UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number 000-50421
April 30, 2007
CONN'S, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 06-1672840
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. 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
[ ]
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 May 29, 2007:
Class Outstanding
- ------------------------------------------- ----------------------------
Common stock, $.01 par value per share 23,428,658
EXPLANATORY NOTE
Correction of Consolidated Financial Statements
We are amending our Quarterly Report on Form 10-Q (the "Original Filing")
for the quarter ended April 30, 2007, to correct a mistake in our consolidated
balance sheet as of April 30, 2007 filed with our Quarterly Report on Form 10-Q
for the quarter ended April 30, 2007, which was filed with the Securities and
Exchange Commission on May 31, 2007. This amendment and correction are
necessitated by a typographical error in the consolidated balance sheets,
specifically in the line entitled "Accounts payable".
All of the information in this Form 10-Q/A is as of April 30, 2007 and does
not reflect any subsequent information or events other than the correction
indicated above. Only the following items have been amended as a result of the
correction:
Part I - Item 1 - Financial Statements, Consolidated Balance Sheets, Page 1
Other than as discussed above, this Form 10-Q/A does not reflect events
occurring after the filing of the Original Filing or modify or update
disclosures (including the exhibits to the Original Filing) affected by
subsequent events. Accordingly, this Form 10-Q/A should be read in conjunction
with our periodic filings made with the Securities and Exchange Commission
subsequent to the date of the Original Filing, including any amendments to those
filings. In addition, this Form 10-Q/A includes updated certifications from our
Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, and
32.1.
i
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements...........................................................................1
- -------
Consolidated Balance Sheets as of January 31, 2007 and April 30, 2007..........................1
Consolidated Statements of Operations for the three months ended
April 30, 2006 and 2007....................................................................2
Consolidated Statement of Stockholders' Equity for the three months ended
April 30, 2007.............................................................................3
Consolidated Statements of Cash Flows for the three months ended
April 30, 2006 and 2007....................................................................4
Notes to Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- and Results of Operations.................................................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................26
- -------
Item 4. Controls and Procedures.......................................................................26
- -------
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings.............................................................................26
- -------
Item 1A. Risk Factors..................................................................................26
- -------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................27
- -------
Item 5. Other Information.............................................................................27
- -------
Item 6. Exhibits......................................................................................27
- -------
SIGNATURE ..................................................................................................28
ii
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
January 31, April 30,
Assets 2007 2007
----------- -----------
Current assets (unaudited)
Cash and cash equivalents ....................................... $ 56,570 $ 52,880
Accounts receivable, net ........................................ 31,448 29,592
Interests in securitized assets ................................. 136,848 150,552
Inventories ..................................................... 87,098 81,255
Deferred income taxes ........................................... 551 856
Prepaid expenses and other assets ............................... 5,247 7,368
----------- -----------
Total current assets ...................................... 317,762 322,503
Non-current deferred income tax asset ........................... 2,920 --
Property and equipment
Land ............................................................ 9,102 6,781
Buildings ....................................................... 13,896 8,691
Equipment and fixtures .......................................... 13,650 14,441
Transportation equipment ........................................ 3,022 2,958
Leasehold improvements .......................................... 66,761 68,307
----------- -----------
Subtotal .................................................. 106,431 101,178
Less accumulated depreciation ................................... (46,991) (48,849)
----------- -----------
Total property and equipment, net ......................... 59,440 52,329
Goodwill, net ................................................... 9,617 9,617
Debt issuance costs and other assets, net ....................... 208 195
----------- -----------
Total assets ............................................. $ 389,947 $ 384,644
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt ............................... $ 110 $ 104
Accounts payable ................................................ 54,045 35,583
Accrued compensation and related expenses ....................... 9,234 7,921
Accrued expenses ................................................ 20,424 20,320
Income taxes payable ............................................ 3,693 4,293
Deferred revenues and allowances ................................ 9,516 12,065
----------- -----------
Total current liabilities ................................. 97,022 80,286
Long-term debt .................................................. 88 59
Non-current deferred income tax liability ....................... -- 1,503
Deferred gains on sales of property ............................. 309 1,500
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;
23,809,522 and 23,850,760 shares issued at January 31, 2007
and April 30, 2007, respectively) .......................... 238 238
Additional paid-in capital ...................................... 93,365 94,415
Accumulated other comprehensive income .......................... 6,305 --
Retained earnings ............................................... 196,417 214,994
Treasury stock, at cost, 168,000 and 346,000 shares, respectively (3,797) (8,351)
----------- -----------
Total stockholders' equity ................................ 292,528 301,296
----------- -----------
Total liabilities and stockholders' equity ............. $ 389,947 $ 384,644
=========== ===========
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
Three Months Ended
April 30,
----------------------
2006 2007
--------- ---------
Revenues
Product sales ..................................... $ 158,509 $ 166,639
Service maintenance agreement commissions, net .... 7,967 9,281
Service revenues .................................. 5,229 5,445
--------- ---------
Total net sales ................................. 171,705 181,365
Finance charges and other ......................... 20,483 23,945
--------- ---------
Total revenues .................................. 192,188 205,310
Cost and expenses
Cost of goods sold, including warehousing
and occupancy costs .............................. 125,729 131,971
Cost of parts sold, including warehousing
and occupancy costs .............................. 1,565 1,866
Selling, general and administrative expense ....... 46,664 51,636
Provision for bad debts ........................... 43 560
--------- ---------
Total cost and expenses ......................... 174,001 186,033
--------- ---------
Operating income ..................................... 18,187 19,277
Interest income, net ................................. (184) (240)
Other income, net .................................... (33) (831)
--------- ---------
Income before income taxes ........................... 18,404 20,348
Provision for income taxes ........................... 6,455 7,402
--------- ---------
Net income ........................................... $ 11,949 $ 12,946
========= =========
Earnings per share
Basic ............................................. $ 0.51 $ 0.55
Diluted ........................................... $ 0.49 $ 0.54
Average common shares outstanding
Basic ............................................. 23,596 23,567
Diluted ........................................... 24,448 24,121
See notes to consolidated financial statements.
2
Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended April 30, 2007
(unaudited)
(in thousands, except descriptive shares)
Accum.
Other
Compre- Additional
Common Stock hensive Paid-in Retained Treasury
Shares Amount Income Capital Earnings Stock Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance January 31, 2007 ...... 23,810 $ 238 $ 6,305 $ 93,365 $ 196,417 $ (3,797) $ 292,528
Cumulative effect of changes in
accounting principles ........ (6,305) 5,631 (674)
Exercise of options to acquire
shares of common stock,
incl. tax benefit ............ 38 468 468
Issuance of shares of common
stock under Employee
Stock Purchase Plan .......... 3 64 64
Stock-based compensation ...... 518 518
Purchase of 178,000 shares
of treasury stock ............ (4,554) (4,554)
Net income .................... 12,946 12,946
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance April 30, 2007 ........ 23,851 $ 238 $ -- $ 94,415 $ 214,994 $ (8,351) $ 301,296
========== ========== ========== ========== ========== ========== ==========
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
Three Months Ended
April 30,
----------------------
2006 2007
--------- ---------
Cash flows from operating activities
Net income .................................................................. $ 11,949 $ 12,946
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation .............................................................. 3,006 3,217
Amortization .............................................................. (97) (161)
Provision for bad debts ................................................... 43 560
Stock-based compensation .................................................. 393 518
Discounts on promotional credit ........................................... 217 631
Gains recognized on sales of receivables .................................. (5,131) (5,377)
Loss on mark-to-market of interests in securitized assets ................. -- 115
Provision for deferred income taxes ....................................... 1,369 869
Gains from sales of property and equipment ................................ (33) (831)
Changes in operating assets and liabilities:
Accounts receivable ....................................................... 2,563 (7,775)
Inventory ................................................................. (6,541) 5,843
Prepaid expenses and other assets ......................................... (506) (2,121)
Accounts payable .......................................................... (4,036) (18,462)
Accrued expenses .......................................................... (8,520) (1,417)
Income taxes payable ...................................................... (3,325) 4,226
Deferred revenue and allowances ........................................... 265 1,607
--------- ---------
Net cash used in operating activities ........................................ (8,384) (5,612)
--------- ---------
Cash flows from investing activities
Purchase of property and equipment .......................................... (7,023) (2,748)
Proceeds from sales of property ............................................. 48 8,727
--------- ---------
Net cash provided by (used in) investing activities .......................... (6,975) 5,979
--------- ---------
Cash flows from financing activities
Proceeds from stock issued under employee benefit plans ..................... 1,132 530
Purchase of treasury stock .................................................. -- (4,554)
Excess tax benefits from stock-based compensation ........................... 133 2
Borrowings under lines of credit ............................................ 3,200 --
Payments on lines of credit ................................................. (3,200) --
Increase in debt issuance costs ............................................. (22) --
Payment of promissory notes ................................................. (136) (35)
--------- ---------
Net cash provided by (used in) financing activities .......................... 1,107 (4,057)
--------- ---------
Net change in cash ........................................................... (14,252) (3,690)
Cash and cash equivalents
Beginning of the year ....................................................... 45,176 56,570
--------- ---------
End of period ............................................................... $ 30,924 $ 52,880
========= =========
See notes to consolidated financial statements.
4
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
April 30, 2007
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three month period
ended April 30, 2007 are not necessarily indicative of the results that may be
expected for the year ending January 31, 2008. The financial statements should
be read in conjunction with the Company's (as defined below) audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K filed on March 29, 2007.
The Company's balance sheet at January 31, 2007 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial presentation. Please see the
Company's Form 10-K for the fiscal year ended January 31, 2007 for a complete
presentation of the audited financial statements at that date, together with all
required footnotes, and for a complete presentation and explanation of the
components and presentations of the financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and its subsidiaries, limited liability companies
and limited partnerships, all of which are wholly-owned (the Company). All
material intercompany transactions and balances have been eliminated in
consolidation.
The Company enters into securitization transactions to sell its retail
installment and revolving customer receivables and retains servicing
responsibilities and subordinated interests. These securitization transactions
are accounted for as sales in accordance with Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, as amended by SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, because the Company has relinquished
control of the receivables. Additionally, the Company has transferred the
receivables to a qualifying special purpose entity (QSPE). Accordingly, neither
the transferred receivables nor the accounts of the QSPE are included in the
consolidated financial statements of the Company. The Company's retained
interest in the transferred receivables is valued under the requirements of SFAS
No. 157, Fair Value Measurements.
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.
5
Earnings Per Share. In accordance with SFAS No. 128, Earnings per Share, the
Company calculates basic earnings per share by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
include the dilutive effects of any stock options granted, as calculated under
the treasury-stock method. The following table sets forth the shares outstanding
for the earnings per share calculations:
Three Months Ended
April 30,
-------------------------
2006 2007
----------- -----------
Common stock outstanding, net of treasury stock, beginning of period ........ 23,571,564 23,641,522
Weighted average common stock issued in stock option exercises .............. 24,095 8,261
Weighted average common stock issued to employee stock purchase plan ........ 722 1,144
Less: Weighted average treasury shares purchased ............................ -- (84,401)
----------- -----------
Shares used in computing basic earnings per share ........................... 23,596,381 23,566,526
Dilutive effect of stock options, net of assumed repurchase of treasury stock 851,192 554,153
----------- -----------
Shares used in computing diluted earnings per share ......................... 24,447,573 24,120,679
=========== ===========
Application of APB 21 to Promotional Credit Programs that Exceed One Year in
Duration. The Company offers promotional credit payment plans, on certain
products, that extend beyond one year. In accordance with APB 21, Interest on
Receivables and Payables, such sales are discounted to their fair value
resulting in a reduction in sales and receivables, and the amortization of the
discount amount over the term of the deferred interest payment plan. The
difference between the gross sale and the discounted amount is reflected as a
reduction of Product sales in the consolidated statements of operations and the
amount of the discount being amortized in the current period is recorded in
Finance charges and other. For the three months ended April 30, 2006 and 2007,
Product sales were reduced by $1.0 million and $2.0 million, respectively, and
Finance charges and other was increased by $0.7 million and $1.3 million,
respectively, to effect the adjustment to fair value and to reflect the
appropriate amortization of the discount.
Texas Tax Law Changes. On May 18, 2006, the Governor of Texas signed a tax
bill that modified the existing franchise tax, with the most significant change
being the replacement of the existing base with a tax based on margin. Taxable
margin is generally defined as total federal tax revenues minus the greater of
(a) cost of goods sold or (b) compensation. The tax rate to be paid by retailers
and wholesalers is 0.5% on taxable margin. This will result in an increase in
taxes paid by the Company, as franchise taxes paid have totaled less than
$50,000 per year for the last several years.
The tax changes impacted earnings beginning in the quarter ended July 31,
2006. For the quarter ended April 30, 2007, the Company accrued, net of federal
tax benefit, approximately $218,000 in additional tax liability as a result of
the new margin tax.
Sale and Leaseback Transactions. During the three months ended April 30,
2007, the Company completed transactions involving certain real estate assets
that qualify for sales-leaseback treatment. As a result, a portion of the gains
resulting from the transactions are being deferred and amortized as a reduction
of rent expense on a straight-line basis over the minimum lease term. The
deferred gains of $1.3 million recorded during the three months ended April 30,
2007, are included in deferred revenues and allowances.
Sales Taxes. The Company records and reports all sales taxes collected on a
net basis in the financial statements.
Reclassifications. Certain reclassifications have been made in the prior
year's financial statements to conform to the current year's presentation.
6
2. Adoption of New Accounting Pronouncements
On February 1, 2007, the Company was required to adopt SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments. Among other things, this
statement establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation. Additionally, the Company had the option to choose to early adopt
the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. Essentially, the Company had to decide between
bifurcation of the embedded derivative and the fair value option in determining
how it would account for its Interests in securitized assets. The Company
elected to early adopt SFAS No. 159 because it believes it provides a more
easily understood presentation for financial statement users. Historically, the
Company had valued and reported its interests in securitized assets at fair
value, though most changes in the fair value were recorded in Other
comprehensive income. The fair value option simplifies the treatment of changes
in the fair value of the asset, by reflecting all changes in the fair value of
its Interests in securitized assets in current earnings, in Finance charges and
other, beginning February 1, 2007. For the three months ended April 30, 2007,
Finance charges and other included gains of $0.1 million, reflecting the growth
of the portfolio and mark-to-market adjustments for other changes in the fair
value (see discussion of SFAS No. 157 below). SFAS Nos. 155 and 159 do not allow
for retrospective application of these changes in accounting principle, as such,
no adjustments have been made to the amounts disclosed in the financial
statements for periods ending prior to February 1, 2007. However, the balance in
Other comprehensive income, as of January 31, 2007, of $6.3 million, which
represented unrecognized gains on the fair value of the Interests in securitized
assets, was included in a cumulative-effect adjustment that was recorded in
Retained earnings, effective February 1, 2007.
Because of its adoption of SFAS No. 159, effective February 1, 2007, the
Company was required to adopt the provisions of SFAS No. 157, Fair Value
Measurements. This statement establishes a framework for measuring fair value
and defines fair value as "the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date." The Company estimates the fair value of
its Interests in securitized assets using a discounted cash flow model with most
of the inputs used being unobservable inputs. The primary unobservable inputs,
which are derived from the Company's historical experience, include the
portfolio yield, credit loss rate, discount rate, payment rate and delinquency
rate and reflect the Company's own assumptions about the assumptions market
participants would use in determining fair value. In determining the cost of
borrowings, the Company uses current actual borrowing rates, and adjusts them,
as appropriate, using interest rate futures data from market sources to project
interest rates over time. Changes in the assumptions over time, including
varying credit portfolio performance, market interest rate changes or a shift in
the mix of funding sources, could result in significant volatility in the fair
value of the Interest in securitized assets, and thus the earnings of the
Company. The following is a reconciliation of the beginning and ending balances
of the Interests in securitized assets for the three months ended April 30, 2007
(in thousands):
Balance of Interests in securitized assets at January 31, 2007 .. $ 136,848
Amounts recorded in Finance charges and other:
Fair value increase associated with portfolio growth ........ 226
Fair value increase due to higher expected portfolio yield .. 269
Fair value increase due to lower discount rate .............. 335
Fair value decrease due to higher expected borrowing cost ... (633)
Other changes ............................................... (96)
---------
Total Gains and Losses included in Finance charges and other 101
Increase in principal balance of subordinated security due to
transfers of receivables ...................................... 13,603
---------
Balance of Interests in securitized assets at April 30, 2007 .... $ 150,552
=========
7
Effective February 1, 2007, the Company was required to adopt the provisions
SFAS No. 156, Accounting for Servicing of Financial Assets, an Amendment of FASB
Statement No. 140. This statement requires companies to measure servicing assets
or servicing liabilities at fair value at each reporting date and report changes
in fair value in earnings in the period the changes occur, or amortize servicing
assets or servicing liabilities in proportion to and over the estimated net
servicing income or loss and assess servicing assets or servicing liabilities
for impairment or increased obligation based on the fair value at each reporting
date. The Company receives a servicing fee each month equal to 0.25% of the
average outstanding sold portfolio balance, plus late fees and other customer
fees collected. Servicing fees collected during the three months ended April 30,
2006 and 2007, totaled $5.0 million and $5.8 million, respectively, and are
reflected in Finance charges and other. In connection with the adoption of SFAS
No. 156 the Company elected to measure its servicing asset or liability at fair
value, and report changes in the fair value in earnings in the period of change.
As such, a $0.7 million cumulative-effect adjustment was recorded to Retained
earnings at February 1, 2007, net of related tax effects, to recognize a $1.1
million servicing liability. The Company uses a discounted cash flow model to
estimate its servicing liability using the portfolio performance and discount
rate assumptions discussed above, and an estimate of the servicing fee a market
participant would require to service the portfolio. In developing its estimate,
based on the provisions of SFAS No. 157, the Company reviewed available
information regarding the servicing fees received by other companies and
estimated an expected risk premium a market participant would add to the current
fee structure to receive adequate compensation. During the three months ended
April 30, 2007, the Company recorded $37,000 of expense related to the increase
in the estimated fair value of the servicing liability, in Finance charges and
other. The increase in the liability was largely driven by the increase in the
balance of the sold portfolio.
Effective February 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
109 (FIN 48). This statement clarifies the criteria that an individual tax
position must satisfy for some or all of the benefits of that position to be
recognized in a company's financial statements. FIN 48 prescribes a recognition
threshold of more-likely-than-not, and a measurement attribute for all tax
positions taken or expected to be taken on a tax return, in order to be
recognized in the financial statements. No cumulative adjustment was required to
effect the adoption of FIN 48 and the Company currently has no liability accrued
or potential penalties or interest recorded for uncertain tax positions. To the
extent penalties and interest are incurred, the Company records these charges as
a component of its Provision for income taxes. The Company is subject to U.S.
federal income tax as well as income tax in multiple state jurisdictions. Tax
returns for the fiscal years subsequent to January 31, 2003, remain open for
examination by the Company's major taxing jurisdictions.
8
3. Supplemental Disclosure of Revenue and Comprehensive Income
The following is a summary of the classification of the amounts included as
Finance charges and other for the three months ended April 30, 2006 and 2007 (in
thousands):
Three Months Ended
April 30,
----------------------
2006 2007
------- -------
Securitization income ........................ $15,237 $17,960
Income from receivables not sold ............. 335 265
Insurance commissions ........................ 4,266 5,261
Other ........................................ 645 459
------- -------
Finance charges and other .................... $20,483 $23,945
======= =======
The components of total comprehensive income for the three months ended
April 30, 2006 and 2007 are presented in the table below (in thousands):
Three Months Ended
April 30,
---------------------
2006 2007
-------- --------
Net income ........................................ $ 11,949 $ 12,946
Adjustment of fair value of securitized assets .... 773 --
Taxes on adjustment of fair value ................. (264) --
-------- --------
Total comprehensive income ........................ $ 12,458 $ 12,946
======== ========
4. Supplemental Disclosure Regarding Managed Receivables
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Total Principal Amount of Principal Amount 60 Days
Receivables or More Past Due (1)
----------- ----------- ----------- -----------
January 31, April 30, January 31, April 30,
2007 2007 2007 2007
----------- ----------- ----------- -----------
Primary portfolio:
Installment ................. $ 382,482 $ 387,609 $ 24,853 $ 22,568
Revolving ................... 53,125 52,809 1,171 1,216
----------- ----------- ----------- -----------
Subtotal ............................... 435,607 440,418 26,024 23,784
Secondary portfolio:
Installment ................. 133,944 143,744 11,638 11,401
----------- ----------- ----------- -----------
Total receivables managed .............. 569,551 584,162 37,662 35,185
Less receivables sold .................. 559,619 574,562 35,677 33,315
----------- ----------- ----------- -----------
Receivables not sold ................... 9,932 9,600 $ 1,985 $ 1,870
=========== ===========
Non-customer receivables ............... 21,516 19,992
----------- -----------
Total accounts receivable, net $ 31,448 $ 29,592
=========== ===========
(1) Amounts are based on end of period balances. The principal amount 60
days or more past due relative to total receivables managed is not
necessarily indicative of relative balances expected at other times during
the year due to seasonal fluctuations in delinquency.
9
Average Balances Credit Charge-offs (1)
------------------ --------------------
Three Months Ended Three Months Ended
April 30, April 30, (1)
------------------ --------------------
2006 2007 2006 2007
-------- -------- -------- ---------
Primary portfolio:
Installment ..... $373,072 $383,652
Revolving ....... 42,553 52,986
-------- --------
Subtotal ................... 415,625 436,638 $ 3,610 $ 2,924
Secondary portfolio:
Installment ..... 104,610 139,310 1,029 960
-------- -------- -------- ---------
Total receivables managed .. 520,235 575,948 4,639 3,884
Less receivables sold ...... 509,809 566,222 4,486 3,687
-------- -------- -------- ---------
Receivables not sold ....... $ 10,426 $ 9,726 $ 153 $ 197
======== ======== ======== =========
(1) Amounts represent total credit charge-offs, net of recoveries, on total
receivables. The increased level of credit losses for three months ended
April 30, 2006 is primarily a result of the bankruptcy law change in October
2005 and the impact on our credit operations of Hurricane Rita that hit the
Gulf Coast during September 2005.
5. Debt and Letters of Credit
At April 30, 2007, the Company had $49.1 million of its $50 million
revolving credit facility available for borrowings. The amounts utilized under
the revolving credit facility reflected $0.9 million related to letters of
credit issued.
There were no amounts outstanding under a short-term revolving bank
agreement that provides up to $8.0 million of availability on an unsecured
basis. This unsecured facility matures in June 2007 and is in the process of
being renewed.
The Company utilizes unsecured letters of credit to secure a portion of the
QSPE's asset-backed securitization program, deductibles under the Company's
property and casualty insurance programs and international product purchases. At
April 30, 2007, the Company had outstanding unsecured letters of credit of $21.9
million. These letters of credit were issued under the three following
facilities:
o The Company has a $5.0 million sub limit provided under its
revolving line of credit for stand-by and import letters of credit.
At April 30, 2007, $0.9 million of letters of credit were
outstanding and callable at the option of the Company's property and
casualty insurance carriers if the Company does not honor its
requirement to fund deductible amounts as billed under its insurance
programs.
o The Company has arranged for a $20.0 million stand-by letter of
credit to provide assurance to the trustee of the asset-backed
securitization program that funds collected by the Company, as the
servicer, would be remitted as required under the base indenture and
other related documents. The letter of credit has a term of one year
and expires in August 2007.
o The Company obtained a $10.0 million commitment for trade letters of
credit to secure product purchases under an international
arrangement. At April 30, 2007, there was $1.0 million outstanding
under this commitment. The letter of credit commitment expires in
May 2007 and is in the process of being renewed. No letter of credit
issued under this commitment can have an expiration date more than
180 days after the commitment expiration date.
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 total $35.0 million as of April 30, 2007.
10
6. Contingencies
Legal Proceedings. The Company is involved in routine litigation incidental
to its business from time to time. Currently, the Company does not expect the
outcome of any of this routine litigation to have a material affect on its
financial condition, results of operations or cash flows. However, the results
of these proceedings cannot be predicted with certainty, and changes in facts
and circumstances could impact the Company's estimate of reserves for
litigation.
Service Maintenance Agreement Obligations. The Company sells service
maintenance agreements that extend the period of covered warranty service on the
products the Company sells. For certain of the service maintenance agreements
sold, the Company is the obligor for payment of qualifying claims. The Company
is responsible for administering the program, including setting the pricing of
the agreements sold and paying the claims. The typical term for these agreements
is between 12 and 36 months. The pricing is set based on historical claims
experience and expectations about future claims. While the Company is unable to
estimate maximum potential claim exposure, it has a history of overall
profitability upon the ultimate resolution of agreements sold. The revenues
related to the agreements sold are deferred at the time of sale and recorded in
revenues in the statement of operations over the life of the agreements. The
revenues deferred related to these agreements totaled $3.6 million and $3.9
million, respectively, as of January 31, 2007 and April 30, 2007, and are
included on the face of the balance sheet in Deferred revenues and allowances.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This report contains forward-looking statements. We sometimes use words such
as "believe," "may," "will," "estimate," "continue," "anticipate," "intend,"
"expect," "project" and similar expressions, as they relate to us, our
management and our industry, to identify forward-looking statements.
Forward-looking statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends and other future
events. We have based our forward-looking statements largely on our current
expectations and projections about future events and financial trends affecting
our business. Actual results may differ materially. Some of the risks,
uncertainties and assumptions about us that may cause actual results to differ
from these forward-looking statements include, but are not limited to:
o the success of our growth strategy and plans regarding opening new
stores and entering adjacent and new markets, including our plans to
continue expanding into the Dallas/Fort Worth Metroplex, and South
Texas;
o our intention to update or expand existing stores;
o our ability to obtain capital for required capital expenditures and
costs related to the opening of new stores or to update or expand
existing stores;
o our cash flows from operations, borrowings from our revolving
line of credit and proceeds from securitizations to fund our
operations, debt repayment and expansion;
o the ability of the QSPE to obtain additional funding for the purpose
of purchasing our receivables;
o the effect of rising interest rates that could increase our cost of
borrowing or reduce securitization income;
o inability to make customer financing programs available that allow
consumers to purchase products at levels that can support our
growth;
o the potential for deterioration in the delinquency status of the
sold or owned credit portfolios or higher than historical net
charge-offs in the portfolios could adversely impact earnings;
o the long-term effect of the change in bankruptcy laws could effect
net charge-offs in the credit portfolio which could adversely impact
earnings;
o technological and market developments, growth trends and projected
sales in the home appliance and consumer electronics industry,
including, with respect to digital products, DVD players, HDTV,
digital radio, home networking devices and other new products, and
our ability to capitalize on such growth;
o the potential for price erosion or lower unit sales that could
result in declines in revenues;
o higher oil and gas prices could adversely affect our customers'
shopping decisions and patterns, as well as the cost of our delivery
and service operations and our cost of products, if vendors pass on
their additional fuel costs through increased pricing for products;
o the ability to attract and retain qualified personnel;
o both short-term and long-term impact of adverse weather conditions
(e.g. hurricanes) that could result in volatility in our revenues
and increased expenses and casualty losses;
12
o changes in laws and regulations and/or interest, premium and
commission rates allowed by regulators on our credit, credit
insurance and service maintenance agreements as allowed by those
laws and regulations;
o our relationships with key suppliers;
o the adequacy of our distribution and information systems and
management experience to support our expansion plans;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o the potential for market share erosion that could result in reduced
revenues;
o the accuracy of our expectations regarding the similarity or
dissimilarity of our existing markets as compared to new markets we
enter; and
o the outcome of litigation affecting our business.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under "Risk Factors" in our Form
10-K filed with the Securities Exchange Commission on March 29, 2007. In light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this report might not happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
All forward-looking statements attributable to us, or to persons acting on
our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
We intend for the following discussion and analysis to provide you with a
better understanding of our financial condition and performance in the indicated
periods, including an analysis of those key factors that contributed to our
financial condition and performance and that are, or are expected to be, the key
"drivers" of our business.
On February 1, 2007, we were required to adopt Statement of Financial
Accounting Standard (SFAS) No. 155, Accounting for Certain Hybrid Financial
Instruments. Among other things, this statement established a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. Additionally, we had the
option to choose to early adopt the provisions of SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. We elected to early adopt
SFAS No. 159 because we believe it provides a more easily understood
presentation for financial statement users. This election resulted in us
including all changes in the fair value of our Interests in securitized assets
in current earnings, in Finance charges and other, beginning February 1, 2007.
Previously, most changes in the fair value of our Interests in securitized
assets were recorded in Other comprehensive income, which was included in
Stockholders' equity. SFAS Nos. 155 and 159 do not allow for retrospective
application of these changes in accounting principle, as such, no adjustments
have been made to the amounts disclosed in the financial statements for periods
ending prior to February 1, 2007. Additionally, effective February 1, 2007, we
adopted SFAS No. 157, Fair Value Measurements, which established a framework for
measuring fair value, based on the assumptions we believe market participants
would use to value assets or liabilities to be exchanged. Changes in the
assumptions over time, including varying credit portfolio performance, market
interest rate changes or a shift in the mix of funding sources, could result in
significant volatility in the fair value of the Interest in securitized assets,
and thus our earnings. We were also required to adopt the provisions of SFAS No.
156, Accounting for Servicing of Financial Assets, effective on February 1,
2007. As a result of the adoption of this pronouncement, along with the
requirements of SFAS No. 157, we recorded a $1.1 million servicing liability on
the balance sheet in Deferred revenues and allowances. Any changes in the fair
value of the liability will be recorded in the period of change in the statement
of operations in Finance charges and other. As with the other changes discussed
above, no adjustments have been made to the financial statements for periods
ending prior to February 1, 2007. See the notes to the financial statements for
discussion of the impacts on the financial statements for the three months ended
April 30, 2007.
13
We are a specialty retailer that sells major home appliances, including
refrigerators, freezers, washers, dryers, dishwashers and ranges, a variety of
consumer electronics, including micro-display projection, plasma and LCD
flat-panel televisions, camcorders, digital cameras, DVD players and home
theater products, lawn and garden products, mattresses and furniture. We also
sell home office equipment, including computers and computer accessories and
continue to introduce additional product categories for the consumer and home to
help increase same store sales and to respond to our customers' product needs.
We require our sales associates to be knowledgeable of all of our products, but
to specialize in certain specific product categories.
We currently operate 62 retail locations in Texas and Louisiana, and have
several other stores under development.
Unlike many of our competitors, we provide flexible in-house credit options
for our customers. In the last three years, we financed, on average,
approximately 58% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and to issue asset-backed
and variable funding notes to third parties to finance its acquisition of the
receivables. We transfer receivables, consisting of retail installment and
revolving account receivables extended to our customers, to the issuer in
exchange for cash and subordinated securities.
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements, under
which we are the primary obligor, to protect the customers after the original
manufacturer's warranty or service maintenance agreement has expired.
Our business is moderately seasonal, with a slightly greater share of our
revenues, pretax and net income realized during the quarter ending January 31,
due primarily to the holiday selling season.
Executive Overview
This narrative is intended to provide an executive level overview of our
operations for the three months ended April 30, 2007. A detailed explanation of
the changes in our operations for these periods as compared to the prior year is
included under Results of Operations. As explained in that section, our pretax
income for the quarter ended April 30, 2007 increased approximately 10.6%,
primarily as a result of higher revenues and gross margin dollars. Some of the
more specific items impacting our operating and pretax income were:
o Same store sales for the quarter declined by 0.3% over the same period for
the prior year as compared to the 16.1% same store sales growth experienced
in the prior year period, largely as a result of Hurricanes Rita and
Katrina. The decline was mitigated by our ability to grow same store sales
in the non-storm impacted markets sufficiently to absorb the decline in the
impacted markets. The same store sales increase in the markets not impacted
by Hurricanes Rita and Katrina, was 2.9% for the quarter ended April 30,
2007. These other markets accounted for 82.3% of same store Product sales
and Service maintenance agreement commissions during the three months ended
April 30, 2007.
14
o Our continued expansion in the Dallas/Fort Worth market and the addition of
stores in our existing Houston and San Antonio markets had a positive
impact on our revenues. We achieved approximately $11.0 million of
increases in product sales and service maintenance agreement commissions
for the quarter ended April 30, 2007, from the new stores that were opened
in these markets after February 1, 2006. Our plans provide for the opening
of additional stores in and around existing markets during fiscal 2008 as
we focus on leveraging our existing infrastructure.
o Deferred interest and "same as cash" plans continue to be an important part
of our sales promotion plans and are utilized to provide a wide variety of
financing to enable us to appeal to a broader customer base. For the three
months ended April 30, 2007, $47.7 million, or 28.6%, of our product sales
were financed by deferred interest and "same as cash" plans. This volume of
promotional credit as a percent of product sales is consistent with our use
of this type of credit product before the hurricanes in late 2005. For the
comparable period in the prior year gross product sales financed by
deferred interest and "same as cash" sales were $35.4 million, or 22.3%.
The credit portfolio grew at an annualized rate of 10%, benefited by 31%
annualized growth in promotional credit balances. Promotional credit (same
as cash and deferred interest programs) is reserved for our highest credit
quality customers, thereby reducing the overall risk in the portfolio, and
is used primarily to finance sales of our highest margin products. We
expect to continue to offer extended term promotional credit in the future.
o Our gross margin for the quarter increased from 33.8% to 34.8% for the
three months ended April 30, 2007 when compared to the same period in the
prior year, primarily as a result of a change in our revenue mix as higher
margin Service maintenance agreement commissions and Finance charges and
other grew faster than Product sales. Our product sales gross margin was
consistent with the prior year.
o Finance charges and other increased 16.9% for the quarter ended April 30,
2007 as:
o securitization income increased by 17.9% for the quarter ended April
30, 2007. The quarterly improvement was driven by a 17.8% decrease
in net credit losses from the prior year period, which was impacted
primarily by the bankruptcy law change in October 2005 and the
disruption to our credit operations caused by Hurricane Rita.
o Insurance commissions grew 23.3%, primarily as a result of lower
credit charge-offs, which resulted in reduced insurance
cancellations.
o During the three months ended April 30, 2007, Selling, general and
administrative (SG&A) expense increased as a percent of revenues to 25.1%
from 24.3% when compared to the prior year, primarily from increased net
advertising expense and occupancy cost, including property taxes, as a
percent of revenues.
o Operating margin decreased from 9.5% to 9.4% for the three months ended
April 30, 2007 when compared to the same period in the prior year due
primarily to increased SG&A expense.
Operational Changes and Resulting Outlook
We have several locations in and around Texas that we believe are promising
and, along with new stores in existing markets, are in various stages of
development for opening in fiscal year 2008.
On May 18, 2006, the Governor of Texas signed a tax bill that modifies the
existing franchise tax, with the most significant change being the replacement
of the existing base with a tax based on margin. Taxable margin is generally
defined as total federal tax revenues minus the greater of (a) cost of goods
sold or (b) compensation. The tax rate to be paid by retailers and wholesalers
is 0.5% on taxable margin. This will result in an increase in taxes paid by us,
as franchise taxes paid have totaled less than $50,000 per year for the last
several years. The tax changes impacted earnings beginning in the quarter ended
July 31, 2006. For the quarter ended April 30, 2007, we accrued, net of federal
tax benefit, approximately $218,000 in additional tax liability as a result of
the new margin tax. We expect our effective tax rate on Income before income
taxes to be between 36% and 37%, compared to an average of 35.4% over the past
three fiscal years.
15
The consumer electronics industry depends on new products to drive same
store sales increases. Typically, these new products, such as high-definition
televisions, DVD players, digital cameras and MP3 players are introduced at
relatively high price points that are then gradually reduced as the product
becomes mainstream. To sustain positive same store sales growth, unit sales must
increase at a rate greater than the decline in product prices. The affordability
of the product helps drive the unit sales growth. However, as a result of
relatively short product life cycles in the consumer electronics industry, which
limit the amount of time available for sales volume to increase, combined with
rapid price erosion in the industry, retailers are challenged to maintain
overall gross margin levels and positive same store sales. This has historically
been our experience, and we continue to adjust our marketing strategies to
address this challenge through the introduction of new product categories and
new products within our existing categories.
Application of Critical Accounting Policies
In applying the accounting policies that we use to prepare our consolidated
financial statements, we necessarily make accounting estimates that affect our
reported amounts of assets, liabilities, revenues and expenses. Some of these
accounting estimates require us to make assumptions about matters that are
highly uncertain at the time we make the accounting estimates. We base these
assumptions and the resulting estimates on authoritative pronouncements,
historical information and other factors that we believe to be reasonable under
the circumstances, and we evaluate these assumptions and estimates on an ongoing
basis. We could reasonably use different accounting estimates, and changes in
our accounting estimates could occur from period to period, with the result in
each case being a material change in the financial statement presentation of our
financial condition or results of operations. We refer to accounting estimates
of this type as "critical accounting estimates." We believe that the critical
accounting estimates discussed below are among those most important to an
understanding of our consolidated financial statements as of April 30, 2007.
Transfers of Financial Assets. We transfer customer receivables to a QSPE
that issues asset-backed securities to third party lenders using these accounts
as collateral, and we continue to service these accounts after the transfer. We
recognize the sale of these accounts when we relinquish control of the
transferred financial asset in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
as amended by SFAS No. 155, Accounting for Certain Hybrid Financial Instruments.
As we transfer the accounts we record an asset representing our interest in the
cash flows of the QSPE, which is the difference between the interest earned on
customer accounts and the cost associated with financing and servicing the
transferred accounts, including a provision for bad debts associated with the
transferred accounts, plus our retained interest in the transferred receivables,
discounted using a market rate of interest. We recognize the income from our
interest in these transferred accounts as gains on the transfer of the asset,
interest income and servicing fees. This income is recorded as Finance charges
and other in our consolidated statements of operations. Additionally, as a
result of our adoption of SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, effective February 1, 2007, we record all
changes in the fair value of our Interest in securitized assets in current
earnings, in Finance charges and other. Previously, most changes in the fair
value of our Interests in securitized assets were recorded in Other
comprehensive income. Effective February 1, 2007, we adopted SFAS No. 157, Fair
Value Measurements, which established a framework for measuring fair value,
based on the assumptions a company believes market participants would use to
value assets or liabilities to be exchanged. The gain or loss recognized on the
sales of the receivables is based on our best estimates of key assumptions,
including forecasted credit losses, payment rates, forward yield curves, costs
of servicing the accounts and appropriate discount rates, based on our
expectations of the assumptions that a market participant would use. We were
required to adopt the provisions of SFAS No. 156, Accounting for Servicing of
Financial Assets, effective on February 1, 2007. As a result of the adoption of
this pronouncement we recorded a servicing liability on the balance sheet in
Deferred revenues and allowances and any changes in the fair value of the
liability are recorded in the period of change in the statement of operations in
Finance charges and other. We estimate the fair value of our servicing liability
using the portfolio performance and discount rate assumptions discussed above,
and an estimate of the servicing fee a market participant would require to
service the portfolio. The use of different estimates or assumptions in the
valuation of our Interest in securitized assets or servicing liability could
produce different financial results. Additionally, changes in the assumptions
over time, including varying credit portfolio performance, market interest rate
changes or a shift in the mix of funding sources, could result in significant
volatility in the fair value of the Interest in securitized assets, and thus our
earnings. For example, if we had assumed a 10.0% reduction in net interest
spread (which might be caused by rising interest rates or reductions in rates
charged on the accounts transferred), our interest in securitized assets and
Finance charges and other would have been reduced by $6.0 million as of April
30, 2007. If the assumption used for estimating credit losses was increased by
0.5%, the impact to Finance charges and other would have been a reduction in
revenues and pretax income of $2.3 million.
16
Deferred Taxes. We have net deferred tax liabilities of approximately $0.6
million as of April 30, 2007. If we had assumed that the future tax rate at
which these deferred items would reverse was 50 basis points higher than
currently anticipated, we would have increased the net deferred tax liability
and decreased net income by approximately $9,000.
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the product is delivered to the customer. Such revenues
are recognized net of any adjustments for sales incentive offers such as
discounts, coupons, rebates, or other free products or services and discounts of
promotional credit sales that will extend beyond one year. We sell service
maintenance agreements and credit insurance contracts on behalf of unrelated
third parties. For contracts where the third parties are the obligors on the
contract, commissions are recognized in revenues at the time of sale, and in the
case of retrospective commissions, at the time that they are earned. Where we
sell service maintenance renewal agreements in which we are deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
service maintenance agreements are renewal contracts that provide our customers
protection against product repair costs arising after the expiration of the
manufacturer's warranty and the third party obligor contracts. These agreements
typically range from 12 months to 36 months. These agreements are separate units
of accounting under Emerging Issues Task Force No. 00-21, Revenue Arrangements
with Multiple Deliverables. The amount of service maintenance agreement revenue
deferred at April 30, 2007 and January 31, 2007 was $3.9 million and $3.6
million, respectively, and is included in Deferred revenues and allowances in
the accompanying balance sheets.
Vendor Allowances. We receive funds from vendors for price protection,
product rebates, marketing and training and promotion programs which are
recorded on the accrual basis as a reduction to the related product cost or
advertising expense according to the nature of the program. We accrue rebates
based on the satisfaction of terms of the program and sales of qualifying
products even though funds may not be received until the end of a quarter or
year. If the programs are related to product purchases, the allowances, credits
or payments are recorded as a reduction of product cost; if the programs are
related to promotion or marketing of the product, the allowances, credits, or
payments are recorded as a reduction of advertising expense in the period in
which the expense is incurred.
Accounting for Share-Based Compensation. We adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, effective February 1, 2006,
using the modified retrospective application transition. This statement
establishes standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services, focusing primarily on
accounting for transactions in which an entity obtains an employee's services.
The statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, based on the grant-date
fair value of the award, and record that cost over the period during which the
employee is required to provide service in exchange for the award The fair value
assigned to awards of share-based compensation are based on assumptions about
the risk-free interest rate, average expected life of the award and expected
stock price volatility over the life of the award. The use of different
estimates or assumptions could produce different financial results.
Accounting for Leases. The accounting for leases is governed primarily by
SFAS No. 13, Accounting for Leases. As required by the standard, we analyze each
lease, at its inception, to determine whether it should be accounted for as an
operating lease or a capital lease. Additionally, monthly lease expense for each
operating lease is calculated as the average of all payments required under the
minimum lease term, including rent escalations. Generally, the minimum lease
term begins with the date we take possession of the property and ends on the
last day of the minimum lease term, and includes all rent holidays, but excludes
renewal terms that are at our option. Any tenant improvement allowances received
are deferred and amortized into income as a reduction of lease expense on a
straight line basis over the minimum lease term. The amortization of leasehold
improvements is computed on a straight line basis over the shorter of the
remaining lease term or the estimated useful life of the improvements. For
transactions that qualify for treatment as a sale-leaseback, any gain or loss is
deferred and amortized as rent expense on a straight-line basis over the minimum
lease term. Any deferred gain would be included in Deferred revenues and
allowances and any deferred loss would be included in Other assets on the
consolidated balance sheets.
17
Results of Operations
The following table sets forth certain statement of operations information
as a percentage of total revenues for the periods indicated:
Three Months Ended
April 30,
--------- ---------
2006 2007
--------- ---------
Revenues:
Product sales .............................................. 82.5 % 81.1 %
Service maintenance agreement commissions (net) ............ 4.1 4.5
Service revenues ........................................... 2.7 2.7
--------- ---------
Total net sales .......................................... 89.3 88.3
Finance charges and other .................................. 10.7 11.7
--------- ---------
Total revenues ...................................... 100.0 100.0
Costs and expenses:
Cost of goods sold, including warehousing and occupancy cost 65.4 64.3
Cost of parts sold, including warehousing and occupancy cost 0.8 0.9
Selling, general and administrative expense ................ 24.3 25.1
Provision for bad debts .................................... 0.0 0.3
--------- ---------
Total costs and expenses ............................ 90.5 90.6
--------- ---------
Operating income ........................................... 9.5 9.4
Interest income, net ....................................... (0.1) (0.1)
Other income, net .......................................... 0.0 (0.4)
--------- ---------
Income before income taxes ................................. 9.6 9.9
Provision for income taxes ................................. 3.4 3.6
--------- ---------
Net income ................................................. 6.2 % 6.3 %
========= =========
The table above identifies several changes in our operations for the current
quarter, including changes in revenue and expense categories expressed as a
percentage of revenues. These changes are discussed in the Executive Overview,
and in more detail in the discussion of operating results beginning in the
analysis below.
Same store sales growth is calculated by comparing the reported sales by
store for all stores that were open throughout a period to reported sales by
store for all stores that were open throughout the prior year period. Sales from
closed stores have been removed from each period. Sales from relocated stores
have been included in each period because each store was relocated within the
same general geographic market. Sales from expanded stores have been included in
each period.
The presentation of gross margins may not be comparable to other retailers
since we include the cost of our in-home delivery service as part of Selling,
general and administrative expense. Similarly, we include the cost related to
operating our purchasing function in Selling, general and administrative
expense. It is our understanding that other retailers may include such costs as
part of their cost of goods sold.
18
Three Months Ended April 30, 2007 Compared to Three Months Ended April 30, 2006
Revenues. Total revenues increased by $13.1 million, or 6.8%, from $192.2
million for the three months ended April 30, 2006 to $205.3 million for the
three months ended April 30, 2007. The increase was attributable to increases in
net sales of $9.6 million, or 5.6%, and $3.5 million, or 16.9%, in finance
charges and other revenue.
The $9.6 million increase in net sales was made up of the following:
o a $0.6 million same store sales decrease of 0.3%, as compared to the
16.1% same store sales growth experienced in the prior year period,
largely as a result of Hurricanes Rita and Katrina. The decline was
mitigated by our ability to grow same store sales in the non-storm
impacted markets sufficiently to absorb the decline in the impacted
markets. The same store sales increase in the markets not impacted by
Hurricanes Rita and Katrina was 2.9%. These other markets accounted for
82.3% of same store Product sales and Service maintenance agreement
commissions during the three months ended April 30, 2007.
o a $11.0 million increase generated by six retail locations that were not
open for three consecutive months in each period;
o a $1.0 million decrease resulted from an increase in discounts on
extended-term promotional credit sales (those with terms longer than 12
months); and
o a $0.2 million increase resulted from an increase in service revenues.
The components of the $9.6 million increase in net sales were a $8.1 million
increase in Product sales and a $1.5 million increase in service maintenance
agreement commissions and service revenues. The $8.1 million increase in product
sales resulted from the following:
o approximately $4.0 million increase attributable to increases in unit
sales, due to increased consumer electronics and furniture sales, and
o approximately $4.1 million increase attributable to increases in unit
price points. The price point impact was driven by a shift to
higher-priced flat-panel televisions and high-efficiency laundry items,
partially offset by a decline in the average price points on our
furniture, track and mattresses categories and the $1.0 million increase
in discounts on extended-term promotional credit sales.
The $1.5 million increase in service maintenance agreement sales and service
revenues was driven primarily by reduced service maintenance agreement
cancellations, as credit charge-offs decreased as compared to the prior year
period.
19
The following table presents the makeup of net sales by product
category in each quarter, including service maintenance agreement commissions
and service revenues, expressed both in dollar amounts and as a percent of total
net sales. Classification of sales has been adjusted from previous filings to
ensure comparability between the categories.
Three Months Ended April 30,
-----------------------------------------
2006 2007
------------------- ------------------- Percent
Category Amount Percent Amount Percent Increase
-------- -------- -------- -------- --------
Major home appliances ....... $ 61,649 35.9 % $57,707 31.8 % (6.4)% (1)
Consumer electronics ........ 53,636 31.2 58,823 32.4 9.7 (2)
Track ....................... 23,264 13.5 21,681 12.0 (6.8) (3)
Delivery .................... 2,872 1.7 3,063 1.7 6.7 (4)
Lawn and garden ............. 5,273 3.1 6,156 3.4 16.7 (5)
Mattresses .................. 5,095 3.0 4,404 2.4 (13.6) (6)
Furniture ................... 5,406 3.2 13,513 7.5 150.0 (7)
Other ....................... 1,314 0.8 1,292 0.7 (1.7)
-------- -------- -------- --------
Total product sales .... 158,509 92.4 166,639 91.9 5.1
Service maintenance agreement
commissions ............... 7,967 4.6 9,281 5.1 16.5 (8)
Service revenues ............ 5,229 3.0 5,445 3.0 4.1 (9)
-------- -------- -------- --------
Total net sales ........ $171,705 100.0 % $181,365 100.0 % 5.6 %
======== ======== ======== ========
- ----------------------------------
(1) This decrease is due to higher than normal demand for these products in
the prior year due to consumers replacing appliances after Hurricanes
Katrina and Rita.
(2) This increase is due to increased unit volume in the area of flat-panel
and micro-display televisions, which also have higher price points than
traditional tube and projection televisions.
(3) The decline in track sales (consisting largely of computers, computer
peripherals, portable electronics and small appliances) is due
primarily to reduced sales of portable electronics, including
camcorders and portable CRT televisions.
(4) This increase is consistent with the overall increase in product sales.
(5) A delayed selling season due to dry weather negatively impacted this
category in the prior year.
(6) This decrease is due to a change in the price points offered that
negatively impacted our sales efforts.
(7) This increase is due to the increased emphasis on the sales of
furniture, primarily sofas, recliners and entertainment centers, and
new products added to this category.
(8) This increase is due to the increase in product sales, increased sales
penetration as we introduced SMA coverage on some of our furniture
products and decreased SMA cancellations as credit charge-offs declined
as compared to the prior year period.
(9) This increase is driven by increased units in operation as we continue
to grow product sales and an increase in the cost of parts used to
repair higher-priced technology (flat-panel and micro-display
televisions, etc.).
Revenue from Finance charges and other increased by approximately $3.5
million, or 16.9%, from $20.5 million for the three months ended April 30, 2006
to $24.0 million for the three months ended April 30, 2007. It increased due
primarily to an increase in securitization income of $2.7 million, or 17.9% and
an increase in insurance commissions of $1.0 million, partially offset by a $0.2
million decrease in service maintenance agreement retrospective commissions. The
securitization income comparison was impacted by a 17.8% decrease in net credit
losses for the quarter ended April 30, 2007, due to the impact in the prior year
of Hurricane Rita on our credit operations and increased bankruptcy filings due
to the new bankruptcy laws that took effect in October 2005. Our net credit loss
rate of 2.7% for the three months ended April 30, 2007, marks a return to our
historical loss levels. Additionally, securitization income, for the three
months ended April 30, 2007, was positively impacted, in the amount of $0.1
million, as we recorded the increase in the fair value of our Interests in
securitized assets in current earnings, due to the mark-to-market adjustment now
required under SFAS No. 159. This increase in fair value was driven primarily by
the growth of the portfolio, higher expected yield on the portfolio and a
decrease in the discount rate, partially offset by higher expected funding costs
(see the notes to the financial statements for additional information).
Insurance commissions increased primarily due to increased sales and reduced
insurance cancellations as credit charge-offs declined from the prior year
period.
20
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $6.3 million, or 5.0%, from $125.7 million for the three
months ended April 30, 2006 to $132.0 million for the three months ended April
30, 2007. This increase was consistent with the 5.1% growth in net product sales
during the three months ended April 30, 2007. Cost of products sold was 79.2% of
net product sales in the quarter ended April 30, 2007 and 79.3% in the quarter
ended April 30, 2006.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $0.3 million, or 16.0%, for the three months ended
April 30, 2007 as compared to the three months ended April 30, 2006, due to a
24.5% increase in parts sales.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $4.9 million, or 10.5%, from $46.7 million
for the three months ended April 30, 2006 to $51.6 million for the three months
ended April 30, 2007. As a percentage of total revenues, it increased from 24.3%
to 25.1%. The increase in expense resulted primarily from higher net advertising
expense and occupancy cost, including property taxes, as a percent of revenues.
The occupancy cost increase is attributable primarily to the additions of new
stores.
Provision for Bad Debts. The provision for bad debts on non-credit portfolio
receivables and credit portfolio receivables retained by the Company and not
transferred to the QSPE increased by $0.5 million, during the three months ended
April 30, 2007, as compared to the three months ended April 30, 2006, primarily
as a result of provision adjustments due to increased credit losses.
Additionally, the provision for bad debts in the three months ended April 30,
2007, benefited from a $0.1 million reserve adjustment related to the special
reserves recorded as a result of the hurricanes in 2005. See the notes to the
financial statements for information regarding the performance of the credit
portfolio.
Interest Income, net. Net interest income improved by $56,000, from net
interest income of $184,000 for the three months ended April 30, 2006 to net
interest income of $240,000 for the three months ended April 30, 2007. The net
improvement in interest (income) expense was primarily attributable to increased
interest income from invested funds, driven largely by higher yields.
Other Income, net. Other income improved by $798,000, from $33,000 for the
three months ended April 30, 2006, to $831,000 for the three months ended April
30, 2007, primarily resulting from gains recognized on the sale of company
assets. Additionally, there were gains realized, but not recognized, on
transactions qualifying for sale-leaseback accounting that have been deferred
and will be amortized as a reduction of rent expense on a straight-line basis
over the minimum lease terms.
Provision for Income Taxes. The provision for income taxes increased by $0.9
million, or 13.8%, from $6.5 million for the three months ended April 30, 2006,
to $7.4 million for the three months ended April 30, 2007. The increase in the
Provision for income taxes is attributable to increased pretax income of 10.6%
and the impact of the new Texas margin tax. Our effective tax rate increased to
36.4% from 35.1% due to the impact of the Texas margin tax.
Liquidity and Capital Resources
Current Activities
Historically we have financed our operations through a combination of cash
flow generated from operations, and external borrowings, including primarily
bank debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables under our asset-backed securitization facilities.
As of April 30, 2007, we had approximately $44.9 million in excess cash, the
majority of which was generated through the operations of the Company. In
addition to the excess cash, we had $49.1 million under our revolving line of
credit, net of standby letters of credit issued, and $8.0 million under our
unsecured bank line of credit available to us for general corporate purposes,
$30.1 million under extended vendor terms for purchases of inventory and $142.5
million in commitments available to our QSPE for the transfer of receivables.
21
In its regularly scheduled meeting on August 24, 2006, our Board of
Directors authorized the repurchase of up to $50 million of our common stock,
dependent on market conditions and the price of the stock. We expect to fund
these purchases with a combination of excess cash, cash flow from operations,
borrowings under our revolving credit facilities and proceeds from the sale of
owned properties. Through April 30, 2007, we had spent $8.4 million under this
authorization to acquire 346,000 shares of our common stock.
A summary of the significant financial covenants that govern our bank credit
facility compared to our actual compliance status at April 30, 2007, is
presented below:
Required
Minimum/
Actual Maximum
-------------- --------------
Debt service coverage ratio must exceed required minimum 4.55 to 1.00 2.00 to 1.00
Total adjusted leverage ratio must be lower than required maximum 1.58 to 1.00 3.00 to 1.00
Consolidated net worth must exceed required minimum $299.5 million $189.6 million
Charge-off ratio must be lower than required maximum 0.02 to 1.00 0.06 to 1.00
Extension ratio must be lower than required maximum 0.02 to 1.00 0.05 to 1.00
Thirty-day delinquency ratio must be lower than required maximum 0.07 to 1.00 0.13 to 1.00
Note: All terms in the above table are defined by the bank credit facility
and may or may not agree directly to the financial statement captions in
this document.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our bank
credit facility and unsecured credit line, extended vendor terms for purchases
of inventory, acquisition of inventory under consignment arrangements and access
to the unfunded portion of the variable funding portion of the QSPE's
asset-backed securitization program will be sufficient to fund our operations,
store expansion and updating activities, stock repurchases, if any, and capital
programs through at least January 31, 2008. However, there are several factors
that could decrease cash provided by operating activities, including:
o reduced demand for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional activities;
o changes in inventory requirements based on longer delivery times of the
manufacturers or other requirements which would negatively impact our
delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under our
current QSPE's asset-backed securitization program as a result of
changes in performance or types of receivables transferred (promotional
versus non-promotional and primary versus secondary portfolio), or as a
result of a change in the mix of funding sources available to the QSPE,
requiring higher collateral levels;
o inability to expand our capacity for financing our receivables portfolio
under new or replacement QSPE asset-backed securitization programs or a
requirement that we retain a higher percentage of the credit portfolio
under such new programs;
22
o increases in program costs (interest and administrative fees relative to
our receivables portfolio associated with the funding of our
receivables); and
o increases in personnel costs.
During the three months ended April 30, 2007, net cash used in operating
activities decreased $2.8 million from $8.4 million for the three months ended
April 30, 2006 to $5.6 million for the three months ended April 30, 2007.
Operating cash flows for both periods were negatively impacted by higher than
normal payments on accounts payable and accrued expenses, as discussed below.
The net decrease in cash used in operations for the three months ended April 30,
2007, was driven primarily by payments on accounts payable, which was driven by
the timing of receipts of inventory, and increased investment in accounts
receivable. Our increased investment in accounts receivable was due primarily to
increased balances in the sold portfolio and a lower funding rate as a
percentage of the sold portfolio. The lower funding rate is being impacted by
the QSPE's pay down of its 2002 Series B bond issuance. The net decrease in cash
used in operations for the three months ended April 30, 2006, resulted primarily
from the timing of payments of accounts payable and federal income and
employment taxes, which had been extended due to the impact of hurricanes in the
prior fiscal year. Those extended terms ended and deadlines were reached in the
quarter ended April 30, 2006, and we were required to satisfy those obligations,
negatively impacting our operating cash flows by approximately $18.9 million.
As noted above, we offer promotional credit programs to certain customers
that provide for "same as cash" or deferred interest interest-free periods of
varying terms, generally three, six, 12, 18, 24 and 36 months. The various "same
as cash" promotional accounts and deferred interest program accounts are
eligible for securitization up to the limits provided for in our securitization
agreements. This limit is currently 30.0% of eligible securitized receivables.
If we exceed this 30.0% limit, we would be required to use some of our other
capital resources to carry the unfunded balances of the receivables for the
promotional period. The percentage of eligible securitized receivables
represented by promotional receivables was 17.9% and 21.1%, as of April 30, 2006
and 2007. The weighted average promotional period was 11.7 months and 14.1
months for promotional receivables outstanding as of April 30, 2006 and 2007,
respectively. The weighted average remaining term on those same promotional
receivables was 7.3 months and 10.7 months as of both April 30, 2006 and 2007,
respectively. While overall these promotional receivables have a much shorter
weighted average term than non-promotional receivables, we receive less income
on these receivables, resulting in a reduction of the net interest margin used
in the calculation of the gain on the sale of receivables.
Net cash from investing activities increased by $13.0 million, from $7.0
million used in the 2006 period to $6.0 million provided in the 2007 period. The
increase in cash provided by investing activities resulted primarily from the
sales of property and equipment, partially offset by purchases of property and
equipment. We entered into leases for certain of the properties sold. The cash
expended for property and equipment was used primarily for construction of new
stores and the reformatting of existing stores to better support our current
product mix. Based on current plans, we expect to increase expenditures for
property and equipment in the remainder of fiscal 2008 as we open additional
stores.
Net cash from financing activities decreased by $5.2 million from $1.1
million provided during the three months ended April 30, 2006 to $4.1 million
used during the three months ended April 30, 2007. The decrease in cash provided
by financing activities resulted primarily from increases in the cash used to
purchase treasury stock and a decline in proceeds from stock issued under
employee benefit plans. During the three months ended April 30, 2007, we used
$4.6 million to purchase 178,000 shares of our common stock.
Off-Balance Sheet Financing Arrangements
Since we extend credit in connection with a large portion of our retail,
service maintenance and credit insurance sales, we have created a qualified
special purpose entity, which we refer to as the QSPE or the issuer, to purchase
customer receivables from us and to issue asset-backed and variable funding
notes to third parties to obtain cash for these purchases. We transfer
receivables, consisting of retail installment contracts and revolving accounts
extended to our customers, to the issuer in exchange for cash and subordinated,
unsecured promissory notes. To finance its acquisition of these receivables, the
issuer has issued the notes and bonds described below to third parties. The
unsecured promissory notes issued to us are subordinate to these third party
notes and bonds.
23
At April 30, 2007, the issuer had issued three series of notes and bonds:
the 2002 Series A variable funding note with a total availability of $300
million, three classes of 2002 Series B bonds with an aggregate amount
outstanding of $130 million, of which $8.0 million was required to be placed in
a restricted cash account for the benefit of the bondholders, and three classes
of 2006 Series A bonds with an aggregate amount outstanding of $150 million, of
which $6.0 million was required to be placed in a restricted cash account for
the benefit of the bondholders. If the net portfolio yield, as defined by
agreements, falls below 5.0%, then the issuer may be required to fund additions
to the cash reserves in the restricted cash accounts. At April 30, 2007, the net
portfolio yield was in compliance with this requirement. Private institutional
investors, primarily insurance companies, purchased the 2002 Series B bonds at a
weighted fixed rate of 5.25% and 2006 Series A bonds at a weighted fixed rate of
5.75%.
We continue to service the transferred accounts for the QSPE, and we receive
a monthly servicing fee, so long as we act as servicer, in an amount equal to
..0025% multiplied by the average aggregate principal amount of receivables
serviced, including the amount of average aggregate defaulted receivables. The
issuer records revenues equal to the interest charged to the customer on the
receivables less losses, the cost of funds, the program administration fees paid
in connection with either the 2002 Series A, 2002 Series B or 2006 Series A bond
holders, the servicing fee and additional earnings to the extent they are
available.
The 2002 Series A variable funding note permits the issuer to borrow funds
up to $300 million to purchase receivables from us or make principal payments on
other bonds, thereby functioning as a "basket" to accumulate receivables. As
issuer borrowings under the 2002 Series A variable funding note approach $300
million, the issuer is required to request an increase in the 2002 Series A
amount or issue a new series of bonds and use the proceeds to pay down the then
outstanding balance of the 2002 Series A variable funding note, so that the
basket will once again become available to accumulate new receivables or meet
other obligations required under the transaction documents. As of April 30,
2007, borrowings under the 2002 Series A variable funding note were $157.5
million.
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the 2002 Series A
note, 2002 Series B bonds and 2006 Series A bonds due to its inability to
collect the transferred customer accounts, the issuer could not pay the
subordinated notes it has issued to us in partial payment for transferred
customer accounts, and the 2002 Series B and 2006 Series A bond holders could
claim the balance in its $14.0 million restricted cash account. We are also
contingently liable under a $20.0 million letter of credit that secures the
performance of our obligations or services under the servicing agreement as it
relates to the transferred assets that are part of the asset-backed
securitization facility.
The issuer is subject to certain affirmative and negative covenants
contained in the transaction documents governing the 2002 Series A variable
funding note, and the 2002 Series B and 2006 Series A bonds, including covenants
that restrict, subject to specified exceptions: the incurrence of non-permitted
indebtedness and other obligations and the granting of additional liens;
mergers, acquisitions, investments and disposition of assets; and the use of
proceeds of the program. The issuer also makes representations and warranties
relating to compliance with certain laws, payment of taxes, maintenance of its
separate legal entity, preservation of its existence, protection of collateral
and financial reporting. In addition, the program requires the issuer to
maintain a minimum net worth.
24
A summary of the significant financial covenants that govern the 2002 Series
A variable funding note compared to actual compliance status at April 30, 2007,
is presented below:
Required
Minimum/
As reported Maximum
------------- -------------
Issuer interest must exceed required minimum $58.0 million $57.5 million
Gross loss rate must be lower than required maximum 3.5% 10.0%
Net portfolio yield must exceed required minimum 8.4% 2.0%
Payment rate must exceed required minimum 6.7% 3.0%
Note: All terms in the above table are defined by the asset backed credit
facility and may or may not agree directly to the financial statement
captions in this document.
Events of default under the 2002 Series A variable funding note and the 2002
Series B and 2006 Series A bonds, subject to grace periods and notice provisions
in some circumstances, include, among others: failure of the issuer to pay
principal, interest or fees; violation by the issuer of any of its covenants or
agreements; inaccuracy of any representation or warranty made by the issuer;
certain servicer defaults; failure of the trustee to have a valid and perfected
first priority security interest in the collateral; default under or
acceleration of certain other indebtedness; bankruptcy and insolvency events;
failure to maintain certain loss ratios and portfolio yield; change of control
provisions and certain other events pertaining to us. The issuer's obligations
under the program are secured by the receivables and proceeds.
Securitization Facilities
We finance most of our customer receivables through asset-backed
securitization facilities
---------------------------
| 2002 Series A Note |
-------> | $300 million |
| | Credit Rating: P1/A1 |
| | Three Pillars Funding LLC |
| ---------------------------
Customer Receivables |
--------- ------------> ----------------- | --------------------------
| Retail | | Qualifying | | | 2002 Series B Bonds |
| Sales | | Special Purpose | | | $130 million |
| Entity | | Entity | <--------|------> | Private Institutional |
| | | ("QSPE") | | | Investors |
| | | | | | Class A: $78.0 mm (Aaa) |
| | | | | | Class B: $37.6 mm (A2) |
| | | | | | Class C: $14.4 mm (Baa2) |
--------- <------------ ----------------- | --------------------------
|
1. Cash Proceeds | --------------------------
2. Subordinated Securities | | 2006 Series A Bonds |
3. Right to Receive Cash Flows | | $150 million |
Equal to Interest Spread | | Private Institutional |
-------> | Investors |
| Class A: $90 mm (Aaa) |
| Class B: $43.3 mm (A2) |
| Class C: $16.7 mm (Baa2) |
--------------------------
Both the bank credit facility and the asset-backed securitization program
are significant factors relative to our ongoing liquidity and our ability to
meet the cash needs associated with the growth of our business. Our inability to
use either of these programs because of a failure to comply with their covenants
would adversely affect our continued growth. Funding of current and future
receivables under the QSPE's asset-backed securitization program can be
adversely affected if we exceed certain predetermined levels of re-aged
receivables, size of the secondary portfolio, the amount of promotional
receivables, write-offs, bankruptcies or other ineligible receivable amounts. If
the funding under the QSPE's asset-backed securitization program was reduced or
terminated, we would have to draw down our bank credit facility more quickly
than we have estimated.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates under our bank credit facility are variable and are
determined, at our option, as the base rate, which is the greater of prime rate
or federal funds rate plus 0.50% plus the base rate margin, which ranges from
0.00% to 0.50%, or LIBOR plus the LIBOR margin, which ranges from 0.75% to
1.75%. Accordingly, changes in the prime rate, the federal funds rate or LIBOR,
which are affected by changes in interest rates generally, will affect the
interest rate on, and therefore our costs under, our bank credit facility. We
are also exposed to interest rate risk associated with our interest only strip
and the subordinated securities we receive from our sales of receivables to the
QSPE.
There have been no material changes in our interest rate risks since January
31, 2007.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, regarding the effectiveness of our disclosure controls and procedures
(as defined in 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act) as of the end of the period covered by this quarterly report. Based on that
evaluation, our management, including our Chief Executive Officer and our Chief
Financial Officer, concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to our
Company (including its consolidated subsidiaries) required to be included in our
periodic filings with the Securities and Exchange Commission. There have been no
changes in our internal control over financial reporting that occurred during
the quarter ended April 30, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to our business from time
to time. Currently, we do not expect the outcome of any of this routine
litigation to have a material affect on our financial condition, results of
operations or cash flows. However, the results of these proceedings cannot be
predicted with certainty, and changes in facts and circumstances could impact
our estimate of reserves for litigation.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended January 31, 2007, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 25, 2006, we announced that our Board of Directors had authorized
a common stock repurchase program, permitting us to purchase, from time to time,
in the open market and in privately negotiated transactions, up to an aggregate
of $50.0 million of our common stock, dependent on market conditions and the
price of the stock. During the quarter ended April 30, 2007, we effected the
following repurchases of our common stock:
Total # of Shares Approximate
Purchased as Dollar Value of
Total # of Average Part of Publicly Shares That May
shares Price Paid Announced Yet Be Purchased
purchased per share Programs Under the Programs
Period
------ ---------- ---------- ----------------- ------------------
February 1 - February 28, 2007 48,900 $ 26.64 48,900 $ 44,909,674
March 1 - March 31, 2007 63,300 $ 23.95 63,300 $ 43,393,358
April 1 - April 30, 2007 65,800 $ 26.29 65,800 $ 41,663,398
---------- -----------------
Total 178,000 178,000
========== =================
Item 5. Other Information
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors since we last provided
disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule
14A.
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are
listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated
herein by reference.
27
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONN'S, INC.
By: /s/ David L. Rogers
----------------------------
David L. Rogers
Chief Financial Officer
(Principal Financial Officer
and duly authorized to
sign this report on behalf
of the registrant)
Date: June 11, 2007
28
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2 Agreement and Plan of Merger dated January 15, 2003, by and among
Conn's, Inc., Conn Appliances, Inc. and Conn's Merger Sub, Inc.
(incorporated herein by reference to Exhibit 2 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
3.1 Certificate of Incorporation of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.1 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
3.1.1 Certificate of Amendment to the Certificate of Incorporation of
Conn's, Inc. dated June 3, 2004 (incorporated herein by reference to
Exhibit 3.1.1 to Conn's, Inc. Form 10-Q for the quarterly period
ended April 30, 2004 (File No. 000-50421) as filed with the
Securities and Exchange Commission on June 7, 2004).
3.2 Bylaws of Conn's, Inc. (incorporated herein by reference to Exhibit
3.2 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
3.2.1 Amendment to the Bylaws of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.2.1 to Conn's Form 10-Q for the quarterly
period ended April 30, 2004 (File No. 000-50421) as filed with the
Securities and Exchange Commission on June 7, 2004).
4.1 Specimen of certificate for shares of Conn's, Inc.'s common stock
(incorporated herein by reference to Exhibit 4.1 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on October 29, 2003).
10.1 Amended and Restated 2003 Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 10.1 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).t
10.1.1 Amendment to the Conn's, Inc. Amended and Restated 2003 Incentive
Stock Option Plan (incorporated herein by reference to Exhibit to
Conn's 10.1.1 Form 10-Q for the quarterly period ended April 30, 2004
(File No. 000-50421) as filed with the Securities and Exchange
Commission on June 7, 2004).t
10.1.2 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.1.2 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Securities
and Exchange Commission on April 5, 2005).t
10.2 2003 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.2 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046)as filed with the Securities and
Exchange Commission on September 23, 2003).t
10.2.1 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.2.1 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Securities
and Exchange Commission on April 5, 2005).t
10.3 Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 10.3 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).t
29
10.4 Conn's 401(k) Retirement Savings Plan (incorporated herein by
reference to Exhibit 10.4 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).t
10.5 Shopping Center Lease Agreement dated May 3, 2000, by and between
Beaumont Development Group, L.P., f/k/a Fiesta Mart, Inc., as Lessor,
and CAI, L.P., as Lessee, for the property located at 3295 College
Street, Suite A, Beaumont, Texas (incorporated herein by reference to
Exhibit 10.5 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
10.5.1 First Amendment to Shopping Center Lease Agreement dated September
11, 2001, by and among Beaumont Development Group, L.P., f/k/a Fiesta
Mart, Inc., as Lessor, and CAI, L.P., as Lessee, for the property
located at 3295 College Street, Suite A, Beaumont, Texas
(incorporated herein by reference to Exhibit 10.5.1 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.6 Industrial Real Estate Lease dated June 16, 2000, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as
filed with the Securities and Exchange Commission on September 23,
2003).
10.6.1 First Renewal of Lease dated November 24, 2004, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6.1 to Conn's,
Inc. Form 10-K for the annual period ended January 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
April 5, 2005).
10.7 Lease Agreement dated December 5, 2000, by and between Prologis
Development Services, Inc., f/k/a The Northwestern Mutual Life
Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as
filed with the Securities and Exchange Commission on September 23,
2003).
10.7.1 Lease Amendment No. 1 dated November 2, 2001, by and between Prologis
Development Services, Inc., f/k/a The Northwestern Mutual Life
Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7.1 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as
filed with the Securities and Exchange Commission on September 23,
2003).
10.8 Lease Agreement dated June 24, 2005, by and between Cabot Properties,
Inc. as Lessor, and CAI, L.P., as Lessee, for the property located at
1132 Valwood Parkway, Carrollton, Texas (incorporated herein by
reference to Exhibit 99.1 to Conn's, Inc. Current Report on Form 8-K
(file no. 000-50421) as filed with the Securities and Exchange
Commission on June 29, 2005).
10.9 Credit Agreement dated October 31, 2005, by and among Conn
Appliances, Inc. and the Borrowers thereunder, the Lenders party
thereto, JPMorgan Chase Bank, National Association, as Administrative
Agent, Bank of America, N.A., as Syndication Agent, and SunTrust
Bank, as Documentation Agent (incorporated herein by reference to
Exhibit 10.9 to Conn's, Inc. Quarterly Report on Form 10-Q (file no.
000-50421) as filed with the Securities and Exchange Commission on
December 1, 2005).
10.9.1 Letter of Credit Agreement dated November 12, 2004 by and between
Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc., the
financial institutions listed on the signature pages thereto, and
JPMorgan Chase Bank, as Administrative Agent (incorporated herein by
reference to Exhibit 99.2 to Conn's Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on November 17, 2004).
30
10.9.2 First Amendment to Credit Agreement dated August 28, 2006 by and
between Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc.,
the financial institutions listed on the signature pages thereto, and
JPMorgan Chase Bank, as Administrative Agent (incorporated herein by
reference to Exhibit 10.1 to Conn's Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on August 28, 2006).
10.10 Receivables Purchase Agreement dated September 1, 2002, by and among
Conn Funding II, L.P., as Purchaser, Conn Appliances, Inc. and CAI,
L.P., collectively as Originator and Seller, and Conn Funding I,
L.P., as Initial Seller (incorporated herein by reference to Exhibit
10.10 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.10.1 First Amendment to Receivables Purchase Agreement dated August 1,
2006, by and among Conn Funding II, L.P., as Purchaser, Conn
Appliances, Inc. and CAI, L.P., collectively as Originator and Seller
(incorporated herein by reference to Exhibit 10.10.1 to Conn's, Inc.
Form 10-Q for the quarterly period ended July 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
September 15, 2006).
10.11 Base Indenture dated September 1, 2002, by and between Conn Funding
II, L.P., as Issuer, and Wells Fargo Bank Minnesota, National
Association, as Trustee (incorporated herein by reference to Exhibit
10.11 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.11.1 First Supplemental Indenture dated October 29, 2004 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on November 4,
2004).
10.11.2 Second Supplemental Indenture dated August 1, 2006 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on August 23,
2006).
10.12 Series 2002-A Supplement to Base Indenture dated September 1, 2002,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.12.1 Amendment to Series 2002-A Supplement dated March 28, 2003, by and
between Conn Funding II, L.P. as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Securities and Exchange Commission on April 5, 2005).
10.12.2 Amendment No. 2 to Series 2002-A Supplement dated July 1, 2004, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.2 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Securities and Exchange Commission on April 5, 2005).
10.12.3 Amendment No. 3 to Series 2002-A Supplement. dated August 1, 2006, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference to
Exhibit 10.12.3 to Conn's, Inc. Form 10-Q for the quarterly period
ended July 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on September 15, 2006).
31
10.13 Series 2002-B Supplement to Base Indenture dated September 1, 2002,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.13.1 Amendment to Series 2002-B Supplement dated March 28, 2003, by and
between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Securities and Exchange Commission on April 5, 2005). 10.14 Servicing
Agreement dated September 1, 2002, by and among Conn Funding II,
L.P., as Issuer, CAI, L.P., as Servicer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.14 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.14.1 First Amendment to Servicing Agreement dated June 24, 2005, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.1 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2005 (File No. 000-50421) as
filed with the Securities and Exchange Commission on August 30,
2005).
10.14.2 Second Amendment to Servicing Agreement dated November 28, 2005, by
and among Conn Funding II, L.P., as 10.14.2 Issuer, CAI, L.P., as
Servicer, and Wells Fargo Bank, National Association, as Trustee
(incorporated herein by reference to Exhibit 10.14.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
December 1, 2005).
10.14.3 Third Amendment to Servicing Agreement dated May 16, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.3 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as
filed with the Securities and Exchange Commission on September 15,
2006).
10.14.4 Fourth Amendment to Servicing Agreement dated August 1, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.4 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as
filed with the Securities and Exchange Commission on September 15,
2006).
10.15 Form of Executive Employment Agreement (incorporated herein by
reference to Exhibit 10.15 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on October 29, 2003).t
10.15.1 First Amendment to Executive Employment Agreement between Conn's,
Inc. and Thomas J. Frank, Sr., Approved by the stockholders May 26,
2005 (incorporated herein by reference to Exhibit 10.15.1 to Conn's,
Inc. Form 10-Q for the quarterly period ended July 31, 2005 (file No.
000-50421) as filed with the Securities and Exchange Commission on
August 30, 2005).t
10.16 Form of Indemnification Agreement (incorporated herein by reference
to Exhibit 10.16 to Conn's, Inc. registration statement on Form S-1
(file no. 333-109046) as filed with the Securities and Exchange
Commission on September 23, 2003).t
10.17 Description of Compensation Payable to Non-Employee Directors
(incorporated herein by reference to Form 8-K (file no. 000-50421)
filed with the Securities and Exchange Commission on June 2, 2005).t
32
10.18 Dealer Agreement between Conn Appliances, Inc. and Voyager Service
Programs, Inc. effective as of January 1, 1998 (incorporated herein
by reference to Exhibit 10.19 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.1 Amendment #1 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.18.2 Amendment #2 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.2 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.18.3 Amendment #3 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.3 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.18.4 Amendment #4 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.4 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.19 Service Expense Reimbursement Agreement between Affiliates Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager
Property and Casualty Insurance Company effective July 1, 1998
(incorporated herein by reference to Exhibit 10.20 to Conn's, Inc.
Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
10.19.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI, L.P., Affiliates Insurance Agency, Inc., American Bankers
Life Assurance Company of Florida, Voyager Property & Casualty
Insurance Company, American Bankers Life Assurance Company of
Florida, American Bankers Insurance Company of Florida and American
Bankers General Agency, Inc. effective July 1, 2005 (incorporated
herein by reference to Exhibit 10.20.1 to Conn's, Inc. Form 10-K for
the annual period ended January 31, 2006 (File No. 000-50421) as
filed with the Securities and Exchange Commission on March 30, 2006).
10.20 Service Expense Reimbursement Agreement between CAI Credit Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager
Property and Casualty Insurance Company effective July 1, 1998
(incorporated herein by reference to Exhibit 10.21 to Conn's, Inc.
Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
33
10.20.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI Credit Insurance Agency, Inc., American Bankers Life
Assurance Company of Florida, Voyager Property & Casualty Insurance
Company, American Bankers Life Assurance Company of Florida, American
Bankers Insurance Company of Florida, American Reliable Insurance
Company, and American Bankers General Agency, Inc. effective July 1,
2005 (incorporated herein by reference to Exhibit 10.21.1 to Conn's,
Inc. Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
10.21 Consolidated Addendum and Amendment to Service Expense Reimbursement
Agreements by and among Certain Member Companies of Assurant
Solutions, CAI Credit Insurance Agency, Inc. and Affiliates Insurance
Agency, Inc. effective April 1, 2004 (incorporated herein by
reference to Exhibit 10.22 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.22 Series 2006-A Supplement to Base Indenture, dated August 1, 2006, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference to
Exhibit 10.23 to Conn's, Inc. Form 10-Q for the quarterly period
ended July 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on September 15, 2006).
10.23 Fourth Amended and Restated Subordination and Priority Agreement,
dated August 31, 2006, by and among Bank of America, N.A. and
JPMorgan Chase Bank, as Agent, and Conn Appliances, Inc. and/or its
subsidiary CAI, L.P (incorporated herein by reference to Exhibit
10.24 to Conn's, Inc. Form 10-Q for the quarterly period ended
October 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on November 30, 2006).
10.23.1 Fourth Amended and Restated Security Agreement, dated August 31,
2006, by and among Conn Appliances, Inc. and CAI, L.P. and Bank of
America, N.A. (incorporated herein by reference to Exhibit 10.24.1 to
Conn's, Inc. Form 10-Q for the quarterly period ended October 31,
2006 (File No. 000-50421) as filed with the Securities and Exchange
Commission on November 30, 2006)..
10.24 Letter of Credit and Reimbursement Agreement, dated September 1,
2002, by and among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(incorporated herein by reference to Exhibit 10.25 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
November 30, 2006).
10.24.1 Amendment to Standby Letter of Credit dated August 23, 2006, by and
among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(incorporated herein by reference to Exhibit 10.25.1 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
November 30, 2006).
10.24.2 Amendment to Standby Letter of Credit dated September 20, 2006, by
and among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(incorporated herein by reference to Exhibit 10.25.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
November 30, 2006).
11.1 Statement re: computation of earnings per share is included under
Note 1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (incorporated herein by reference to
Exhibit 21 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
(filed herewith).
34
32.1 Section 1350 Certification (Chief Executive Officer and Chief
Financial Officer) (furnished herewith).
99.1 Subcertification by Chief Operating Officer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.2 Subcertification by Treasurer in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.3 Subcertification by Secretary in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.4 Subcertification of Chief Operating Officer, Treasurer and Secretary
in support of Section 1350 Certifications (Chief Executive Officer
and Chief Financial Officer) (furnished herewith).
t Management contract or compensatory plan or arrangement.
35
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF EXECUTIVE OFFICER)
I, Thomas J. Frank, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Thomas J. Frank, Sr.
---------------------------
Thomas J. Frank, Sr.
Chairman of the Board
and Chief Executive Officer
Date: June 11, 2007
36
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF FINANCIAL OFFICER)
I, David L. Rogers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ David L. Rogers
---------------------------
David L. Rogers
Chief Financial Officer
Date: June 11, 2007
37
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company")
on Form 10-Q for the period ended April 30, 2007 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, Thomas J. Frank,
Sr., Chairman of the Board and Chief Executive Officer of the Company and David
L. Rogers, Chief Financial Officer of the Company, hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Thomas J. Frank Sr.
-------------------------
Thomas J. Frank, Sr.
Chairman of the Board and
Chief Executive Officer
/s/ David L. Rogers
-------------------------
David L. Rogers
Chief Financial Officer
Date: June 11, 2007
A signed original of this written statement required by Section 906 has been
provided to Conn's, Inc. and will be retained by Conn's, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request. The foregoing
certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and
is not being filed as part of the Report or as a separate disclosure document.
38
EXHIBIT 99.1
SUBCERTIFICATION OF CHIEF OPERATING OFFICER IN SUPPORT OF RULE
13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, William C. Nylin Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ William C. Nylin, Jr.
----------------------------------------
William C. Nylin, Jr.
Executive Vice-Chairman of the Board and
Chief Operating Officer
Date: June 11, 2007
39
EXHIBIT 99.2
SUBCERTIFICATION OF TREASURER IN SUPPORT OF RULE
13a-14(a)/15d-14(a) CERTIFICATION (CHIEF FINANCIAL OFFICER)
I, David R. Atnip, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ David R. Atnip
-----------------------------------
David R. Atnip
Senior Vice President and Treasurer
Date: June 11, 2007
40
EXHIBIT 99.3
SUBCERTIFICATION OF SECRETARY IN SUPPORT OF RULE 13a-14(a)/15d-14(a)
CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Sydney K. Boone, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Sydney K. Boone, Jr.
---------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Date: June 11, 2007
41
EXHIBIT 99.4
SUBCERTIFICATION OF CHIEF OPERATING OFFICER,
TREASURER AND SECRETARY IN SUPPORT OF
18 U.S.C. SECTION 1350 CERTIFICATION,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company")
on Form 10-Q for the period ended April 30, 2007 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, William C. Nylin,
Jr., President and Chief Operating Officer of the Company, David R. Atnip,
Senior Vice President and Treasurer of the Company, and Sydney K. Boone, Jr.,
Corporate General Counsel and Secretary of the Company, hereby certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ William C. Nylin, Jr.
-----------------------------------------
William C. Nylin, Jr.
Executive Vice-Chairman of the Board and
Chief Operating Officer
/s/ David R. Atnip
-----------------------------------------
David R. Atnip
Senior Vice President and Treasurer
/s/ Sydney K. Boone, Jr.
-----------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Date: June 11, 2007
A signed original of this written statement has been provided to Conn's, Inc.
and will be retained by Conn's, Inc. The foregoing certification is being
furnished solely to support certifications pursuant to 18 U.S.C. Section 1350
and is not being filed as part of the Report or as a separate disclosure
document.
42
