Edgar Filing: CONNS INC

a6531008.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 October 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 December 1, ,2010:

Class	Outstanding
Common stock, $.01 par value per share	31,758,211

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION	Page No.

Item 1.	Financial Statements		1

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

	Consolidated Statements of Operations for the three and nine months ended
	October 31, 2009 and 2010		2

	Consolidated Statement of Stockholders’ Equity for the nine months ended
	October 31, 2010		3

	Consolidated Statements of Cash Flows for the nine months ended
	October 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		19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43

Item 4.	Controls and Procedures		44

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		44

Item 1A.	Risk Factors		44

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		58

Item 5.	Other Information		58

Item 6.	Exhibits		58


SIGNATURE			59

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets	January 31, 2010			October 31, 2010
				(unaudited)
Cash and cash equivalents	$	12,247		$	12,422
(includes balances of VIE of $104 and $2,575, respectively)
Customer accounts receivable, net of allowance of $19,204 and $18,542 respectively		368,304			344,482
(includes balances of VIE of $279,948 and $236,151, respectively)
Other accounts receivable, net of allowance of $50 and $60, respectively		23,254			26,025
Inventories		63,499			83,729
Deferred income taxes		15,237			13,508
Federal income taxes recoverable		8,178			4,467
Prepaid expenses and other assets		8,020			9,577
Total current assets		498,739			494,210
Long-term portion of customer accounts receivable, net of
allowance of $16,598 and $15,542, respectively		318,341			288,738
(includes balances of VIE of $241,971 and $197,937, respectively)
Property and equipment
Land		7,682			7,264
Buildings		10,480			10,314
Equipment and fixtures		25,592			26,642
Leasehold improvements		91,299			91,770
Subtotal		135,053			135,990
Less accumulated depreciation		(75,350	)		(84,375	)
Total property and equipment, net		59,703			51,615
Non-current deferred income tax asset		5,485			6,685
Other assets, net (includes balances of VIE of $7,106 and $13,793, respectively)		10,198			22,101
Total assets	$	892,466		$	863,349
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt	$	64,055		$	7,665
(includes balances of VIE of $63,900 and $7,500, respectively)
Accounts payable		39,944			39,997
Accrued compensation and related expenses		5,697			4,896
Accrued expenses		31,685			27,779
Income taxes payable		2,640			1,482
Deferred revenues and allowances		14,596			12,703
Total current liabilities		158,617			94,522
Long-term debt		388,249			419,932
(includes balances of VIE of $282,500 and $292,700, respectively)
Other long-term liabilities		5,195			4,594
Fair value of interest rate swaps		337			185
Deferred gains on sales of property		905			898
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 24,222,025 shares issued at January 31, 2010 and October 31, 2010, respectively)		242			242
Additional paid-in capital		106,226			108,045
Accumulated other comprehensive loss		(218	)		(120	)
Retained earnings		269,984			272,122
Treasury stock, at cost, 1,723,205 shares		(37,071	)		(37,071	)
Total stockholders' equity		339,163			343,218
Total liabilities and stockholders' equity	$	892,466		$	863,349

See notes to consolidated financial statements.

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

	Three Months Ended October 31,						Nine Months Ended October 31,
	2009			2010			2009			2010
	(As adjusted						(As adjusted
Revenues	see Note 1)						see Note 1)
Product sales	$	148,463		$	127,035		$	508,669		$	443,778
Repair service agreement commissions, net		7,320			6,035			25,968			22,293
Service revenues		5,599			3,769			17,195			12,709

Total net sales		161,382			136,839			551,832			478,780

Finance charges and other		36,116			33,019			115,945			102,262


Total revenues		197,498			169,858			667,777			581,042

Cost and expenses
Cost of goods sold, including warehousing
and occupancy costs		120,963			99,546			407,594			343,979
Cost of parts sold, including warehousing
and occupancy costs		2,672			1,642			8,056			6,134
Selling, general and administrative expense		65,307			56,507			192,326			178,876
Goodwill impairment		9,617			-			9,617			-
Costs related to financing transactions not completed		-			2,896			-			2,896
Provision for bad debts		12,651			9,372			26,321			24,694

Total cost and expenses		211,210			169,963			643,914			556,579

Operating income (loss)		(13,712	)		(105	)		23,863			24,463
Interest expense, net		5,649			7,722			16,692			20,234
Other (income) expense, net		(34	)		(17	)		(54	)		166

Income (loss) before income taxes		(19,327	)		(7,810	)		7,225			4,063

Provision (benefit) for income taxes		(4,955	)		(2,716	)		5,017			1,925

Net income (loss)	$	(14,372	)	$	(5,094	)	$	2,208		$	2,138

Earnings (loss) per share
Basic	$	(0.64	)	$	(0.23	)	$	0.10		$	0.10
Diluted	$	(0.64	)	$	(0.23	)	$	0.10		$	0.10
Average common shares outstanding
Basic		22,459			22,493			22,453			22,484
Diluted		22,459			22,493			22,658			22,487

See notes to consolidated financial statements.

Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended October 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		28		-		129										129

Stock-based compensation						1,690										1,690

Net income											2,138					2,138

Adjustment of fair value of
interest rate swaps
net of tax of $53								98								98
Other comprehensive income								98								98
Total comprehensive income																2,236

Balance October 31, 2010		24,222	$	242	$	108,045	$	(120	)	$	272,122	$	(37,071	)	$	343,218

See notes to consolidated financial statements.

Conn’s, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
	Nine Months Ended October 31,
	2009			2010
	(As adjusted
Cash flows from operating activities	see Note 1)
Net income	$	2,208		$	2,138
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		10,062			9,776
Amortization, net		369			2,026
Costs related to financing transactions not completed		-			2,896
Provision for bad debts		26,321			24,694
Stock-based compensation		1,869			1,690
Goodwill impairment		9,617			-
Discounts and accretion on promotional credit		(926	)		(1,570	)
Provision for deferred income taxes		(3,948	)		822
(Gains) losses on sales of property and equipment		(79	)		176
Changes in operating assets and liabilities:
Customer accounts receivable		(4,551	)		30,317
Other accounts receivable		11,148			(2,771	)
Inventory		24,273			(20,230	)
Prepaid expenses and other assets		(1,287	)		(1,558	)
Accounts payable		(15,150	)		53
Accrued expenses		5,673			(6,173	)
Income taxes payable		(11,224	)		2,207
Deferred revenue and allowances		571			(1,893	)
Net cash provided by operating activities		54,946			42,600
Cash flows from investing activities
Purchases of property and equipment		(8,627	)		(2,340	)
Proceeds from sales of property		57			601
Increase in restricted cash		-			(6,532	)
Net cash used in investing activities		(8,570	)		(8,271	)
Cash flows from financing activities
Proceeds from stock issued under employee benefit plans		165			129
Borrowings under lines of credit		239,931			200,171
Payments on lines of credit		(282,331	)		(224,769	)
Increase in deferred financing costs		(437	)		(9,576	)
Payment of promissory notes		(26	)		(109	)
Net cash used in financing activities		(42,698	)		(34,154	)
Net change in cash		3,678			175
Cash and cash equivalents
Beginning of the year		11,909			12,247
End of period	$	15,587		$	12,422

See notes to consolidated financial statements.

Conn’s, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

October 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 nine month periods ended October 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:

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

b)	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) are 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 applies 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 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 nine months ended October 31, 2009, Income before income taxes was increased by approximately $1.4 million and $1.6 million, respectively;

-	For the three and nine months ended October 31, 2009, Net income was increased by approximately $0.9 million and $1.0 million, respectively;

-	For the three and nine months ended October 31, 2009, Basic and diluted earnings per share were increased by $0.04 and $0.05, respectively;

-	For the nine months ended October 31, 2009, Cash flows from operating activities was increased by approximately $109.4 million; and

-	For the nine months ended October 31, 2009, Cash flows from financing activities was reduced by approximately $104.5 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. Conn’s, Inc. is a holding company with no independent assets or operations other than its investments in it is subsidiaries. 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 approximates its carrying amount based on the fact that the facility was recently extended and expanded to reflect current market conditions. The VIE’s 2002 Series A variable funding note approximates its carrying amount based on the fact that the note has now been retired. The estimated fair value of the VIE’s 2006 Series A medium term notes was approximately $135 million on principal of $135 million outstanding as of October 31, 2010 and $139 million on principal of $150 million as of January 31, 2010, respectively, based on its estimate of the rates available at these dates, for instruments with similar terms and maturities. The fair value as of October 31, 2010 was deemed to approximate the carrying amount as these notes have now been retired. 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 October 31, 2009 and 2010, respectively. Due to the net loss incurred for the three months ended October 31, 2009 and the three months ended October 31, 2010, no stock options were included in the computation of diluted loss per share. 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 nine months ended October 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
	October 31,
	2009		2010

Common stock outstanding, net of treasury stock, beginning of period		22,457,486		22,489,638
Weighted average common stock issued to employee stock purchase plan		1,767		3,194
Shares used in computing basic earnings per share		22,459,253		22,492,832
Dilutive effect of stock options, net of assumed repurchase of treasury stock		-		-
Shares used in computing diluted earnings per share		22,459,253		22,492,832

	Nine Months Ended
	October 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		9,189		12,549
Shares used in computing basic earnings per share		22,453,429		22,483,899
Dilutive effect of stock options, net of assumed repurchase of treasury stock		204,729		2,606
Shares used in computing diluted earnings per share		22,658,158		22,486,505

Subsequent to October 31, 2010, the Company completed a common stock subscription rights offering, issuing one right to each shareholder of record as of the close of business on November 1, 2010, for each outstanding share of common stock on that day. The rights provided the holder with one basic subscription privilege and one oversubscription privilege. The basic subscription privilege entitled the holder to purchase .41155 shares of common stock at a price of $2.70 per share. The oversubscription privilege entitled the rights holder to purchase additional shares of stock at $2.70 per share, to the extent all basic subscription privileges were not exercised. The Company received gross proceeds of approximately $25.0 million and issued 9,259,390 shares of common stock in completing the rights offering.

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 earned 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 $48.9 million at January 31, 2010, and October 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 segments the portfolio based on certain underwriting criteria (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 $34.1 million, at January 31, 2010, and October 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 $4.3 million, are included in Other assets, net, on the balance sheet and will be amortized upon completion of the related debt financing transaction, included as a reduction of any equity related proceeds, or expensed in the event the Company fails to complete such a transaction. The Company also has approximately $4.0 million of these costs that are currently being amortized over the life of the related debt facilities. During the three months and nine months ended October 31, 2010, the Company determined that it was appropriate to write-off $2.9 million of expenses incurred related to financing alternatives that it does not expect to complete. 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 was $6.0 million at January 31, 2010, and $12.5 million at October 31, 2010.

Comprehensive Income (Loss). Comprehensive income (loss) for the three months ended October 31, 2010 and 2009, and the nine months ended October 31, 2009, is as follows (in thousands):

	Three Months Ended						Nine Months
	October 31,						ended
	2009			2010			October 31, 2009

Net income (loss)	$	(14,372	)	$	(5,094	)	$	2,208
Adjustment of fair value of interest rate swaps,
net of tax of $34, $19 and $116		(63	)		36			(213	)
Total comprehensive income (loss)	$	(14,435	)	$	(5,058	)	$	1,995

Income Taxes. The provision (benefit) for income taxes primarily fluctuates with the change in income before income taxes. The provision (benefit) for income taxes can be negatively impacted by the effect of the taxes for the state of Texas, which are based on gross margin, instead of income before taxes. The prior year effective tax benefit rate was higher than the effective rate in the current year period, primarily due to the fact that no tax benefit was recorded in the prior year period related to the litigation reserve accrual that was made in the third quarter of the prior year period.

Recent Accounting Pronouncements. In July 2010, the FASB issued ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU No. 2010-20 enhances the existing disclosure requirements providing more transparency of the allowance for loan losses and credit quality of financing receivables. The new disclosures that relate to information as of the end of a reporting period will be effective for the first interim and annual reporting periods ending on or after December 15, 2010; therefore, the Company will be required to apply most of the provisions of this ASU effective for the Company’s fiscal year 2011 year–end reporting. The new disclosures that relate to activity occurring during the reporting period will be effective for the first interim and annual periods beginning after December 15, 2010 or effective for the Company’s first quarter of fiscal 2012 and thereafter.

Subsequent Events. All material subsequent events that have occurred since October 31, 2010, that required recognition or disclosure in the Company’s current period financial statements are presented in footnote 7 to these 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. Additionally, deferred financing cost amortization expense of approximately $0.4 million and $1.1 million, respectively, for the three and nine months ended October 31, 2009 was reclassified from Selling, general and administrative expense to Interest expense, net, on the consolidated statement of operations. The following is a table that shows the impact of the reclassification of the amortization expense for all quarterly periods of the prior three fiscal years:

	Selling, general, and administrative							Interest Expense
	As Presented		Reclass			As Adjusted		As Presented		Reclass		As Adjusted
FY 2009
Quarter ending 4/30/2008	$	60,436	$	(84	)	$	60,352	$	5,486	$	84	$	5,570
Quarter ending 7/31/2008		62,968		(91	)		62,877		5,130		91		5,221
Quarter ending 10/31/2008		62,472		(507	)		61,965		6,783		507		7,290
Quarter ending 1/31/2009		68,296		(340	)		67,956		6,198		340		6,538
Total Fiscal Year 2009	$	254,172	$	(1,022	)	$	253,150	$	23,597	$	1,022	$	24,619

FY 2010
Quarter ending 4/30/2009	$	62,738	$	(350	)	$	62,388	$	5,004	$	350	$	5,354
Quarter ending 7/31/2009		64,979		(348	)		64,631		5,341		348		5,689
Quarter ending 10/31/2009		65,661		(353	)		65,308		5,295		353		5,648
Quarter ending 1/31/2010		62,564		(363	)		62,201		4,931		363		5,294
Total Fiscal Year 2010	$	255,942	$	(1,414	)	$	254,528	$	20,571	$	1,414	$	21,985

FY 2011
Quarter ending 4/30/2010	$	60,743	$	(998	)	$	59,745	$	4,785	$	998	$	5,783
Quarter ending 7/31/2010		63,478		(854	)		62,624		5,875		854		6,729
Quarter ending 10/31/2010		56,507		-			56,507		7,722		-		7,722
Year to Date Fiscal Year 2011	$	180,728	$	(1,852	)	$	178,876	$	18,382	$	1,852	$	20,234

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 nine months ended October 31, 2009 and 2010 (in thousands):

	Three Months ended				Nine Months ended
	October 31				October 31
	2009		2010		2009		2010

Interest income and fees on customer receivables	$	32,765	$	29,279	$	102,736	$	89,908
Insurance commissions		3,253		3,525		12,864		11,673
Other		98		215		345		681
Finance charges and other	$	36,116	$	33,019	$	115,945	$	102,262

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,			October 31,			January 31,		October 31,		January 31,		October 31,
	2010			2010			2010		2010		2010		2010
Primary portfolio:
Installment	$	555,573		$	528,981		$	46,758	$	43,057	$	93,219	$	85,199
Revolving		41,787			27,935			2,017		1,815		1,819		1,529
Subtotal		597,360			556,916			48,775		44,872		95,038		86,728
Secondary portfolio:
Installment		138,681			120,078			24,616		20,062		49,135		39,537
Total receivables managed		736,041			676,994		$	73,391	$	64,934	$	144,173	$	126,265
Allowance for uncollectible accounts		(35,802	)		(34,084	)
Allowances for promotional credit programs		(13,594	)		(9,689	)
Current portion of customer accounts
receivable, net		368,304			344,482
Long-term customer accounts
receivable, net	$	318,341		$	288,739

Receivables transferred to the VIE	$	521,919		$	434,089		$	59,840	$	47,594	$	122,521	$	96,754
Receivables not transferred to the VIE		214,122			242,905			13,551		17,340		21,652		29,511
Total receivables managed	$	736,041		$	676,994		$	73,391	$	64,934	$	144,173	$	126,265

(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				Nine Months Ended				Nine Months Ended
	October 31,				October 31,				October 31,				October 31,
	2009		2010		2009		2010		2009		2010		2009		2010
Primary portfolio:
Installment	$	562,511	$	538,799					$	555,885	$	539,903
Revolving		33,405		30,159						33,674		34,470
Subtotal		595,916		568,958	$	5,860	$	6,967		589,559		574,373	$	14,261	$	19,344
Secondary portfolio:
Installment		149,614		126,370		2,236		2,512		154,456		130,449		5,840		6,628
Total receivables managed	$	745,530	$	695,328	$	8,096	$	9,479	$	744,015	$	704,822	$	20,101	$	25,972

Receivables transferred to
the VIE	$	524,136	$	458,253	$	6,978	$	6,630	$	570,136	$	481,199	$	18,069	$	18,635
Receivables not transferred to
the VIE		221,394		237,075		1,118		2,849		173,879		223,623		2,032		7,337
Total receivables managed	$	745,530	$	695,328	$	8,096	$	9,479	$	744,015	$	704,822	$	20,101	$	25,972

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

4. Debt and Letters of Credit

The following discussion pertains to the Company’s debt facilities as they were on October 31, 2010. Please refer to footnote 7 for subsequent events pertaining to the Company’s refinancing transactions which impacted the debt facilities subsequent to October 31, 2010. Due to the long-term nature of the debt facilities that were entered into subsequent to the balance sheet date, all of the Company’s debt at October 31, 2010, was classified as long-term with the exception of the required $7.5 million principal payment on the VIE’s 2006 Series A Note that was made in November 2010, prior to the completion of the refinancing transactions. That amount and the current portion of the Company’s other notes were classified as current as of the balance sheet date.

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,		October 31,
	2010		2010


Asset-based revolving credit facility	$	105,498	$	127,100
2002 Series A Variable Funding Note		196,400		165,200
2006 Series A Notes		150,000		135,000
Unsecured revolving line of credit for $10 million; matured in September 2010		-		-
Other long-term debt		406		297
Total debt		452,304		427,597
Less current portion of debt		64,055		7,665
Long-term debt	$	388,249	$	419,932

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 October 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. The 2002 Series A program consists of a $170 million commitment that was renewed in August 2010 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, was 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 began in September 2010, will retire the bonds prior to that date, if not otherwise repaid prior to that date. The VIE’s borrowing agreements contain certain covenants requiring the maintenance of various financial ratios and customer receivables performance standards. As of October 31, 2010, the three month average net portfolio yield fell to 4.1%, requiring the VIE to post additional cash reserves of approximately $6.0 million. The Issuer was in compliance with the requirements of the agreements, as amended, as of October 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 are 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 payments of approximately $0.9 million on May 1, 2010, $1.7 million on August 1, 2010 and $1.9 million on November 1, 2010. These amounts are recorded in interest expense (net) in the periods in which they are paid.

As of October 31, 2010, the Company had approximately $38.8 million under its asset-based revolving credit facility, net of standby letters of credit issued, immediately available for general corporate purposes. The Company also had an additional $21.9 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 October 31, 2010, the Company had outstanding letters of credit of $22.2 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 $22.2 million as of October 31, 2010.

The Company held interest rate swaps with notional amounts totaling $25.0 million as of October 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 October 31, 2010, the estimated net amount of loss that is expected to be reclassified into earnings within the next twelve months is $0.1 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			October 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	$	185

Total derivatives designated
as hedging instruments		$	337		$	185

Amount of

Gain or (Loss)

Amount of

Recognized in

Gain or (Loss)

Location of

Income on

Amount of

Reclassified

Gain or (Loss)

Derivative

Gain or (Loss)

Location of

from

Recognized in

(Ineffective

Recognized

Gain or (Loss)

Accumulated

Income on

Portion

in OCI on

Reclassified

OCI into

Derivative

and Amount

Derivative

from

Income

(Ineffective

Excluded from

(Effective

Accumulated

(Effective

Portion

Effectiveness

Derivatives in

Portion)

OCI into

Portion)

and Amount

Testing)

Cash Flow

Three Months Ended

Income

Three Months Ended

Excluded from

Three Months Ended

Hedging

October 31,

(Effective

October 31,

Effectiveness

October 31,

Relationships

2009

2010

Portion)

2009

2010

Testing)

2009

2010

Interest Rate

Interest income/

Contracts

(63

)

(36

)

(expense)

(107

)

(75

)

(expense)

Total

(63

)

(36

)

(107

)

(75

)

Amount of

Gain or (Loss)

Amount of

Recognized in

Gain or (Loss)

Location of

Income on

Amount of

Reclassified

Gain or (Loss)

Derivative

Gain or (Loss)

Location of

from

Recognized in

(Ineffective

Recognized

Gain or (Loss)

Accumulated

Income on

Portion

in OCI on

Reclassified

OCI into

Derivative

and Amount

Derivative

from

Income

(Ineffective

Excluded from

(Effective

Accumulated

(Effective

Portion

Effectiveness

Derivatives in

Portion)

OCI into

Portion)

and Amount

Testing)

Cash Flow

Nine Months Ended

Income

Nine Months Ended

Excluded from

Nine Months Ended

Hedging

October 31,

(Effective

October 31,

Effectiveness

October 31,

Relationships

2009

2010

Portion)

2009

2010

Testing)

2009

2010

Interest Rate

Interest income/

Contracts

(213

)

(98

)

(expense)

(199

)

(245

)

(expense)

Total

(213

)

(98

)

(199

)

(245

)

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, which are not expected to be material. 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 October 31, 2010, were $7.3 million and $6.6 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
	Nine Months Ended
	October 31,
	2009			2010

Balance in deferred revenues at beginning of period	$	7,213		$	7,268
Revenues earned during the period		(5,267	)		(5,289	)
Revenues deferred on sales of new agreements		5,342			4,577
Balance in deferred revenues at end of period	$	7,288		$	6,556

Total claims incurred during the period, excludes selling expenses	$	2,596		$	2,967

6. Segment Reporting

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

	Three Months Ended October 31,
	2009							2010
	Retail		Credit			Total		Retail		Credit			Total
Revenues
Product sales	$	148,463	$	-		$	148,463	$	127,035	$	-		$	127,035
Repair service agreement commissions (net) (a)		10,166		(2,846	)		7,320		9,514		(3,479	)		6,035
Service revenues		5,599		-			5,599		3,769		-			3,769
Total net sales		164,228		(2,846	)		161,382		140,318		(3,479	)		136,839
Finance charges and other		98		36,018			36,116		215		32,804			33,019
Total revenues		164,326		33,172			197,498		140,533		29,325			169,858
Cost and expenses
Cost of goods and parts sold, including
warehousing and occupancy costs		123,635		-			123,635		101,188		-			101,188
Selling, general and
administrative expense (b) (c)		50,360