Management's Discussion and Analysis of Financial Condition
	and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		40

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		41

Item 1A.	Risk Factors		41

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		54

Item 5.	Other Information		54

Item 6.	Exhibits		54

SIGNATURE			55

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Conn's, Inc.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

Assets	January 31, 2010			July 31, 2010
				(unaudited)
Cash and cash equivalents	$	12,247		$	8,466
(includes balances of VIE of $104 and $104, respectively)
Other accounts receivable, net of allowance of $50 and $61, respectively		23,254			28,753
Customer accounts receivable, net of allowance of $19,204 and $18,479 respectively
(includes balances of VIE of $279,948 and $258,015, respectively)		368,304			355,861
Inventories		63,499			99,106
Deferred income taxes		15,237			13,830
Federal income taxes recoverable		8,148			-
Prepaid expenses and other assets		8,050			7,785
Total current assets		498,739			513,801
Long-term portion of customer accounts receivable, net of
allowance of $16,598 and $15,868, respectively		318,341			305,584
(includes balances of VIE of $241,971 and $221,562, respectively)
Property and equipment
Land		7,682			7,264
Buildings		10,480			10,314
Equipment and fixtures		23,797			24,640
Transportation equipment		1,795			1,684
Leasehold improvements		91,299			91,522
Subtotal		135,053			135,424
Less accumulated depreciation		(75,350	)		(81,354	)
Total property and equipment, net		59,703			54,070
		5,485			6,364
Other assets, net (includes balances of VIE of $7,106 and $7,569, respectively)		10,198			12,518
Total assets	$	892,466		$	892,337
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt	$	64,055		$	122,664
(includes balances of VIE of $63,900 and $122,500, respectively)
Accounts payable		39,944			62,115
Accrued compensation and related expenses		5,697			5,245
Accrued expenses		31,685			26,726
Income taxes payable		2,640			1,612
Deferred revenues and allowances		14,596			13,210
Total current liabilities		158,617			231,572
Long-term debt		388,249			307,073
(includes balances of VIE of $282,500 and $197,500, respectively)
Other long-term liabilities		5,195			4,794
Fair value of interest rate swaps		337			240
Deferred gains on sales of property		905			961
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;
24,194,555 and 24,212,843 shares issued at January 31, 2010 and July 31, 2010, respectively)		242			242
Additional paid-in capital		106,226			107,465
Accumulated other comprehensive loss		(218	)		(155	)
Retained earnings		269,984			277,216
Treasury stock, at cost, 1,723,205 shares		(37,071	)		(37,071	)
Total stockholders' equity		339,163			347,697
Total liabilities and stockholders' equity	$	892,466		$	892,337

See notes to consolidated financial statements.

Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)

	Three Months Ended July 31,					Six Months Ended July 31,
	2009			2010		2009			2010
	(As adjusted					(As adjusted
Revenues	see Note 1)					see Note 1)
Product sales	$	175,389		$	166,378	$	360,206		$	316,743
Repair service agreement commissions, net		8,859			8,341		18,649			16,258
Service revenues		6,052			4,183		11,596			8,940

Total net sales		190,300			178,902		390,451			341,941

Finance charges and other		40,128			34,763		79,828			69,243

Total revenues		230,428			213,665		470,279			411,184

Cost and expenses
Cost of goods sold, including warehousing
and occupancy costs		140,761			130,276		286,631			244,433
Cost of parts sold, including warehousing
and occupancy costs		2,797			2,120		5,384			4,492
Selling, general and administrative expense		64,979			63,478		127,717			124,221
Provision for bad debts		8,026			9,048		13,670			15,322

Total cost and expenses		216,563			204,922		433,402			388,468

Operating income		13,865			8,743		36,877			22,716
Interest expense, net		5,342			5,875		10,346			10,660
Other (income) expense, net		(13	)		12		(21	)		183

Income before income taxes		8,536			2,856		26,552			11,873

Provision for income taxes		3,312			1,171		9,972			4,641

Net income	$	5,224		$	1,685	$	16,580		$	7,232

Earnings per share
Basic	$	0.23		$	0.07	$	0.74		$	0.32
Diluted	$	0.23		$	0.07	$	0.73		$	0.32
Average common shares outstanding
Basic		22,454			22,484		22,450			22,479
Diluted		22,660			22,488		22,675			22,483

See notes to consolidated financial statements.

Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended July 31, 2010
(unaudited)
(in thousands, except descriptive shares)

							Other
					Additional		Compre-
	Common Stock				Paid-in		hensive			Retained		Treasury
	Shares		Amount		Capital		Loss			Earnings		Stock			Total

Balance January 31, 2010		24,194	$	242	$	106,226	$	(218	)	$	269,984	$	(37,071	)	$	339,163

Issuance of shares of common
stock under Employee
Stock Purchase Plan		19		-		93										93

Stock-based compensation						1,146										1,146

Net income											7,232					7,232

Adjustment of fair value of
interest rate swaps
net of tax of $34								63								63
Other comprehensive income								63								63
Total comprehensive income																7,295

Balance July 31, 2010		24,213	$	242	$	107,465	$	(155	)	$	277,216	$	(37,071	)	$	347,697

See notes to consolidated financial statements.

Conn’s, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited) (in thousands)

	Six Months Ended July 31,
	2009			2010
	(As adjusted
Cash flows from operating activities	see Note 1)
Net income	$	16,580		$	7,232
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		6,660			6,625
Amortization, net		437			1,707
Provision for bad debts		13,670			15,322
Stock-based compensation		1,272			1,146
Discounts and accretion on promotional credit		(1,396	)		(1,011	)
Provision for deferred income taxes		(1,522	)		840
(Gains) losses on sales of property and equipment		(5	)		62
Changes in operating assets and liabilities:
Customer accounts receivable		(4,634	)		10,906
Other accounts receivable		10,044			(5,499	)
Inventory		(4,896	)		(35,607	)
Prepaid expenses and other assets		997			235
Accounts payable		(2,551	)		22,171
Accrued expenses		(10,306	)		(5,411	)
Income taxes payable		(8,231	)		6,804
Deferred revenue and allowances		(769	)		(1,586	)
Net cash provided by operating activities		15,350			23,936
Cash flows from investing activities
Purchases of property and equipment		(6,763	)		(1,650	)
Proceeds from sales of property		22			589
Net cash used in investing activities		(6,741	)		(1,061	)
Cash flows from financing activities
Proceeds from stock issued under employee benefit plans		117			93
Borrowings under lines of credit		198,146			127,372
Payments on lines of credit		(213,444	)		(149,870	)
Increase in deferred financing costs		(378	)		(4,182	)
Payment of promissory notes		(3	)		(69	)
Net cash used in financing activities		(15,562	)		(26,656	)
Net change in cash		(6,953	)		(3,781	)
Cash and cash equivalents
Beginning of the year		11,909			12,247
End of period	$	4,956		$	8,466

See notes to consolidated financial statements.

Conn’s, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

July 31, 2010

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, except as otherwise described herein. Operating results for the three and six month periods ended July 31, 2010, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2011. 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 Current Report on Form 8-K filed on July 7, 2010.

The Company’s balance sheet at January 31, 2010, has been derived from the audited financial statements at that date, revised for the retrospective application of the new accounting principles discussed below, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete financial presentation. Please see the Company’s Form 8-K filed on July 7, 2010 for a complete presentation of the audited financial statements for the fiscal year ended January 31, 2010, together with all required footnotes, and for a complete presentation and explanation of the components and presentations of the financial statements.

Business Activities. The Company, through its retail stores, provides products and services to its customer base in seven primary market areas, including southern Louisiana, southeast Texas, Houston, South Texas, San Antonio/Austin, Dallas/Fort Worth and Oklahoma. Products and services offered through retail sales outlets include home appliances, consumer electronics, home office equipment, lawn and garden products, mattresses, furniture, repair service agreements, installment and revolving credit account programs, and various credit insurance products. These activities are supported through an extensive service, warehouse and distribution system. For the reasons discussed below, the Company has aggregated its results into two operating segments: credit and retail. The Company’s retail stores bear the “Conn’s” name, and deliver the same products and services to a common customer group. The Company’s customers generally are individuals rather than commercial accounts. All of the retail stores follow the same procedures and methods in managing their operations. The Company’s management evaluates performance and allocates resources based on the operating results of its retail and credit segments. With the adoption of the new accounting principles discussed below, which require the consolidation of the Company’s variable interest entity engaged in receivables securitizations, management began separately evaluating the performance of its retail and credit operations. As a result, management believes it is appropriate to disclose separate financial information of its retail and credit segments. The separate financial information is disclosed in footnote 6 – “Segment Reporting”.

Adoption of New Accounting Principles. The Company enters into securitization transactions to transfer eligible retail installment and revolving customer receivables and retains servicing responsibilities and subordinated interests. Additionally, the Company transfers the eligible customer receivables to a bankruptcy-remote variable interest entity (VIE). In June 2009, the FASB issued revised authoritative guidance to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about:

a transfer of financial assets;

the effects of a transfer on its financial position, financial performance, and cash flows; and

	-	a transferor’s continuing involvement, if any, in transferred financial assets;
		and,

Improvements in financial reporting by companies involved with variable interest entities to provide more relevant and reliable information to users of financial statements by requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and

The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

After the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. The new FASB-issued authoritative guidance was effective for the Company beginning February 1, 2010.

The Company determined that it qualifies as the primary beneficiary of its VIE based on the following considerations:

The Company directs the activities that generate the customer receivables that are transferred to the VIE,

The Company directs the servicing activities related to the collection of the customer receivables transferred to the VIE,

The Company absorbs all losses incurred by the VIE to the extent of its residual interest in the customer receivables held by the VIE before any other investors incur losses, and

The Company has the rights to receive all benefits generated by the VIE after paying the contractual amounts due to the other investors.

As a result, the Company’s adoption of the provisions of the new guidance, effective February 1, 2010, resulted in the Company’s VIE, which is engaged in customer receivable financing and securitization, being consolidated in the Company’s balance sheet and the Company’s statements of operations, stockholders’ equity and cash flows. Previously, the operations of the VIE were reported off-balance sheet. The Company has elected to apply the provisions of this new guidance by retrospectively restating prior period financial statements to give effect to the consolidation of the VIE, presenting the balances at their carrying value as if they had always been carried on its balance sheet. The retrospective application impacted the comparative prior period financial statements as follows:

For the three and six months ended July 31, 2009, Income before income taxes was increased by approximately $0.4 million and $0.2 million, respectively.

For the three and six months ended July 31, 2009, Net income was increased by approximately $0.3 million and $0.1 million, respectively.

For the three and six months ended July 31, 2009, Basic earnings per share was increased by $.01

For the three months ended July 31, 2009, Diluted earnings per share was increased by $.01. For the six months ended July 31, 2009, Diluted earnings per share was unchanged.

For the six months ended July 31, 2009, Cash flows from operating activities was increased by approximately $82.5 million.

For the six months ended July 31, 2009, Cash flows from financing activities was reduced by approximately $82.5 million.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and all of its wholly-owned subsidiaries (the Company), including the Company’s VIE. The liabilities of the VIE and the assets specifically collateralizing those obligations are not available for the general use of the Company and have been parenthetically presented on the face of the Company’s balance sheet. All material intercompany transactions and balances have been eliminated in consolidation.

Fair Value of Financial Instruments. The fair value of cash and cash equivalents, receivables and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of the Company’s long-term debt and the VIE’s $170 million 2002 Series A variable funding note approximate their carrying amount based on the fact that the agreements were recently amended and the cost of the borrowings were revised to reflect current market conditions. The estimated fair value of the VIE’s $150 million 2006 Series A medium term notes was approximately $143 million and $139 million as of July 31, 2010 and January 31, 2010, respectively, based on its estimate of the rates available at these dates, for instruments with similar terms and maturities. The Company’s interest rate swaps are presented on the balance sheet at fair value.

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.

Earnings Per Share (EPS). 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 1.5 million and 2.7 million for the three months ended July 31, 2009 and 2010, respectively. The weighted average number of anti-dilutive stock options not included in calculating diluted EPS was 1.5 million and 2.7 million for the six months ended July 31, 2009 and 2010, respectively. The following table sets forth the shares outstanding for the earnings per share calculations:

The following table sets forth the shares outstanding for the earnings per share calculations:

	Three Months Ended
	July 31,
	2009		2010

Common stock outstanding, net of treasury stock, beginning of period		22,452,045		22,480,848
Weighted average common stock issued to employee stock purchase plan		1,893		3,057
Shares used in computing basic earnings per share		22,453,938		22,483,905
Dilutive effect of stock options, net of assumed repurchase of treasury stock		206,360		3,679
Shares used in computing diluted earnings per share		22,660,298		22,487,584

	Six Months Ended
	July 31,
	2009		2010

Common stock outstanding, net of treasury stock, beginning of period		22,444,240		22,471,350
Weighted average common stock issued to employee stock purchase plan		6,247		8,008
Shares used in computing basic earnings per share		22,450,487		22,479,358
Dilutive effect of stock options, net of assumed repurchase of treasury stock		224,085		3,241
Shares used in computing diluted earnings per share		22,674,572		22,482,599

Customer Accounts Receivable. Customer accounts receivable reported in the consolidated balance sheet includes receivables transferred to the Company’s VIE and those receivables not transferred to the VIE. The Company records the amount of principal and accrued interest on Customer receivables that is expected to be collected within the next twelve months, based on contractual terms, in current assets on its consolidated balance sheet. Those amounts expected to be collected after 12 months, based on contractual terms, are included in long-term assets. Typically, customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Additionally, the Company offers reage programs to customers with past due balances that have experienced a financial hardship; if they meet the conditions of the Company’s reage policy. Reaging a customer’s account can result in updating an account from a delinquent status to a current status. 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 for doubtful accounts and interest accrued subsequent to the last payment will be reversed. 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 amount.

Interest Income on Customer Accounts Receivable. Interest income is accrued using the Rule of 78’s method for installment contracts and the simple interest method for revolving charge accounts, and is reflected in Finance charges and other. Typically, interest income is accrued until the contract or account is paid off or charged-off and we provide an allowance for estimated uncollectible interest. Interest income is recognized on interest-free promotion credit programs based on the Company’s historical experience related to customers that fail to satisfy the requirements of the interest-free programs. Additionally, for sales on deferred interest and “same as cash” programs that exceed one year in duration, the Company discounts the sales to their fair value, resulting in a reduction in sales and customer receivables, and accretes the discount amount to Finance charges and other over the term of the program. The amount of customer receivables carried on the Company’s consolidated balance sheet that were past due 90 days or more and still accruing interest was $54.8 million and $46.7 million at January 31, 2010, and July 31, 2010, respectively.

Allowance for Doubtful Accounts. The Company records an allowance for doubtful accounts, including estimated uncollectible interest, for its Customer and Other accounts receivable, based on its historical net loss experience and expectations for future losses. The net charge-off data used in computing the loss rate is reduced by the amount of post-charge-off recoveries received, including cash payments, amounts realized from the repossession of the products financed and, at times, payments under credit insurance policies. Additionally, the Company separately evaluates the Primary and Secondary portfolios when estimating the allowance for doubtful accounts. The balance in the allowance for doubtful accounts and uncollectible interest for customer receivables was $35.8 million and $34.3 million, at January 31, 2010, and July 31, 2010, respectively. Additionally, as a result of the Company’s practice of reaging customer accounts, if the account is not ultimately collected, the timing and amount of the charge-off is impacted. If these accounts had been charged-off sooner the historical net loss rates might have been higher.

Inventories. Inventories consist of finished goods or parts and are valued at the lower of cost (moving weighted average method) or market.

Other Assets. The Company has certain deferred financing costs for transactions that have not yet been completed and has not begun amortization of those costs. These costs, which total approximately $1.5 million, are included in Other assets, net, on the balance sheet and will be amortized upon completion of the related financing transaction or expensed in the event the Company fails to complete such a transaction. The Company also has certain restricted cash balances included in Other assets. The restricted cash balances represent collateral for note holders of the Company’s VIE, and the amount is expected to decrease as the respective notes are repaid. However, the required balance could increase dependent on certain net portfolio yield requirements. The balance of this restricted cash account was $6.0 million at January 31, 2010, and July 31, 2010.

Comprehensive Income.

Comprehensive income for the three and six months ended July 31, 2009, is as follows (in thousands):

	Three			Six
	Months			Months
	ended			ended

Net income	$	5,224		$	16,580
Adjustment of fair value of interest rate swaps, net of tax of $37 and $81		(69	)		(150	)
Total comprehensive income	$	5,155		$	16,430

Subsequent Events. No material subsequent events have occurred since July 31, 2010, that required recognition or disclosure in the Company’s current period financial statements

Reclassifications. Certain reclassifications have been made in the prior year’s financial statements to conform to the current year’s presentation, by reclassifying the balance of construction-in-progress of approximately $0.9 million from Property and equipment – Buildings to Property and equipment – Leasehold improvements, on the consolidated balance sheet.

2. Supplemental Disclosure of Finance Charges and Other Revenue

The following is a summary of the classification of the amounts included as Finance charges and other for the three and six months ended July 31, 2009 and 2010 (in thousands):

	Three Months ended				Six Months ended
	July 31				July 31
	2009		2010		2009		2010

Interest income and fees on customer receivables	$	35,015	$	30,236	$	69,971	$	60,629
Insurance commissions		4,981		4,311		9,611		8,148
Other		132		216		246		466
Finance charges and other	$	40,128	$	34,763	$	79,828	$	69,243

3. Supplemental Disclosure of Customer Receivables

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

	Total Outstanding Balance
	of Customer Receivables						60 Days Past Due (1)				Reaged (1)
	January 31,			July 31,			January 31,		July 31,		January 31,		July 31,
	2010			2010			2010		2010		2010		2010
Primary portfolio:
Installment	$	555,573		$	543,327		$	46,758	$	41,232	$	93,219	$	85,748
Revolving		41,787			32,325			2,017		1,868		1,819		1,613
Subtotal		597,360			575,652			48,775		43,100		95,038		87,361
Secondary portfolio:
Installment		138,681			130,687			24,616		20,544		49,135		42,465
Total receivables managed		736,041			706,339		$	73,391	$	63,644	$	144,173	$	129,826
Allowance for uncollectible accounts		(35,802	)		(34,346	)
Allowances for promotional credit programs		(13,594	)		(10,548	)
Current portion of customer accounts
receivable, net		368,304			355,861
Long-term customer accounts
receivable, net	$	318,341		$	305,584

Receivables transferred to the VIE	$	521,919		$	479,576		$	59,840	$	48,542	$	122,521	$	103,267
Receivables not transferred to the VIE		214,122			226,763			13,551		15,102		21,652		26,559
Total receivables managed	$	736,041		$	706,339		$	73,391	$	63,644	$	144,173	$	129,826

(1)	Amounts are based on end of period balances and accounts could be represented in both the past due and reaged columns shown above.

					Net Credit								Net Credit
	Average Balances				Charge-offs (2)				Average Balances				Charge-offs (2)
	Three Months Ended				Three Months Ended				Six Months Ended				Six Months Ended
	July 31,				July 31,				July 31,				July 31,
	2009		2010		2009		2010		2009		2010		2009		2010
Primary portfolio:
Installment	$	556,386	$	537,333					$	552,956	$	541,023
Revolving		31,467		34,306						33,479		36,627
Subtotal		587,853		571,639	$	4,485	$	6,240		586,435		577,650	$	8,401	$	12,393
Secondary portfolio:
Installment		154,225		130,958		1,915		2,008		156,983		132,814		3,604		4,100
Total receivables managed	$	742,078	$	702,597	$	6,400	$	8,248	$	743,418	$	710,464	$	12,005	$	16,493

Receivables transferred to
the VIE	$	569,494	$	483,008	$	5,843	$	5,928	$	593,048	$	494,080	$	11,092	$	12,004
Receivables not transferred to
the VIE		172,584		219,589		557		2,320		150,370		216,384		913		4,489
Total receivables managed	$	742,078	$	702,597	$	6,400	$	8,248	$	743,418	$	710,464	$	12,005	$	16,493

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

4. Debt and Letters of Credit

The Company’s borrowing facilities consist of an asset-based revolving credit facility, a $10 million unsecured revolving line of credit, its VIE’s 2002 Series A variable funding note and its VIE’s 2006 Series A medium term notes. Debt consisted of the following at the periods ended (in thousands):

	January 31,		July 31,
	2010		2010


Asset-based revolving credit facility	$	105,498	$	109,400
2002 Series A Variable Funding Note		196,400		170,000
2006 Series A Notes		150,000		150,000
Unsecured revolving line of credit for $10 million maturing in September 2010		-		-
Other long-term debt		406		337
Total debt		452,304		429,737
Less current portion of debt		64,055		122,664
Long-term debt	$	388,249	$	307,073

The Company’s $210 million asset-based revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory and matures in August 2011. The credit facility bears interest at LIBOR plus a spread ranging from 325 basis points to 375 basis points, based on a fixed charge coverage ratio. In addition to the fixed charge coverage ratio, the revolving credit facility includes a total liabilities to tangible net worth requirement, a minimum customer receivables cash recovery percentage requirement, a net capital expenditures limit and combined portfolio performance covenants. The Company was in compliance with the covenants, as amended, at July 31, 2010. Additionally, the agreement contains cross-default provisions, such that, any default under another credit facility of the Company or its VIE would result in a default under this agreement, and any default under this agreement would result in a default under those agreements. The asset-based revolving credit facility is secured by the assets of the Company not otherwise encumbered.

The 2002 Series A program functions as a revolving credit facility to fund the transfer of eligible customer receivables to the VIE. When the outstanding balance of the facility approaches a predetermined amount, the VIE (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 customer 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. Given the current state of the financial markets, especially with respect to asset-backed securitization financing, the Company has been unable to issue medium-term notes or increase the availability under the existing variable funding note program. The 2002 Series A program consists of a $170 million commitment that was renewed in August 2010, and is renewable annually, at the Company’s option, until August 2011 and bears interest at commercial paper rates plus a spread of 250 basis points. The total commitment under the 2002 Series A program was reduced from $200 million at January 31, 2010. Additionally, in connection with recent amendments to the 2002 Series A facility, the VIE agreed to reduce the total available commitment to $130 million in April 2011.

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 scheduled monthly $7.5 million principal payments, which begin in September 2010, will retire the bonds prior to that date. The VIE’s borrowing agreements contain certain covenants requiring the maintenance of various financial ratios and customer receivables performance standards. The Issuer was in compliance with the requirements of the agreements, as amended, as of July 31, 2010. The VIE’s debt is secured by the Customer accounts receivable that are transferred to it, which are included in Customer accounts receivable and Long-term portion of customer accounts receivable on the consolidated balance sheet. 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 VIE to pay when due. Additionally, the Company has no recourse to the VIE’s assets to satisfy its obligations. The Company’s retained interests in the customer receivables collateralizing the securitization program and the related cash flows 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. The ultimate realization of the retained interest is subject to credit, prepayment, and interest rate risks on the transferred financial assets.

In March 2010, the Company and its VIE completed amendments to the various borrowing agreements that revised the covenant requirements as of January 31, 2010, and revised certain future covenant requirements. The revised covenant calculations include both the operating results and assets and liabilities of the Company and the VIE, effective January 31, 2010, for all financial covenant calculations. In addition to the covenant changes, the Company, as servicer of the customer receivables, agreed to implement certain additional collection procedures if certain performance requirements were not maintained, and agreed to make fee payments to the 2002 Series A facility providers on the amount of the commitment available at specific future dates. The Company also agreed to use the proceeds from any capital raising activity it completes to further reduce the commitments and debt outstanding under the securitization program’s debt facilities. The fee payments will equal the following rates multiplied times the total available borrowing commitment under the 2002 Series A facility on the dates shown:

50 basis points on May 1, 2010,

100 basis points on August 1, 2010,

110 basis points on November 1, 2010,

115 basis points on February 1, 2011,

115 basis point on May 1, 2011, and

123 basis points on August 1, 2011.

In accordance with the schedule, the Company made a payment of approximately $0.9 million on May 1, 2010 and another payment of approximately $1.7 million on August 1, 2010.

As of July 31, 2010, the Company had approximately $57.1 million under its asset-based 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 also had $21.8 million that may become available under its asset-based revolving credit facility if it grows the balance of eligible customer receivables and its total eligible inventory balances.

The Company’s asset–based revolving credit facility provides it the ability to utilize letters of credit to secure its obligations as the servicer under its VIE’s asset-backed securitization program, deductibles under the Company’s property and casualty insurance programs and international product purchases, among other acceptable uses. At July 31, 2010, 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 July 31, 2010.

The Company held interest rate swaps with notional amounts totaling $25.0 million as of July 31, 2010, with terms extending through July 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. At July 31, 2010, the estimated net amount of loss that is expected to be reclassified into earnings within the next twelve months is $0.2 million.

For information on the location and amounts of derivative fair values in the statement of operation, see the tables presented below (in thousands):

	Fair Values of Derivative Instruments

	Liability Derivatives
	January 31, 2010			July 31, 2010
	Balance			Balance
	Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value
Derivatives designated as
hedging instruments under
Interest rate contracts	Other liabilities	$	337	Other liabilities	$	240

Total derivatives designated
as hedging instruments		$	337		$	240

Derivatives in	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Cash Flow	Three Months Ended						Income	Three Months Ended						Excluded from	Three Months Ended
Hedging	July 31,			July 31,			(Effective	July 31,			July 31,			Effectiveness	July 31,		July 31,
Relationships	2009			2010			Portion)	2009			2010			Testing)	2009		2010
Interest Rate							Interest income/							Interest income/
Contracts	$	(69	)	$	(7	)	(expense)	$	(75	)	$	(72	)	(expense)	$	-	$	-

Total	$	(69	)	$	(7	)		$	(75	)	$	(72	)		$	-	$	-

Derivatives in	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)						Location of Gain or (Loss) Reclassified from Accumulated OCI into	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)						Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Cash Flow	Six Months Ended						Income	Six Months Ended						Excluded from	Six Months Ended
Hedging	July 31,			July 31,			(Effective	July 31,			July 31,			Effectiveness	July 31,		July 31,
Relationships	2009			2010			Portion)	2009			2010			Testing)	2009		2010
Interest Rate							Interest income/							Interest income/
Contracts	$	(150	)	$	(63	)	(expense)	$	(92	)	$	(170	)	(expense)	$	-	$	-

Total	$	(150	)	$	(63	)		$	(92	)	$	(170	)		$	-	$	-

5. Contingencies

Legal Proceedings. The Company is involved in routine litigation and claims incidental to its business from time to time, and, as required, has accrued its estimate of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in the Company’s assumptions or the effectiveness of its strategies related to these proceedings. 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.

Repair Service Agreement Obligations. The Company sells repair service agreements that extend the period of covered warranty service on the products the Company sells. For certain of the repair service 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 agreements can be canceled at any time and any deferred revenue associated with canceled agreements is reversed at the time of cancellation. The amounts of repair service agreement revenue deferred at January 31, 2010, and July 31, 2010, were $7.3 million and $7.1 million, respectively, and are included in Deferred revenue and allowances in the accompanying consolidated balance sheets. The following table presents a reconciliation of the beginning and ending balances of the deferred revenue on the Company’s repair service agreements and the amount of claims paid under those agreements (in thousands):

Reconciliation of deferred revenues on repair service agreements
	Six Months Ended
	July 31,
	2009			2010

Balance in deferred revenues at beginning of period	$	7,213		$	7,268
Revenues earned during the period		(3,501	)		(3,583	)
Revenues deferred on sales of new agreements		3,526			3,456
Balance in deferred revenues at end of period	$	7,238		$	7,141

Total claims incurred during the period, excludes selling expenses	$	1,638		$	1,841

6. Segment Reporting

Financial information by segment is presented in the following tables for the three and six months ended July 31, 2010 and 2009 (in thousands):

	Three Months Ended July 31,
	2009									2010
	Retail			Credit			Total			Retail		Credit			Total
Revenues
Product sales	$	175,389		$	-		$	175,389		$	166,378	$	-		$	166,378
Repair service agreement commissions (net) (a)		11,433			(2,574	)		8,859			11,534		(3,193	)		8,341
Service revenues		6,052						6,052			4,183					4,183
Total net sales		192,874			(2,574	)		190,300			182,095		(3,193	)		178,902
Finance charges and other		131			39,997			40,128			216		34,547			34,763
Total revenues		193,005			37,423			230,428			182,311		31,354			213,665
Cost and expenses
Cost of goods and parts sold, including
warehousing and occupancy costs		143,558			-			143,558			132,396		-			132,396
Selling, general and
administrative expense (b) (c)		49,407			15,572			64,979			46,407		17,071			63,478
Provision for bad debts		7			8,019			8,026			207		8,841			9,048
Total cost and expenses		192,972			23,591			216,563			179,010		25,912			204,922
Operating income		33			13,832			13,865			3,301		5,442			8,743
Interest expense, net		-			5,342			5,342			-		5,875			5,875
Other (income) expense, net		(13	)		-			(13	)		12		-			12
Segment income (loss)
before income taxes	$	46		$	8,490		$	8,536		$	3,289	$	(433	)	$	2,856

	Six Months Ended July 31,
	2009							2010
	Retail		Credit			Total		Retail		Credit			Total
Revenues
Product sales	$	360,206	$	-		$	360,206	$	316,743	$	-		$	316,743
Repair service agreement commissions (net) (a)		23,520		(4,871	)		18,649		22,458		(6,200	)		16,258
Service revenues		11,596					11,596		8,940					8,940
Total net sales		395,322		(4,871	)		390,451		348,141		(6,200	)		341,941
Finance charges and other		246		79,582			79,828		466		68,777			69,243
Total revenues		395,568		74,711			470,279		348,607		62,577			411,184
Cost and expenses
Cost of goods and parts sold, including
warehousing and occupancy costs		292,015		-			292,015		248,925		-			248,925
Selling, general and
administrative expense (b) (d)		96,303		31,414			127,717		89,604		34,617			124,221
Provision for bad debts