UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
10-K/A
(AMENDMENT NO. 1)
(AMENDMENT NO. 1)
Annual
Report Pursuant to Section l3 or l5(d)
of
the Securities Exchange Act of l934
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For
the fiscal year ended January 31,
2006
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Commission
File Number 000-50421
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CONN'S,
INC.
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(Exact
Name of Registrant as Specified in its
Charter)
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A
Delaware Corporation
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06-1672840
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification Number)
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3295
College Street
Beaumont, Texas 77701 |
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(Address
of Principal Executive
Offices)
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(409)
832-1696
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Registrant's
Telephone Number, Including Area Code)
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Securities
registered pursuant to Section l2(b)
of the Act:
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NONE
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Securities
registered pursuant to Section 12(g) of the Act:
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Title
of Class
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Common
Stock, Par Value $0.01 Per
Share
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes [ ] No [ x ]
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes [ ] No [ x ]
Indicate
by check mark whether the registrant (l) has filed all reports required to
be
filed by Section l3 or l5(d) of the Securities Exchange Act of 1934 during
the
preceding l2 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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant's knowledge, in definitive proxy
or
information statements incorporated by reference in Part III of this Form
10-K
or any amendment to this Form 10-K. [ ]
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 ]
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of July 29, 2005 was approximately $180,604,464 based on
the
closing price of the registrant’s common stock as reported on the NASDAQ
National Market.
There
were 23,571,564 shares of common stock, $0.01 par value per share, outstanding
on March 27, 2006.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the Definitive Proxy Statement for the Annual Meeting of Stockholders
to be
held May 31, 2006 (incorporated herein by reference in Part III).
EXPLANATORY
NOTE
Restatement
of Consolidated Financial Statements
We
are
amending our Annual Report on Form 10-K (the “Original Filing”) for the year
ended January 31, 2006, to restate our consolidated financial statements
for the
years ended January 31, 2006, 2005 and 2004 and the related disclosures.
This
Form 10-K/A also includes the restatement of selected financial data as of
and
for the years ended January 31, 2006, 2005, 2004, 2003, and July 31, 2001,
the
six months ended January 31, 2002 and the twelve months ended January 31,
2002,
included in Item 6, and certain of the financial information presented in
Item 7
- Management’s Discussion and Analysis of Financial Condition and Results of
Operations. See Note 13 to the consolidated financial statements for a summary
of the restated amounts.
On
September 8, 2006, we concluded that our consolidated financial statements
for
the years ended January 31, 2006, 2005 and 2004 as well as the selected
financial data for the years ended January 31, 2006, 2005, 2004, 2003, and
July
31, 2001, the six months ended January 31, 2002 and the twelve months ended
January 31, 2002, should be restated to correct for errors in recording
interests in securitized assets, securitization income and related income
tax
impacts that were incorrectly accounted for under U.S. generally accepted
accounting principles, specifically covered by Statement of Financial Accounting
Standards (“SFAS”) No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
and
Emerging Issues Task Force (“EITF”) No. 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interest
in Securitized Financial Assets.
Our
decision to restate our consolidated financial statements and certain related
and selected financial information for the stated years and periods was based
on
the results of an internal review of our accounting for the fair value of
our
retained interest asset performed under the direction of the Audit Committee
of
the Board of Directors.
During
the preparation of our consolidated financial statements for the quarter
ended
July 31, 2006, we identified an issue related to the recording of securitization
income. Based on our discovery and the results of discussions with our
independent accountants and the Audit Committee of the Board of Directors,
it
was determined that a review of our accounting under SFAS No. 140 should
be
completed before the statements for the quarter ended July 31, 2006 were
issued.
The internal review revealed that we had incorrectly reduced securitization
income and the value of our interests in securitized assets by the amount
of
future expected loan losses recorded on the books of the qualifying special
purpose entity that owns the receivables.
As
a
result of the error discussed above and the resulting restatement, management
has concluded that a material weakness in its internal controls over financial
reporting existed. Specifically, controls were not operating effectively
to
ensure that the proper accounting and corresponding consolidated financial
statement presentation of securitization income and the fair value of interests
in securitized assets was consistent with SFAS No. 140. As a result of this
material weakness, we concluded that our disclosure controls and procedures
were
not effective as of January 31, 2006.
We
believe we have taken the steps necessary to remediate this material weakness
relating to our accounting under SFAS No. 140 and related processes, procedures,
and controls; however, we cannot confirm the effectiveness of our enhanced
internal controls with respect to our accounting under SFAS No. 140 until
we and
our independent auditors have conducted sufficient tests. Accordingly, we
will
continue to monitor the effectiveness of the processes, procedures, and controls
we have implemented and will make any further changes management determines
appropriate.
We
have
not amended and do not anticipate amending our Annual Reports on Form 10-K
for
any years prior to January 31, 2006. With the exception of our Form 10-Q
for the
quarter ended April 30, 2006, we will not be amending any of our Quarterly
Reports on Form 10-Q. We have filed today the Form 10-Q/A for the quarter
ended
April 30, 2006 amending the Quarterly Report on Form 10-Q previously filed.
The
financial information that has been previously filed or otherwise reported
for
these periods is superseded by the financial information in this Annual Report
on Form 10-K/A and the Quarterly Report on Form 10-Q/A. Accordingly, the
consolidated financial statements and related financial information contained
in
those previously filed Annual Report on Form 10-K and Quarterly Report on
Form
10-Q should no longer be relied upon.
All
of
the information in this Form 10-K/A is as of January 31, 2006 and does not
reflect any subsequent information or events other than the restatement and
related matters discussed in Note 13. Only the following items have been
amended
as a result of the restatement:
Part
I -
Item 1 - Business;
Part
II -
Item 6 - Selected Financial Data;
Part
II -
Item 7 - Management’s Discussion and Analysis of Financial Condition and Results
of Operations;
Part
II -
Item 8 - Financial Statements and Supplementary Data;
Part
II -
Item 9A - Controls and Procedures
Part
IV -
Item 15 - Exhibits and Financial Statement Schedules
Other
than as discussed above, this Form 10-K/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,
except for the adoption of SFAS 123R (see Note 7 to the consolidated financial
statements). Accordingly, this Form 10-K/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-K/A includes updated certifications from our Chief
Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, and
32.1.
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TABLE
OF CONTENTS
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Page
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PART
I
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ITEM
1.
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BUSINESS.
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3
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ITEM
1A.
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RISK
FACTORS.
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18
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS.
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26
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ITEM
2.
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PROPERTIES.
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26
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ITEM
3.
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LEGAL
PROCEEDINGS.
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26
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ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.
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27
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PART
II
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ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS
AND ISSUER
PURCHASES OF EQUITY SECURITIES.
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27
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ITEM
6.
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SELECTED
FINANCIAL DATA.
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28
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ITEM
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS.
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29
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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50
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
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51
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
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81
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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81
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ITEM
9B.
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OTHER
INFORMATION
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82
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PART
III
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ITEM
10.
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
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82
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ITEM
11.
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EXECUTIVE
COMPENSATION
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82
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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82
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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82
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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82
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PART
IV
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ITEM
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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83
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SIGNATURES
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84
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EXHIBIT
INDEX
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85
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ITEM
1. BUSINESS.
Unless
the context indicates otherwise, references to "we," "us," and "our" refer
to
the consolidated business operations of Conn's, Inc. and all of its direct
and
indirect subsidiaries, limited liability companies and limited
partnerships.
Overview
We
are a
specialty retailer of home appliances and consumer electronics. We sell major
home appliances including refrigerators, freezers, washers, dryers and ranges,
and a variety of consumer electronics including projection, plasma and LCD
televisions, camcorders, DVD players and home theater products. We also sell
home office equipment, lawn and garden equipment, mattresses and furniture
and
we continue to introduce additional product categories for the home and for
consumer entertainment, such as MP3’s, to help increase same store sales and to
respond to our customers’ product needs. We offer over 1,100 product items, or
SKUs, at good-better-best price points representing such national brands
as
General Electric, Whirlpool, Frigidaire, Maytag, LG, Mitsubishi, Samsung,
Sony,
Toshiba, Serta, Hewlett Packard and Compaq. Based on revenue in 2004, we
were
the 12th
largest
retailer of home appliances in the United States. Additionally, historically
we
are the second or third leading retailer of home appliances in terms of market
share in the majority of our established markets. Likewise, in the home
entertainment product categories in which we compete, we rank third or fourth
in
market share in the majority of our established markets.
We
began
as a small plumbing and heating business in 1890. We began selling home
appliances to the retail market in 1937 through one store located in Beaumont,
Texas. We opened our second store in 1959 and have since grown to 56
stores.
We
have
been known for providing excellent customer service for over 115 years. We
believe that our customer-focused business strategies make us an attractive
alternative to appliance and electronics superstores, department stores and
other national, regional and local retailers. We strive to provide our customers
with:
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a
high level of customer service;
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highly
trained and knowledgeable sales personnel;
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a
broad range of competitively priced, customer-driven, brand name
products;
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flexible
financing alternatives through our proprietary credit programs;
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same
day and next day delivery capabilities; and
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outstanding
product repair service.
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We
believe that these strategies drive repeat purchases and enable us to generate
substantial brand name recognition and customer loyalty. During fiscal 2006,
approximately 62% of our credit customers, based on the number of invoices
written, were repeat customers.
In
1994,
we realigned and added to our management team, enhanced our infrastructure
and
refined our operating strategy to position ourselves for future growth. From
fiscal 1994 to fiscal 1999, we selectively grew our store base from 21 to
26
stores while improving operating margins from 5.2% to 8.7%. Since fiscal
1999,
we have generated significant growth in our number of stores, revenue and
profitability. Specifically:
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we
have grown from 26 stores to 56 stores, an increase of over 115%,
with
several more stores currently under development;
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total
revenues have grown by 199% at a compounded annual rate of 16.9%
from
$234.5 million in fiscal 1999, to $701.1 million in fiscal 2006;
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3
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net
income from continuing operations has grown by 367% at a compounded
annual
rate of 24.6% from $8.8 million in fiscal 1999 to $41.1 million
in fiscal
2006; and
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our
same store sales growth from fiscal 1999 through fiscal 2006 has
averaged
9.2%; it was 16.9% for fiscal 2006. See additional discussion about
same
store sales under Managements Discussion and Analysis of Financial
Condition and Results of
Operations.
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Our
principal executives offices are located at 3295 College Street, Beaumont,
Texas
77701. Our telephone number is (409) 832-1696, and our corporate website
is
www.conns.com. We do not intend for information contained on our website
to be
part of this Form 10-K.
Corporate
Reorganization
We
were
formed as a Delaware corporation in January 2003 with an initial capitalization
of $1,000 to become the holding company of Conn Appliances, Inc., a Texas
corporation. Prior to the completion of our initial public offering (the
"IPO")
in November 2003, we had no operations. As a result of the IPO, Conn Appliances,
Inc. became our wholly-owned subsidiary and the common and preferred
stockholders of Conn Appliances, Inc. exchanged their common and preferred
stock
on a one-for-one basis for the common and preferred stock of Conn's, Inc.
Immediately after the IPO, all preferred stock and accumulated dividends
were
redeemed, either through the payment of cash or through the conversion of
preferred stock to common stock.
Industry
Overview
The
home
appliance and consumer electronics industry includes major home appliances,
small appliances, home office equipment and software, projection, plasma
and LCD
televisions, and audio, video and portable electronics. Sellers of home
appliances and consumer electronics include large appliance and electronics
superstores, national chains, small regional chains, single-store operators,
appliance and consumer electronics departments of selected department and
discount stores and home improvement centers.
Based
on
data published in Twice,
This Week in Consumer Electronics,
a
weekly magazine dedicated to the home appliances and consumer electronics
industry in the United States, the top 100 major appliance retailers reported
sales of approximately $22.1 billion in 2004, up approximately 10.0% from
reported sales in 2003 of approximately $20.1 billion. The retail appliance
market is large and concentrated among a few major dealers. Sears has been
the
leader in the retail appliance market, with a market share of the top 100
retailers of approximately 39% in 2004, down from approximately 42% in 2003.
Lowe’s and Home Depot held the second and third place positions, respectively,
in national market share in 2004.
As
measured by Twice,
the top
100 consumer electronics retailers in the United States reported equipment
and
software sales of $96.7 billion in 2004, a 7.9% increase from the $89.6 billion
reported in 2003. According to the Consumer Electronics Association, or CEA,
total industry manufacturer sales of consumer electronics products in the
United
States, including imports, are projected to exceed $109 billion by 2007.
The
consumer electronics market is highly fragmented. We estimate, based on data
provided in Twice,
that
the two largest consumer electronics superstore chains together accounted
for
less than 28% of the total electronics sales attributable to the 100 largest
retailers in 2004. New entrants in both the home appliances and consumer
electronics industries have been successful in gaining market share by offering
similar product selections at lower prices.
In
the
home appliance market, many factors drive growth, including consumer confidence,
household formations and new product introductions. Product design and
innovation is rapidly becoming a key driver of growth in this market. Products
either recently introduced or scheduled to be offered include high efficiency,
front-loading laundry appliances, three door refrigerators, double ovens,
free-standing ranges, cabinet style dishwashers, and dual fuel cooking
appliances.
Technological
advancements and the introduction of new products have largely driven growth
in
the consumer electronics market. Recently, industry growth has been fueled
primarily by the introduction of products that incorporate digital technology,
such as portable and traditional DVD players, digital cameras and camcorders,
digital stereo receivers, satellite technology, MP3 products and high definition
flat panel and projection televisions. Digital products offer significant
advantages over their analog counterparts, including better clarity and quality
of video and audio, durability of recording and compatibility with computers.
Due to these advantages, we believe that digital technology will continue
to
drive industry growth as consumers replace their analog products with digital
products. We believe the following product advancements will continue to
fuel
growth in the consumer electronics industry and that they offer us the potential
for significant sales growth:
4
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Digital
Television (DTV and High Definition TV). The
Federal Communications Commission has set a hard date of February
17, 2009
for all commercial television stations to transition from broadcasting
analog signals to digital signals. The Yankee Group, a communications
and
networking research and consulting firm, estimates that by the
year 2007,
HDTV signals will be in nearly 41.6 million, or 40%, of homes in
the
United States. This represents a compounded annual growth rate
of 17.1%
from the estimated 18.9 million homes receiving digital cable at
the end
of 2002. To view a digital transmission, consumers will need either
a
digital television or a set-top box converter capable of converting
the
digital broadcast for viewing on an analog set. According to the
CEA, DTV
unit sales are expected to grow from 12.0 million units in 2005
to 15.8
million units in 2006, representing an annual growth rate of 32.5%.
We
believe the high clarity digital flat panel televisions in both
liquid
crystal display (LCD), and plasma formats has increased the quality
and
sophistication of these entertainment products and will be a key
driver of
digital television growth as more digital and high definition content
is
made available either through traditional distribution methods
or through
emerging content delivery systems. As prices continue to drop on
such
products, they become increasingly attractive to larger and more
diverse
group of consumers.
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Digital
Versatile Disc (DVD). According
to the CEA, the DVD player has become the fastest growing consumer
electronics product in history. First introduced in March 1997,
DVD
players are currently in 80% of U.S. homes. We believe newer technology
based on the DVD delivery system, such as high definition DVD,
“blu-ray”,
and portable players will continue to drive consumer interest in
this
entertainment category.
Portable
electronics.
Compressed-music portables, represented most
notably by the Apple “iPod”, enjoy significant growth, and accounted for
84.5% of total dollar sales in battery-operated music portables
in 2005
according to the CEA as reported in TWICE magazine. Apple shipped
more
than 14 million units of the iPod in the quarter ended December
31, 2005
as compared to 4.6 million in the prior year
period.
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Business
Strategy
Our
objective is to be the leading specialty retailer of home appliances and
consumer electronics in each of our markets. We strive to achieve this objective
through a continuing focus on superior execution in five key areas:
merchandising, consumer credit, distribution, product service and training.
Successful execution in each area relies on the following strategies:
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Providing
a high level of customer service. We
endeavor to maintain a very high level of customer service as a
key
component of our culture, which has resulted in average customer
satisfaction levels of approximately 91% over the past three years.
We
measure customer satisfaction on the sales floor, in our delivery
operation and in our service department by sending survey cards
to all
customers to whom we have delivered or installed a product or made
a
service call. Our customer service resolution department attempts
to
address all customer complaints within 48 hours of
receipt.
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Developing
and retaining highly trained and knowledgeable sales
personnel. We
require all sales personnel to specialize in home appliances, consumer
electronics or “track” products. Some of our sales associates qualify in
more than one specialty. Track products include small appliances,
computers, camcorders, DVD players, cameras, MP3 players and telephones
that are sold within the interior of a large colorful track that
circles
the interior floor of our stores. This specialized approach allows
the
sales person to focus on specific product categories and become
an expert
in selling and using products in those categories. New sales personnel
must complete an intensive two-week classroom training program
conducted
at our corporate office and an additional week of on-the-job training
riding in a delivery and a service truck to observe how we serve
our
customers after the sale is made.
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Offering
a broad range of customer-driven, brand name
products. We
offer a comprehensive selection of high-quality, brand name merchandise
to
our customers at guaranteed low prices. Consistent with our
good-better-best merchandising strategy, we offer a wide range
of product
selections from entry-level models through high-end models. We
maintain
strong relationships with approximately 50 manufacturers and distributors
that enable us to offer over 1,100 SKUs to our customers. Our principal
suppliers include General Electric, Whirlpool, Frigidaire, Maytag,
LG,
Mitsubishi, Samsung, Sony, Toshiba, Serta, Poulan, Weedeater, American
Yard Products, Hewlett Packard and Compaq. To facilitate our
responsiveness to customer demand, we use our prototype store,
located
near our corporate offices in Beaumont, Texas, to test the sales
process
of all new products and obtain customers’ reactions to new display formats
before introducing these products and display formats to our other
stores.
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5
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Offering
flexible financing alternatives through our proprietary credit
programs.
In the last three years, we financed, on average, approximately
57% of our
retail sales through our internal credit programs. We believe our
credit
programs expand our potential customer base, increase our sales
revenue
and enhance customer loyalty by providing our customers immediate
access
to financing alternatives that our competitors typically do not
offer. Our
credit department makes all credit decisions internally, entirely
independent of our sales personnel. We provide special consideration
to
the customer’s credit history with us. Before extending credit, we match
our loss experience by product category with the customer’s credit
worthiness to determine down payment amounts and other credit terms.
This
facilitates product sales while keeping our credit risk within
an
acceptable range. Approximately 58% of customers who have active
credit
accounts with us take advantage of our in-store payment option
and come to
our stores each month to make their payments, which we believe
results in
additional sales to these customers. Through our predictive dialing
program, we contact customers with past due accounts daily and
attempt to
work with them to collect payments in times of financial difficulty
or
periods of economic downturn. Our credit decisions and collections
process
enabled us to achieve a 2.9% net loss ratio in fiscal 2004, a 2.4%
net
loss ratio in fiscal 2005 and a 2.5% net loss ratio in fiscal 2006
on the
credit portfolio that we service for a Qualifying Special Purpose
Entity
or QSPE.
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Maintaining
same day and next day distribution capabilities. We
maintain four regional distribution centers and three other related
facilities that cover all of the major markets in which we operate.
These
facilities are part of a sophisticated inventory management system
that
also includes a fleet of approximately 130 transfer and delivery
vehicles
that service all of our markets. Our distribution operations enable
us to
deliver products on the day of, or the day after, the sale to
approximately 95% of our customers.
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Providing
outstanding product repair service. We
service every product that we sell, and we service only the products
that
we sell. In this way, we can assure our customers that they will
receive
our service technicians’ exclusive attention to their product repair
needs. All of our service centers are authorized factory service
facilities that provide trained technicians to offer in-home diagnostic
and repair service as well as on-site service and repairs for products
that cannot be repaired in the customer’s home.
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Store
Development and Growth Strategy
In
addition to executing our business strategy, we intend to continue to achieve
profitable, controlled growth by increasing same store sales, opening new
stores
and updating, expanding or relocating our existing stores.
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Increasing
same store sales. We
plan to continue to increase our same store sales by:
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continuing
to offer quality products at competitive prices;
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re-merchandising
our product offerings in response to changes in consumer demand;
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adding
new merchandise to our existing product lines;
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training
our sales personnel to increase sales closing rates;
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updating
our stores on a three-year rotating basis;
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continuing
to promote sales of computers and smaller electronics within the
interior
track area of our stores, including the expansion of high margin
accessory
items;
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6
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continuing
to provide a high level of customer service in sales, delivery
and
servicing of our products; and
|
|
|
•
|
|
increasing
sales of our merchandise, finance products, service maintenance
agreements
and credit insurance through direct mail and in-store credit promotion
programs.
|
|
|
•
|
|
Opening
new stores. We
intend to take advantage of our reliable infrastructure and proven
store
model to continue the pace of our new store openings by opening
six to
eight new stores in fiscal 2007. This infrastructure includes our
proprietary management information systems, training processes,
distribution network, merchandising capabilities, supplier relationships
and centralized credit approval and collection processes. We intend
to
expand our store base in existing, adjacent and new markets, as
follows:
|
|
|
•
|
|
Existing
and adjacent markets. We
intend to increase our market presence by opening new stores in
our
existing markets, in adjacent markets and in new markets as we
identify
the need and opportunity. New store openings in these locations
will allow
us to maximize opportunity in those markets and leverage our existing
distribution network, advertising presence, brand name recognition
and
reputation.
|
|
|
•
|
|
New
markets. In
fiscal 2006, we opened another new store in South Texas in Harlingen
and
continued to open new stores in our Dallas/Fort Worth and San Antonio
markets. We have identified several new markets that meet our criteria
for
site selection, including East Texas and central Louisiana around
Shreveport, Monroe and Alexandria, southern Oklahoma and southwest
Arkansas. We intend to consider these new markets, as well as others,
over
the next several fiscal years. We intend to first address markets
in
states in which we currently operate. We expect that this new store
growth
will include major metropolitan markets in both Texas and Louisiana.
We
have also identified a number of smaller markets within Texas and
Louisiana in which we expect to explore new store opportunities.
Our
long-term growth plans include markets in other areas of significant
population density within neighboring states.
|
|
|
•
|
|
Updating,
expanding or relocating existing stores. Over
the last three years, we have updated, expanded or relocated most
of our
stores. We have implemented our larger prototype store model at
all
locations at which the market demands support such store size,
and where
available physical space would accommodate the required design
changes. As
we continue to add new stores or replace existing stores, we intend
to
modify our floor plan to include this new model as we perceive
market
support. We continuously evaluate our existing and potential sites
to
ensure our stores are in the best possible locations and relocate
stores
that are not properly positioned. We typically lease rather than
purchase
our stores to retain the flexibility of subleasing a location if
we later
decide that the store is performing below our standards or the
market
would be better served by a relocation. After updating, expanding
or
relocating a store, we expect to increase same store sales at those
stores.
|
The
addition of new stores has played, and we believe will continue to play,
a
significant role in our continued growth and success. We currently operate
56
retail stores located in Texas and Louisiana. We opened three stores in fiscal
2004; and we opened six stores in each of fiscal 2005 and fiscal 2006. We
also
closed one clearance store in one of our markets in fiscal 2005. We plan
to
continue our store development program by opening an additional six to eight
new
stores, or an approximately 10% increase, per year and continue to update
a
portion of our existing stores each year. We believe that continuing our
strategies of updating existing stores, growing our store base and locating
our
stores in desirable geographic markets are essential for our future
success.
Customers
We
do not
have a significant concentration of sales with any individual customer and,
therefore, the loss of any one customer would not have a material impact
on our
business. No single customer accounts for more than 10% of our total revenues;
in fact, no single customer accounted for more than $500,000 (less than 0.1%)
of
our total revenue of $701.1 million during the year ended January 31,
2006.
7
Products
and Merchandising
Product
Categories. Each
of our stores sells five major categories of products: major home appliances,
consumer electronics, computers and peripheral equipment, delivery and
installation services and other household products, including lawn and garden
equipment and mattresses. The following table, which has been adjusted from
previous filings to ensure comparability, presents a summary of net sales
by
major product category, service maintenance agreement commissions and service
revenues, for the years ended January 31, 2004, 2005, and 2006:
|
Years
Ended January
31,
|
|||||||||||||||||||||
|
2004
|
2005
|
2006
|
|||||||||||||||||||
|
|
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||
|
Major
home appliances
|
$
|
159,401
|
36.2
|
%
|
$
|
168,962
|
34.2
|
%
|
$
|
223,651
|
36.0
|
%
|
|||||||||
|
Consumer
electronics
|
139,417
|
31.6
|
154,880
|
31.3
|
186,679
|
30.1
|
|||||||||||||||
|
Track
|
70,031
|
15.9
|
85,644
|
17.3
|
100,154
|
16.1
|
|||||||||||||||
|
Delivery
|
6,726
|
1.5
|
7,605
|
1.5
|
9,870
|
1.6
|
|||||||||||||||
|
Lawn
and garden
|
11,505
|
2.6
|
13,710
|
2.8
|
17,083
|
2.8
|
|||||||||||||||
|
Bedding
|
6,441
|
1.5
|
10,262
|
2.1
|
13,126
|
2.1
|
|||||||||||||||
|
Furniture
|
5,712
|
1.3
|
7,182
|
1.5
|
15,313
|
2.5
|
|||||||||||||||
|
Other
|
3,346
|
0.8
|
3,315
|
0.7
|
4,001
|
0.6
|
|||||||||||||||
|
Total
product sales
|
402,579
|
91.3
|
451,560
|
91.4
|
569,877
|
91.8
|
|||||||||||||||
|
Service
maintenance agreement
|
|||||||||||||||||||||
|
commissions
|
20,074
|
4.6
|
23,950
|
4.8
|
30,583
|
4.9
|
|||||||||||||||
|
Service
revenues
|
18,265
|
4.1
|
18,725
|
3.8
|
20,278
|
3.3
|
|||||||||||||||
|
Total
net sales
|
$
|
440,918
|
100.0
|
%
|
$
|
494,235
|
100.0
|
%
|
$
|
620,738
|
100.0
|
%
|
|||||||||
Within
these major product categories (excluding service maintenance agreements,
service revenues and delivery and installation), we offer our customers over
1,100 SKUs in a wide range of price points. Most of these products are
manufactured by brand name companies, including General Electric, Whirlpool,
Frigidaire, Maytag, LG, Mitsubishi, Samsung, Sony, Hitachi, Toshiba, Serta,
Hewlett Packard and Compaq. As part of our good-better-best merchandising
strategy, our customers are able to choose from products ranging from low-end
to
mid- to high-end models in each of our key product categories, as follows:
|
Category
|
|
Products
|
|
Selected
Brands
|
|
Major
appliances
|
|
Refrigerators,
freezers, washers, dryers, ranges, dishwashers, air conditioners
and
vacuum cleaners
|
|
General
Electric, Frigidaire, Whirlpool, Maytag, LG, KitchenAid, Sharp,
Samsung,
Friedrich, Roper, Hoover and Eureka
|
|
Consumer
electronics
|
|
Projection,
plasma, LCD and DLP televisions, and home theater systems
|
|
Mitsubishi,
Sony, Toshiba, Samsung, Sanyo, JVC, Hitachi, Yamaha, Apple and
Fujifilm
|
|
Track
|
|
Computers,
computer peripherals, VCRs, camcorders, digital cameras, DVD players,
audio components, compact disc players, speakers and portable electronics
(e.g. iPods)
|
|
Hewlett
Packard, Compaq, Sony
|
|
Other
|
|
Lawn
and garden, furniture and mattresses
|
|
Poulan,
Husqvarna, Toro, Weedeater, Ashley and
Serta
|
8
Purchasing. We
purchase products from over 100 manufacturers and distributors. Our agreements
with these manufacturers and distributors typically cover a one or two year
time
period, are renewable at the option of the parties and are terminable upon
30
days written notice by either party. Similar to other specialty retailers,
we
purchase a significant portion of our total inventory from a limited number
of
vendors. During fiscal 2006, 60.6% of our total inventory purchases were
from
six vendors, including 17.0%, 12.2% and 11.4% of our total inventory from
Frigidaire, Whirlpool and Sony respectively. The loss of any one or more
of
these key vendors or our failure to establish and maintain relationships
with
these and other vendors could have a material adverse effect on our results
of
operations and financial condition. We have no indication that any of our
suppliers will discontinue selling us merchandise. We have not experienced
significant difficulty in maintaining adequate sources of merchandise, and
we
generally expect that adequate sources of merchandise will continue to exist
for
the types of products we sell.
Merchandising
Strategy. We
focus on providing a comprehensive selection of high-quality merchandise
to
appeal to a broad range of potential customers. Consistent with our
good-better-best merchandising strategy, we offer a wide range of product
selections from entry-level models through high-end models. We primarily
sell
brand name warranted merchandise. Our established relationships with major
appliance and electronic vendors and our affiliation with NATM, a major buying
group, give us purchasing power that allows us to offer custom-featured
appliances and electronics and provides us a competitive selling advantage
over
other independent retailers. We use our prototype store, located near our
corporate offices in Beaumont, Texas, to test the sale of all new products
and
obtain customers’ reactions to new display formats before introducing these
products and display formats to our other stores. As part of our merchandising
strategy, we operate clearance centers, either as stand-alone units or
incorporated within one of our retail stores, in our Houston, San Antonio
and
Dallas markets to help sell damaged, used or discontinued merchandise. We
have
recently redesigned our approach to the merchandising of our “track” products to
provide consumer-friendly point of sale transactions that take place within
a
track area located in the interior of our store. We believe that this focused
approach to creating consumer awareness and ease of purchase of our track
products will help increase same store sales.
Pricing. We
emphasize competitive pricing on all of our products and maintain a low price
guarantee that is valid in all markets from 10 to 30 days after the sale,
depending on the product. At most of our stores, to print an invoice that
contains pricing other than the price maintained within our computer system,
sales personnel must call a special “hotline” number at the corporate office for
approval. Personnel staffing this hotline number are familiar with competitor
pricing and are authorized to make price adjustments to fulfill our low price
guarantee when a customer presents acceptable proof of the competitor’s lower
price. This centralized function also allows us to maintain control of pricing
and to store and retrieve pricing data of our competitors.
Customer
Service
We
focus
on customer service as a key component of our strategy. We believe our same
day
or next day delivery option, which is not offered by most of our competitors,
is
one of the keys to our success. Additionally, we attempt to answer and resolve
all customer complaints within 48 hours of receipt. We track customer complaints
by individual salesperson, delivery person and service technician. We send
out
over 36,000 customer satisfaction survey cards each month covering all
deliveries and service calls. Based upon a response rate from our customers
of
approximately 15%, we consistently report an average customer satisfaction
level
of approximately 91%.
9
Store
Operations
Stores. At
the end of fiscal 2006 we operated 56 retail and clearance stores located
in
Texas and Louisiana. The following table illustrates our markets, the number
of
freestanding and strip mall stores in each market and the calendar year in
which
we opened our first store in each market:
|
Number
of Stores
|
First
|
|||||||||
|
Market
|
Stand
|
Strip
|
Store
|
|||||||
|
Alone
|
Mall
|
Opened
|
||||||||
|
Houston
|
8
|
10
|
1983
|
|||||||
|
San
Antonio/Austin
|
6
|
7
|
1994
|
|||||||
|
Golden
Triangle (Beaumont, Port Arthur and Orange, Texas
|
||||||||||
|
and
Lake Charles, Louisiana)
|
1
|
4
|
1937
|
|||||||
|
Baton
Rouge/Lafayette
|
1
|
4
|
1975
|
|||||||
|
Corpus
Christi
|
1
|
0
|
2002
|
|||||||
|
Dallas/Fort
Worth
|
1
|
11
|
2003
|
|||||||
|
South
Texas
|
1
|
1
|
2004
|
|||||||
|
Total
|
19
|
37
|
||||||||
Our
stores have an average selling space of approximately 21,100 square feet,
plus a
rear storage area averaging approximately 6,000 square feet for fast-moving
or
smaller products that customers prefer to carry out rather than wait for
in-home
delivery. Two of our stores are clearance centers for discontinued product
models and damaged merchandise, returns and repossessed product located in
our
Houston and Dallas markets and contain 28,800 square feet of combined selling
space. All stores are open from 10:00 a.m. to 9:00 p.m. Monday through Friday,
from 9:00 a.m. to 9:00 p.m. on Saturday, and from 11:00 a.m. to 7:00 p.m.
on
Sunday. We also offer extended store hours during the holiday selling season.
Approximately
66% of our stores are located in strip shopping centers and regional malls,
with
the balance being stand-alone buildings in “power centers” of big box consumer
retail stores. All of our locations have parking available immediately adjacent
to the store’s front entrance. Our storefronts have a distinctive front that
guides the customer to the entrance of the store. Inside the store, a large
colorful tile track circles the interior floor of the store. One side of
the
track leads the customer to major appliances, while the other side of the
track
leads the customer to a large display of television and projection television
products. The inside of the track contains various home office and consumer
electronic products such as computers, printers, DVD players, camcorders,
digital cameras and MP3 players. We are continually refining our approach
to
merchandising of our track products, and in fiscal 2006 expanded our small
kitchen appliance assortment, introduced musical products and expanded our
offering of seasonal products. Mattresses, furniture and lawn and garden
equipment displays occupy the rear of the sales floor. To reach the cashier’s
desk at the center of the track area, our customers must walk past our products.
We believe this increases sales to customers who have purchased products
from us
on credit in the past and who return to our stores to make their monthly
credit
payments.
We
have
updated most of our stores in the last three years. We expect to continue
to
update our stores as needed to address each store’s specific needs. All of our
updated stores, as well as our new stores, include modern interior selling
spaces featuring attractive signage and display areas specifically designed
for
each major product type. Our prototype store for future expansion has from
25,000 to 30,000 square feet of retail selling space, which is approximately
20%
more than the average size of our existing stores and a rear storage area
of
between 5,000 and 7,000 square feet. Our investment to update a store has
averaged approximately $220,000 per store over the past three years, and
as a
result of the updating, we expect to increase same store sales at those stores.
Over the last three years, we have invested approximately $7.8 million updating,
refurbishing or relocating our existing stores.
Site
Selection. Our
stores are typically located adjacent to freeways or major travel arteries
and
in the vicinity of major retail shopping areas. We prefer to locate our stores
in areas where our prominent tower storefront will be the anchor of the shopping
center or readily visible from major thoroughfares. We also attempt to locate
our stores in the vicinity of major home appliance and electronics superstores.
We have typically entered major metropolitan markets where we can potentially
support at least 10 to 12 stores. We believe this number of stores allows
us to
optimize advertising and distribution costs. We have and may continue, however,
to elect to experiment with opening lower numbers of new stores in smaller
communities where customer demand for products and services outweighs any
extra
cost. Other factors we consider when evaluating potential markets include
the
distance from our distribution centers, our existing store locations and
store
locations of our competitors and population, demographics and growth potential
of the market.
10
Store
Economics. We
lease 50 of our 56 current store locations, with an average monthly rent
of
$18,800. Our average per store investment for the 12 new stores we have opened
in the last two years was approximately $1.5 million, including leasehold
improvements, fixtures and equipment and inventory (net of accounts payable).
For these new stores, the net sales per store have averaged $0.7 million
per
month.
Our
new
stores have typically been profitable on an operating basis within their
first
three to six months of operation and, on average have returned our net cash
investment in 20 months or less. We consider a new store to be successful
if it
achieves $8 million to $9 million in sales volume and 2% to 5% in operating
margins before other ancillary revenues and allocations of overhead and
advertising in the first full year of operation. We expect successful stores
that have matured, which generally occurs after two to three years of
operations, to generate annual sales of approximately $12 million to $15
million
and 5% to 9% in operating margins before other ancillary revenues and overhead
and allocations. However, depending on the credit and insurance penetration
of
an individual store, we believe that a store that does not achieve these
levels
of sales can still contribute significantly to our pretax margin.
Personnel
and Compensation. We
staff a typical store with a store manager, an assistant manager, an average
of
23 sales personnel and other support staff including cashiers and/or porters
based on store size and location. Managers have an average tenure with us
of
approximately seven years and typically have prior sales floor experience.
In
addition to store managers, we have seven district managers that generally
oversee from six to eight stores in each market. Our district managers generally
have five to fifteen years of sales experience and report to our vice president
of store operations, who has over twenty years of sales experience.
We
compensate our sales associates on a straight commission arrangement, while
we
generally compensate store managers on a salary basis plus incentives and
cashiers at an hourly rate. In some instances, store managers receive earned
commissions plus base salary. Our clearance center is staffed with a manager
and
six to eight sales personnel who are paid on a straight commission arrangement.
We believe that because our store compensation plans are tied to sales, they
generally provide us an advantage in attracting and retaining highly motivated
employees.
Training. New
sales personnel must complete an intensive two week classroom training program
conducted at our corporate office. We then require them to spend an additional
week riding in a delivery and service truck to gain an understanding of how
we
serve our customers after the sale is made. Installation and delivery staff
and
service personnel receive training through an on-the-job program in which
individuals are assigned to an experienced installation and delivery or service
employee as helpers prior to working alone. In addition, our employees benefit
from on-site training conducted by many of our vendors.
We
attempt to identify store manager candidates early in their careers with
us and
place them in a defined program of training. They generally first attend
our
in-house training program, which provides guidance and direction for the
development of managerial and supervisory skills. They then attend an external
Dale Carnegie certified management course that helps solidify their management
knowledge and builds upon their internal training. After completion of these
training programs, manager candidates work as assistant managers for six
to
twelve months and are then allowed to manage one of our smaller stores, where
they are supervised closely by the store’s district manager. We give new
managers an opportunity to operate larger stores as they become more proficient
in their management skills. Each store manager attends mandatory training
sessions on a monthly basis and also attends bi-weekly sales training meetings
where participants receive and discuss new product information.
Marketing
We
design
our marketing and advertising programs to increase our brand name recognition,
educate consumers about our products and services and generate customer traffic
in order to increase sales. Our programs include periodic promotions such
as
three, six, twelve, eighteen, twenty-four or thirty-six months of no interest
financing. We conduct our advertising programs primarily through local
newspapers, local radio and television stations and direct marketing through
direct mail, telephone and our website.
Direct
marketing has become an effective way for us to present our products and
services to our existing customers and potential new customers. We use direct
mail to target promotional mailings to credit worthy individuals, including
new
residents in our market areas from time to time. In addition, we use direct
mail
to market increased credit lines to existing customers, to encourage customers
using third party credit to convert to our credit programs and for customer
appreciation mailings. We also conduct a mail program to reestablish contact
with customers who applied for credit recently at one of our stores but did
not
purchase a product. We also call customers who recently applied for credit
at
one of our retail locations but did not purchase a product; this often redirects
potential purchasers back into the original store location.
11
Our
website, www.conns.com, offers information about our selection of products
and
provides useful information to the consumer on pricing, features and benefits
for each product and required corporate governance information. Our website
also
allows the customers residing in the markets in which we operate retail
locations to apply and be considered for credit, to see our special on-line
promotional items and to make purchases on-line through the use of approved
credit cards. The website currently averages approximately 5,040 visits per
day
from potential and existing customers and during fiscal 2006, was the source
of
approximately 80,400 credit applications. The website is linked to a call
center, allowing us to better assist customers with their credit and product
needs.
Distribution
and Inventory Management
We
typically locate our stores in close proximity of our five regional distribution
centers located in Houston, San Antonio, Dallas and Beaumont, Texas and
Lafayette, Louisiana and smaller cross-dock facilities in Austin and Harlingen,
Texas. This enables us to deliver products to our customers quickly, reduces
inventory requirements at the individual stores and facilitates regionalized
inventory and accounting controls.
In
our
retail stores, we maintain an inventory of fast-moving items and products
that
the customer is likely to carry out of the store. Our sophisticated Distribution
Inventory Sales computer system and the recent introduction of scanning
technology in our distribution centers allow us to determine on a real-time
basis the exact location of any product we sell. If we do not have a product
at
the desired retail store at the time of sale, we can provide it through our
distribution system on a next day basis.
We
maintain a fleet of tractors and trailers that allow us to move products
from
market to market and from distribution centers to stores. Our fleet of home
delivery vehicles enables our highly-trained delivery and installation
specialists to quickly complete the sales process, enhancing customer service.
We receive a delivery fee based on their choice of same day or next day
delivery. Additionally, we are able to complete deliveries to our customers
on
the same day as, or the day after the sale for approximately 95% of our
customers who have requested delivery.
12
Finance
Operations
General. We
sell our products for cash or for payment through major credit cards, which
we
treat as cash sales. We also offer our customers several financing alternatives
through our proprietary credit programs. In the last three fiscal years,
we
financed, on average, approximately 57% of our retail sales through one of
our
two credit programs. We offer our customers a choice of installment payment
plans and revolving credit plans through our primary credit portfolio. We
also
offer an installment program through our secondary credit portfolio to a
limited
number of customers who do not qualify for credit under our primary credit
portfolio. The following table shows our product sales and gross service
maintenance agreements sales, excluding returns and allowances and service
revenues, by method of payment for the periods indicated.
|
Years
Ended January 31,
|
|||||||||||||||||||||
|
2004
|
2005
|
2006
|
|||||||||||||||||||
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
||||||||||||||||
|
(dollars
in thousands)
|
|||||||||||||||||||||
|
Cash
and other credit cards
|
$
|
198,765
|
47.0
|
%
|
$
|
193,753
|
40.8
|
%
|
$
|
254,047
|
42.3
|
%
|
|||||||||
|
Primary
credit portfolio:
|
|||||||||||||||||||||
|
Installment
|
182,802
|
43.3
|
225,369
|
47.4
|
263,667
|
43.9
|
|||||||||||||||
|
Revolving
|
16,627
|
3.9
|
20,663
|
4.3
|
30,697
|
5.1
|
|||||||||||||||
|
Secondary
credit portfolio
|
24,459
|
5.8
|
35,725
|
7.5
|
52,049
|
8.7
|
|||||||||||||||
|
Total
|
$
|
422,653
|
100.0
|
%
|
$
|
475,510
|
100.0
|
%
|
$
|
600,460
|
100.0
|
%
|
|||||||||
Credit
Approval. Our
credit programs are operated by our centralized credit department staff,
completely independent of sales personnel. As part of our centralized credit
approval process, we have developed a proprietary standardized scoring model
that provides preliminary credit decisions, including down payment amounts
and
credit terms, based on both customer and product risk. We developed this
model
with data analysis by Equifax®
to
correlate the product category of a customer purchase with the default
probability. Although we rely on this program to approve automatically some
credit applications from customers for whom we have previous credit experience,
over 92.8% of our credit decisions are based on evaluation of the customer’s
creditworthiness by a qualified credit grader. As of January 31, 2006, we
employed approximately 400 full-time and part-time employees who focus on
credit
approval and collections. These employees are highly trained to follow our
strict methodology in approving credit, collecting our accounts, and charging
off any uncollectible accounts based on pre-determined aging criteria.
A
significant part of our ability to control delinquency and charge-off rates
is
tied to the relatively high level of down payments that we require and the
purchase money security interest that we obtain in the product financed,
which
reduce our credit risk and increase our customers’ willingness to meet their
future obligations. We require the customer to provide proof of credit property
insurance coverage to offset potential losses relating to theft or damage
of the
product financed.
Installment
accounts are paid over a specified period of time with set monthly payments.
Revolving accounts provide customers with a specified amount which the customer
may borrow, repay and re-borrow so long as the credit limit is not exceeded.
Most of our installment accounts provide for payment over 12 to 36 months,
and
for those accounts paid in full during fiscal 2006, the average account was
outstanding for approximately 13 to 15 months. Our revolving accounts were
outstanding approximately 12 to 17 months for those accounts paid in full
during
fiscal 2006. During fiscal 2006, approximately 7.2% of the applications approved
under the primary program were handled automatically through our computer
system
based on previous credit history with us. We automatically send the application
of any new credit customer or any customer seeking additional credit where
there
has been a past delinquency or performance problem to an experienced, in-house
credit grader.
We
created our secondary credit portfolio program to meet the needs of those
customers who do not qualify for credit under our primary program. If we
cannot
approve a customer’s application for credit under our primary portfolio, we
automatically send the application to the credit staff of our secondary
portfolio for further consideration. We offer only the installment program
to
these customers, and we grant credit to these consumers under stricter
underwriting criteria, including higher down payments. An experienced, in-house
credit grader administers the credit approval process. Most of the installment
accounts approved under this program provide for repayment over 12 to 36
months,
and for those accounts paid in full during fiscal 2006, the average account
was
outstanding for approximately 13 to 15 months.
13
The
following two tables present, for comparison purposes, information regarding
our
two credit portfolios.
|
Primary
Portfolio (1)
|
||||||||||
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
(total
outstanding balance in thousands)
|
||||||||||
|
Total
outstanding balance (period end)
|
$
|
293,909
|
$
|
358,252
|
$
|
421,649
|
||||
|
Average
outstanding customer balance
|
$
|
1,189
|
$
|
1,268
|
$
|
1,284
|
||||
|
Number
of active accounts (period end)
|
247,151
|
282,533
|
328,402
|
|||||||
|
Total
applications processed (2)
|
499,755
|
567,352
|
684,674
|
|||||||
|
Percent
of retail sales financed
|
47.2
|
%
|
51.7
|
%
|
49.0
|
%
|
||||
|
Total
applications approved
|
59.3
|
%
|
56.4
|
%
|
52.8
|
%
|
||||
|
Average
down payment
|
8.6
|
%
|
7.4
|
%
|
7.6
|
%
|
||||
|
Average
interest spread (3)
|
12.2
|
%
|
12.7
|
%
|
12.0
|
%
|
||||
|
Secondary
Portfolio
|
||||||||||
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
(total
outstanding balance in thousands)
|
||||||||||
|
Total
outstanding balance (period end)
|
$
|
55,561
|
$
|
70,448
|
$
|
98,072
|
||||
|
Average
outstanding customer balance
|
$
|
1,057
|
$
|
1,040
|
$
|
1,128
|
||||
|
Number
of active accounts (period end)
|
52,566
|
67,718
|
86,936
|
|||||||
|
Total
applications processed (2)
|
192,228
|
238,605
|
314,698
|
|||||||
|
Percent
of retail sales financed
|
5.8
|
%
|
7.5
|
%
|
8.7
|
%
|
||||
|
Total
applications approved
|
26.9
|
%
|
33.3
|
%
|
34.1
|
%
|
||||
|
Average
down payment
|
27.7
|
%
|
27.2
|
%
|
26.4
|
%
|
||||
|
Average
interest spread (3)
|
13.0
|
%
|
14.0
|
%
|
14.1
|
%
|
||||
|
(1)
|
|
The
Primary Portfolio consists of owned and sold
receivables.
|
|
(2)
|
Unapproved
credit applications in the primary portfolio are automatically
referred to
the secondary portfolio.
|
|
|
(3)
|
|
Difference
between the average interest rate yield on the portfolio and the
average
cost of funds under the program plus the allocated interest related
to
funds required to finance the credit enhancement portion of the
portfolio.
Also reflects the loss of interest income resulting from interest
free
promotional programs.
|
Credit
Quality. We
enter into securitization transactions to sell our retail receivables to
a
qualifying special purpose entity or QSPE, which we formed for this purpose.
After the sale, we continue to service these receivables under a contract
with
the QSPE. We closely monitor these credit portfolios to identify delinquent
accounts early and dedicate resources to contacting customers concerning
past
due accounts. We believe that our local presence, ability to work with customers
and flexible financing alternatives contribute to the historically low
charge-off rates on these portfolios. In addition, our customers have the
opportunity to make their monthly payments in our stores, and approximately
58%
of our active credit accounts did so at some time during the last 12 months.
We
believe that these factors help us maintain a relationship with the customer
that keeps losses low while encouraging repeat purchases.
Our
follow-up collection activities involve a combination of centralized efforts
that take place in our corporate office and outside collection efforts that
involve a visit by one of our credit counselors to the customer’s home. We
maintain a sophisticated predictive dialer system and letter campaign that
helps
us contact between 20,000 and 25,000 delinquent customers daily. We also
maintain a very experienced skip-trace department that utilizes current
technology to locate customers who have moved and left no forwarding address.
Our outside collectors provide an on-site contact with the customer to assist
in
the collection process or, if needed, to actually repossess the product in
the
event of non-payment. Repossessions are made when it is clear that the customer
is unwilling to establish a reasonable payment process. Our legal department
represents us in bankruptcy proceedings and filing of delinquency judgment
claims and helps handle any legal issues associated with the collection process.
14
Generally,
we deem an account to be uncollectible and charge it off if the account is
120
days or more past due and has not had a payment in the last seven months.
Over
the last 36 months, we have recovered approximately 19% of charged-off amounts
through our collection activities. The income that we realize from our interest
in securitized receivables depends on a number of factors, including expected
credit losses. Therefore, it is to our advantage to maintain a low delinquency
rate and loss ratio on these credit portfolios.
Our
accounting and credit staff consistently monitors trends in charge-offs by
examining the various characteristics of the charge-offs, including store
of
origination, product type, customer credit information, down payment amounts
and
other identifying information. We track our charge-offs both gross, or before
recoveries, and net, or after recoveries. We periodically adjust our credit
granting, collection and charge-off policies based on this information.
The
following table reflects the performance of our two credit portfolios, net
of
unearned interest.
|
|
Primary
Portfolio (1)
|
Secondary
Portfolio
|
||||||||||||||||||||||
|
Years
Ended January 31,
|
Years
Ended January 31,
|
|||||||||||||||||||||||
|
2004
|
2005
|
2006
|
2004
|
2005
|
2006
|
|||||||||||||||||||
|
(dollars
in thousands)
|
(dollars
in thousands)
|
|||||||||||||||||||||||
|
Total
outstanding balance (period end)
|
$
|
293,909
|
$
|
358,252
|
$
|
421,649
|
$
|
55,561
|
$
|
70,448
|
$
|
98,072
|
||||||||||||
|
Average
total outstanding balance
|
$
|
271,659
|
$
|
323,108
|
$
|
387,464
|
$
|
54,988
|
$
|
64,484
|
$
|
86,461
|
||||||||||||
|
Account
balances over 60 days old (period end
|
$
|
13,484
|
$
|
17,503
|
$
|
26,029
|
$
|
4,783
|
$
|
5,640
|
$
|
9,508
|
||||||||||||
|
Percent
of balances over 60 days old to total outstanding (period end)
(2)
|
4.6
|
%
|
4.9
|
%
|
6.2
|
%
|
8.6
|
%
|
8.0
|
%
|
9.7
|
%
|
||||||||||||
|
Bad
debt write-offs (net of recoveries)
|
$
|
7,905
|
$
|
7,601
|
$
|
10,225
|
$
|
1,499
|
$
|
1,604
|
$
|
1,915
|
||||||||||||
|
Percent
of write-offs (net) to average
outstanding
(3)
|
2.9
|
%
|
2.4
|
%
|
2.6
|
%
|
2.7
|
%
|
2.5
|
%
|
2.2
|
%
|
||||||||||||
| (1) |
The
Primary Portfolio consists of owned and sold
receivables.
|
| (2) |
At
January 31, 2006, the percent of balances over 60 days old was elevated
due to the impact of Hurricanes Katrina and Rita. See additional
discussion in Management’s Discussion and Analysis of Financial Condition
and Results of Operations.
|
| (3) |
The
fiscal year ended January 31, 2005, includes the benefit of new
information received during the year, which impacted the realization
of
sales tax credits on prior year
write-offs.
|
The
following table presents information regarding the growth of our combined credit
portfolios, including unearned interest.
|
Years
Ended January 31,
|
||||||||||
|
|
|
2004
|
|
2005
|
|
2006
|
||||
|
(dollars
in thousands)
|
||||||||||
|
Beginning
balance
|
$
|
362,076
|
$
|
418,702
|
$
|
514,204
|
||||
|
New
receivables financed
|
331,849
|
423,935
|
495,553
|
|||||||
|
Revolving
finance charges
|
4,354
|
3,926
|
3,858
|
|||||||
|
Returns
on account
|
(6,860
|
)
|
(10,670
|
)
|
(5,397
|
)
|
||||
|
Collections
on account
|
(263,313
|
)
|
(312,484
|
)
|
(375,342
|
)
|
||||
|
Accounts
charged off
|
(11,934
|
)
|
(11,825
|
)
|
(14,392
|
)
|
||||
|
Recoveries
of charge-offs
|
2,530
|
2,620
|
2,252
|
|||||||
|
Ending
balance
|
418,702
|
514,204
|
620,736
|
|||||||
|
Less
unearned interest at end of period
|
(69,232
|
)
|
(85,504
|
)
|
(101,015
|
)
|
||||
|
Total
portfolio, net
|
$
|
349,470
|
$
|
428,700
|
$
|
519,721
|
||||
Product
Support Services
Credit
Insurance. Acting
as agents for unaffiliated insurance companies, we sell credit life, credit
disability, credit involuntary unemployment and credit property insurance at
all
of our stores. These products cover payment of the customer’s credit account in
the event of the customer’s death, disability or involuntary unemployment or if
the financed property is lost or damaged. We receive sales commissions from
the
unaffiliated insurance company at the time we sell the coverage, and we
recognize retrospective commissions, which are additional commissions paid
by
the insurance carrier if insurance claims are lower than projected, as such
commissions are actually earned.
15
We
require proof of property insurance on all installment credit purchases,
although we do not require that customers purchase this insurance from us.
During fiscal 2006, approximately 75.2% of our credit customers purchased one
or
more of the credit insurance products we offer, and approximately 29.1%
purchased all of the insurance products we offer. Commission revenues from
the
sale of credit insurance contracts represented approximately 3.3%, 3.2% and
2.6%
of total revenues for fiscal years 2004, 2005 and 2006, respectively.
Warranty
Service. We
provide warranty service for all of the products we sell and only for the
products we sell. Customers purchased service maintenance agreements on products
representing approximately 48.8% of our total retail sales for fiscal 2006.
These agreements broaden and extend the period of covered manufacturer warranty
service for up to five years from the date of purchase, depending on the
product, and cover certain items during the manufacturer’s warranty period.
These agreements are sold at the time the product is purchased. Customers may
finance the cost of the agreements along with the purchase price of the
associated product. We contact the customer prior to the expiration of the
service maintenance period to provide them the opportunity to renew the period
of warranty coverage.
We
have
contracts with unaffiliated third party insurers that issue the service
maintenance agreements to cover the costs of repairs performed by our service
department under these agreements. The initial service contract is between
the
customer and the independent insurance company, but we are the insurance
company’s first choice to provide service when it is needed. We receive a
commission on the sale of the contract, and we bill the insurance company for
the cost of the service work that we perform. Commissions on these third party
contracts are recognized in revenues, net of the payment to the third party
obligor. Renewal contracts are between the customer and our in-house service
department. Under renewal contracts we recognize revenues received, and direct
selling expenses incurred, over the life of the contracts, and expense the
cost
of the service work performed as products are repaired.
Of
the
15,000 to 20,000 repairs that we perform each month, approximately 35.4% are
covered under these service maintenance agreements, approximately 50.5% are
covered by manufacturer warranties and the remainder are “walk-in” repairs from
our customers. Revenues from the sale of service contracts represented
approximately 4.6%, 4.8%, and 4.9% of net sales during fiscal years 2004, 2005
and 2006, respectively.
Management
Information Systems
We
have a
fully integrated management information system that tracks on a real-time basis
point-of-sale information, inventory receipt and distribution, merchandise
movement and financial information. The management information system also
includes a local area network that connects all corporate users to e-mail,
scheduling and various servers. All of our facilities are linked by a wide-area
network that provides communication for in-house credit authorization and real
time polling of sales and merchandise movement at the store level. In our
distribution centers, we use radio frequency terminals to assist in receiving,
stock put-away, stock movement, order filling, cycle counting and inventory
management. At our stores, we currently use desktop terminals to assist in
receiving, transferring and maintaining perpetual inventories.
Our
integrated management information system also includes extensive functionality
for management of the complete credit portfolio life cycle as well as
functionality for the management of product service. The credit system continues
from our in-house credit authorization through account set up and tracking,
credit portfolio condition, collections, credit employee productivity metrics,
skip-tracing, bankruptcy and fraud and legal account management. The service
system provides for service order processing, warranty claims processing, parts
inventory management, technician scheduling and dispatch, technician performance
metrics and customer satisfaction measurement. All of these systems share a
common customer and product sold database.
Our
point
of sale system uses an IBM Series i5 hardware system that runs on the i5OS
operating system. This system enables us to use a variety of readily available
applications in conjunction with software that supports the system. All of
our
current business application software, except our accounting and human resources
systems, has been developed in-house by our management information system
employees. We believe our management information systems efficiently support
our
current operations and provide a foundation for future growth.
We
employ
a Nortel telephone switch and state of the art Avaya (formerly Mosaix)
predictive dialer, as well as a redundant data network and cable plant, to
improve the efficiency of our collection and overall corporate communication
efforts.
16
As
part
of our ongoing system availability protection and disaster recovery planning,
we
have implemented a secondary IBM Series i5 system. We installed and implemented
a back-up IBM Series i5 system in our corporate offices to provide the ability
to switch production processing from the primary system to the secondary system
within fifteen to thirty minutes should the primary system become disabled
or
unreachable. The two machines are kept synchronized utilizing third party
software. This backup system provides “high availability” of the production
processing environment. The primary IBM Series i5 system is geographically
removed from our corporate office for purposes of disaster recovery and
security. These systems worked as designed during our recent evacuation from
our
corporate headquarters in Beaumont, Texas, due to Hurricane Rita. While we
were
displaced, our store, distribution and service operations that were not impacted
by the hurricane continued to have normal system availability and
functionality.
Competition
According
to Twice,
total
industry manufacturer sales of home appliances and consumer electronics products
in the United States, including imports, to the top 100 dealers were estimated
to be $21.3 billion and $96.4 billion, respectively, in 2004. The retail home
appliance market is large and concentrated among a few major suppliers. Sears
has historically been the leader in the retail home appliance market, with
a
market share among the top 100 retailers of approximately 39% in 2004, down
from
42% in 2003. The consumer electronics market is highly fragmented. We estimate
that the two largest consumer electronics superstore chains accounted for less
than 35% of the total electronics sales attributable to the 100 largest
retailers in 2003. However, new entrants in both industries have been successful
in gaining market share by offering similar product selections at lower prices.
As
reported by Twice,
based
upon revenue in 2004, we were the 12th largest retailer of home appliances.
Our
competitors include national mass merchants such as Sears and Wal-Mart,
specialized national retailers such as Circuit City and Best Buy, home
improvement stores such as Lowe’s and Home Depot, and locally-owned regional or
independent retail specialty stores. The availability and convenience of the
Internet and other direct-to-consumer alternatives are increasing as a
competitive factor in our industry, especially for distribution of computer
and
entertainment software.
We
compete primarily based on enhanced customer service through our unique sales
force training and product knowledge, same day or next day delivery
capabilities, proprietary in-house credit program, guaranteed low prices and
product repair service.
Regulation
The
extension of credit to consumers is a highly regulated area of our business.
Numerous federal and state laws impose disclosure and other requirements on
the
origination, servicing and enforcement of credit accounts. These laws include,
but are not limited to, the Federal Truth in Lending Act, Equal Credit
Opportunity Act and Federal Trade Commission Act. State laws impose limitations
on the maximum amount of finance charges that we can charge and also impose
other restrictions on consumer creditors, such as us, including restrictions
on
collection and enforcement. We routinely review our contracts and procedures
to
ensure compliance with applicable consumer credit laws. Failure on our part
to
comply with applicable laws could expose us to substantial penalties and claims
for damages and, in certain circumstances, may require us to refund finance
charges already paid and to forego finance charges not yet paid under
non-complying contracts. We believe that we are in substantial compliance with
all applicable federal and state consumer credit and collection laws.
Our
sale
of credit life, credit disability, credit involuntary unemployment and credit
property insurance products is also highly regulated. State laws currently
impose disclosure obligations with respect to our sales of credit and other
insurance products similar to those required by the Federal Truth in Lending
Act, impose restrictions on the amount of premiums that we may charge and
require licensing of certain of our employees and operating entities. We believe
we are in substantial compliance with all applicable laws and regulations
relating to our credit insurance business.
17
Employees
As
of
January 31, 2006, we had approximately 2,600 full-time employees and 200
part-time employees, of which approximately 1,200 were sales personnel. We
provide a comprehensive benefits package including health, life, long term
disability, and dental insurance coverage as well as a 401(k) plan, employee
stock purchase plan, paid vacation, sick pay and holiday pay. None of our
employees are covered by collective bargaining agreements and we believe our
employee relations are good.
Tradenames
and Trademarks
We
have
registered the trademarks "Conn's" and our logos.
Available
Information
We
are
subject to reporting requirements of the Securities Exchange Act of 1934, or
the
Exchange Act, and its rules and regulations. The Exchange Act requires us to
file reports, proxy and other information statements and other information
with
the Securities and Exchange Commission (“SEC”). Copies of these reports, proxy
statements and other information can be inspected and copied at the SEC Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330. You may also obtain these materials electronically by accessing
the SEC’s home page on the internet at www.sec.gov.
In
addition, we make available, free of charge on our internet website, our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
we
electronically file this material with, or furnish it to, the SEC. You may
review these documents, under the heading “Conn’s Investor Relations,” by
accessing our website at www.conns.com. Also, reports and other information
concerning us are available for inspection and copying at NASDAQ Capital
Markets.
ITEM
1A. RISK FACTORS.
An
investment in our common stock involves risks and uncertainties. You should
consider carefully the following information about these risks and uncertainties
before buying shares of our common stock. The occurrence of any of the risks
described below could adversely affect our business, financial condition or
results of operations. In that case, the trading price of our stock could
decline, and you could lose all or part of the value of your investment.
Our
success depends substantially on our ability to open and operate profitably
new
stores in existing, adjacent and new geographic markets.
We
plan
to continue our expansion by opening an additional six to eight new stores
in
fiscal 2007. We anticipate these new stores to include additional stores in
the
Dallas/Fort Worth Metroplex, South Texas, where we currently have two stores,
and possibly others in areas where we have not operated previously. We have
not
yet selected sites for all of the stores that we plan to open within the next
fiscal year. We may not be able to open all of these stores, and any new stores
that we open may not be profitable or meet our goals. Any of these circumstances
could have a material adverse effect on our financial results.
There
are
a number of factors that could affect our ability to open and operate new stores
consistent with our business plan, including:
| · |
competition
in existing, adjacent and new
markets;
|
| · |
competitive
conditions, consumer tastes and discretionary spending patterns in
adjacent and new markets that are different from those in our existing
markets;
|
| · |
a
lack of consumer demand for our products at levels that can support
new
store growth;
|
18
| · |
limitations
created by covenants and conditions under our credit facilities and
our
asset-backed securitization
program;
|
| · |
the
availability of additional financial resources;
|
| · |
the
substantial outlay of financial resources required to open new stores
and
the possibility that we may recognize little or no related benefit;
|
| · |
an
inability or unwillingness of vendors to supply product on a timely
basis
at competitive prices;
|
| · |
the
failure to open enough stores in new markets to achieve a sufficient
market presence;
|
| · |
the
inability to identify suitable sites and to negotiate acceptable
leases
for these sites;
|
| · |
unfamiliarity
with local real estate markets and demographics in adjacent and new
markets;
|
| · |
problems
in adapting our distribution and other operational and management
systems
to an expanded network of stores;
|
| · |
difficulties
associated with the hiring, training and retention of additional
skilled
personnel, including store managers; and
|
| · |
higher
costs for print, radio and television advertising.
|
These
factors may also affect the ability of any newly opened stores to achieve sales
and profitability levels comparable with our existing stores or to become
profitable at all.
If
we are unable to manage our growing business, our revenues may not increase
as
anticipated, our cost of operations may rise and our profitability may decline.
We
face
many business risks associated with growing companies, including the risk that
our management, financial controls and information systems will be inadequate
to
support our planned expansion. Our growth plans will require management to
expend significant time and effort and additional resources to ensure the
continuing adequacy of our financial controls, operating procedures, information
systems, product purchasing, warehousing and distribution systems and employee
training programs. We cannot predict whether we will be able to manage
effectively these increased demands or respond on a timely basis to the changing
demands that our planned expansion will impose on our management, financial
controls and information systems. If we fail to manage successfully the
challenges our growth poses, do not continue to improve these systems and
controls or encounter unexpected difficulties during our expansion, our
business, financial condition, operating results or cash flows could be
materially adversely affected.
The
inability to obtain funding for our credit operations through securitization
facilities or other sources may adversely affect our business and expansion
plans.
We
finance most of our customer receivables through asset-backed securitization
facilities. The trust arrangement governing these facilities currently provides
for two separate series of asset-backed notes that allow us to finance up to
$450 million in customer receivables. Under each note series, we transfer
customer receivables to a qualifying special purpose entity we formed for this
purpose in exchange for cash, subordinated securities and the right to receive
cash flows equal to the interest rate spread between the transferred receivables
and the notes issued to third parties ("interest only strip"). This qualifying
special purpose entity, in turn, issues notes that are collateralized by these
receivables and entitle the holders of the notes to participate in certain
cash
flows from these receivables. The Series A program is a $250 million variable
funding note held by Three Pillars Funding Corporation, of which $185.0 million
was drawn as of January 31, 2006. The Series B program consists of
$200 million
in private bond placements that will require scheduled principal payments
beginning in October 2006.
19
Our
ability to raise additional capital through further securitization transactions,
and to do so on economically favorable terms, depends in large part on factors
that are beyond our control.
These
factors include:
| · |
conditions
in the securities and finance markets generally;
|
| · |
conditions
in the markets for securitized instruments;
|
| · |
the
credit quality and performance of our customer receivables;
|
| · |
our
ability to obtain financial support for required credit enhancement;
|
| · |
our
ability to service adequately our financial instruments;
|
| · |
the
absence of any material downgrading or withdrawal of ratings given
to our
securities previously issued in securitizations; and
|
| · |
prevailing
interest rates.
|
Our
ability to finance customer receivables under our current asset-backed
securitization facilities depends on our compliance with covenants relating
to
our business and our customer receivables. If these programs reach their
capacity or otherwise become unavailable, and we are unable to arrange
substitute securitization facilities or other sources of financing, we may
have
to limit the amount of credit that we make available through our customer
finance programs. This may adversely affect revenues and results of operations.
Further, our inability to obtain funding through securitization facilities
or
other sources may adversely affect the profitability of outstanding accounts
under our credit programs if existing customers fail to repay outstanding credit
due to our refusal to grant additional credit. Since our cost of funds under
our
bank credit facility is expected to be greater in future years than our cost
of
funds under our current securitization facility, increased reliance on our
bank
credit facility may adversely affect our net income.
An
increase in interest rates may adversely affect our profitability.
The
interest rates on our bank credit facility and the Series A program under our
asset-backed securitization facility fluctuate up or down based upon the
LIBO/LIBOR rate, the prime rate of our administrative agent or the federal
funds
rate in the case of the bank credit facility and the commercial paper rate
in
the case of the Series A program. To the extent that such rates increase, the
fair value of the interest only strip will decline and our interest expense
could increase which may result in a decrease in our profitability.
We
have significant future capital needs which we may be unable to fund, and we
may
need additional funding sooner than currently anticipated.
We
will
need substantial capital to finance our expansion plans, including funds for
capital expenditures, pre-opening costs and initial operating losses related
to
new store openings. We may not be able to obtain additional financing on
acceptable terms. If adequate funds are not available, we will have to curtail
projected growth, which could materially adversely affect our business,
financial condition, operating results or cash flows.
We
estimate that capital expenditures during fiscal 2007 will be approximately
$25
million to $30 million and that capital expenditures during future years may
exceed this amount. We expect that cash provided by operating activities,
available borrowings under our credit facility, and access to the unfunded
portion of our asset-backed securitization program will be sufficient to fund
our operations, store expansion and updating activities and capital expenditure
programs through at least January 31, 2007. However, this may not be the case.
We may be required to seek additional capital earlier than anticipated if future
cash flows from operations fail to meet our expectations and costs or capital
expenditures related to new store openings exceed anticipated amounts.
20
A
decrease in our credit sales could lead to a decrease in our product sales
and
profitability.
In
the
last three years, we financed, on average, approximately 57% of our retail
sales
through our internal credit programs. Our ability to provide credit as a
financing alternative for our customers depends on many factors, including
the
quality of our accounts receivable portfolio. Payments on some of our credit
accounts become delinquent from time to time, and some accounts end up in
default, due to several factors, including general and local economic
conditions. As we expand into new markets, we will obtain new credit accounts
that may present a higher risk than our existing credit accounts since new
credit customers do not have an established credit history with us. A general
decline in the quality of our accounts receivable portfolio could lead to a
reduction of available credit provided through our finance operations. As a
result, we might sell fewer products, which could adversely affect our earnings.
Further, because approximately 58% of our credit customers make their credit
account payments in our stores, any decrease in credit sales could reduce
traffic in our stores and lower our revenues. A decline in the credit quality
of
our credit accounts could also cause an increase in our credit losses, which
could result in a decrease in our securitization income or increase the
provision for bad debts on our statement of operations and result in an adverse
effect on our earnings. A decline in credit quality could also lead to stricter
underwriting criteria which might have a negative impact on sales.
A
downturn in the economy may affect consumer purchases of discretionary items,
which could reduce our net sales.
A
large
portion of our sales represent discretionary spending by our customers. Many
factors affect discretionary spending, including world events, war, conditions
in financial markets, general business conditions, interest rates, inflation,
energy and gasoline prices, consumer debt levels, the availability of consumer
credit, taxation, unemployment trends and other matters that influence consumer
confidence and spending. Our customers’ purchases of discretionary items,
including our products, could decline during periods when disposable income
is
lower or periods of actual or perceived unfavorable economic conditions. If
this
occurs, our net sales and profitability could decline.
We
face significant competition from national, regional and local retailers of
major home appliances and consumer electronics.
The
retail market for major home appliances and consumer electronics is highly
fragmented and intensely competitive. We currently compete against a diverse
group of retailers, including national mass merchants such as Sears, Wal-Mart,
Target, Sam’s Club and Costco, specialized national retailers such as Circuit
City and Best Buy, home improvement stores such as Lowe’s and Home Depot, and
locally-owned regional or independent retail specialty stores that sell major
home appliances and consumer electronics similar, and often identical, to those
we sell. We also compete with retailers that market products through store
catalogs and the Internet. In addition, there are few barriers to entry into
our
current and contemplated markets, and new competitors may enter our current
or
future markets at any time.
We
may
not be able to compete successfully against existing and future competitors.
Some of our competitors have financial resources that are substantially greater
than ours and may be able to purchase inventory at lower costs and better
sustain economic downturns. Our competitors may respond more quickly to new
or
emerging technologies and may have greater resources to devote to promotion
and
sale of products and services. If two or more competitors consolidate their
businesses or enter into strategic partnerships, they may be able to compete
more effectively against us.
Our
existing competitors or new entrants into our industry may use a number of
different strategies to compete against us, including:
| · |
expansion
by our existing competitors or entry by new competitors into markets
where
we currently operate;
|
| · |
lower
pricing;
|
| · |
aggressive
advertising and marketing;
|
| · |
extension
of credit to customers on terms more favorable than we offer;
|
21
| · | larger store size, which may result in greater operational efficiencies, or innovative store formats; and |
| · |
adoption
of improved retail sales methods.
|
Competition
from any of these sources could cause us to lose market share, revenues and
customers, increase expenditures or reduce prices, any of which could have
a
material adverse effect on our results of operations.
If
new products are not introduced or consumers do not accept new products, our
sales may decline.
Our
ability to maintain and increase revenues depends to a large extent on the
periodic introduction and availability of new products and technologies. We
believe that the introduction and continued growth in consumer acceptance of
new
products, such as digital video recorders and digital, high-definition
televisions, will have a significant impact on our ability to increase revenues.
These products are subject to significant technological changes and pricing
limitations and are subject to the actions and cooperation of third parties,
such as movie distributors and television and radio broadcasters, all of which
could affect the success of these and other new consumer electronics
technologies. It is possible that new products will never achieve widespread
consumer acceptance.
If
we fail to anticipate changes in consumer preferences, our sales may decline.
Our
products must appeal to a broad range of consumers whose preferences cannot
be
predicted with certainty and are subject to change. Our success depends upon
our
ability to anticipate and respond in a timely manner to trends in consumer
preferences relating to major household appliances and consumer electronics.
If
we fail to identify and respond to these changes, our sales of these products
may decline. In addition, we often make commitments to purchase products from
our vendors up to six months in advance of proposed delivery dates. Significant
deviation from the projected demand for products that we sell may have a
material adverse effect on our results of operations and financial condition,
either from lost sales or lower margins due to the need to reduce prices to
dispose of excess inventory.
A
disruption in our relationships with, or in the operations of, any of our key
suppliers could cause our sales to decline.
The
success of our business and growth strategies depends to a significant degree
on
our relationships with our suppliers, particularly our brand name suppliers
such
as General Electric, Whirlpool, Frigidaire, Maytag, LG, Mitsubishi, Sony,
Hitachi, Samsung, Toshiba, Serta, Hewlett Packard and Compaq. We do not have
long term supply agreements or exclusive arrangements with the majority of
our
vendors. We typically order our inventory through the issuance of individual
purchase orders to vendors. We also rely on our suppliers for cooperative
advertising support. We may be subject to rationing by suppliers with respect
to
a number of limited distribution items. In addition, we rely heavily on a
relatively small number of suppliers. Our top six suppliers represented 60.6%
of
our purchases for fiscal 2006, and the top two suppliers represented
approximately 29.2% of our total purchases. The loss of any one or more of
these
key vendors or our failure to establish and maintain relationships with these
and other vendors could have a material adverse effect on our results of
operations and financial condition.
Our
ability to enter new markets successfully depends, to a significant extent,
on
the willingness and ability of our vendors to supply merchandise to additional
warehouses or stores. If vendors are unwilling or unable to supply some or
all
of their products to us at acceptable prices in one or more markets, our results
of operations and financial condition could be materially adversely affected.
Furthermore,
we rely on credit from vendors to purchase our products. As of January 31,
2006,
we had $40.9 million in accounts payable and $74.0 million in merchandise
inventories. A substantial change in credit terms from vendors or vendors'
willingness to extend credit to us would reduce our ability to obtain the
merchandise that we sell, which could have a material adverse effect on our
sales and results of operations.
22
You
should not rely on our comparable store sales as an indication of our future
results of operations because they fluctuate significantly.
Our
historical same store sales growth figures have fluctuated significantly from
quarter to quarter. For example, same store sales growth for each of the
quarters of fiscal 2006 were 7.3%, 12.1%, 23.3%, and 22.6%, respectively. Even
though we achieved double-digit same store sales growth during fiscal 2006,
we
may not be able to increase same store sales at this pace in the future. A
number of factors have historically affected, and will continue to affect,
our
comparable store sales results, including:
| · |
changes
in competition;
|
| · |
general
economic conditions;
|
| · |
new
product introductions;
|
| · |
consumer
trends;
|
| · |
changes
in our merchandise mix;
|
| · |
changes
in the relative sales price points of our major product categories;
|
| · |
the
impact of our new stores on our existing stores, including potential
decreases in existing stores’ sales as a result of opening new stores;
|
| · |
weather
conditions in our markets;
|
| · |
timing
of promotional events;
|
| · |
timing
and location of major sporting events; and
|
| · |
our
ability to execute our business strategy effectively.
|
Changes
in our quarterly and annual comparable store sales results could cause the
price
of our common stock to fluctuate significantly.
Because
we experience seasonal fluctuations in our sales, our quarterly results will
fluctuate, which could adversely affect our common stock price.
We
experience seasonal fluctuations in our net sales and operating results. In
fiscal 2006, we generated 29.8% of our net sales and 31.1% of our net income
in
the fiscal quarter ended January 31 (which included the holiday selling season).
We also incur significant additional expenses during this fiscal quarter due
to
higher purchase volumes and increased staffing. If we miscalculate the demand
for our products generally or for our product mix during the fiscal quarter
ending January 31, our net sales could decline, resulting in excess inventory,
which could harm our financial performance. A shortfall in expected net sales,
combined with our significant additional expenses during this fiscal quarter,
could cause a significant decline in our operating results. This could adversely
affect our common stock price.
Our
business could be adversely affected by changes in consumer protection laws
and
regulations.
Federal
and state consumer protection laws and regulations, such as the Fair Credit
Reporting Act, limit the manner in which we may offer and extend credit. Since
we finance a substantial portion of our sales, any adverse change in the
regulation of consumer credit could adversely affect our total revenues and
gross margins. For example, new laws or regulations could limit the amount
of
interest or fees that may be charged on consumer loan accounts or restrict
our
ability to collect on account balances, which would have a material adverse
effect on our earnings. Compliance with existing and future laws or regulations
could require us to make material expenditures, in particular personnel training
costs, or otherwise adversely affect our business or financial results. Failure
to comply with these laws or regulations, even if inadvertent, could result
in
negative publicity, fines or additional licensing expenses, any of which could
have an adverse effect on our results of operations and stock price.
23
Pending
litigation relating to the sale of credit insurance and the sale of service
maintenance agreements in the retail industry, including one lawsuit in which
we
were the defendant, could adversely affect our business.
We
understand that states’ attorneys general and private plaintiffs have filed
lawsuits against other retailers relating to improper practices conducted in
connection with the sale of credit insurance in several jurisdictions around
the
country. We offer credit insurance in all of our stores and require the purchase
of property credit insurance products from us or from third party providers
in
connection with sales of merchandise on installment credit; therefore, similar
litigation could be brought against us. We were previously named as a defendant
in a purported class action lawsuit alleging breach of contract and violations
of state and federal consumer protection laws arising from the terms of our
service maintenance agreements. A final judgment was entered dismissing that
lawsuit. While we believe we are in full compliance with applicable laws and
regulations, if we are found liable in any future lawsuit regarding credit
insurance or service maintenance agreements, we could be required to pay
substantial damages or incur substantial costs as part of an out-of-court
settlement, either of which could have a material adverse effect on our results
of operations and stock price. An adverse judgment or any negative publicity
associated with our service maintenance agreements or any potential credit
insurance litigation could also affect our reputation, which could have a
negative impact on sales.
If
we lose key management or are unable to attract and retain the highly qualified
sales personnel required for our business, our operating results could suffer.
Our
future success depends to a significant degree on the skills, experience and
continued service of Thomas J. Frank, Sr., our Chairman of the Board and Chief
Executive Officer, William C. Nylin, Jr., our President and Chief Operating
Officer, David L. Rogers, our Chief Financial Officer, David R. Atnip, our
Senior Vice President and Treasurer, Sydney K. Boone, our Secretary and General
Counsel, and other key personnel. If we lose the services of any of these
individuals, or if one or more of them or other key personnel decide to join
a
competitor or otherwise compete directly or indirectly with us, our business
and
operations could be harmed, and we could have difficulty in implementing our
strategy In addition, as our business grows, we will need to locate, hire and
retain additional qualified sales personnel in a timely manner and develop,
train and manage an increasing number of management level sales associates
and
other employees. Competition for qualified employees could require us to pay
higher wages to attract a sufficient number of employees, and increases in
the
federal minimum wage or other employee benefits costs could increase our
operating expenses. If we are unable to attract and retain personnel as needed
in the future, our net sales growth and operating results could suffer.
Because
our stores are located in Texas and Louisiana, we are subject to regional risks.
Our
56
stores are located exclusively in Texas and Louisiana. This subjects us to
regional risks, such as the economy, weather conditions, hurricanes and other
natural disasters. If the region suffered an economic downturn or other adverse
regional event, there could be an adverse impact on our net sales and
profitability and our ability to implement our planned expansion program.
Several of our competitors operate stores across the United States and thus
are
not as vulnerable to the risks of operating in one region.
Our
information technology infrastructure is vulnerable to damage that could harm
our business.
Our
ability to operate our business from day to day, in particular our ability
to
manage our credit operations and inventory levels, largely depends on the
efficient operation of our computer hardware and software systems. We use
management information systems to track inventory information at the store
level, communicate customer information, aggregate daily sales information
and
manage our credit portfolio. These systems and our operations are vulnerable
to
damage or interruption from:
| · |
power
loss, computer systems failures and Internet, telecommunications
or data
network failures;
|
| · |
operator
negligence or improper operation by, or supervision of, employees;
|
24
| · |
physical
and electronic loss of data or security breaches, misappropriation
and
similar events;
|
| · |
computer
viruses;
|
| · |
intentional
acts of vandalism and similar events; and
|
| · |
hurricanes,
fires, floods and other natural disasters.
|
The
software that we have developed to use in granting credit may contain undetected
errors that could cause our network to fail or our expenses to increase. Any
failure due to any of these causes, if it is not supported by our disaster
recovery plan, could cause an interruption in our operations and result in
reduced net sales and profitability.
If
we are unable to maintain our current insurance coverage for our service
maintenance agreements, our customers could incur additional costs and our
repair expenses could increase, which could adversely affect our financial
condition and results of operations.
There
are
a limited number of insurance carriers that provide coverage for our service
maintenance agreements. If insurance becomes unavailable from our current
carriers for any reason, we may be unable to provide replacement coverage on
the
same terms, if at all. Even if we are able to obtain replacement coverage,
higher premiums could have an adverse impact on our profitability if we are
unable to pass along the increased cost of such coverage to our customers.
Inability to obtain insurance coverage for our service maintenance agreements
could cause fluctuations in our repair expenses and greater volatility of
earnings.
If
we are unable to maintain group credit insurance policies from insurance
carriers, which allow us to offer their credit insurance products to our
customers purchasing on credit, our revenues could be reduced and bad debts
might increase.
There
are
a limited number of insurance carriers that provide credit insurance coverage
for sale to our customers. If credit insurance becomes unavailable for any
reason we may be unable to offer replacement coverage on the same terms, if
at
all. Even if we are able to obtain replacement coverage, it may be at higher
rates or reduced coverage, which could affect the customer acceptance of these
products, reduce our revenues or increase our credit losses.
Changes
in trade regulations, currency fluctuations and other factors beyond our control
could affect our business.
A
significant portion of our inventory is manufactured overseas and in Mexico.
Changes in trade regulations, currency fluctuations or other factors beyond
our
control may increase the cost of items we purchase or create shortages of these
items, which in turn could have a material adverse effect on our results of
operations and financial condition. Conversely, significant reductions in the
cost of these items in U.S. dollars may cause a significant reduction in the
retail prices of those products, resulting in a material adverse effect on
our
sales, margins or competitive position. In addition, commissions earned on
both
our credit insurance and service maintenance agreement products could be
adversely affected by changes in statutory premium rates, commission rates,
adverse claims experience and other factors.
We
may be unable to protect our intellectual property rights, which could impair
our name and reputation.
We
believe that our success and ability to compete depends in part on consumer
identification of the name "Conn’s." We have registered the trademarks "Conn’s"
and our logo. We intend to protect vigorously our trademark against infringement
or misappropriation by others. A third party, however, could attempt to
misappropriate our intellectual property in the future. The enforcement of
our
proprietary rights through litigation could result in substantial costs to
us
that could have a material adverse effect on our financial condition or results
of operations.
25
Any
changes in the tax laws of the states of Texas and Louisiana could affect our
state tax liabilities.
From
time
to time, legislation has been introduced in the Texas legislature that would,
among other things, remove the current exemption from franchise tax liability
that limited partnerships enjoy. Currently, the Texas Legislature is not in
session and its next regular session is scheduled to begin in January 2007;
however, the Texas Governor has announced he will call a special session of
the
Texas Legislature beginning April 17, 2006 to address school finance reform
mandated by the Texas Supreme Court. Legislation could be introduced that,
among
other things, could change the way that limited partnerships are taxed in the
state of Texas; however, the outcome of any particular proposal cannot be
predicted with any certainty.
A
further rise in oil and gasoline prices could affect our customers’
determination to drive to our stores, and cause us to raise our delivery
charges.
A
further
significant increase in oil and gasoline prices could adversely affect our
customers’ shopping decisions and patterns. We rely heavily on our internal
distribution system and our same or next day delivery policy to satisfy our
customers’ needs and desires, and any such significant increases could result in
increased distribution charges. Such increases may not significantly affect
our
competitors.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
The
following summarizes the geographic location of our stores, warehouse and
distribution centers and corporate facilities by major market area:
|
Geographic
Location
|
No.
of Locations
|
Leased
Facilities
|
Total
Square Feet
|
Warehouse
Square Feet
|
Leases
With Options Expiring Beyond 10 Years
|
|||||||||||
|
Golden
Triangle District (1)
|
5
|
5
|
153,568
|
32,169
|
5
|
|||||||||||
|
Louisiana
District
|
5
|
5
|
129,890
|
27,200
|
5
|
|||||||||||
|
Houston
District
|
18
|
14
|
394,240
|
90,070
|
13
|
|||||||||||
|
San
Antonio/Austin District
|
13
|
13
|
379,330
|
83,982
|
12
|
|||||||||||
|
Corpus
Christi
|
1
|
1
|
51,670
|
14,300
|
1
|
|||||||||||
|
South
Texas
|
2
|
2
|
55,660
|
8,435
|
2
|
|||||||||||
|
Dallas
District
|
12
|
10
|
351,243
|
79,245
|
10
|
|||||||||||
|
Store
Totals
|
56
|
50
|
1,515,601
|
335,401
|
48
|
|||||||||||
|
Warehouse/Distribution
Centers
|
6
|
3
|
703,453
|
703,453
|
1
|
|||||||||||
|
Service
Centers
|
5
|
3
|
191,932
|
133,636
|
1
|
|||||||||||
|
Corporate
Offices
|
1
|
1
|
106,783
|
25,000
|
1
|
|||||||||||
|
Total
|
68
|
57
|
2,517,769
|
1,197,490
|
51
|
|||||||||||
___________
(1)
Includes one store in Lake Charles, Louisiana.
ITEM
3. LEGAL PROCEEDINGS.
We
are
involved in routine litigation incidental to our business from time to time.
We
do not expect the outcome of any of this routine litigation to have a material
effect on our financial condition or results of operation. However, the results
of their proceedings cannot be predicted with certainty, and changes in facts
and circumstances could impact our estimate of reserves for
litigation.
26
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There
were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 2006.
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
What
is the principal market for our common stock?
The
principal market for our common stock is the NASDAQ National Market. Our common
stock is listed on the NASDAQ National Market under the symbol "CONN."
Information regarding the high and low sales prices for our common stock for
each quarterly period since our initial public offering as reported on NASDAQ
is
summarized as follows:
|
High
|
Low
|
||||||
|
Quarter
ended April 30, 2004
|
$
|
18.08
|
$
|
14.50
|
|||
|
Quarter
ended July 31, 2004
|
$
|
19.18
|
$
|
15.35
|
|||
|
Quarter
ended October 31, 2004
|
$
|
16.82
|
$
|
13.79
|
|||
|
Quarter
ending January 31, 2005
|
$
|
18.33
|
$
|
14.37
|
|||
|
Quarter
ended April 30, 2005
|
$
|
19.70
|
$
|
15.29
|
|||
|
Quarter
ended July 31, 2005
|
$
|
27.51
|
$
|
16.69
|
|||
|
Quarter
ended October 31, 2005
|
$
|
29.80
|
$
|
23.20
|
|||
|
Quarter
ended January 31, 2006
|
$
|
44.93
|
$
|
28.68
|
|||
How
many common stockholders do we have?
As
of
March 27, 2006, we had approximately 57 common stockholders of record and an
estimated 6,400 beneficial owners of our common stock.
Did
we declare any cash dividends in fiscal 2005 or fiscal
2006?
No
cash
dividends were paid in fiscal 2005 or 2006. We do not anticipate paying
dividends in the foreseeable future. Any future payment of dividends will be
at
the discretion of the Board of Directors and will depend upon our results of
operations, financial condition, cash requirements and other factors deemed
relevant by the Board of Directors, including the terms of our indebtedness.
Provisions in agreements governing our long-term indebtedness restrict the
amount of dividends that we may pay to our stockholders. See “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.”
Has
the Company had any sales of unregistered securities during the last
year?
The
Company has had no sales of unregistered securities during fiscal
2006.
27
ITEM
6. SELECTED FINANCIAL DATA.
(Restated)
|
Twelve
|
||||||||||||||||||||||||||||
|
Year
|
Six
Months
|
Months
|
||||||||||||||||||||||||||
|
Ended
|
Ended
|
Ended
|
||||||||||||||||||||||||||
|
July
31,
|
January
31,
|
January
31,
|
Years
Ended January 31,
|
|||||||||||||||||||||||||
|
2001
|
2002
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||||||||||||||||
|
Statement
of Operations (1):
|
(dollars
and shares in thousands, except per share amounts)
|
|||||||||||||||||||||||||||
|
Total
revenues
|
$
|
327,088
|
$
|
206,187
|
$
|
378,337
|
$
|
445,267
|
$
|
498,378
|
$
|
565,821
|
$
|
701,148
|
||||||||||||||
|
Operating
expense:
|
||||||||||||||||||||||||||||
|
Cost
of goods sold, including warehousing and occupancy
cost
|
201,963
|
127,543
|
233,226
|
276,956
|
317,712
|
359,710
|
453,374
|
|||||||||||||||||||||
|
Selling,
general and administrative expense
|
92,194
|
58,630
|
106,949
|
125,712
|
135,282
|
153,652
|
182,797
|
|||||||||||||||||||||
|
Provision
for bad debts
|
390
|
(290
|
)
|
530
|
1,779
|
2,504
|
2,589
|
1,133
|
||||||||||||||||||||
|
Total
operating expense
|
294,547
|
185,883
|
340,705
|
404,447
|
455,498
|
515,951
|
637,304
|
|||||||||||||||||||||
|
Operating
income
|
32,541
|
20,304
|
37,632
|
40,820
|
42,880
|
49,870
|
63,844
|
|||||||||||||||||||||
|
Interest
expense, net and minority interest
|
3,754
|
2,940
|
4,855
|
7,237
|
4,577
|
2,477
|
400
|
|||||||||||||||||||||
|
Earnings
before income taxes
|
28,787
|
17,364
|
32,777
|
33,583
|
38,303
|
47,393
|
63,444
|
|||||||||||||||||||||
|
Provision
for income taxes
|
10,299
|
6,256
|
11,734
|
11,919
|
13,260
|
16,706
|
22,341
|
|||||||||||||||||||||
|
Net
income from continuing operations
|
18,488
|
11,108
|
21,043
|
21,664
|
25,043
|
30,687
|
41,103
|
|||||||||||||||||||||
|
Discontinued
operations, net of tax
|
(546
|
)
|
-
|
(389
|
)
|
-
|
-
|
-
|
-
|
|||||||||||||||||||
|
Net
income
|
17,942
|
11,108
|
20,654
|
21,664
|
25,043
|
30,687
|
41,103
|
|||||||||||||||||||||
|
Less
preferred stock dividends (2)
|
(2,173
|
)
|
(1,025
|
)
|
(1,939
|
)
|
(2,133
|
)
|
(1,954
|
)
|
-
|
-
|
||||||||||||||||
|
Net
income available for common stockholders
|
$
|
15,769
|
$
|
10,083
|
$
|
18,715
|
$
|
19,531
|
$
|
23,089
|
$
|
30,687
|
$
|
41,103
|
||||||||||||||
|
Earnings
per common share:
|
||||||||||||||||||||||||||||
|
Basic
|
$
|
0.92
|
$
|
0.59
|
$
|
1.10
|
$
|
1.17
|
$
|
1.30
|
$
|
1.32
|
$
|
1.76
|
||||||||||||||
|
Diluted
|
$
|
0.92
|
$
|
0.58
|
$
|
1.08
|
$
|
1.17
|
$
|
1.26
|
$
|
1.30
|
$
|
1.71
|
||||||||||||||
|
Average
common shares outstanding:
|
||||||||||||||||||||||||||||
|
Basic
|
17,169
|
17,025
|
17,060
|
16,724
|
17,726
|
23,192
|
23,412
|
|||||||||||||||||||||
|
Diluted
|
17,194
|
17,327
|
17,383
|
16,724
|
18,257
|
23,646
|
24,088
|
|||||||||||||||||||||
|
Other
Financial Data:
|
||||||||||||||||||||||||||||
|
Stores
open at end of period
|
32
|
36
|
36
|
42
|
45
|
50
|
56
|
|||||||||||||||||||||
|
Same
store sales growth (3)
|
10.3
|
%
|
16.7
|
%
|
15.6
|
%
|
1.3
|
%
|
2.6
|
%
|
3.6
|
%
|
16.9
|
%
|
||||||||||||||
|
Inventory
turns (4)
|
5.9
|
7.5
|
6.8
|
6.6
|
6.5
|
6.0
|
6.6
|
|||||||||||||||||||||
|
Gross
margin percentage (5)
|
38.3
|
%
|
38.1
|
%
|
38.4
|
%
|
37.8
|
%
|
36.3
|
%
|
36.4
|
%
|
35.3
|
%
|
||||||||||||||
|
Operating
margin (6)
|
9.9
|
%
|
9.8
|
%
|
9.9
|
%
|
9.2
|
%
|
8.6
|
%
|
8.8
|
%
|
9.1
|
%
|
||||||||||||||
|
Return
on average equity (7)
|
38.3
|
%
|
32.9
|
%
|
31.2
|
%
|
28.1
|
%
|
19.4
|
%
|
16.1
|
%
|
17.7
|
%
|
||||||||||||||
|
Capital
expenditures
|
$
|
14,833
|
$
|
10,551
|
$
|
15,547
|
$
|
15,070
|
$
|
9,401
|
$
|
19,619
|
$
|
18,490
|
||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||||||||||
|
Working
capital
|
$
|
44,064
|
$
|
50,224
|
$
|
50,224
|
$
|
74,139
|
$
|
121,154
|
$
|
156,006
|
$
|
190,073
|
||||||||||||||
|
Total
assets
|
137,737
|
150,757
|
150,757
|
185,663
|
240,081
|
276,716
|
353,158
|
|||||||||||||||||||||
|
Total
debt
|
31,445
|
38,750
|
38,750
|
51,992
|
14,512
|
10,532
|
136
|
|||||||||||||||||||||
|
Preferred
stock
|
15,400
|
15,226
|
15,226
|
15,226
|
-
|
-
|
-
|
|||||||||||||||||||||
|
Total
stockholders’ equity
|
58,191
|
67,538
|
67,538
|
86,824
|
171,911
|
208,734
|
255,861
|
|||||||||||||||||||||
| (1) |
Information
excludes the operations of the rent-to-own division that was sold
in
February, 2001.
|
| (2) |
Dividends
were not actually declared or paid until 2004, but are presented
for
purposes of earnings per share
calculations.
|
| (3) |
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 period.
Sales
from closed stores have been removed from each period. Sales from
relocated stores have been included in each period because each such
store
was relocated within the same general geographic market. Sales from
expanded stores have been included in each
period.
|
| (4) |
Inventory
turns are defined as the cost of goods sold, excluding warehousing
and
occupancy cost, divided by the average of the beginning and ending
product
inventory, excluding consigned goods; information for the six months
ended
January 31, 2002 has been annualized for comparison
purposes.
|
| (5) |
Gross
margin percentage is defined as total revenues less cost of goods
and
parts sold, including warehousing and occupancy cost, divided by
total
revenues.
|
| (6) |
Operating
margin is defined as operating income divided by total
revenues.
|
| (7) |
Return
on average equity is calculated as current period net income from
continuing operations divided by the average of the beginning and
ending
equity; information for the six months ended January 31, 2002 has
been
annualized for comparison purposes.
|
28
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS.
(Restated)
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:
· 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;
· our
intention to update or expand existing stores;
· 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;
· our
cash
flows from operations, borrowings from our revolving line of credit and proceeds
from securitizations to fund our operations, debt repayment and
expansion;
· rising
interest rates may increase our cost of borrowings or reduce securitization
income;
· technological
and market developments, growth trends and projected sales in the home appliance
and consumer electronics industry, including with respect to digital products
like DVD players, HDTV, digital radio, home networking devices and other new
products, and our ability to capitalize on such growth;
· the
potential for price erosion or lower unit sales points that could result in
declines in revenues;
· increasing
oil and gas prices that could adversely affect our customers’ shopping decisions
and patterns;
· 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;
· 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;
· our
relationships with key suppliers;
· the
adequacy of our distribution and information systems and management experience
to support our expansion plans;
· the
accuracy of our expectations regarding competition and our competitive
advantages;
· the
potential for market share erosion that could result in reduced
revenues;
· the
accuracy of our expectations regarding the similarity or dissimilarity of our
existing markets as compared to new markets we enter; and
· the
outcome of litigation affecting our business.
29
Additional
important factors that could cause our actual results to differ materially
from
our expectations are discussed under “Risk Factors” in this Form 10-K. 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
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
September 8, 2006, we concluded that our consolidated financial statements
for
the years ended January 31, 2006, 2005 and 2004 as well as the selected
financial data for the years ended January 31, 2006, 2005, 2004, 2003, and
July
31, 2001, the six months ended January 31, 2002 and the twelve months ended
January 31, 2002, should be restated to correct for errors in recording
interests in securitized assets, securitization income and related income tax
impacts that were incorrectly accounted for under U.S. generally accepted
accounting principles, specifically covered by Statement of Financial Accounting
Standards (“SFAS”) No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
and
Emerging Issues Task Force (“EITF”) No. 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interest
in Securitized Financial Assets.
The
following discussion has been updated, as appropriate, to reflect the changes
to
our financial statements. See Note 13 to the financial statements for discussion
of the impacts on the financial statements.
Additionally,
on February 1, 2006, we adopted Statement of Financial Accounting Standard
No.
123R, Stock-Based
Compensation.
We
elected to use the modified retrospective application transition, which results
in the retrospective adjustment of all prior period financial statements using
the fair-value-based method of accounting for stock-based compensation. As
applicable, all amounts disclosed in the financial statements and in
Management’s Discussion and Analysis of Financial Condition and Results of
Operations have been adjusted accordingly. See Note 1 to the financial
statements for discussion of the impacts on the financial
statements.
Through
our 56 retail stores, we provide products and services to our customers in
six
primary market areas, including Houston, San Antonio/Austin, Dallas/Fort Worth,
southern Louisiana, Southeast Texas, and South Texas. Products and services
offered through retail sales outlets include major home appliances, consumer
electronics, home office equipment, lawn and garden products, mattresses,
furniture, service maintenance agreements, customer credit programs, including
installment and revolving credit account services, and various credit insurance
products. These activities are supported through our extensive service,
warehouse and distribution system. Our stores bear the “Conn’s” name, after our
founder’s family, and deliver the same products and services to our customers.
All of our stores follow the same procedures and methods in managing their
operations. The Company’s management evaluates performance and allocates
resources based on the operating results of the retail stores and considers
the
credit programs, service contracts and distribution system to be an integral
part of the Company’s retail operations.
Presented
below is a diagram setting forth our five cornerstones which represent, in
our
view, the five components of our sales goal - strong merchandising systems,
state of the art credit options for our customers, an extensive warehousing
and
distribution system, a service system to support our customers needs beyond
the
product warranty periods, and our uniquely, well-trained employees in each
area.
Each of these systems combine to create a “nuts and bolts” support system for
our customers needs and desires. Each of these systems is discussed at length
in
the Business section of this report.
30
We,
of
course, derive a large part of our revenue from our product sales. However,
unlike many of our competitors, we provide in-house credit options for our
customers’ product purchases. In the last three years, we have financed, on
average, approximately 57% of our retail sales through these programs. In
turn,
we finance (convert to cash) substantially all of our customer receivables
from
these credit options through an asset-backed securitization facility. See
“Business - Finance Operations” for a detailed discussion of our in-house credit
programs. 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 fund such purchases. We transfer our
receivables, consisting of retail installment contracts and revolving accounts
extended to our customers, to the issuer in exchange for cash and subordinated
securities.
While
our
warehouse and distribution system does not directly generate revenues, other
than the fees paid by our customers for delivery and installation of the
products to their homes, it is our extra, “value-added” program that our
existing customers have come to rely on, and our new customers are hopefully
sufficiently impressed with to become repeat customers. We derive revenues
from
our repair services on the products we sell. Additionally, acting as an agent
for unaffiliated companies, we sell credit insurance to protect our customers
from credit losses due to death, disability, involuntary unemployment and damage
to the products they have purchased; to the extent they do not already have
it.
Executive
Overview
This
overview is intended to provide an executive level overview of our operations
for our fiscal year ended January 31, 2006. A detailed explanation of the
changes in our operations for the fiscal year ended January 31, 2006 as compared
to the prior year is included beginning under Results of Operations. Following
are significant financial items in managements view:
| · |
Our
revenues for the fiscal year ended January 31, 2006 increased by
23.9
percent, or $135.3 million, from fiscal year 2005 to $701.1 million
due to
sales growth, primarily from existing stores, and increased securitization
income. Our same store sales product growth rate for the fiscal year
ended
January 31, 2006 was 16.9%, versus 3.6% for fiscal 2005. The improvement
in same store sales growth was due primarily to improved execution
at the
store level and effective sales promotions. (Also see “Operational Changes
and Outlook.”)
|
| · |
During
the last half of fiscal year 2006, two hurricanes, Katrina and Rita,
hit
the Gulf Coast. These storms significantly impacted our operations
by:
|
| § |
temporary
closing of our Louisiana, South East Texas, Corpus Christi and Houston
stores and related distribution operations for limited periods of
time,
|
31
| § |
positively
impacting Net sales as customers in the affected areas replaced appliances
and other household products damaged as a result of the
storms,
|
| § |
disrupting
credit collection efforts while we were displaced from our corporate
headquarters as a result of Hurricane Rita, causing a short-term
increase
in the credit portfolio’s delinquency statistics and resulting in a
reduction of Finance charges and other and an increase in Bad debt
expense, and
|
| § |
causing
us to incur expenses related to the relocation of our corporate office
functions and losses related to damaged merchandise and facilities,
net of
insurance proceeds.
|
| · |
Same
store sales benefited from the effects of the hurricanes. Appliance
sales
accounted for the majority of the increase in total same stores sales
during the period due in part to our customers’ need to replace items
damaged by the storms. We believe same store sales, adjusted for
our
estimate of the impact of the hurricanes, grew approximately 12%
for the
year ended January 31, 2006.
|
| · |
Our
entry into the Dallas/Fort Worth and the South Texas markets had
a
positive impact on our revenues. Approximately $75.9 million of our
product sales for the year ended January 31, 2006, came from the
opening
of twelve new stores in these markets, since February 2004. Our plans
provide for the opening of additional stores in existing markets
during
the balance of fiscal 2007 as we focus on opportunities in markets
in
which we have existing infrastructure.
|
| · |
While
deferred interest and ”same as cash” plans continue to be an important
part of our sales promotion plans, our improved execution and effective
use of a variety of sales promotions, enabled us to reduce the level
of
deferred interest and ”same as cash” plans that extend beyond one year,
relative to gross product sales volume. For the fiscal years ended
January
31, 2005 and 2006, $29.0 million and $33.9 million, respectively,
in gross
product sales were financed by extended deferred interest and “same as
cash” plans. These extended term promotional programs were not offered
broadly until April, 2004. We expect to continue to offer this type
of
extended term promotional credit in the
future.
|
| · |
During
the year ended January 31, 2006, pretax income was reduced by $1.0
million
to reflect our estimate of expected losses due to increased delinquencies
from Hurricane Rita and a temporary increase in bankruptcy filings.
The
increase in bankruptcy filings is as a result of the new bankruptcy
law
that took effect October 17, 2005, prompting consumers to file for
bankruptcy protection before the new law went into effect. The $1.0
million charge to earnings reduced Finance charges and other by $895,000
and increased Bad debt expense by $105,000.
|
| · |
Our
gross product margin was 35.3% for fiscal year 2006, a decrease from
36.4%
in fiscal 2005, primarily as a result of a change in our revenue
mix as
Product sales grew faster than Service revenues and Finance charges
and
other. Also, reduced insurance sales penetration negatively impacted
our
gross margin.
|
| · |
Our
operating margin increased to 9.1% from 8.8% in fiscal 2005. In fiscal
year 2006, we decreased SG&A expense as a percent of revenues to 26.0%
from 27.1% when compared to the prior year, primarily from decreases
in
payroll and payroll related expenses and net advertising expense
as a
percent of revenues. Partially offsetting these reductions were increased
general liability insurance expense and expenses incurred due to
Hurricane
Rita of approximately $907,000, net of estimated insurance proceeds.
Additionally, our operating margin benefited from a decrease in the
Provision for bad debts as a percent of revenues from 0.5% to 0.2%.
|
| · |
Operating
cash flows were $64.2 million for fiscal 2006. Our operating cash
flows
increased as a result of increased net income, improved funding under
our
asset-backed securitization and vendor and federal employment and
income
tax payment deferrals granted because of the hurricanes. Most of
the
payments deferred will be paid during the three month period ended
April
30, 2006.
|
| · |
Our
pretax income for fiscal 2006 increased by 33.9% or approximately
$16.0
million, from fiscal 2005 to $63.4 million. The increase was driven
largely by the increase in sales with additional benefit from improved
expense leverage, as Selling, general and administrative expenses
did not
grow as fast as revenues.
|
32
Operational Changes
and Outlook
We
have
implemented, continued increased focus on or modified several initiatives in
fiscal 2006 that we believe will positively impact our future operating results,
including:
|
•
|
A
reorganization of our retail management team, including strengthening
the
district management team in the Dallas/Fort Worth market;
|
||
|
|
•
|
|
Successfully
increasing the sales force by adding approximately 13% more sales
associates per store, resulting in incremental sales volume;
|
|
|
•
|
|
Implementation
of call centers in the stores, emphasizing regular, consistent contact
with our customers;
|
|
|
•
|
|
Increased
emphasis on the sales of furniture, and additional product
lines added to this category; and
|
|
|
•
|
|
Promoting
flat panel technology in our stores as the price point becomes more
affordable for our customers.
|
Our
sales
during the last five months of fiscal 2006 benefited from the impact of
Hurricanes Katrina and Rita. This impact could affect future same store sales
due to:
|
•
|
|
The
acceleration of the sale of essential appliances in the affected
markets
disrupting the normal replacement cycle for these items;
and
|
|
|
•
|
The
same store sales reported for the impacted markets being elevated
to a
level that might not be duplicated.
|
While
our
credit portfolio delinquency statistics were still negatively impacted by the
effects of the hurricanes at January 31, 2006, we anticipate the portfolio
performance returning to historical levels as we continue to work with the
customers impacted by these events.
During
the year, we opened four new stores in the Dallas/Fort Worth market, one in
Harlingen, Texas and one in San Antonio, Texas. We continue to be satisfied
with
the results in the Dallas/Fort Worth market and will continue to expand the
number of stores in that market. We added additional distribution capability
during the year by opening our 140,000 square foot distribution center in
Dallas, and increased our service center capabilities in Dallas by converting
our previous distribution center to a full-time service center. Our new
Harlingen store now joins a store in McAllen, Texas, opened in early September
2004, forming our South Texas market, We believe that this market is
substantially underserved and provides great growth potential for our company.
We have several other locations in Texas and Louisiana that we believe are
promising and, along with new stores in existing markets, are in various stages
of development for opening in fiscal year 2007. We also continue to look at
other markets, including neighboring states for opportunities.
The
consumer electronics industry depends on new products to drive same store sales
increases. Typically, these new products, such as digital televisions, DVD
players, digital cameras and MP3 players are introduced at relatively high
price
points that are then gradually reduced as the product becomes more 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 January 31, 2006.
33
Transfers
of Financial Assets. We
transfer customer receivables to the 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 Statement of Financial Accounting Standards (“SFAS”) No. 140,
Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities.
As we
transfer the accounts, we record an asset representing the “interest only
strip”, which is cash flows resulting entirely from the interest on the
security. The gain or loss recognized on these transactions 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. The use of different estimates or assumptions could produce different
financial results. For example, if we had assumed a 10.0% reduction in net
interest spread (which might be caused by rising interest rates), our interest
in securitized assets would have been reduced by $5.5 million as of January
31,
2006, which may have an adverse effect on earnings. We recognize income from
our
interest in these transferred accounts based on the difference between the
interest earned on customer accounts and the costs associated with financing
and
servicing the transferred accounts, less a provision for bad debts associated
with the transferred assets. This income is recorded as “Finance charges and
other” in our consolidated statement of operations. If we had assumed a 10%
increase in the assumption used for developing the reserve for doubtful accounts
on the books of the QSPE, the impact to recorded “Finance charges and other”
would have been a reduction in revenues and pretax income of $1.3
million.
Deferred
Tax Assets. We
have net deferred tax assets of approximately $218,000 as of January 31, 2006,
which are subject to periodic recoverability assessments. Realization of our
net
deferred tax assets may be dependent upon whether we achieve projected future
taxable income. Our estimates regarding future profitability may change due
to
future market conditions, our ability to continue to execute at historical
levels and our ability to continue our growth plans. These changes, if any,
may
require material adjustments to these deferred tax asset balances. For example,
if we had assumed that the future tax rate at which these deferred items would
reverse was 34.1% rather than 35.1%, we would have reduced the net deferred
tax
asset and net income by approximately $6,000.
Intangible
Assets. We
have significant intangible assets related primarily to goodwill. The
determination of related estimated useful lives and whether or not these assets
are impaired involves significant judgments. Effective with the implementation
of SFAS 142, we ceased amortizing goodwill and began testing potential
impairment of this asset annually based on judgments regarding ongoing
profitability and cash flow of the underlying assets. Changes in strategy or
market conditions could significantly impact these judgments and require
adjustments to recorded asset balances. For example, if we had reason to believe
that our recorded goodwill had become impaired due to decreases in the fair
market value of the underlying business, we would have to take a charge to
income for that portion of goodwill that we believe is impaired. Our goodwill
balance at January 31, 2005 and 2006 was $9.6 million
Property,
Plant and Equipment.
Our
accounting policies regarding land, buildings, and equipment include judgments
regarding the estimated useful lives of such assets, the estimated residual
values to which the assets are depreciated, and the determination as to what
constitutes increasing the life of existing assets. These judgments and
estimates may produce materially different amounts of depreciation and
amortization expense than would be reported if different assumptions were used.
These judgments may also impact the need to recognize an impairment charge
on
the carrying amount of these assets if the anticipated cash flows associated
with the assets are not realized. In addition, the actual life of the asset
and
residual value may be different from the estimates used to prepare financial
statements in prior periods.
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. We sell service maintenance agreements and credit
insurance contracts on behalf of unrelated third parties. For contracts where
the third parties are the obligor on the contract, commissions are recognized
in
revenues at the time of sale, and in the case of retrospective commissions,
based on claims experience, at the time that they are earned. When we sell
service maintenance 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 direct obligor
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 and 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
amounts of service maintenance agreement revenue deferred at January 31, 2005
and 2006 were $3.9 million and $3.6 million, respectively, and are included
in “Deferred revenue” in the accompanying balance sheets. The amounts of service
maintenance agreement revenue recognized for the fiscal years ended January
31,
2004, 2005 and 2006 were $4.5 million, $5.0 million and $5.0 million,
respectively.
34
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.
Recent
Accounting Pronouncements. In
December 2004, Statement of Financial Accounting Standards No. 123R,
Share-Based
Payment,
was
issued. 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. Additionally, the statement provides multiple options for adopting
the requirements of the standard. We implemented the provisions of this
statement effective February 1, 2006, and elected to retrospectively adjust
prior year results for comparison purposes. See Note 1 to our financial
statements for additional information.
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. 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.
35
Results
of Operations
The
following table sets forth certain statement of operations information as a
percentage of total revenues for the periods indicated.
|
Years
ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Revenues:
|
||||||||||
|
Product
sales
|
80.8
|
%
|
79.8
|
%
|
81.2
|
%
|
||||
|
Service
maintenance agreement commissions (net)
|
4.0
|
4.2
|
4.4
|
|||||||
|
Service
revenues
|
3.7
|
3.3
|
2.9
|
|||||||
|
Total
net sales
|
88.5
|
87.3
|
88.5
|
|||||||
|
Finance
charges and other
|
11.5
|
12.7
|
11.5
|
|||||||
|
Total
revenues
|
100.0
|
100.0
|
100.0
|
|||||||
|
Cost
and expenses:
|
||||||||||
|
Cost
of goods sold, including warehousing and occupancy costs
|
62.9
|
62.8
|
63.9
|
|||||||
|
Cost
of parts sold, including warehousing and occupancy costs
|
0.8
|
0.8
|
0.8
|
|||||||
|
Selling,
general and administrative expense
|
27.2
|
27.1
|
26.0
|
|||||||
|
Provision
for bad debts
|
0.5
|
0.5
|
0.2
|
|||||||
|
Total
costs and expenses
|
91.4
|
91.2
|
90.9
|
|||||||
|
Operating
income
|
8.6
|
8.8
|
9.1
|
|||||||
|
Interest
expense (including minority interest)
|
0.9
|
0.4
|
0.1
|
|||||||
|
Earnings
before income taxes
|
7.7
|
8.4
|
9.0
|
|||||||
|
Provision
for income taxes
|
||||||||||
|
Current
|
2.7
|
3.0
|
3.3
|
|||||||
|
Deferred
|
-
|
-
|
(0.2
|
)
|
||||||
|
Total
provision for income taxes
|
2.7
|
3.0
|
3.1
|
|||||||
|
Net
income
|
5.0
|
%
|
5.4
|
%
|
5.9
|
%
|
||||
In
reviewing the percentages reflected in the above table, we noted that the
following trends in our operations developed within the last twelve months.
| · |
The
increase in cost of goods sold as a percentage of total revenues
reflects
the shift in revenue mix as product sales grew faster than service
revenues and finance charges and other. Cost of products sold was
78.7% of
net product sales in the 2005 period and 78.6% in the 2006 period.
|
| · |
The
decline in selling, general and administrative expense as a percentage
of
total revenues resulted primarily from decreased payroll and payroll
related expenses and net advertising expense, as a percent of revenues,
that were partially offset by increased general liability insurance
expense and higher expenses incurred due to Hurricane
Rita.
|
| · |
The
declining trend in interest expense as a percentage of total revenues
is a
function of continuing to generate positive cash flow, the pay-off
of debt
with our IPO proceeds in fiscal year 2004 and the impact of expiring
interest rate swap agreements.
|
The
presentation of our 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 of merchandising
our
products, including amounts related to purchasing the product and a portion
of
our advertising cost, in selling, general and administrative expense. It is
our
understanding that other retailers may include such costs as part of cost of
goods sold.
36
The
following table presents certain operations information in dollars and
percentage changes from year to year:
|
Analysis
of Consolidated Statements of Operations
|
||||||||||||||||||||||
|
(in
thousands except percentages)
|
2005
vs. 2004
|
2006
vs. 2005
|
||||||||||||||||||||
|
Years
Ended January 31,
|
Incr/(Decr)
|
Incr/(Decr)
|
||||||||||||||||||||
|
2004
|
2005
|
2006
|
Amount
|
Pct
|
Amount
|
Pct
|
||||||||||||||||
|
Revenues
|
||||||||||||||||||||||
|
Product
sales
|
$
|
402,579
|
$
|
451,560
|
$
|
569,877
|
$
|
48,981
|
12.2
|
%
|
$
|
118,317
|
26.
2
|
%
|
||||||||
|
Service
maintenance agreement commissions (net)
|
20,074
|
23,950
|
30,583
|
3,876
|
19.3
|
6,633
|
27.7
|
|||||||||||||||
|
Service
revenues
|
18,265
|
18,725
|
20,278
|
460
|
2.5
|
1,553
|
8.3
|
|||||||||||||||
|
Total
net sales
|
440,918
|
494,235
|
620,738
|
53,317
|
12.1
|
126,503
|
25.6
|
|||||||||||||||
|
Finance
charges and other
|
57,460
|
71,586
|
80,410
|
14,126
|
24.6
|
8,824
|
12.3
|
|||||||||||||||
|
Total
revenues
|
498,378
|
565,821
|
701,148
|
67,443
|
13.5
|
135,327
|
23.9
|
|||||||||||||||
|
Cost
of goods and parts sold
|
317,712
|
359,710
|
453,374
|
41,998
|
13.2
|
93,664
|
26.0
|
|||||||||||||||
|
Gross
Profit
|
180,666
|
206,111
|
247,774
|
25,445
|
14.1
|
41,663
|
20.2
|
|||||||||||||||
|
Gross
Margin
|
36.3
|
%
|
36.4
|
%
|
35.3
|
%
|
||||||||||||||||
|
Selling,
general and administrative expense
|
135,282
|
153,652
|
182,797
|
18,370
|
13.6
|
29,145
|
19.0
|
|||||||||||||||
|
Provision
for bad debts
|
2,504
|
2,589
|
1,133
|
85
|
3.4
|
(1,456
|
)
|
(56.2
|
)
|
|||||||||||||
|
Operating
income
|
42,880
|
49,870
|
63,844
|
6,990
|
16.3
|
13,974
|
28.0
|
|||||||||||||||
|
Operating
Margin
|
8.6
|
%
|
8.8
|
%
|
9.1
|
%
|
||||||||||||||||
|
Interest
expense
|
4,577
|
2,359
|
400
|
(2,218
|
)
|
(48.5
|
)
|
(1,959
|
)
|
(83.0
|
)
|
|||||||||||
|
Minority
interest in limited partnership
|
-
|
118
|
-
|
118
|
(118
|
)
|
||||||||||||||||
|
Pretax
Income
|
38,303
|
47,393
|
63,444
|
9,090
|
23.7
|
16,051
|
33.9
|
|||||||||||||||
|
Income
taxes
|
13,260
|
16,706
|
22,341
|
3,446
|
26.0
|
5,635
|
33.7
|
|||||||||||||||
|
Net
Income
|
25,043
|
30,687
|
41,103
|
5,644
|
22.5
|
10,416
|
33.9
|
|||||||||||||||
|
Less
preferred dividends
|
1,954
|
-
|
-
|
(1,954
|
)
|
(100.0 | ) |
-
|
-
|
|||||||||||||
|
Net
income available
|
||||||||||||||||||||||
|
for
common stockholders
|
$
|
23,089
|
$
|
30,687
|
$
|
41,103
|
$
|
7,598
|
32.9 | % |
$
|
10,416
|
33.9
|
%
|
||||||||
Refer
to
the above Analysis of Consolidated Statements of Operations in condensed
form
while reading the operations review on a year by year basis.
Year
Ended January 31, 2005 Compared to the Year Ended January 31,
2006
Revenues.
Total
revenues increased by $135.3 million, or 23.9%, from $565.8 million for the
year
ended January 31, 2005 to $701.1 million for the year ended January 31, 2006.
The increase was attributable to increases in net sales of $126.5 million,
or
25.6%, and $8.8 million, or 12.3%, in finance charges and other revenue.
The
$126.5 million increase in net sales was made up of the following:
| · |
a
$75.8 million increase resulted from a same store sales increase
of 16.9%.
Appliance sales accounted for the majority of the increase and were
significantly impacted by our customers’ need to replace items damaged as
a result of Hurricanes Katrina and Rita. After adjusting for our
estimate
of the impact of the storms, we believe same store sales increased
approximately 12%, with appliance, electronics, track and furniture
sales
being the biggest contributors. As a result of changes in the commission
structure on our third-party service maintenance agreement (SMA)
contracts, beginning July 2005, we began realizing the benefit of
increased front-end commissions on SMA sales, which increased net
sales
$1.4 million, (offsetting this increase is a decrease in retrospective
commissions which is reflected in Finance charges and
other),
|
| · |
a
$49.8 million increase generated by twelve retail locations that
were not
open for twelve consecutive months in each period, net of reductions
related to the closing of one location,
|
37
| · |
a
$644,000 decrease resulted from an increase in discounts on promotional
credit sales, and
|
| · |
a
$1.6 million increase resulted from an increase in service revenues.
|
The
components of the $126.5 million increase in net sales were a $118.3 million
increase in product sales and an $8.2 million net increase in service
maintenance agreement commissions and service revenues. The $118.3 million
increase in product sales resulted from the following:
| · |
approximately
$82.6 million was attributable to increases in unit sales, due to
increased appliances, track, furniture, and consumer electronics
sales,
and
|
| · |
approximately
$35.7 million was attributable to increases in unit price points.
The
price point impact was driven primarily
by:
|
| o |
consumers
selecting higher priced consumer electronics products, as the new
technology becomes more affordable;
|
| o |
consumers
selecting higher priced appliance products, including high-efficiency
washers and dryers and stainless kitchen appliances,
and
|
| o |
higher
prices on appliances in general.
|
The
following table presents the makeup of net sales by product category in each
period, 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.
|
Years
Ended January 31,
|
||||||||||||||||||||
|
|
|
2005
|
|
|
2006
|
|
|
Percent
|
||||||||||||
|
Category
|
Amount
|
Percent
|
Amount
|
Percent
|
Increase
|
|||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Major
home appliances
|
$
|
168,962
|
34.2
|
%
|
$
|
223,651
|
36.0
|
%
|
32.4
|
%
|
(1
|
)
|
||||||||
|
Consumer
electronics
|
154,880
|
31.3
|
186,679
|
30.1
|
20.5
|
(2
|
)
|
|||||||||||||
|
Track
|
85,644
|
17.3
|
100,154
|
16.1
|
16.9
|
(2
|
)
|
|||||||||||||
|
Delivery
|
7,605
|
1.5
|
9,870
|
1.6
|
29.8
|
(2
|
)
|
|||||||||||||
|
Lawn
and garden
|
13,710
|
2.8
|
17,083
|
2.8
|
24.6
|
(2
|
)
|
|||||||||||||
|
Bedding
|
10,262
|
2.1
|
13,126
|
2.1
|
27.9
|
(2
|
)
|
|||||||||||||
|
Furniture
|
7,182
|
1.5
|
15,313
|
2.5
|
113.2
|
(3
|
)
|
|||||||||||||
|
Other
|
3,315
|
0.7
|
4,001
|
0.6
|
20.7
|
(2
|
)
|
|||||||||||||
|
Total
product sales
|
451,560
|
91.4
|
569,877
|
91.8
|
26.2
|
|||||||||||||||
|
Service
maintenance agreement commissions
|
23,950
|
4.8
|
30,583
|
4.9
|
27.7
|
(2
|
)
|
|||||||||||||
|
Service
revenues
|
18,725
|
3.8
|
20,278
|
3.3
|
8.3
|
|||||||||||||||
|
Total
net sales
|
$
|
494,235
|
100.0
|
%
|
$
|
620,738
|
100.0
|
%
|
25.6
|
%
|
||||||||||
| (1) |
In
addition to strong overall sales growth, appliance sales benefited
from
our customers’ needs after the
hurricanes.
|
| (2) |
These
increases are consistent with overall increase in product sales and
improved unit prices.
|
| (3) |
This
increase is due to the increased emphasis on the sales of furniture,
primarily sofas, recliners and entertainment centers, and new product
lines added to this category.
|
Revenue
from Finance charges and other increased by approximately $8.8 million, or
12.3%, from $71.6 million for the year ended January 31. 2005 to $80.4 million
for the year ended January 31, 2006. This increase in revenue resulted primarily
from increases in securitization income of $9.4 million, a $1.0 million decrease
in service maintenance agreement retrospective commissions and a net increase
in
insurance commissions and other revenues of $445,000. The increase in
securitization income is attributable to higher product sales and increases
in
our retained interest in assets transferred to the QSPE, due primarily to
increases in the transferred balances. Partially offsetting the securitization
income increases was an impairment charge of $895,000 for estimated losses
resulting from increased bankruptcy filings by our customers prior to October
17, 2005, the effective date of the new bankruptcy law and our estimate of
expected additional loan losses due to the impact of Hurricane
Rita.
38
Cost
of Goods Sold.
Cost of
goods sold, including warehousing and occupancy cost, increased by $92.9
million, or 26.2%, from $355.2 million for the year ended January 31, 2005
to
$448.1 million for the year ended January 31, 2006. This increase was consistent
with the 26.2% increase in net product sales during the year ended January
31,
2006. Cost of products sold was 78.7% of net product sales in the 2005 period
and 78.6% in the 2006 period.
Cost
of Service Parts Sold.
Cost of
service parts sold, including warehousing and occupancy cost, increased
approximately $759,000, or 16.7%, for the year ended January 31, 2006 as
compared to the year ended January 31, 2005, due to increases in parts
sales.
Selling,
General and Administrative Expense.
While
Selling, general and administrative expense increased by $29.1 million, or
19.0%, from $153.7 million for the year ended January 31, 2005 to $182.8 million
for the year ended January 31, 2006, it decreased as a percentage of total
revenue from 27.1% to 26.0%. The decrease in expense as a percentage of total
revenues resulted primarily from decreased payroll and payroll related expenses
and net advertising expense, as a percent of revenues, that were partially
offset by increased general liability insurance expense and higher expenses
incurred due to Hurricane Rita of approximately $907,000, net of estimated
insurance proceeds, including expenses related to relocation of the corporate
office functions and losses related to damaged merchandise and facility damage.
Provision
for Bad Debts.
The
provision for bad debts on receivables retained by the Company and not
transferred to the QSPE and other non-credit portfolio receivables decreased
by
$1.5 million, or 56.2%, during the year ended January 31, 2006 as compared
to
the year ended January 31, 2005, primarily as a result of changes in the loss
history and provision adjustments based on favorable loss experience during
the
last twelve months, and revised loss allocations between receivables retained
by
us and those transferred to the QSPE, which were offset in Finance charges
and
other. Partially offsetting the bad debt expense decrease was a charge of
$105,000 for estimated losses resulting from increased bankruptcy filings by
our
customers prior to October 17, 2005, the effective date of the new bankruptcy
law and expected additional loan losses due to the impact of Hurricane Rita
on
our customers. See Note 2 to the financial statements for information regarding
the performance of the credit portfolio.
Interest
Expense, net.
Net
interest expense decreased by $2.0 million, or 83.0%, from $2.4 million for
the
year ended January 31, 2005 to $400,000 for the year ended January 31, 2006.
The
net decrease in interest expense was attributable to the following
factors:
| · |
expiration
of $20.0 million in our interest rate hedges and the discontinuation
of
hedge accounting for derivatives resulted in a net decrease in interest
expense of approximately $856,000;
and
|
| · |
the
deconsolidation of SRDS (previously consolidated as a VIE according
to FIN
46) resulted in a decrease of interest expense of
$759,000,
|
The
remaining decrease in interest expense of $385,000 resulted from lower average
outstanding debt balances and higher interest income from invested
funds.
Minority
Interest.
As a
result of FIN 46, for the year ended January 31, 2005, we eliminated the pretax
operating profit contributed from the consolidation of SRDS through the minority
interest line item in our consolidated statement of operations (see Note 1
of
Notes to the Financial Statements).
Provision
for Income Taxes.
The
provision for income taxes increased by $5.6 million, or 33.7%, from $16.7
million for the year ended January 31, 2005 to $22.3 million for the year ended
January 31, 2006, consistent with the increase in pretax income of
33.9%.
Net
Income.
As a
result of the above factors, Net income increased $10.4 million, or 33.9%,
from
$30.7 million for the year ended January 31, 2005 to $41.1 million for the
year
ended January 31, 2006.
39
Year
Ended January 31, 2004 Compared to the Year Ended January 31,
2005
Revenues.
Total
revenues increased by $67.4 million, or 13.5%, from $498.4 million for the
year
ended January 31, 2004 to $565.8 million for the year ended January 31, 2005.
The increase was attributable to increases in net sales of $53.3 million, or
12.1%, and $14.1 million, or 24.6%, in finance charges and other revenue.
The
$53.3
million increase in net sales was made up of the following:
| · |
a
$14.8 million increase resulted from a same store sales increase
of 3.6%.
|
| · |
a
$40.5 million increase generated by nine retail locations that were
not
open for twelve consecutive months in each period.
|
| · |
a
$2.4 million decrease resulted from an increase in discounts on
promotional credit sales, and
|
| · |
a
$460,000 increase resulted from an increase in service revenues.
|
The
components of the $53.3 million increase in net sales were a $49.0 million
increase in product sales and a $4.3 million net increase in service maintenance
agreement commissions and service revenues. The $49.0 million increase in
product sales resulted from the following:
| · |
approximately
$18.0 million was attributable to increases in unit sales, due to
increased appliances, mattresses and track sales,
and
|
| · |
approximately
$31.0 million was attributable to increases in unit price points.
The
price point impact was driven primarily by consumers selecting higher
priced products as new technology prices fall and become more
affordable.
|
The
following table presents the makeup of net sales by product category in each
period, 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.
|
Years
Ended January 31,
|
||||||||||||||||||||
|
2004
|
2005
|
Percent
|
||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Increase
|
||||||||||||||||
|
(dollars
in thousands)
|
||||||||||||||||||||
|
Major
home appliances
|
$
|
159,401
|
36.1
|
%
|
$
|
168,962
|
34.2
|
%
|
6.0
|
%
|
||||||||||
|
Consumer
electronics
|
139,417
|
31.6
|
154,880
|
31.3
|
11.1
|
|||||||||||||||
|
Track
|
70,031
|
15.9
|
85,644
|
17.3
|
22.3
|
(1
|
)
|
|||||||||||||
|
Delivery
|
6,726
|
1.5
|
7,605
|
1.5
|
13.1
|
|||||||||||||||
|
Lawn
and garden
|
11,505
|
2.6
|
13,710
|
2.8
|
19.2
|
(2
|
)
|
|||||||||||||
|
Bedding
|
6,441
|
1.5
|
10,262
|
2.1
|
59.3
|
(2
|
)
|
|||||||||||||
|
Furniture
|
5,712
|
1.3
|
7,182
|
1.5
|
25.7
|
(3
|
)
|
|||||||||||||
|
Other
|
3,346
|
0.8
|
3,315
|
0.7
|
(0.9
|
)
|
||||||||||||||
|
Total
product sales
|
402,579
|
91.3
|
451,560
|
91.4
|
12.2
|
|||||||||||||||
|
Service
maintenance agreement commissions
|
20,074
|
4.6
|
23,950
|
4.8
|
19.3
|
|||||||||||||||
|
Service
revenues
|
18,265
|
4.1
|
18,725
|
3.8
|
2.5
|
|||||||||||||||
|
Total
net sales
|
$
|
440,918
|
100.0
|
%
|
$
|
494,235
|
100.0
|
%
|
12.1
|
%
|
||||||||||
| (1) |
Emphasis
continues to be given to promotion of sales in the “track” area of
computers, computer peripherals, portable electronics and small
appliances.
|
| (2) |
The
increases in lawn and garden and mattresses result from our increased
emphasis placed on these relatively new product categories and the
introduction of the Serta brand mattresses to our product
line.
|
| (3) |
There
has been significant growth in the sales of furniture, primarily
recliners
and other seating products. More square footage is being devoted
to
furniture in certain store locations as we continue to “test the market”
for this product category.
|
40
Revenue
from Finance charges and other increased by approximately $14.1 million, or
24.6%, from $57.5 million for the year ended January 31. 2004 to $71.6 million
for the year ended January 31, 2005. This increase in revenue resulted primarily
from increases in securitization income of $11.5 million, and increases in
insurance commissions and other revenues of $2.6 million. The increase in
securitization income is attributable to higher product sales and increases
in
our retained interest in assets transferred to the QSPE, due primarily to
increases in the transferred balances.
Cost
of Goods Sold.
Cost of
goods sold, including warehousing and occupancy cost, increased by $41.5
million, or 13.2%, from $313.6 million for the year ended January 31, 2004
to
$355.1 million for the year ended January 31, 2005. This increase primarily
resulted from the 12.2% increase in net product sales as well as an increase
in
cost of products sold. Cost of products sold was 77.9% of net product sales
in
the 2004 period and 78.7% in the 2005 period. The overall increase in cost
of
goods sold as a percentage of product sales was primarily caused by the
continued deterioration of retail price points and sales of relatively lower
margin computer products growing at a more rapid rate than sales of higher
margin products.
Cost
of Service Parts Sold.
Cost of
service parts sold, including warehousing and occupancy cost, increased
approximately $500,000, or 11.7%, for the year ended January 31, 2005 as
compared to the year ended January 31, 2004, due to increases in parts
sales.
Selling,
General and Administrative Expense.
While
Selling, general and administrative expense increased by $18.4 million, or
13.6%, from $135.3 million for the year ended January 31, 2004 to $153.7 million
for the year ended January 31, 2005, it decreased as a percentage of total
revenue from 27.2% to 27.1%. The increase in total expense was primarily the
result of increased sales salaries and commissions (and other payroll-related
expense), delivery, occupancy and depreciation expense due to the addition
of
new stores and all in line with the 12.1% increase in net sales. Professional
services was up 41.2% which partially reflects the effect of complying with
Sarbanes/Oxley Section 404 by expending approximately $600,000 on direct
implementation, including our independent accounting firms cost incurred in
testing and preparation necessary to issue its initial report, but not including
our employee man hours. General liability, property and health insurance costs
were up 24.3% due to additional stores, additional employees (primarily sales)
and the higher exposure of being a publicly-traded company. These cost increases
were partially offset by decreases in telephone, amortization, advertising
and
equipment lease expense.
Provision
for Bad Debts.
The
provision for bad debts on receivables retained by the Company and not
transferred to the QSPE and other non-credit portfolio receivables increased
by
$85,000, or 3.4%, during the year ended January 31, 2005 as compared to the
year
ended January 31, 2004, primarily due to increases in our receivables balances.
Interest
Expense, net.
Net
interest expense decreased by $2.2 million, or 48.5%, from $4.6 million for
the
year ended January 31, 2004 to $2.4 million for the year ended January 31,
2005.
The net decrease in interest expense was attributable to the following
factors:
| · |
the
expiration of $30.0 million of our interest rate hedges in April
2003 and
the expiration of $50.0 million of our interest rate hedges in November
2003 and the discontinuation of hedge accounting for derivatives
resulted
in a net decrease of $1.4 million in interest expense from the prior
period; and
|
| · |
the
decrease in our average outstanding debt from $39.9 million to $2.6
million (when ignoring the impact of FIN 46 consolidation of $14.8
million, see below) as a result of our public offering and payoff
of
substantially all of our outstanding debt with the proceeds resulted
in a
decrease in interest expense of approximately $1.9 million;
|
these
decreases were offset by the following:
| · |
the
increase in interest rates in our continuing revolving debt facilities
and
related commitment fees of $361,000;
and
|
| · |
the
implementation of FIN 46 resulted in reclassification of $759,000
in
expenses previously reflected as occupancy cost in Selling, general
and
administrative expense to Interest expense; these reclassifications
should
not be necessary in the future since we are no longer subject to
the
provisions of FIN 46.
|
41
Minority
Interest.
As a
result of FIN 46, beginning February 1, 2004, we eliminate the pretax operating
profit contributed from the consolidation of SRDS through the minority interest
line item in our consolidated statement of operations.
Provision
for Income Taxes.
The
provision for income taxes increased by $3.4 million, or 26.0%, from $13.3
million for the year ended January 31, 2004 to $16.7 million for the year ended
January 31, 2005. The increase in the tax provision was directly related to
the
increase in pretax profits of $9.1 million, or 23.7%. The effective tax rate
attributable to continuing operations for the year ended January 31, 2005 was
35.3%, compared with 34.6% for the prior year. Taxes were comprised of federal
and state rates totaling 35.5% in both periods offset by cash refunds due to
return amounts being lower than estimates and adjustments of previous tax
provisions in both periods.
Net
Income.
As a
result of the above factors, Net income increased $5.6 million, or 22.5%, from
$25.0 million for the year ended January 31, 2004 to $30.7 million for the
year
ended January 31, 2005.
Impact
of Inflation
We
do not
believe that inflation has a material effect on our net sales or results of
operations. However, a continuing significant increase in oil and gasoline
prices could adversely affect our customers’ shopping decisions and patterns. We
rely heavily on our internal distribution system and our same or next day
delivery policy to satisfy our customers’ needs and desires, and any such
significant increases could result in increased distribution charges. Such
increases may not affect our competitors in the same manner as it affects us.
Seasonality
and Quarterly Results of Operations
Our
business is somewhat seasonal, with a higher portion of sales and operating
profit realized during the quarter that ends January 31. The fiscal quarter
ending January 31 reflects the holiday selling season, the major collegiate
bowl
season, the National Football League playoffs and the Super Bowl. Over the
four
quarters of fiscal 2006, gross margins were 35.3%, 36.3%, 35.5% and 34.5%.
During the same period, operating margins were 9.9%, 9.1%, 8.0% and 9.5%. A
portion of the fluctuation in gross margins and operating margins is due to
planned infrastructure cost additions, such as increased warehouse space and
larger stores, additional personnel and systems required to absorb the
significant increase in revenues that we have experienced over the last several
years.
Additionally,
quarterly results may fluctuate materially depending on factors such as the
following:
| o |
timing
of new product introductions, new store openings and store
relocations
|
| o |
sales
contributed by new stores;
|
| o |
increases
or decreases in comparable store
sales;
|
| o |
adverse
weather conditions;
|
| o |
shifts
in the timing of certain holidays or promotions;
and
|
| o |
changes
in our merchandise mix.
|
Results
for any quarter are not necessarily indicative of the results that may be
achieved for a full year.
42
The
following tables sets forth certain unaudited quarterly statement of operations
information for the eight quarters ended January 31, 2006. The unaudited
quarterly information has been prepared on a consistent basis and includes
all
normal recurring adjustments that management considers necessary for a fair
presentation of the information shown.
|
2005
|
||||||||||||||||
|
Quarter
Ended
|
||||||||||||||||
|
Apr.
30
|
Jul.
31
|
Oct.
31
|
Jan.
31
|
|||||||||||||
|
(dollars
and shares in thousands, except per share amounts)
|
||||||||||||||||
|
Revenues
|
||||||||||||||||
|
Product
sales
|
$
|
107,528
|
$
|
108,305
|
$
|
104,869
|
$
|
130,858
|
||||||||
|
Service
maintenance agreement commissions (net)
|
6,635
|
5,776
|
5,399
|
6,140
|
||||||||||||
|
Service
revenues
|
4,378
|
4,770
|
4,853
|
4,724
|
||||||||||||
|
Total
net sales
|
118,541
|
118,851
|
115,121
|
141,722
|
||||||||||||
|
Finance
charges and other
|
16,286
|
17,579
|
17,612
|
20,109
|
||||||||||||
|
Total
revenues
|
134,827
|
136,430
|
132,733
|
161,831
|
||||||||||||
|
|
||||||||||||||||
|
Percent
of annual revenues
|
23.8
|
%
|
24.1
|
%
|
23.5
|
%
|
28.6
|
%
|
||||||||
|
|
||||||||||||||||
|
Cost
and expenses
|
||||||||||||||||
|
Cost
of goods sold, including warehousing and occupancy costs
|
84,774
|
85,704
|
82,523
|
102,158
|
||||||||||||
|
Cost
of service parts sold, including warehousing and occupancy
costs
|
1,104
|
1,092
|
1,159
|
1,196
|
||||||||||||
|
Selling,
general and administrative expense
|
35,002
|
37,703
|
37,921
|
43,026
|
||||||||||||
|
Provision
for bad debts
|
628
|
559
|
609
|
793
|
||||||||||||
|
Total
cost and expenses
|
121,508
|
125,058
|
122,212
|
147,173
|
||||||||||||
|
Operating
Income
|
13,319
|
11,372
|
10,521
|
14,658
|
||||||||||||
|
Operating
Profit as a % total revenues
|
9.9
|
%
|
8.3
|
%
|
7.9
|
%
|
9.1
|
%
|
||||||||
|
Interest
expense
|
582
|
567
|
615
|
595
|
||||||||||||
|
Income
before minority interest and income taxes
|
12,737
|
10,805
|
9,906
|
14,063
|
||||||||||||
|
Minority
interest in limited partnership
|
114
|
131
|
113
|
(240
|
)
|
|||||||||||
|
Income
before income taxes
|
12,623
|
10,674
|
9,793
|
14,303
|
||||||||||||
|
Total
provision for income taxes
|
4,482
|
3,707
|
3,245
|
5,272
|
||||||||||||
|
Net
income
|
$
|
8,141
|
$
|
6,967
|
$
|
6,548
|
$
|
9,031
|
||||||||
|
Net
income as a % of revenue
|
6.0
|
%
|
5.1
|
%
|
4.9
|
%
|
5.6
|
%
|
||||||||
|
Outstanding
shares:
|
||||||||||||||||
|
Basic
|
23,145
|
23,179
|
23,206
|
23,230
|
||||||||||||
|
Diluted
|
23,629
|
23,682
|
23,638
|
23,730
|
||||||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
|
$
|
0.35
|
$
|
0.30
|
$
|
0.28
|
$
|
0.39
|
||||||||
|
Diluted
|
$
|
0.34
|
$
|
0.29
|
$
|
0.28
|
$
|
0.38
|
||||||||
43
|
2006
|
||||||||||||||||
|
Quarter
Ended
|
||||||||||||||||
|
Apr.
30
|
Jul.
31
|
Oct.
31
|
Jan.
31
|
|||||||||||||
|
(dollars
and shares in thousands, except per share amounts)
|
||||||||||||||||
|
Revenues
|
||||||||||||||||
|
Product
sales
|
$
|
127,275
|
$
|
130,867
|
$
|
140,405
|
$
|
171,330
|
||||||||
|
Service
maintenance agreement commissions (net)
|
6,884
|
7,848
|
7,506
|
8,345
|
||||||||||||
|
Service
revenues
|
4,775
|
5,134
|
5,157
|
5,212
|
||||||||||||
|
Total
net sales
|
138,934
|
143,849
|
153,068
|
184,887
|
||||||||||||
|
Finance
charges and other
|
18,985
|
20,711
|
19,521
|
21,193
|
||||||||||||
|
Total
revenues
|
157,919
|
164,560
|
172,589
|
206,080
|
||||||||||||
|
|
||||||||||||||||
|
Percent
of annual revenues
|
22.5
|
%
|
23.5
|
%
|
24.6
|
%
|
29.4
|
%
|
||||||||
|
Cost
and expenses
|
||||||||||||||||
|
Cost
of goods sold, including warehousing and occupancy costs
|
100,917
|
103,579
|
110,024
|
133,544
|
||||||||||||
|
Cost
of service parts sold, including warehousing and occupancy
costs
|
1,225
|
1,236
|
1,334
|
1,515
|
||||||||||||
|
Selling,
general and administrative expense
|
39,745
|
44,978
|
47,125
|
50,949
|
||||||||||||
|
Provision
for bad debts
|
468
|
(137
|
)
|
331
|
471
|
|||||||||||
|
Total
cost and expenses
|
142,355
|
149,656
|
158,814
|
186,479
|
||||||||||||
|
Operating
Income
|
15,564
|
14,904
|
13,775
|
19,601
|
||||||||||||
|
Operating
Profit as a % total revenues
|
9.9
|
%
|
9.1
|
%
|
8.0
|
%
|
9.5
|
%
|
||||||||
|
Interest
expense
|
355
|
59
|
74
|
(88
|
)
|
|||||||||||
|
Income
before minority interest and income taxes
|
15,209
|
14,845
|
13,701
|
19,689
|
||||||||||||
|
Minority
interest in limited partnership
|
-
|
-
|
-
|
-
|
||||||||||||
|
Income
before income taxes
|
15,209
|
14,845
|
13,701
|
19,689
|
||||||||||||
|
Total
provision for income taxes
|
5,341
|
5,252
|
4,846
|
6,902
|
||||||||||||
|
Net
income
|
$
|
9,868
|
$
|
9,593
|
$
|
8,855
|
$
|
12,787
|
||||||||
|
Net
income as a % of revenue
|
6.2
|
%
|
5.8
|
%
|
5.1
|
%
|
6.2
|
%
|
||||||||
|
Outstanding
shares:
|
||||||||||||||||
|
Basic
|
23,307
|
23,366
|
23,458
|
23,523
|
||||||||||||
|
Diluted
|
23,775
|
24,012
|
24,265
|
24,532
|
||||||||||||
|
Earnings
per share:
|
||||||||||||||||
|
Basic
|
$
|
0.42
|
$
|
0.41
|
$
|
0.38
|
$
|
0.54
|
||||||||
|
Diluted
|
$
|
0.42
|
$
|
0.40
|
$
|
0.36
|
$
|
0.52
|
||||||||
Liquidity
and Capital Resources
We
require capital to finance our growth as we add new stores and markets to our
operations, which in turn requires additional working capital for increased
receivables and inventory. We have historically financed our operations through
a combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended terms provided by our vendors for
inventory purchases, acquisition of inventory under consignment arrangements
and
transfers of receivables to our asset-backed securitization facilities. At
January 31, 2006, we had a revolving line of credit facility with a group of
lenders in the amount of $50 million, under which we had no borrowings
outstanding but utilized $3.0 million of availability to issue letters of
credit. We expect that our cash requirements for the foreseeable future,
including those for our capital expenditure requirements, will be met with
our
available line of credit and our existing $45.2 million in cash and cash
equivalents at January 31, 2006, together with cash generated from operations.
Our current plans are to grow our store base by approximately 10% a year. We
expect we will invest in real estate and customer receivables to support the
additional stores and same store sales growth. Depending on market conditions
we
may, at times, enter into sale-leaseback transactions to finance our real estate
or seek alternative financing sources for new store expansions and customer
receivables growth.
The
following is a comparison of our statement of cash flows for our fiscal years
2005 and 2006:
The
increase in cash flow from operating activities for fiscal year 2006 from fiscal
year 2005 of $64.1 million, resulted primarily from increased net income, a
smaller increase in the retained interest in the asset backed securitization
program and the timing of payments of accounts payable and federal income and
employment taxes. Operating cash flows have been positively impacted in the
amount of approximately $18.9 million by federal income and employment tax
payment deadlines being deferred until February 28, 2006 after Hurricane
Rita.
44
Our
promotional credit programs offered to certain customers provide for “same as
cash” interest free periods of varying terms, generally three, six, twelve,
eighteen, twenty-four or thirty-six months. These promotional accounts are
eligible for securitization up to 30.0% of eligible securitized receivables.
The
percentage of eligible securitized receivables represented by promotional
receivables was 15.0%, 23.5% and 19.4% as of January 31, 2004, 2005 and 2006,
respectively. To the extent we exceed the 30.0% limit, or to the extent we
have
such promotional credit receivables that do not qualify for inclusion in the
programs, we are required to use our other capital resources to fund the unpaid
balance of the receivables for the promotional period. The weighted average
promotional period was 12.5 and 11.8 months for promotional receivables
outstanding as of January 31, 2005 and January 31, 2006, respectively. The
weighted average remaining term on those same promotional receivables was 9.0
and 7.3 months, respectively. While overall these promotional receivables have
a
much shorter average weighted life than non-promotional receivables, we receive
less income as a result of a reduced net interest margin used in the calculation
of the gain on the sale of the receivables. As a result, the existence of the
interest free extended payment terms negatively impacts the gains or losses
as
compared to the other receivables, and results in a decrease in our available
cash.
Net
cash
used in investing activities was $18.5 million for both fiscal year 2005 and
fiscal year 2006. Offsetting the $1.1 million decline in purchases of property
and equipment was a $1.1 million decline in proceeds from sales of property
and
equipment. Included in the fiscal 2005 purchases of property and equipment
was
$1.7 million of purchases by SRDS, which was consolidated in our fiscal 2005
Statement of Cash Flows. 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. We estimate that capital expenditures
for the 2007 fiscal year will approximate $25 million to $30
million.
We
lease
50 of our 56 stores, and our plans for future store locations include primarily
leases, but does not exclude store ownership. Our capital expenditures for
future store projects should primarily be for our tenant improvements to the
property leased (including any new distribution centers and warehouses), the
cost of which is approximately $1.5 million per store, and for our existing
store remodels, in the range of $220,000 per store remodel, depending on store
size. In the event we purchase existing properties, our capital expenditures
will depend on the particular property and whether it is improved when
purchased. We are continuously reviewing new relationship and funding sources
and alternatives for new stores, which may include “sale-leaseback” or direct
“purchase-lease” programs, as well as other funding sources for our purchase and
construction of those projects. If we are successful in these relationship
developments, our direct cash needs should include only our capital expenditures
for tenant improvements to leased properties and our remodel programs for
existing stores, but could include full ownership if it meets our cash
investment strategy.
Net
cash
from financing activities decreased $19.6 million from $12.0 million for the
year ended January 31, 2005, to a use of cash of $7.6 million for the year
ended
January 31, 2006. This change resulted primarily from increases in payments
on
various debt instruments of $10.5 million, as opposed to borrowings in the
prior
year of $10.4 million. Partially offsetting the use of cash was increased
proceeds from stock issued under employee benefit plans. We do not expect to
incur significant net borrowing or repayments under our bank credit facilities
in fiscal 2007.
On
October 31, 2005, we entered into a new, expanded bank credit facility with
the
same group of banks that had provided the previous credit arrangement. The
new
agreement expands the line of credit to $50 million, from $35 million, provides
an accordion feature to allow further expansion of the facility to $90 million,
under certain conditions, and extends the maturity date to November 1, 2010.
Additionally, the facility provides sublimits of $8 million for a swingline
line
of credit for faster advances on borrowing requests, and $5 million for standby
letters of credit. Loans
under our revolving credit facility may, at our option, bear interest at either
the alternate base rate, which is the greater of the administrative agent’s
prime rate or the federal funds rate, or the adjusted LIBO/LIBOR rate for the
applicable interest period, in each case plus an applicable interest margin.
The
interest margin is between 0.00% and 0.50% for base rate loans and between
0.75%
and 1.75% for LIBO/LIBOR alternative rate loans. The interest margin will vary
depending on our debt coverage ratio. We additionally pay commitment fees for
the undrawn portion of our revolving credit facility. At January 31, 2006 the
interest rate on the revolving facility was 7.25%.
45
A
summary
of the significant financial covenants that govern our bank credit facility
compared to our actual compliance status at January 31, 2006, is presented
below:
|
Actual
|
Required
Minimum/
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
|
1.50
to 1.00
|
3.00
to 1.00
|
|||||
|
Adjusted
consolidated net worth must exceed required minimum
|
$
|
245,369,000
|
$
|
144,308,250
|
|||
|
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
|
0.03
to 1.00
|
0.05
to 1.00
|
|||||
|
30-day
delinquency ratio must be lower than required maximum
|
0.09
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.
Events
of
default under the credit facility include, subject to grace periods and notice
provisions in certain circumstances, non-payment of principal, interest or
fees;
violation of covenants; material inaccuracy of any representation or warranty;
default under or acceleration of certain other indebtedness; bankruptcy and
insolvency events; certain judgments and other liabilities; certain
environmental claims; and a change of control. If an event of default occurs,
the lenders under the credit facility are entitled to take various actions,
including accelerating amounts due under the credit facility and requiring
that
all such amounts be immediately paid in full. Our obligations under the credit
facility are secured by all of our and our subsidiaries’ assets, excluding
customer receivables owned by the QSPE and certain inventory subject to vendor
floor plan arrangements.
The
following table reflects outstanding commitments for borrowings and letters
of
credit, and the amounts utilized under those commitments, as of January 31,
2006:
|
Balance
at
|
Available
at
|
|||||||||||||||||||||||||||
|
Commitment
Expires in Fiscal Year Ending January 31,
|
January
31,
|
January
31,
|
||||||||||||||||||||||||||
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
Total
|
2006
|
2006
|
||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||
|
Revolving
Bank Facility (1)
|
$
|
-
|
$
|
50,000
|
$
|
50,000
|
$
|
3,015
|
$
|
46,985
|
||||||||||||||||||
|
Unsecured
Line of Credit
|
8,000
|
8,000
|
-
|
8,000
|
||||||||||||||||||||||||
|
Inventory
Financing (2)
|
30,000
|
30,000
|
12,626
|
17,374
|
||||||||||||||||||||||||
|
Letters
of Credit
|
1,500
|
1,500
|
-
|
1,500
|
||||||||||||||||||||||||
|
Total
|
$
|
39,500
|
$
|
-
|
$
|
-
|
$
|
50,000
|
$
|
-
|
$
|
-
|
$
|
89,500
|
$
|
15,641
|
$
|
73,859
|
||||||||||
|
(1)
Includes letter of credit sublimit. There was $3.0 million of letters
of
credit issued at January 31, 2006.
|
||||||||||||||||||||||||||||
|
(2)
Included in accounts payable on the consolidated balance sheet
as of
January 31, 2006.
|
Since
we
extend credit in connection with a large portion of our retail, service
maintenance and credit insurance sales, we created a QSPE in 2002 to purchase
customer receivables from us and to issue asset-backed and variable funding
notes to third parties to finance its purchase of these receivables. We transfer
receivables, consisting of retail installment contracts and revolving accounts
extended to our customers, to the issuer in exchange for cash, subordinated
securities and the right to receive the interest spread between the assets
held
by the QSPE and the notes issued to third parties and our servicing fees. The
subordinated securities issued to us accrue interest based on prime rates and
are subordinate to these third party notes.
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
asset-backed securitization program can be adversely affected if we exceed
certain predetermined levels of re-aging receivables, write-offs, bankruptcies
or other ineligible receivable amounts. If the funding under the asset-backed
securitization program were reduced or terminated, we would have to draw down
our bank credit facility more quickly than we have estimated.
46
A
summary
of the total receivables managed under the credit portfolio, including
quantitative information about delinquencies, net credit losses and components
of securitized assets, is presented in note 2 to our consolidated financial
statements.
Based
on
current operating plans, we believe that cash provided by operating activities,
available borrowings under our credit facility, access to the unfunded portion
of the variable funding portion of our asset- backed securitization program
and
our current cash and cash equivalents will be sufficient to fund our operations,
store expansion and updating activities and capital expenditure programs through
at least January 31, 2007. However, there are several factors that could
decrease cash provided by operating activities, including:
|
·
|
reduced
demand for our products;
|
|
·
|
more
stringent vendor terms on our inventory purchases;
|
|
·
|
loss
of ability to acquire inventory on
consignment;
|
|
·
|
increases
in product cost that we may not be able to pass on to our customers;
|
|
·
|
reductions
in product pricing due to competitor promotional activities;
|
|
·
|
changes
in inventory requirements based on longer delivery times of the
manufacturers or other requirements which would negatively impact
our
delivery and distribution
capabilities;
|
|
·
|
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);
|
|
·
|
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
programs;
|
|
·
|
increases
in the program costs (interest and administrative fees relative
to our
receivables portfolio) associated with the funding of our receivables;
|
|
·
|
increases
in personnel costs required for us to stay competitive in our markets;
and
|
|
·
|
our
inability to obtain a relationship to provide the purchase of and
financing of our capital expenditures for our new
stores.
|
If
cash
provided by operating activities during this period is less than we expect
or if
we need additional financing for future growth, we may need to increase our
revolving credit facility or undertake additional equity or debt offerings.
We
may not be able to obtain such financing on favorable terms, if at all.
Off-Balance
Sheet Financing Arrangements
At
January 31, 2006, the issuer has issued two series of notes: a Series A variable
funding note with a capacity of $250.0 million purchased by Three Pillars
Funding Corporation and three classes of Series B notes in the aggregate amount
of $200.0 million. The commercial paper underlying the Series A variable funding
note is rated A1/P1 by Standard and Poors and Moody’s, respectively. These
ratings represent the highest rating (“highest quality”) of each rating agency’s
three short-term investment grade ratings, except that Standard and Poors could
add a “+” which would convert the “highest quality” rating to an “extremely
strong” rating. The Series B notes consist of: Class A notes in the amount
$120.0 million, rated Aaa by Moody’s representing the highest rating (“highest
quality”) of the four long term investment grade ratings provided by this
organization; Class B notes in the amount $57.8 million, rated A2 by Moody’s
representing the middle of the third rating (“upper medium quality”) of the four
long term investment grade ratings provided by this organization; and Class
C
notes in the amount of $22.2 million, rated Baa2/BBB by Moody’s and Fitch,
respectively. These ratings represent the lowest of the four investment grades
(“medium quality”) provided by these organizations. The ratings disclosed are
not recommendations to buy, sell or hold securities. These ratings may be
changed or withdrawn at any time without notice, and each of the ratings should
be evaluated independently of any other rating. We are not aware of a rating
by
any other rating organization and are not aware of any changes in these ratings.
Private institutional investors, primarily insurance companies, purchased the
Series B notes. The issuer used the proceeds of these issuances, along with
funds provided by us in fiscal 2003 from borrowings under our bank credit
facility, to initially purchase eligible accounts receivable from us and to
fund
a required $8.0 million restricted cash account for credit enhancement of the
Series B notes.
47
We
are
entitled to a monthly servicing fee, so long as we act as servicer, in an amount
equal to .25% multiplied by the average aggregate principal amount of
receivables plus 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
to either Three Pillars Funding Corporation or the Series B note holders, and
the servicing fee. SunTrust Capital Markets, Inc. serves as an administrative
agent for Three Pillars Funding Corporation in connection with the Series A
variable funding note.
The
Series A variable funding note permits the issuer to borrow funds up to $250.0
million to purchase receivables from us, thereby functioning as a credit
facility to accumulate receivables. When borrowings under the Series A variable
funding note approach $250.0 million, the issuer intends to refinance the
receivables by issuing a new series of notes and use the proceeds to pay down
the outstanding balance of the Series A variable funding note, so that the
credit facility will once again become available to accumulate new receivables.
As of January 31, 2006, borrowings under the Series A variable funding note
were
$185.0 million.
The
Series A variable funding note matures on September 1, 2007. The issuer will
repay the Series A variable funding note and any refinancing note with amounts
received from customers pursuant to receivables that we transferred to the
issuer. Beginning on October 20, 2006, the issuer will begin to make scheduled
principal payments on the Series B notes with amounts received from customers
pursuant to receivables that we transferred to the issuer. To the extent that
the issuer has not otherwise repaid the Series B notes, they mature on September
1, 2010. We are currently in negotiations to increase the amount and extend
the
term of the Series A variable funding note and issue a new series of fixed-rate
notes to provide funding for additional purchases of receivables and the paydown
of the Series B notes.
The
Series A variable funding note bears interest at the commercial paper rate
plus
an applicable margin, in most instances of 0.8%, and the Series B notes have
fixed rates of 4.469%, 5.769% and 8.180% for the Class A, B and C notes,
respectively. In addition, there is an annual administrative fee and a non-use
fee associated with the unused portion of the committed facility.
We
are
not directly liable to the lenders under the asset-backed securitization
facility. If the issuer is unable to repay the Series A and Series B notes
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 Series B lenders could claim the balance
in the restricted cash account. We are also contingently liable under a $10.0
million letter of credit that secures our 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 Series A variable funding note and the
Series B notes, including covenants that restrict, subject to specified
exceptions: the incurrence of additional 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 covenants 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.
Events
of
default under the Series A variable funding note and the Series B notes, 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 events
pertaining to us. The issuer’s obligations under the program are secured by the
receivables and proceeds.
48
Certain
Transactions
Since
1996, we have leased a retail store location of approximately 19,150 square
feet
in Houston, Texas from Thomas J. Frank, Sr., our Chairman of the Board and
Chief
Executive Officer. The lease provides for base monthly rental payments of
$17,235 plus escrows for taxes, insurance and common area maintenance expenses
of increasing monthly amounts based on expenditures by the management company
operating the shopping center of which this store is a part through January
31,
2011. We also have an option to renew the lease for two additional five-year
terms. Mr. Frank received total payments under this lease of $281,000 in fiscal
2004, 2005 and 2006, respectively. Based on market lease rates for comparable
retail space in the area, we believe that the terms of this lease are no less
favorable to us than we could have obtained in an arms’ length transaction at
the date of the lease commencement.
We
leased
six store locations from Specialized Realty Development Services, LP (“SRDS”), a
real estate development company that was created prior to our becoming publicly
held and was owned by various members of management and individual investors
of
Stephens Group, Inc., a significant shareholder of the company. Based on
independent appraisals that were performed on each project that was completed,
we believe that the terms of the leases were at least comparable to those that
could be obtained in an arms’ length transaction. As part of the ongoing
operation of SRDS, we received management fees associated with the
administrative functions that were provided to SRDS of $5,000, $100,000 and
$6,500 for the years ended January 31, 2004, 2005 and 2006, respectively. As
of
January 31, 2005, we no longer leased any properties from SRDS since it divested
itself of the leased properties. As part of the divestiture, SRDS reimbursed
us
$75,000 for costs related to lease modifications.
We
engage
the services of Direct Marketing Solutions, Inc., or DMS, for a substantial
portion of its direct mail advertising. Direct Marketing Solutions, Inc. is
partially owned (less than 50%) by the Stephens Group Inc., members of the
Stephens family, Jon Jacoby, and Doug Martin. The Stephens Group Inc. and the
members of the Stephens family are significant shareholders of the Company,
and
Jon Jacoby and Doug Martin are members of our Board of Directors. The fees
we
paid to DMS during fiscal years ended 2005 and 2006 amounted to approximately
$1.8 million and $4.3 million, respectively. Thomas J. Frank, the Chief
Executive Officer and Chairman of the Board of Directors owned a small
percentage (0.7%) at the end of fiscal year 2005, but divested his interest
during the first half of fiscal year 2006.
49
Contractual
Obligations
The
following table presents a summary of our known contractual obligations as
of
January 31, 2006, with respect to the specified categories, classified by
payments due per period.
|
Payments
due by period
|
||||||||||||||||
|
Total
|
Less
Than 1 Year
|
1-3
Years
|
3-5
Years
|
More
Than 5 Years
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Long
term debt
|
$
|
136
|
$
|
136
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Operating
leases:
|
||||||||||||||||
|
Real
estate
|
112,262
|
14,348
|
27,448
|
24,933
|
45,533
|
|||||||||||
|
Equipment
|
3,795
|
1,217
|
1,439
|
831
|
308
|
|||||||||||
|
Purchase
obligations (1)
|
2,789
|
1,664
|
1,125
|
-
|
-
|
|||||||||||
|
Total
contractual cash obligations
|
$
|
118,982
|
$
|
17,365
|
$
|
30,012
|
$
|
25,764
|
$
|
45,841
|
||||||
_____________________
(1)
Includes contracts for long-term communication services. Does not include
outstanding purchase orders for merchandise, services or supplies which are
ordered in the normal course of operations and which generally are received
and
recorded within 30 days.
ITEM
7A. 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
LIBO/LIBOR plus the LIBO/LIBOR margin, which ranges from 0.75% to 1.75%.
Accordingly, changes in the prime rate, the federal funds rate or LIBO/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. See footnote 2 to the audited financial statements for disclosures related
to the sensitivity of the current fair value of the interest only strip and
the
subordinated securities to 10% and 20% adverse changes in the factors that
affect these assets, including interest rates.
We
held
interest rate swaps and collars with notional amounts totaling $20.0 million
as
of January 31, 2004, with terms extending through April 2005. Those instruments
were held for the purpose of hedging variable interest rate risk, primarily
related to cash flows from our interest-only strip as well as our variable
rate
debt. In fiscal 2004, hedge accounting was discontinued for the remaining $20.0
million. At the time the cash flow hedge designation was discontinued, we began
to recognize changes in the fair value of the swaps as interest expense and
to
amortize the accumulated other comprehensive loss related to those derivates
as
interest expense over the period that the forecasted transactions effected
the
statement of operations. During fiscal 2004, we reclassified $0.2 million of
losses previously recorded in accumulated other comprehensive losses into the
statement of operations and recorded $1.7 million of income into the statement
of operations because of the change in fair value of the swaps. During fiscal
2005, we reclassified $1.1 million of losses previously recorded in accumulated
other comprehensive losses into the statement of operations and recorded $1.1
million of income into the statement of operations because of the change in
fair
value of the swaps. During fiscal 2006, we reclassified $0.2 million of losses
previously recorded in accumulated other comprehensive losses into the statement
of operations and recorded $0.2 million of income into the statement of
operations because of the change in fair value of the swaps.
Prior
to
discontinuing these hedges, each period we recorded hedge ineffectiveness,
which
arose from differences between the interest rate stated in the derivative
instrument and the interest rate upon which the underlying hedged transaction
is
based. Ineffectiveness totaled $0.4 million, for the year ended January 31,
2004, and is reflected in “Interest Expense” in our consolidated statement of
operations. Since all hedge accounting has ceased, no ineffectiveness was
recognized in fiscal 2005 or 2006.
50
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Page
|
|
|
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
52
|
|
Report
of Independent Registered Public Accounting Firm on Internal Control
Over
Financial Reporting
|
53
|
|
Report
of Independent Auditors
|
55
|
|
Consolidated
Balance Sheets
|
56
|
|
Consolidated
Statements of Operations
|
57
|
|
Consolidated
Statements of Stockholders' Equity
|
58
|
|
Consolidated
Statements of Cash Flows
|
59
|
|
Notes
to Consolidated Financial Statements
|
60
|
51
Management’s
Report on Internal Control Over Financial Reporting (as
revised)
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) or Rule
15(d)-15(f) under the Exchange Act. Our internal control over financial
reporting is designed 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.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Therefore, even those systems determined to
be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.
Our
management (with the participation of our principal executive officer and our
principal financial officer) assessed the effectiveness of our internal control
over financial reporting as of January 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework. In our Annual Report on Form 10-K for the year ended January 31,
2006, filed with the Securities and Exchange Commission on March 30, 2006,
management concluded that our internal control over financial reporting was
effective as of January 31, 2006. Subsequently, management identified the
following material weakness in internal control over financial reporting with
respect to accounting for securitization income:
| o |
a
failure to ensure the correct application of Statement of Financial
Accounting Standards (“SFAS”) No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment
of
Liabilities
when recording securitization income and failure to identify and
correct
that error.
|
This
material weakness has resulted in errors that reduced interest in securitized
assets and securitization income, and, as a result, caused us to amend our
Annual Report on Form 10-K for the year ended January 31, 2006, in order to
restate the previously issued financial statements. As a result of this material
weakness, our management has revised its earlier assessment and has now
concluded that our internal control over financial reporting was not effective
as of January 31, 2006.
Management's
revised assessment of the effectiveness of our internal control over financial
reporting as of January 31, 2006 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report which
is included elsewhere herein.
Conn’s,
Inc.
Beaumont,
Texas
September
14, 2006
/s/
David L. Rogers
David
L.
Rogers
Chief
Financial Officer
/s/
Thomas J. Frank
Thomas
J.
Frank
Chief
Executive Officer
52
Report
of Independent Registered Public Accounting Firm (as
revised)
The
Board
of Directors and Shareholders of Conn’s, Inc.
We
have
audited management’s assessment, included in the accompanying Management’s
Report on Internal Control Over Financial Reporting (as revised), that Conn’s,
Inc. did not maintain effective internal control over financial reporting as
of
January 31, 2006, because of the effect of a material weakness with respect
to a
failure to ensure the correct application of SFAS No. 140 when recording
securitization income and a failure to correct that error, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Conn’s,
Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion
on
management’s assessment and an opinion on the effectiveness of the company’s
internal control over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed 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. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
report dated March 29, 2006, we expressed an unqualified opinion on management’s
previous assessment that the Company maintained effective internal controls
over
financial reporting as of January 31, 2006 and an unqualified opinion that
the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 31, 2006, based on the COSO criteria.
Management has subsequently determined that a deficiency in controls relating
to
the failure to ensure the correct application of SFAS No. 140 when recording
securitization income, and a failure to correct that error existed as of the
previous assessment date, and has further concluded that such a deficiency
represented a material weakness as of January 31, 2006. As a result, management
has revised its assessment, as presented in the accompanying Management’s Report
on Internal Control over Financial Reporting, to conclude that the Company’s
internal control over financial reporting was not effective as of January 31,
2006. Accordingly, our present opinion on the effectiveness of the Company’s
internal control over financial reporting as of January 31, 2006, as expressed
herein, is different from that expressed in our previous report.
A
material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included
in
management’s assessment:
| · |
failure
to ensure the correct application of Statement of Financial Accounting
Standards (“SFAS”) No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment
of
Liabilities,
when recording securitization income, and a failure to identify and
correct that error
|
53
As
a
result, the Company failed to identify that the Company’s securitization income
and the value of interests in securitized assets were understated. This material
weakness resulted in restatements of the Company's previously issued interim
and
annual financial statements as described more fully in Note 13 to the
consolidated financial statements. This material weakness was considered in
determining the nature, timing, and extent of audit tests applied in our audit
of the 2006 financial statements, and this report does not affect our report
dated March 29, 2006, except for Notes 1, 2, 5 and 13 as to which the date
is September 14, 2006, on those financial statements.
In
our
opinion, management’s assessment that Conn’s, Inc. did not maintain effective
internal control over financial reporting as of January 31, 2006, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, because of the effect of the material weakness described above on
the
achievement of the objectives of the control criteria, Conn’s, Inc. has not
maintained effective internal control over financial reporting as of January
31,
2006, based on the COSO criteria.
Ernst
& Young LLP
Houston,
Texas
March
29,
2006, except for the effects of the material weakness described in the sixth
paragraph of this report, as to which the date is September 14,
2006.
54
Report
of Independent Registered Public Accounting Firm (as
revised)
The
Board
of Directors and Shareholders of Conn’s, Inc.
We
have
audited the accompanying consolidated balance sheets of Conn’s, Inc. as of
January 31, 2006 and 2005, and the related consolidated statements of
operations, shareholders’ equity, and cash flows for each of the three years in
the period ended January 31, 2006. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Conn’s, Inc. at
January 31, 2006 and 2005, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended January 31,
2006,
in conformity with U.S. generally accepted accounting principles. Also, in
our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As
discussed in Note 1 to the consolidated financial statements, effective January
31, 2004 the Company adopted Financial Standards Board Interpretation No. 46,
“Consolidation of Variable Interest Entities”.
As
discussed in Note 13 to the consolidated financial statements, the consolidated
financial statements have been restated to correct an error in accounting for
interest in securitized assets and securitization income.
On
February 1, 2006, the Company adopted SFAS No. 123R, Stock-Based
Payment,
using
the modified retrospective application transition. Under the modified
retrospective application transition, all prior period financial statements
have
been adjusted to give effect to the fair-value-based method of accounting for
stock-based compensation.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Conn’s, Inc.’s internal
control over financial reporting as of January 31, 2006, based on criteria
established in Internal Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 29, 2006, except for the effects of the material weakness described in
sixth paragraph of the report, as to which the date is September 14, 2006,
expressed an
unqualified opinion on management's assessment of the effectiveness of the
Company's internal control over financial reporting and an adverse opinion
on
the effectiveness of the Company's internal control over financial reporting
because of a material weakness.
Houston,
Texas
March
29,
2006, except for Notes 1, 2, 5 and 13 as to which the date is September 14,
2006
55
Conn’s,
Inc.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share data)
(As
Adjusted, see Note 1, and As Restated, see Note 13)
|
January
31,
|
|||||||
|
Assets
|
2005
|
2006
|
|||||
|
Current
Assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
7,027
|
$
|
45,176
|
|||
|
Accounts
receivable, net of allowance for doubtful accounts of $2,211 and
$914,
respectively
|
26,728
|
23,542
|
|||||
|
Interest
in securitized assets
|
117,159
|
139,282
|
|||||
|
Inventories
|
62,346
|
73,987
|
|||||
|
Deferred
income taxes
|
825
|
-
|
|||||
|
Prepaid
expenses and other assets
|
3,552
|
4,004
|
|||||
|
Total
current assets
|
217,637
|
285,991
|
|||||
|
Non-current
deferred income tax asset
|
1,523
|
2,464
|
|||||
|
Property
and equipment
|
|||||||
|
Land
|
2,919
|
6,671
|
|||||
|
Buildings
|
8,068
|
7,084
|
|||||
|
Equipment
and fixtures
|
10,036
|
9,612
|
|||||
|
Transportation
equipment
|
4,419
|
3,284
|
|||||
|
Leasehold
improvements
|
56,926
|
65,507
|
|||||
|
Subtotal
|
82,368
|
92,158
|
|||||
|
Less
accumulated depreciation
|
(34,658
|
)
|
(37,332
|
)
|
|||
|
Total
property and equipment, net
|
47,710
|
54,826
|
|||||
|
Goodwill,
net
|
9,617
|
9,617
|
|||||
|
Other
assets, net
|
229
|
260
|
|||||
|
Total
assets
|
$
|
276,716
|
$
|
353,158
|
|||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
Liabilities
|
|||||||
|
Notes
payable
|
$
|
5,500
|
$
|
-
|
|||
|
Current
portion of long-term debt
|
29
|
136
|
|||||
|
Accounts
payable
|
27,108
|
40,920
|
|||||
|
Accrued
compensation and related expenses
|
8,548
|
18,847
|
|||||
|
Accrued
expenses
|
11,928
|
17,380
|
|||||
|
Income
taxes payable
|
-
|
8,794
|
|||||
|
Deferred
income taxes
|
958
|
1,343
|
|||||
|
Deferred
revenues and allowances
|
7,383
|
8,498
|
|||||
|
Fair
value of derivatives
|
177
|
-
|
|||||
|
Total
current liabilities
|
61,631
|
95,918
|
|||||
|
Long-term
debt
|
5,003
|
-
|
|||||
|
Non-current
deferred tax liability
|
704
|
903
|
|||||
|
Deferred
gain on sale of property
|
644
|
476
|
|||||
|
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; 23,267,596
and
23,571,564 shares issued and outstanding at January 31, 2005
and 2006,
respectively)
|
233
|
236
|
|||||
|
Accumulated
other comprehensive income
|
8,408
|
10,492
|
|||||
|
Additional
paid in capital
|
85,090
|
89,027
|
|||||
|
Retained
earnings
|
115,003
|
156,106
|
|||||
|
Total
stockholders’ equity
|
208,734
|
255,861
|
|||||
|
Total
liabilities and stockholders' equity
|
$
|
276,716
|
$
|
353,158
|
|||
See
notes
to consolidated financial statements.
56
Conn’s,
Inc.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except earnings per share)
(As
Adjusted, see Note 1, and As Restated, see Note 13)
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Revenues
|
||||||||||
|
Product
sales
|
$
|
402,579
|
$
|
451,560
|
$
|
569,877
|
||||
|
Service
maintenance agreement commissions (net)
|
20,074
|
23,950
|
30,583
|
|||||||
|
Service
revenues
|
18,265
|
18,725
|
20,278
|
|||||||
|
Total
net sales
|
440,918
|
494,235
|
620,738
|
|||||||
|
Finance
charges and other
|
57,460
|
71,586
|
80,410
|
|||||||
|
Total
revenues
|
498,378
|
565,821
|
701,148
|
|||||||
|
Cost
and expenses
|
||||||||||
|
Cost
of goods sold, including warehousing and occupancy costs
|
313,637
|
355,159
|
448,064
|
|||||||
|
Cost
of service parts sold, including warehousing and occupancy
cost
|
4,075
|
4,551
|
5,310
|
|||||||
|
Selling,
general and administrative expense
|
135,282
|
153,652
|
182,797
|
|||||||
|
Provision
for bad debts
|
2,504
|
2,589
|
1,133
|
|||||||
|
Total
cost and expenses
|
455,498
|
515,951
|
637,304
|
|||||||
|
Operating
income
|
42,880
|
49,870
|
63,844
|
|||||||
|
Interest
expense
|
4,577
|
2,359
|
400
|
|||||||
|
Income
before minority interest and income taxes
|
38,303
|
47,511
|
63,444
|
|||||||
|
Minority
interest in limited partnership
|
-
|
118
|
-
|
|||||||
|
Income
before income taxes
|
38,303
|
47,393
|
63,444
|
|||||||
|
Provision
for income taxes
|
||||||||||
|
Current
|
12,980
|
16,147
|
23,048
|
|||||||
|
Deferred
|
280
|
559
|
(707
|
)
|
||||||
|
Total
provision for income taxes
|
13,260
|
16,706
|
22,341
|
|||||||
|
Net
Income
|
25,043
|
30,687
|
41,103
|
|||||||
|
Less
preferred dividends
|
1,954
|
-
|
-
|
|||||||
|
Net
income available for common stockholders
|
$
|
23,089
|
$
|
30,687
|
$
|
41,103
|
||||
|
Earnings
per share
|
||||||||||
|
Basic
|
$
|
1.30
|
$
|
1.32
|
$
|
1.76
|
||||
|
Diluted
|
$
|
1.26
|
$
|
1.30
|
$
|
1.71
|
||||
|
Average
common shares outstanding
|
||||||||||
|
Basic
|
17,726
|
23,192
|
23,412
|
|||||||
|
Diluted
|
18,257
|
23,646
|
24,088
|
|||||||
See
notes
to consolidated financial statements.
57
Conn’s,
Inc.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in
thousands, except per share amounts)
(As
Adjusted, see Note 1, and As Restated, See Note 13)
|
Accum.
|
|||||||||||||||||||||||||||||||||||||||
|
Other
|
|||||||||||||||||||||||||||||||||||||||
|
Compre-
|
|||||||||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
hensive
|
Paid
in
|
Retained
|
Treasury
Stock
|
||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Income
|
Capital
|
Earnings
|
Shares
|
Amount
|
Total
|
||||||||||||||||||||||||||||||
|
Balance
January 31, 2003
|
175
|
$
|
15,226
|
17,175
|
$
|
172
|
$
|
1,964
|
$
|
-
|
$
|
73,073
|
|
455
|
$
|
(3,611
|
)
|
$
|
86,824
|
||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||||
|
Preferred
dividends declared
|
10,194
|
(10,194
|
)
|
- | |||||||||||||||||||||||||||||||||||
|
Preferred
stock redeemed:
|
|||||||||||||||||||||||||||||||||||||||
|
For
cash
|
(10
|
)
|
(1,454
|
)
|
(1,454
|
)
|
|||||||||||||||||||||||||||||||||
|
For
common stock
|
(165
|
)
|
(23,966
|
)
|
1,712
|
17
|
23,949
|
-
|
|||||||||||||||||||||||||||||||
|
Additional
common stock issued at IPO
|
4,623
|
46
|
58,311
|
58,357
|
|||||||||||||||||||||||||||||||||||
|
Exercise
of options
|
47
|
1
|
396
|
397
|
|||||||||||||||||||||||||||||||||||
|
Cancellation
of treasury stock
|
(455
|
)
|
(5
|
)
|
(3,606
|
)
|
(455
|
)
|
3,611
|
-
|
|||||||||||||||||||||||||||||
|
Stock-based
compensation
|
108
|
108
|
|||||||||||||||||||||||||||||||||||||
|
Net
income
|
25,043
|
25,043
|
|||||||||||||||||||||||||||||||||||||
|
Unrealized
gain on derivative instruments (net of tax of $794), net of
reclassification adjustments of $158 (net of tax of $
89)
|
1,411
|
1,411
|
|||||||||||||||||||||||||||||||||||||
|
Adjustment
of fair value of securitized assets
(net of tax of $303), net of reclassification adjustments of $9,341
(net
of tax of $5,096)
|
1,225
|
1,225
|
|||||||||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
27,679
|
||||||||||||||||||||||||||||||||||||||
|
Balance
January 31, 2004
|
-
|
-
|
23,102
|
231
|
4,600
|
82,764
|
84,316
|
-
|
-
|
171,911
|
|||||||||||||||||||||||||||||
|
Exercise
of options, including
tax benefit
|
162
|
2
|
1,465
|
1,467
|
|||||||||||||||||||||||||||||||||||
|
Issuance
of common stock under Employee
Stock Purchase Plan
|
9
|
109
|
109
|
||||||||||||||||||||||||||||||||||||
|
Forfeiture
of 5,181 restricted shares
|
(5
|
)
|
-
|
||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation
|
752
|
752
|
|||||||||||||||||||||||||||||||||||||
|
Net
income
|
30,687
|
30,687
|
|||||||||||||||||||||||||||||||||||||
|
Reclassification
adjustments on
derivative instruments (net
of tax of $ 399)
|
732
|
732
|
|||||||||||||||||||||||||||||||||||||
|
Adjustment
of fair value of securitized
assets (net of tax
of $1,674), net of reclassification
adjustments of $10,943
(net of tax of $5,919)
|
3,076
|
3,076
|
|||||||||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
34,495
|
||||||||||||||||||||||||||||||||||||||
|
Balance
January 31, 2005
|
-
|
-
|
23,268
|
233
|
8,408
|
85,090
|
115,003
|
-
|
-
|
208,734
|
|||||||||||||||||||||||||||||
|
Exercise
of options, including tax benefit
|
293
|
3
|
2,579
|
2,582
|
|||||||||||||||||||||||||||||||||||
|
Issuance
of common stock under Employee
Stock Purchase Plan
|
11
|
192
|
192
|
||||||||||||||||||||||||||||||||||||
|
Stock-based
compensation
|
1,166
|
1,166
|
|||||||||||||||||||||||||||||||||||||
|
Net
income
|
41,103
|
41,103
|
|||||||||||||||||||||||||||||||||||||
|
Reclassification
adjustments on
derivative instruments(net of tax of $ 86)
|
160
|
160
|
|||||||||||||||||||||||||||||||||||||
|
Adjustment
of fair value of securitized
assets (net of tax
of $1038), net of reclassification
adjustments of $12,626
(net of tax of $6,828)
|
1,924
|
1,924
|
|||||||||||||||||||||||||||||||||||||
|
Total
comprehensive income
|
43,187
|
||||||||||||||||||||||||||||||||||||||
|
Balance
January 31, 2006
|
-
|
$
|
-
|
23,572
|
$
|
236
|
$
|
10,492
|
$ |
89,027
|
$
|
156,106
|
-
|
$
|
-
|
$
|
255,861
|
||||||||||||||||||||||
See
notes
to consolidated financial statements.
58
Conn’s,
Inc.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
(As
Adjusted, see Note 1, and As Restated, see Note 13)
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Cash
flows from operating activities
|
||||||||||
|
Net
income
|
$
|
25,043
|
$
|
30,687
|
$
|
41,103
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
|
6,654
|
8,777
|
11,271
|
|||||||
|
Amortization
|
592
|
18
|
(318
|
)
|
||||||
|
Provision
for bad debts
|
2,604
|
3,299
|
1,186
|
|||||||
|
Stock-based
compensation
|
108
|
752
|
1,166
|
|||||||
|
Excess
tax benefits from stock-based compensation
|
-
|
(59
|
)
|
(134
|
)
|
|||||
|
Accretion
from interests in securitized assets
|
(14,437
|
)
|
(16,862
|
)
|
(19,454
|
)
|
||||
|
Provision
for deferred income taxes
|
280
|
559
|
(707
|
)
|
||||||
|
Loss
(gain) from sale of property and equipment
|
64
|
126
|
69
|
|||||||
|
Discounts
on promotional credit, net
|
-
|
1,571
|
691
|
|||||||
|
Losses
(gains) from derivatives
|
(1,010
|
)
|
(15
|
)
|
69
|
|||||
|
Change
in operating assets and liabilities:
|
||||||||||
|
Accounts
receivable
|
(8,672
|
)
|
(26,808
|
)
|
1,648
|
|||||
|
Inventory
|
(7,624
|
)
|
(8,604
|
)
|
(11,641
|
)
|
||||
|
Prepaid
expenses and other assets
|
900
|
(515
|
)
|
(452
|
)
|
|||||
|
Accounts
payable
|
1,910
|
696
|
13,812
|
|||||||
|
Accrued
expenses
|
4,200
|
7,697
|
15,751
|
|||||||
|
Income
taxes payable
|
2,429
|
(2,430
|
)
|
8,794
|
||||||
|
Deferred
revenues and allowances
|
(648
|
)
|
1,222
|
1,330
|
||||||
|
Net
cash provided by operating activities
|
12,393
|
111
|
64,184
|
|||||||
|
Cash
flows from investing activities
|
||||||||||
|
Purchase
of property and equipment
|
(9,401
|
)
|
(19,619
|
)
|
(18,490
|
)
|
||||
|
Proceeds
from sales of property
|
1,291
|
1,131
|
34
|
|||||||
|
Net
cash used in investing activities
|
(8,110
|
)
|
(18,488
|
)
|
(18,456
|
)
|
||||
|
Cash
flows from financing activities
|
||||||||||
|
Net
proceeds from the sale of common stock
|
58,357
|
-
|
-
|
|||||||
|
Net
proceeds from stock issued under employee benefit plans, including
tax
benefit
|
397
|
1,603
|
2,813
|
|||||||
|
Excess
tax benefits from stock-based compensation
|
-
|
59
|
134
|
|||||||
|
Redemption
of preferred stock
|
(1,454
|
)
|
-
|
-
|
||||||
|
Net
borrowings (payments) under line of credit
|
(31,999
|
)
|
10,500
|
(10,500
|
)
|
|||||
|
Payments
on term note
|
(15,000
|
)
|
-
|
-
|
||||||
|
Increase
in debt issuance costs
|
(213
|
)
|
(118
|
)
|
(130
|
)
|
||||
|
Borrowings
on promissory notes
|
-
|
-
|
136
|
|||||||
|
Payment
of promissory notes
|
(4,901
|
)
|
(60
|
)
|
(32
|
)
|
||||
|
Net
cash provided by (used in) financing activities
|
5,187
|
11,984
|
(7,579
|
)
|
||||||
|
Impact
on cash of consolidation of SRDS
|
1,024
|
478
|
-
|
|||||||
|
Net
change in cash
|
10,494
|
(5,915
|
)
|
38,149
|
||||||
|
Cash
and cash equivalents
|
||||||||||
|
Beginning
of the year
|
2,448
|
12,942
|
7,027
|
|||||||
|
End
of the year
|
$
|
12,942
|
$
|
7,027
|
$
|
45,176
|
||||
|
Supplemental
disclosure of cash flow information
|
||||||||||
|
Cash
interest paid
|
$
|
5,718
|
$
|
2,387
|
$
|
635
|
||||
|
Cash
income taxes paid, net of refunds
|
10,162
|
19,372
|
13,179
|
|||||||
|
Cash
interest received from interests in securitized assets
|
12,801
|
19,630
|
26,996
|
|||||||
|
Cash
proceeds from new securitizations
|
213,741
|
256,139
|
285,529
|
|||||||
|
Cash
flows from servicing fees
|
12,089
|
15,529
|
18,572
|
|||||||
|
Supplemental
disclosure of non-cash activity
|
||||||||||
|
Customer
receivables exchanged for interests in securitized assets
|
41,123
|
58,342
|
58,835
|
|||||||
|
Amounts
reinvested in interests in securitized assets
|
(56,478
|
)
|
(81,652
|
)
|
(76,133
|
)
|
||||
See
notes to consolidated financial statements.
59
CONN’S
, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
January
31, 2006
(Restated)
1. Summary
of Significant Accounting Policies
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. 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
because
the Company has relinquished control of the receivables. Additionally, the
Company has transferred such 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.
See Note 2 for further discussion.
Application
of FIN 46.
In
January 2003, the Financial Accounting Standards Board issued Interpretation
No.
46, Consolidation
of Variable Interest Entities, An Interpretation of Accounting Research Bulletin
No. 51,
or FIN
46. FIN 46 requires entities, generally, to be consolidated by a company when
it
has a controlling financial interest through ownership, direct or indirect,
of a
majority voting interest in an entity with which it conducts business. The
Company evaluated the effects of the issuance of FIN 46 on the accounting for
its leases with Specialized Realty Development Services, LP (“SRDS”) and
determined that it was appropriate to consolidate the balance sheet of SRDS
with
the Company as of January 31, 2004. As of January 31, 2005, the Company no
longer leased any of its facilities from SRDS and therefore FIN 46 no longer
applies and the Company no longer consolidates SRDS’s balance sheet or statement
of operations. However, the operations of SRDS are consolidated with those
of
the Company commencing on February 1, 2004 through the last effective date
of
the Company’s leases with SRDS of January 30, 2005. The effect of such
consolidation on the Company’s Statement of Operations for the year ended
January 31, 2005 was to reduce “Selling, general and administrative expense” by
$0.9 million, increase “Interest expense” by $0.8 million and reduce “Income
before income taxes” by $0.1 million for “Minority interest in limited
partnership”. The Company had no exposure to losses incurred by
SRDS.
Business
Activities. The
Company, through its retail stores, provides products and services to its
customer base in six primary market areas, including southern Louisiana,
southeast Texas, Houston, South Texas, San Antonio/Austin, and Dallas, Texas.
Products and services offered through retail sales outlets include major home
appliances, consumer electronics, home office equipment, lawn and garden
products, mattresses, furniture, service maintenance agreements, installment
and
revolving credit account services, and various credit insurance products. These
activities are supported through an extensive service, warehouse and
distribution system. For the reasons discussed below, the aggregation of
operating companies represent one reportable segment under SFAS No. 131,
Disclosures
About Segments of an Enterprise and Related Information.
Accordingly, the accompanying consolidated financial statements reflect the
operating results of the Company’s single reportable segment. The Company’s
retail stores bear the “Conn’s” name, and deliver the same products and services
to a common customer group. The Company’s customers generally are individuals
rather than commercial accounts. All of the retail stores follow the same
procedures and methods in managing their operations. The Company’s management
evaluates performance and allocates resources based on the operating results
of
the retail stores and considers the credit programs, service contracts and
distribution system to be an integral part of the Company’s retail operations.
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.
60
Vendor
Programs. The
Company receives funds from vendors for price protection, product and volume
rebates, marketing, training and promotional programs which are recorded on
as
the amounts are earned as a reduction to the related product cost or advertising
expense, according to the nature of the program. The Company accrues 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, which would include
price protection, product and volume rebates, the allowances, credits, or
payments are recorded as a reduction of product cost and are reflected in cost
of goods sold when the related product is sold. If the programs relate to
marketing, training and promotions that are not for reimbursement of specific
incremental costs, the allowances, credits or payments are reflected as a
reduction of cost of goods sold. If the programs are related to promotion or
marketing of the product, the allowances, credits, or payments for reimbursement
of specific, incremental, identifiable, advertising-related costs incurred
in
selling the vendors’ products are recorded as a reduction of advertising expense
and are reflected in selling, general and administrative expenses in the period
in which the expense is incurred. The credits/payments received from vendors
that were netted against advertising expense for the years ended January 31,
2004, 2005 and 2006 were $2.8 million, $4.8 million and $5.8 million,
respectively.
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 calculated under
the
treasury method. The following table sets forth the shares outstanding for
the
earnings per share calculations (shares in thousands):
|
Year
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Common
stock outstanding, beginning of period
|
17,175
|
23,102
|
23,268
|
|||||||
|
Weighted
average common stock issued in initial public offering
|
719
|
-
|
||||||||
|
Weighted
average common stock issued in preferred stock redemption
|
285
|
-
|
||||||||
|
Weighted
average common stock issued in stock option exercises
|
2
|
89
|
142
|
|||||||
|
Weighted
average common stock issued to employee stock purchase plan
|
-
|
3
|
2
|
|||||||
|
Weighted
average number of restricted shares forfeited
|
-
|
(2
|
)
|
|||||||
|
Less:
Weighted average treasury shares purchased and weighted average
shares
purchased and cancelled
|
(455
|
)
|
-
|
|||||||
|
Shares
used in computing basic earnings per share
|
17,726
|
23,192
|
23,412
|
|||||||
|
Dilutive
effect of stock options, net of assumed repurchase of treasury
stock
|
531
|
454
|
676
|
|||||||
|
Shares
used in computing diluted earnings per share
|
18,257
|
23,646
|
24,088
|
|||||||
During
the periods presented, options with an exercise price in excess of the average
market price of the Company’s common stock are excluded from the calculation of
the dilutive effect of stock options for diluted earnings per share
calculations. The weighted average number of options not included in the
calculation of the dilutive effect of stock options was 0.1 million for each
of
the years ended January 31, 2005 and 2006, and none for the year ended January
31, 2004.
Cash
and Cash Equivalents. The
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Inventories. Inventories
consist of finished goods or parts and are valued at the lower of cost (moving
weighted average method) or market.
61
Property
and Equipment. Property
and equipment are recorded at cost. Costs associated with major additions and
betterments that increase the value or extend the lives of assets are
capitalized and depreciated. Normal repairs and maintenance that do not
materially improve or extend the lives of the respective assets are charged
to
operating expenses as incurred. Depreciation is computed on the straight-line
method over the estimated useful lives of the assets, or in the case or
leasehold improvements, over the shorter of the estimated useful lives or the
remaining terms of the respective leases. The estimated lives used to compute
depreciation expense are summarized as follows:
|
Buildings
|
30
years
|
|||
|
Equipment
and fixtures
|
3
- 5 years
|
|||
|
Transportation
equipment
|
3
years
|
|||
|
Leasehold
improvements
|
5
- 10 years
|
Property
and equipment are evaluated for impairment at the retail store level. The
Company performs a periodic assessment of assets for impairment in the absence
of such information or indicators. Additionally, an impairment evaluation is
performed whenever events or changes in circumstances indicate that the carrying
amount of the assets might not be recoverable. The most likely condition that
would necessitate an assessment would be an adverse change in historical and
estimated future results of a retail store’s performance. For property and
equipment to be held and used, the Company recognizes an impairment loss if
its
carrying amount is not recoverable through its undiscounted cash flows and
measures the impairment loss based on the difference between the carrying amount
and fair value.
All
gains
and losses on sale of assets are included in “Selling, general and
administrative expense” in the consolidated statements of
operations.
|
Years
Ended January 31,
|
||||||||||
|
(in
thousands of dollars)
|
2004
|
2005
|
2006
|
|||||||
|
Gain
(loss) on sale of assets
|
(64
|
)
|
(126
|
)
|
(69
|
)
|
||||
Receivable
Sales and Interests in Securitized Receivables. The
Company enters into securitization transactions to sell customer retail
installment and revolving receivable accounts. In these transactions, the
Company retains interest-only strips and subordinated securities, all of which
are retained interests in the securitized receivables. Gain or loss on the
sales
of the receivables depends in part on the previous carrying amount of the
financial assets involved in the transfer, allocated between the assets sold
and
the retained interests, based on their relative fair value at the date of
transfer. Retained interests are carried at fair value on the Company’s balance
sheet as available-for-sale securities in accordance with SFAS No. 115,
Accounting
for Certain Investments in Debt and Equity Securities.
Impairment and interest income are recognized in accordance with Emerging Issues
Task Force (“EITF”) No. 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interests
in Securitized Financial Assets.
Servicing fees are recognized monthly as they are earned. Gains on sales of
receivables, impairment on retained interests, interest income from retained
interests and servicing fees are included in “Finance charges and other” in the
consolidated statement of operations.
The
Company estimates fair value of its retained interest in both the initial
securitization and thereafter based on the present value of future expected
cash
flows using management’s best estimates of the key assumptions—credit losses,
prepayment rates, forward yield curves, and discount rates commensurate with
the
risks involved. The Company’s retained interest in the transferred receivables
are valued on a revolving pool basis.
Receivables
Not Sold. Certain
receivables are not eligible for inclusion in the securitization transactions
and are therefore carried on the Company’s balance sheet in “Accounts
receivable”. Such receivables are recorded net of an allowance for doubtful
accounts, which is calculated based on historical losses. Generally, a
receivable is considered delinquent if a payment has not been received on the
scheduled due date. Generally, an account that is delinquent more than 120
days
and for which no payment has been received in the past seven months will be
charged-off against the allowance and interest accrued subsequent to the last
payment will be reversed. The Company has a secured interest in the merchandise
financed by these receivables and therefore has the opportunity to recover
a
portion of the charged-off value. (See also Note 2.)
62
Goodwill. Goodwill
represents the excess of purchase price over the fair market value of net assets
acquired. The Company assesses the potential future impairment of goodwill
on an
annual basis, or at any other time when impairment indicators exist. In fiscal
2004, 2005 and 2006, the Company concluded that goodwill was not impaired based
on its annual impairment testing.
Income
Taxes. The
Company follows the liability method of accounting for income taxes. Under
this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the tax rates and laws that are expected be in effect when the
differences are expected to reverse.
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. The Company sells service maintenance agreements and
credit insurance contracts on behalf of unrelated third parties. For contracts
where the third parties are the obligor 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. The Company records a receivable
for earned but unremitted retrospective commissions and reserves for future
cancellations of service maintenance agreements and credit insurance contracts
estimated based on historical experience. Where the Company sells service
maintenance agreements in which it is 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 Company-obligor
service maintenance agreements are renewal contracts which 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 EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables
and are
valued based on the agreed upon retail selling price. The amounts of service
maintenance agreement revenue deferred at January 31, 2005 and 2006 were $3.9
million and $3.6 million, respectively, and are included in “Deferred
revenue and allowances” in the accompanying balance sheets. Under the renewal
contracts, the Company defers and amortizes its direct selling expenses over
the
contract term and records the cost of the service work performed as products
are
repaired.
The
classification of the amounts included as “Finance charges and other” is
summarized as follows (in thousands):
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Securitization
income:
|
||||||||||
|
Servicing
fees received
|
$
|
12,089
|
$
|
15,529
|
$
|
18,572
|
||||
|
Accretion
of gains on sale of receivables
|
19,128
|
24,719
|
26,724
|
|||||||
|
Impairment
recorded on retained interests
|
-
|
-
|
(895
|
)
|
||||||
|
Interest
earned on retained interests
|
6,908
|
9,389
|
14,633
|
|||||||
|
Total
securitization income
|
38,125
|
49,637
|
59,034
|
|||||||
|
Interest
Income from receivables not sold
|
888
|
1,224
|
1,181
|
|||||||
|
Insurance
commissions
|
14,804
|
16,101
|
16,672
|
|||||||
|
Other
|
3,643
|
4,624
|
3,523
|
|||||||
|
Finance
charges and other
|
$
|
57,460
|
$
|
71,586
|
$
|
80,410
|
||||
|
Gains
on sale of receivables
|
$
|
20,655
|
$
|
29,468
|
$
|
29,687
|
||||
63
Securitization
income includes accretion of gains on sales of receivables, impairment of
retained interests, interest income from retained interests and servicing fees.
No significant impairments related to the interest only strip of retained
interests have been recorded in the years ended January 31, 2004, 2005, or
2006.
Gains on sale of receivables are recognized as securitization income as
accretion over the lives of the related receivables. See “Receivable Sales and
Interest in Securitized Receivables” for revenue recognition policies related to
these components.
The
Company offers interest free promotional programs for three- to 24-month
contracts and has recorded interest income only on those contracts that are
not
expected to make payments within the time period specified to satisfy the
promotional requirements. The Company also offers 24- and 36-month no-interest
contracts on which no interest is owed for the term of the contract, unless
the
terms of the contract related to periodic payments are not met, in which case
interest accrues at the normal contract rate from that point forward. Other
than
these promotional programs, the Company does not extend credit at interest
rates
other than market rates.
The
following table sets forth the sales made under the interest free programs
(in
thousands):
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Sales
under interest-free programs
|
$
|
66,986
|
$
|
126,575
|
$
|
159,767
|
||||
These
sales are recognized at the time the product is delivered to the customer,
which
is consistent with the above stated policy. Considering the short-term nature
of
interest free programs for terms less than one year, sales are recorded at
full
value and are not discounted. Sales financed by longer-term (18-, 24- and
36-month) interest free programs are recorded at their net present value (see
“Application of APB 21 to Cash Option Programs that Exceed One Year in Duration”
below). Receivables arising out of the Company’s interest-free programs are
securitized with other qualifying customer receivables.
The
Company classifies amounts billed to customers relating to shipping and handling
as revenues. Costs of $15.1 million, $16.7 million and $21.0 million associated
with shipping and handling revenues are included in “Selling, general and
administrative expense” for the years ended January 31, 2004, 2005 and 2006,
respectively.
Fair
Value of Financial Instruments. The
fair value of cash and cash equivalents, receivables, and notes and accounts
payable approximate their carrying amounts because of the short maturity of
these instruments. The fair value of the Company’s interests in securitized
receivables is determined by estimating the present value of future expected
cash flows using management’s best estimates of the key assumptions, including
credit losses, prepayment rates, forward yield curves and discount rates
commensurate with the risks involved. See Note 2. The carrying value of the
Company’s long-term debt approximates fair value due to either the time to
maturity or the existence of variable interest rates that approximate current
market rate.
The
fair
value of interest rate swap agreements are recorded in current liabilities
based
on the settlement value obtained from the counter-party in the transaction.
The
Company does not use derivative financial instruments for trading purposes.
The
Company uses derivatives to hedge a portion of the variable interest rate risk
related to the cash flows from its interest only strip and its variable rate
debt.
We
held
interest rate swaps and collars with notional amounts totaling $20 million
at
both January 31, 2004 and 2005, with terms extending through April 2005. Those
instruments were held for the purpose of hedging a portion of the variable
interest rate risk, primarily related to cash flows from our interest-only
strip
as well as our variable rate debt. Hedge accounting was discontinued for the
rate swaps in fiscal 2004. At the time the cash flow hedge designation was
discontinued, we began to recognize changes in the fair value of the swaps
as
interest expense and amortize the accumulated other comprehensive loss related
to those derivates as interest expense over the period that the forecasted
transactions effected the statement of operations. During fiscal 2004, we
reclassified $0.2 million of losses previously recorded in accumulated other
comprehensive losses into the statement of operations and recorded $1.7 million
of income into the statement of operations because of the change in fair value
of the swaps. During fiscal 2005, we reclassified $1.1 million of losses
previously recorded in accumulated other comprehensive losses into the statement
of operations and recorded $1.1 million of income into the statement of
operations because of the change in fair value of the swaps. During fiscal
2006,
we reclassified $0.2 million of losses previously recorded in accumulated other
comprehensive losses into the statement of operations and recorded $0.2 million
of income into the statement of operations because of the change in fair value
of the swaps.
64
Prior
to
discontinuing these hedges, each period we recorded hedge ineffectiveness,
which
arose from differences between the interest rate stated in the derivative
instrument and the interest rate upon which the underlying hedged transaction
is
based. Ineffectiveness totaled $0.4 million for the year ended January 31,
2004,
and is reflected in “Interest Expense” in our consolidated statement of
operations. Since all hedge accounting has ceased, no ineffectiveness was
recognized in fiscal 2005 or 2006.
Stock-Based
Compensation. On
February 1, 2006, the Company adopted SFAS No. 123R, Stock-Based
Payment,
using
the modified retrospective application transition. Under the modified
retrospective application transition, all prior period financial statements
have
been adjusted to give effect to the fair-value-based method of accounting for
stock-based compensation. The adoption of the statement impacted the financial
statements presented as follows:
| · |
For
the years ended January 31, 2004, 2005 and 2006, Income before income
taxes was reduced by $0.1 million, $0.8 million and $1.2 million,
respectively.
|
| · |
For
the years ended January 31, 2004, 2005 and 2006, Net income was reduced
by
$0.1 million, $0.6 million and $1.0 million,
respectively.
|
| · |
For
the years ended January 31, 2005 and 2006, Basic earnings per share
was
reduced by $.03 and $.04, respectively. There was no Basic earnings
per
share impact in the year ended January 31,
2004.
|
| · |
For
the years ended January 31, 2005 and 2006, Diluted earnings per share
was
reduced by $.03 and $.04, respectively. There was no Diluted earnings
per
share impact in the year ended January 31,
2004.
|
| · |
For
the years ended January 31, 2004, 2005 and 2006, Cash flows from
operating
activities were reduced by, and Cash flows from investing activities
were
increased by, $0.0, $0.1 and $0.1 million,
respectively.
|
| · |
As
of January 31, 2006, the Current deferred income tax asset increased
$0.3
million, Additional paid-in capital increased $2.0 million and Retained
earnings decreased $1.7 million.
|
For
post-IPO stock option grants, the Company has used the Black-Scholes model
to
determine fair value. Stock-based compensation expense is recorded, net of
estimated forfeitures, on a straight-line basis over the vesting period of
the
applicable grant. Prior to the IPO, the value of the options issued was
estimated using the minimum valuation option-pricing model. Since the minimum
valuation option-pricing model does not qualify as a fair value pricing model
under FAS 123R, the Company follows the intrinsic value method of accounting
for
stock-based compensation to employees for these grants, as prescribed by
Accounting Principles Board (“APB”) Opinion No. 25, Accounting
for Stock Issued to Employees,
and
related interpretations The following table presents the impact to earnings
per
share as if the Company had adopted the fair value recognition provisions of
SFAS No. 123 (dollars in thousands except per share data):
65
|
Years
Ended January 31,
|
||||||||||||
|
2004
|
2005
|
2006
|
||||||||||
|
Net
income available for common stockholders as reported
|
$
|
23,089
|
$
|
30,687
|
$
|
41,103
|
||||||
|
Add:
Stock-based compensation recorded, net of tax
|
|
87
|
|
609
|
|
963
|
||||||
|
|
||||||||||||
|
Less:
Stock-based compensation, net of tax, for all awards
|
(530
|
)
|
(1,017
|
)
|
(1,313
|
)
|
||||||
|
Pro
forma net income
|
$
|
22,646
|
$
|
30,279
|
$
|
40,753
|
||||||
|
Earnings
per share-as reported:
|
||||||||||||
|
Basic
|
$
|
1.30
|
$
|
1.32
|
$
|
1.76
|
||||||
|
Diluted
|
$
|
1.26
|
$
|
1.30
|
$
|
1.71
|
||||||
|
Pro
forma earnings per share:
|
||||||||||||
|
Basic
|
$
|
1.28
|
$
|
1.31
|
$
|
1.74
|
||||||
|
Diluted
|
$
|
1.24
|
$
|
1.28
|
$
|
1.69
|
||||||
|
Percent
change:
|
||||||||||||
|
Net
income
|
(1.9
|
)%
|
(1.3
|
)%
|
(0.9
|
)%
|
||||||
|
Assumptions
used in pricing model:
|
||||||||||||
|
Weighted
average risk free interest rates
|
0.9
|
%
|
1.8
|
%
|
3.9
|
%
|
||||||
|
Weighted
average expected lives in years
|
4.3
|
4.4
|
4.6
|
|||||||||
|
Weighted
average volatility
|
37.5
|
%
|
30.0
|
%
|
32.0
|
%
|
||||||
|
Expected
dividends
|
-
|
-
|
-
|
|||||||||
As
of
January 31, 2006, the total compensation cost related to non-vested awards
not
yet recognized totaled $6.0 million and is expected to be recognized over a
weighted average period of 3.8 years.
Self
insurance. The
Company is self-insured for certain losses relating to group health, workers’
compensation, automobile, general and product liability claims. The Company
has
stop loss coverage to limit the exposure arising from these claims.
Self-insurance losses for claims filed and claims incurred, but not reported,
are accrued based upon the Company’s estimates of the aggregate liability for
uninsured claims incurred using development factors based on historical
experience.
Expense
Classifications. The
Company records “Cost of goods sold” as the direct cost of products sold, any
related in-bound freight costs, and receiving costs, inspection costs, internal
transfer costs, and other costs associated with the operations of its
distribution system. Also included in “Cost of goods sold” is an allocation of
advertising expense computed at approximately 6% of the product direct cost.
The
offset for this allocation is in “Selling, general and administrative expense”
and is netted with advertising costs along with vendor rebates (see “Vendor
Programs” above). Advertising expense included in Selling, general and
administrative expense for the years ended January 31, 2004, 2005 and 2006,
was:
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
(in
thousands)
|
||||||||||
|
Gross
advertising expense
|
$
|
24,686
|
$
|
28,564
|
$
|
32,107
|
||||
|
Less:
|
||||||||||
|
Vendor
rebates
|
(2,812
|
)
|
(4,752
|
)
|
(5,793
|
)
|
||||
|
Allocation
to Cost of goods sold
|
(17,517
|
)
|
(20,635
|
)
|
(26,621
|
)
|
||||
|
Net
advertising expense in
|
||||||||||
|
Selling,
general and adminstrative expense
|
$
|
4,357
|
$
|
3,177
|
$
|
(307
|
)
|
|||
In
addition, the Company records as “Cost of service parts sold” the direct cost of
parts used in its service operation and the related inbound freight costs,
purchasing and receiving costs, inspection costs, internal transfer costs,
and
other costs associated with the warranty and service distribution operation.
The
costs
associated with the Company’s merchandising function, including product
purchasing, advertising, sales commissions, and all store occupancy costs are
included in “Selling, general and administrative expense.”
66
Application
of APB 21 to Cash Option Programs that Exceed One Year in Duration.
In
February 2004, the Company began offering 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 years ended January 31, 2005 and 2006, “Product sales” were reduced by $2.4
million and $3.1 million, respectively, and “Finance charges and other” was
increased by $0.9 million and $2.4 million, respectively, to effect the
adjustment to fair value and to reflect the appropriate amortization of the
discount.
Reclassifications. Certain
reclassifications have been made in the prior years’ financial statements to
conform to the current year’s presentation. Specifically, the impact of the
cancellation of insurance policies on charged-off receivables, which were
previously included in the Provision for bad debts on the consolidated
statements of operations, are now reported as a reduction of Insurance
commissions, which is included in Finance charges and other.
Accumulated
Other Comprehensive Income. The
balance of accumulated other comprehensive income (net of tax) at January 31,
2005 was comprised of $8.6 million of unrealized gains on interests in
securitized assets less $0.2 million of unrealized losses on derivatives. The
balance of accumulated other comprehensive income (net of tax) at January 31,
2006 was comprised of $10.5 million of unrealized gains on interests in
securitized assets.
Recent
Accounting Pronouncements.
In February 2006, SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments,
was
issued. This statements is an amendment of SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities,
and SFAS
No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities-a replacement of FASB Statement No. 125.
This
statement permits fair value remeasurement for any hybrid financial instrument
that contains an embedded derivative that would otherwise require bifurcation,
clarifies which interest-only strips and principal-only strips are not subject
to the requirements of SFAS No. 133, 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, clarifies that concentrations
of
credit risk in the form of subordination are not embedded derivatives and amends
SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. This statement
is
effective for all financial instruments acquired or issued after the beginning
of an entity’s first fiscal year that begins after September 15, 2006. The
Company is currently analyzing the impact this statement will have on its
consolidated results of operations and its financial position.
In
March
2006, SFAS No. 156, Accounting
for Servicing of Financial Assets an amendment of FASB Statement No.
140,
was
issued. This statement requires an entity to recognize a servicing asset or
liability each time it undertakes an obligation to service a financial asset
by
entering into a servicing contract, requires all separately recognized servicing
assets and servicing liabilities to be initially measured at fair value, permits
an entity to choose either the amortization method or fair value measurement
method for subsequent measurement of each class of separately recognized
servicing assets, permits, at its initial adoption, a one-time reclassification
of available-for-sale securities to trading securities by entities with
recognized servicing rights and, requires separate presentation of and
additional disclosures for servicing assets and servicing liabilities
subsequently measured at fair value. This statement is effective for all
financial instruments acquired or issued after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The Company is currently
analyzing the impact this statement will have on its consolidated results of
operations and its financial position.
67
2. Interests
in Securitized Receivables
The
Company has an agreement to sell customer receivables. As part of this
agreement, the Company sells eligible retail installment and revolving
receivable accounts to a QSPE that pledges the transferred accounts to a trustee
for the benefit of investors. The following table summarizes the availability
of
funding under the Company’s securitization program at January 31, 2006 (in
thousands):
|
Capacity
|
Utilized
|
Available
|
||||||||
|
Series
A
|
$
|
250,000
|
$
|
185,000
|
$
|
65,000
|
||||
|
Series
B – Class A
|
120,000
|
120,000
|
—
|
|||||||
|
Series
B – Class B
|
57,778
|
57,778
|
—
|
|||||||
|
Series
B – Class C
|
22,222
|
22,222
|
—
|
|||||||
|
Total
|
$
|
450,000
|
$
|
385,000
|
$
|
65,000
|
||||
The
Series A program functions as a credit facility to fund the initial transfer
of
eligible receivables. When the facility approaches capacity, the QSPE (“Issuer”)
intends to seek financing to pay down the outstanding balance in the Series
A
variable funding note; at that point, the facility will once again become
available to accumulate the transfer of new receivables or to meet required
principal payments on other series as they become due. This new financing could
be in the form of additional notes, bonds or other instruments as the market
might allow. The Series A program matures September 1, 2007. The Series B
program (which is non-amortizing for the first four years) matures officially
on
September 1, 2010, although it is expected that the principal payments, which
are required to begin in October 2006, will retire the bonds prior to that
date.
The
agreement contains certain covenants requiring the maintenance of various
financial ratios and receivables performance standards. The Company was in
compliance with the requirements of the agreement as of January 31, 2006. As
part of the new securitization program, the Company and Issuer arranged for
the
issuance of a stand-by letter of credit in the amount of $10.0 million to
provide assurance to the trustee on behalf of the bondholders that funds
collected monthly by the Company, as servicer, will be remitted as required
under the base indenture and other related documents. The letter of credit
has a
term of one year, and the maximum potential amount of future payments is the
face amount of the letter of credit. The letter of credit is callable, at the
option of trustee, if the Company, as servicer, fails to make the required
monthly payments of the cash collected to the trustee.
Through
its retail sales activities, the Company generates customer retail installment
and revolving receivable accounts. The Company enters into securitization
transactions to sell these accounts to the QSPE. In these securitizations,
the
Company retains servicing responsibilities and subordinated interests. The
Company receives annual servicing fees and other benefits approximating 3.9%
of
the outstanding balance and rights to future cash flows arising after the
investors in the securities issued by or on behalf of the QSPE have received
from the trustee all contractually required principal and interest amounts.
The
Company does not record an asset or liability related to any servicing
obligations because the servicing benefits received are determined to be just
adequate to compensate the Company for its servicing responsibilities. The
investors and the securitization trustee have no recourse to the Company’s other
assets for failure of the individual customers of the Company and the QSPE
to
pay when due. The Company’s retained interests are subordinate to the investors’
interests. Their value is subject to credit, prepayment, and interest rate
risks
on the transferred financial assets.
68
The
fair
values of the Company’s interest in securitized assets were as follows (in
thousands):
|
January
31,
|
|||||||
|
2005
|
2006
|
||||||
|
Interest-only
strip
|
$
|
20,497
|
$
|
25,238
|
|||
|
Subordinated
securities
|
96,662
|
114,044
|
|||||
|
Total
fair value of interests in securitized assets
|
$
|
117,159
|
$
|
139,282
|
|||
The
table
below summarizes valuation assumptions used for each period presented:
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Prepayment
rates
|
||||||||||
|
Primary
installment
|
1.5
|
%
|
1.5
|
%
|
1.5
|
%
|
||||
|
Primary
revolving
|
3.0
|
%
|
3.0
|
%
|
3.0
|
%
|
||||
|
Secondary
installment
|
1.5
|
%
|
1.5
|
%
|
1.5
|
%
|
||||
|
Net
interest spread
|
||||||||||
|
Primary
installment
|
13.4
|
%
|
13.3
|
%
|
12.8
|
%
|
||||
|
Primary
revolving
|
13.4
|
%
|
13.3
|
%
|
12.8
|
%
|
||||
|
Secondary
installment
|
14.1
|
%
|
15.0
|
%
|
14.7
|
%
|
||||
|
Expected
losses
|
||||||||||
|
Primary
installment
|
3.5
|
%
|
3.4
|
%
|
3.0
|
%
|
||||
|
Primary
revolving
|
3.5
|
%
|
3.4
|
%
|
3.0
|
%
|
||||
|
Secondary
installment
|
3.5
|
%
|
3.4
|
%
|
3.0
|
%
|
||||
|
Projected
expense
|
||||||||||
|
Primary
installment
|
3.9
|
%
|
4.1
|
%
|
4.1
|
%
|
||||
|
Primary
revolving
|
3.9
|
%
|
4.1
|
%
|
4.1
|
%
|
||||
|
Secondary
installment
|
3.9
|
%
|
4.1
|
%
|
4.1
|
%
|
||||
|
Discount
rates
|
||||||||||
|
Primary
installment
|
10.0
|
%
|
10.0
|
%
|
13.0
|
%
|
||||
|
Primary
revolving
|
10.0
|
%
|
10.0
|
%
|
13.0
|
%
|
||||
|
Secondary
installment
|
14.0
|
%
|
14.0
|
%
|
17.0
|
%
|
||||
|
Delinquency
and deferral rates
|
||||||||||
|
Primary
installment
|
9.4
|
%
|
10.1
|
%
|
9.3
|
%
|
||||
|
Primary
revolving
|
11.3
|
%
|
8.9
|
%
|
7.3
|
%
|
||||
|
Secondary
installment
|
16.5
|
%
|
15.3
|
%
|
14.0
|
%
|
||||
69
At
January 31, 2006, key economic assumptions and the sensitivity of the current
fair value of the interests in securitized assets to immediate 10% and 20%
adverse changes in those assumptions are as follows (dollars in
thousands):
|
Primary
|
Primary
|
Secondary
|
|||||||||||
|
Portfolio
|
Portfolio
|
Portfolio
|
|||||||||||
|
Installment
|
Revolving
|
Installment
|
|||||||||||
|
Fair
value of interest in securitized assets
|
$
|
98,923
|
$
|
10,958
|
$
|
29,401
|
|||||||
|
Expected
weighted average life.
|
1.2
years
|
1.4
years
|
1.6
years
|
||||||||||
|
Annual
prepayment rate assumption.
|
1.5
|
%
|
3.0
|
%
|
1.5
|
%
|
|||||||
|
Impact
on fair value of 10% adverse change
|
$
|
212
|
$
|
24
|
$
|
141
|
|||||||
|
Impact
on fair value of 20% adverse change
|
$
|
415
|
$
|
46
|
$
|
276
|
|||||||
|
Net
interest spread assumption.
|
12.8
|
%
|
12.8
|
%
|
14.7
|
%
|
|||||||
|
Impact
on fair value of 10% adverse change
|
$
|
3,396
|
$
|
376
|
$
|
1,745
|
|||||||
|
Impact
on fair value of 20% adverse change
|
$
|
6,705
|
$
|
743
|
$
|
3,405
|
|||||||
|
Expected
losses assumptions
|
3.0
|
%
|
3.0
|
%
|
3.0
|
%
|
|||||||
|
Impact
on fair value of 10% adverse change
|
$
|
806
|
$
|
89
|
$
|
364
|
|||||||
|
Impact
on fair value of 20% adverse change
|
$
|
1,605
|
$
|
178
|
$
|
723
|
|||||||
|
Projected
expense assumption
|
4.1
|
%
|
4.1
|
%
|
4.1
|
%
|
|||||||
|
Impact
on fair value of 10% adverse change
|
$
|
769
|
$
|
85
|
$
|
330
|
|||||||
|
Impact
on fair value of 20% adverse change
|
$
|
1,538
|
$
|
170
|
$
|
660
|
|||||||
|
Discount
rate assumption
|
13.0
|
%
|
13.0
|
%
|
17.0
|
%
|
|||||||
|
Impact
on fair value of 10% adverse change
|
$
|
1,010
|
$
|
112
|
$
|
558
|
|||||||
|
Impact
on fair value of 20% adverse change
|
$
|
2,004
|
$
|
222
|
$
|
1,101
|
|||||||
|
Delinquency
and deferral
|
9.3
|
%
|
7.3
|
%
|
14.0
|
%
|
|||||||
|
Impact
on fair value of 10% adverse change (1)
|
$
|
124
|
$
|
14
|
$
|
121
|
|||||||
|
Impact
on fair value of 20% adverse change (1)
|
$
|
244
|
$
|
27
|
$
|
239
|
|||||||
(1)
For
purposes of this analysis, an adverse change is assumed to be a decrease
in the
delinquency and deferral rate. A decrease results in a faster repayment of
the
loans, which reduces the fair value of the interest-only strip a greater
amount
than the resulting increase in the fair value of the subordinated securities.
Since it is assumed that none of the other assumptions would change, an increase
in the delinquency and deferral rate results in an increase in the fair value,
(i.e. losses are not assumed to increase as a result).
These
sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in fair value based on a 10% variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, the effect
of
the variation in a particular assumption on the fair value of the interest-only
strip is calculated without changing any other assumption; in reality, changes
in one factor may result in changes in another (i.e. increases in market
interest rates may result in lower prepayments and increased credit losses),
which might magnify or counteract the sensitivities.
70
The
following illustration presents quantitative information about the receivables
portfolios managed by the Company (in thousands):
|
Total
Principal Amount of
|
Principal
Amount Over
|
||||||||||||
|
Receivables
|
60
Days Past Due (1)
|
||||||||||||
|
January
31,
|
January
31,
|
||||||||||||
|
2005
|
2006
|
2005
|
2006
|
||||||||||
|
Primary
portfolio:
|
|||||||||||||
|
Installment
|
$
|
328,042
|
$
|
380,603
|
$
|
16,636
|
$
|
24,934
|
|||||
|
Revolving
|
30,210
|
41,046
|
867
|
1,095
|
|||||||||
|
Subtotal
|
358,252
|
421,649
|
17,503
|
26,029
|
|||||||||
|
Secondary
portfolio:
|
|||||||||||||
|
Installment
|
70,448
|
98,072
|
5,640
|
9,508
|
|||||||||
|
Total
receivables managed
|
428,700
|
519,721
|
23,143
|
35,537
|
|||||||||
|
Less
receivables sold
|
419,172
|
509,681
|
21,540
|
33,483
|
|||||||||
|
Receivables
not sold
|
9,528
|
10,040
|
$
|
1,603
|
$
|
2,054
|
|||||||
|
Non-customer
receivables
|
17,200
|
13,502
|
|||||||||||
|
Total
accounts receivable, net
|
$
|
26,728
|
$
|
23,542
|
|||||||||
|
Average
Balances
|
Credit
Charge-offs
|
||||||||||||
|
January
31,
|
January
31, (2)
|
||||||||||||
|
2005
|
2006
|
2005
|
2006
|
||||||||||
|
Primary
portfolio:
|
|||||||||||||
|
Installment
|
$
|
297,187
|
$
|
352,315
|
|||||||||
|
Revolving
|
25,921
|
35,149
|
|||||||||||
|
Subtotal
|
323,108
|
387,464
|
$
|
7,601
|
$
|
10,225
|
|||||||
|
Secondary
portfolio:
|
|||||||||||||
|
Installment
|
64,484
|
83,461
|
1,604
|
1,915
|
|||||||||
|
Total
receivables managed
|
387,592
|
470,925
|
9,205
|
12,140
|
|||||||||
|
Less
receivables sold
|
378,178
|
461,215
|
8,105
|
11,267
|
|||||||||
|
Receivables
not sold
|
$
|
9,414
|
$
|
9,710
|
$
|
1,100
|
$
|
873
|
|||||
|
(1)
|
|
Amounts
are based on end of period balances.
|
|
(2)
|
|
Amounts
represent total loan charge-offs, net of recoveries, on total receivables.
|
3. Notes
Payable and Long-Term Debt
At
January 31, 2006, the Company had $47.0 million of its $50 million revolving
credit facility available for borrowings. The amounts utilized under the
revolving credit facility reflected $3.0 million related to letters of credit
issued. The letters of credit were issued under a $5.0 million sublimit provided
under the facility for standby letters of credit. Additionally, 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 May 2006 and has a floating rate of interest, based on Prime, which
equaled 7.00% at January 31, 2006.
71
Long-term
debt consists of the following (in thousands, except repayment explanations):
|
January
31,
|
|||||||
|
2005
|
2006
|
||||||
|
Revolving
credit facility with interest at variable rates (7.25% at January
31,
2006)
|
$
|
5,000
|
$
|
-
|
|||
|
Promissory
notes, due in monthly installments
|
32
|
136
|
|||||
|
Total
long-term debt
|
5,032
|
136
|
|||||
|
Less
amounts due within one year
|
(29
|
)
|
(136
|
)
|
|||
|
Amounts
classified as long-term
|
$
|
5,003
|
$
|
-
|
|||
The
revolving facility is subject to the Company maintaining various financial
and
non-financial covenants. In addition, the provisions of the bank credit facility
limit the payment of dividends on the Company’s common stock. As of January 31,
2005 and January 31, 2006, the Company was in compliance with all financial
and
non-financial covenants.
The
current agreement provides for a revolving facility capacity of $50 million,
with a $5 million letter of credit sublimit and an $8.0 million sublimit for
a
swingline of credit. Interest rates are variable and are determined, at the
option of the Company, at the Base Rate (the greater of Agent’s prime rate or
federal funds rate plus 0.50%) plus the Base Rate Margin (which ranges from
0.00% to 0.50%) or LIBO/LIBOR Rate plus the LIBO/LIBOR Margin (which ranges
from
0.75% to 1.75%). Both the Base Rate Margin and the LIBO/LIBOR Margin are
determined quarterly based on a debt coverage ratio equal to the rolling
four-quarter relationship of total debt (including lease obligations) to
earnings before interest, taxes, depreciation, amortization and rent. The
Company is obligated to pay a non-use fee on a quarterly basis on the
non-utilized portion of the revolving facility at rates ranging from .20% to
.375%. The revolving facility is secured by the assets of the Company not
otherwise encumbered and a pledge of substantially all of the stock of the
Company’s present and future subsidiaries and matures in November 2010.
Interest
expense incurred on notes payable and long-term debt totaled $2.2, $1.1 and
$0.2
million for the years ended January 31, 2004, 2005 and 2006, respectively.
Interest expense included interest related to SRDS debt, which totaled $0.8
million for the year ended January 31, 2005. Aggregate maturities of long-term
debt as of January 31 in the year indicated are as follows (in thousands):
|
2007
|
$
|
136
|
||
|
2008
|
-
|
|||
|
2009
|
-
|
|||
|
Total
|
$
|
136
|
4.
Letters of Credit
The
Company utilizes unsecured letters of credit to secure a portion of the QSPE’s
asset-backed securitization program, deductibles under the Company’s insurance
programs and international product purchases. At January 31, 2005 and January
31, 2006, the Company had outstanding unsecured letters of credit of $12.1
million and $13.0 million, respectively. These letters of credit were issued
under the three following facilities:
| · |
The
Company has a $5.0 million sublimit provided under its revolving
line of
credit for stand-by and import letters of credit. At January 31,
2006,
$3.0 million of letters of credit were outstanding and callable at
the
option of the Company’s insurance carrier if the Company does not honor
its requirement to fund deductible amounts as billed under its insurance
program.
|
| · |
The
Company has arranged for a $10.0 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
2006.
|
| · |
The
Company obtained a $1.5 million commitment for trade letters of credit
to
secure product purchases under an international arrangement. At January
31, 2006, there were no letters of credit outstanding under this
commitment. The letter of credit commitment has a term of one year
and
expires in May 2006.
|
72
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 $16.5 million as of January 31,
2006.
5. Income
Taxes
Deferred
income taxes reflect the net effects of temporary timing differences between
the
carrying amounts of assets and liabilities for financial reporting purposes
and
the amounts used for income tax purposes. Significant components of the
Company’s net deferred tax assets result primarily from differences between
financial and tax methods of accounting for income recognition on service
contracts and residual interests, capitalization of costs in inventory, and
deductions for depreciation and doubtful accounts, and the fair value of
derivatives. The deferred tax assets and liabilities are summarized as follows
(in thousands):
|
January
31,
|
|||||||
|
2005
|
2006
|
||||||
|
Deferred
Tax Assets
|
|||||||
|
Allowance
for doubtful accounts and warranty and insurance cancellations
|
$
|
1,124
|
$
|
2,158
|
|||
|
Deferred
revenue
|
2,204
|
597
|
|||||
|
Fair
value of derivatives
|
62
|
-
|
|||||
|
Stock-based
compensation
|
137
|
301
|
|||||
|
Property
and equipment
|
1,297
|
2,297
|
|||||
|
Inventories
|
952
|
772
|
|||||
|
Accrued
vacation and other
|
667
|
1,268
|
|||||
|
Total
deferred tax assets
|
6,443
|
7,393
|
|||||
|
Deferred
Tax Liabilities
|
|||||||
|
Sales
tax receivable
|
(919
|
)
|
(768
|
)
|
|||
|
Interest
in securitized assets
|
(4,095
|
)
|
(4,889
|
)
|
|||
|
Goodwill
|
(672
|
)
|
(903
|
)
|
|||
|
Other
|
(71
|
)
|
(615
|
)
|
|||
|
Total
deferred tax liabilities
|
(5,757
|
)
|
(7,175
|
)
|
|||
|
Net
Deferred Tax Asset
|
$
|
686
|
$
|
218
|
|||
Significant
components of income taxes were as follows (in thousands):
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
12,866
|
$
|
16,100
|
$
|
23,023
|
||||
|
State
|
114
|
47
|
25
|
|||||||
|
Total
current
|
12,980
|
16,147
|
23,048
|
|||||||
|
Deferred:
|
||||||||||
|
Federal
|
279
|
557
|
(701
|
)
|
||||||
|
State
|
1
|
2
|
(6
|
)
|
||||||
|
Total
deferred
|
280
|
559
|
(707
|
)
|
||||||
|
Total
tax provision
|
$
|
13,260
|
$
|
16,706
|
$
|
22,341
|
||||
73
A
reconciliation of the statutory tax rate and the effective tax rate for each
of
the periods presented in the statements of operations is as follows:
|
Years
Ended January 31,
|
||||||||||
|
2004
|
2005
|
2006
|
||||||||
|
U.S.
Federal statutory rate
|
35.0
|
%
|
35.0
|
%
|
35.0
|
%
|
||||
|
State
and local income taxes
|
0.3
|
0.1
|
0.1
|
|||||||
|
Non-deductible
entertainment, tax-free interest income and
other
|
0.1
|
0.7
|
0.2
|
|||||||
|
Effective
tax rate attributable to continuing operations
|
35.4
|
%
|
35.8
|
%
|
35.3
|
%
|
||||
|
Other
|
(0.8
|
)
|
(0.5
|
)
|
(0.1
|
)
|
||||
|
Effective
tax rate
|
34.6
|
%
|
35.3
|
%
|
35.2
|
%
|
||||
6. Leases
The
Company leases certain of its facilities and operating equipment from outside
parties and from a stockholder/officer. The real estate leases generally have
initial lease periods of from 5 to 15 years with renewal options at the
discretion of the Company; the equipment leases generally provide for initial
lease terms of three to seven years and provide for a purchase right by the
Company at the end of the lease term at the fair market value of the equipment.
The
following is a schedule of future minimum base rental payments required under
the operating leases that have initial non-cancelable lease terms in excess
of
one year (in thousands):
|
Third
|
Related
|
|||||||||
|
Years
Ended January 31,
|
Party
|
Party
|
Total
|
|||||||
|
2007
|
$
|
15,358
|
$
|
207
|
$
|
15,565
|
||||
|
2008
|
14,764
|
207
|
14,971
|
|||||||
|
2009
|
13,709
|
207
|
13,916
|
|||||||
|
2010
|
13,077
|
207
|
13,284
|
|||||||
|
2011
|
12,273
|
207
|
12,480
|
|||||||
|
Thereafter
|
45,841
|
-
|
45,841
|
|||||||
|
Total
|
$
|
115,022
|
$
|
1,035
|
$
|
116,057
|
||||
Total
lease expense was approximately $14.0 million, $15.0 million and $15.7 million
for the years ended January 31, 2004, 2005 and 2006, respectively, including
approximately $1.6 million, $0.2 million and $0.2 million paid to related
parties, respectively. During the year ended January 31, 2005, the Company
paid
$1.4 million under leases with SRDS. As SRDS was consolidated in the statement
of operations for the year ended January 31, 2005, these payments were
characterized as selling, general and administrative expenses, depreciation
expense, interest expense and minority interest in limited partnership. See
Note
1.
Certain
of our leases are subject to scheduled minimum rent increases or escalation
provisions, the cost of which is recognized on a straight-line basis over the
minimum lease term. Tenant improvement allowances, when granted by lessor,
are
deferred and amortized as contra-lease expense over the term of the
lease.
7. Stock-Based
Compensation
The
Company approved an Incentive Stock Option Plan that provides for a pool of
up
to 3.5 million options to purchase shares of the Company’s common stock. Such
options are to be granted to various officers and employees at prices equal
to
the market value on the date of the grant. The options vest over three or five
year periods (depending on the grant) and expire ten years after the date of
grant. As part of the completion of the IPO, the Company amended the Incentive
Stock Option Plan to provide for a total available pool of 2,559,767 options,
adopted a Non-Employee Director Stock Option Plan that included 300,000 options,
and adopted an Employee Stock Purchase Plan that reserved up to 1,267,085 shares
of the Company’s common stock to be issued. On November 24, 2003, the Company
issued six non-employee directors 240,000 total options to acquire the Company’s
stock at $14.00 per share. On June 3, 2004, the Company issued 40,000 options
to
acquire the Company’s stock at $17.34 per share to a seventh non-employee
director. At January 31, 2006, the Company had 20,000 options remaining in
the
Non-Employee Director Stock Option Plan.
74
The
Employee Stock Purchase Plan is available to a majority of the employees of
the
Company and its subsidiaries, subject to minimum employment conditions and
maximum compensation limitations. At the end of each calendar quarter, employee
contributions are used to acquire shares of common stock at 85% of the lower
of
the fair market value of the common stock on the first or last day of the
calendar quarter. During the year ended January 31, 2005 and 2006, the Company
issued 8,664 and 10,496 shares of common stock, respectively, to employees
participating in the plan, leaving 1,247,925 shares remaining reserved for
future issuance under the plan as of January 31, 2006.
A
summary
of the status of the Company’s Incentive Stock Option Plan and the activity
during the years ended January 31, 2004, 2005 and 2006 is presented below
(shares in thousands):
|
Years
Ended January 31,
|
|||||||||||||||||||
|
2004
|
2005
|
2006
|
|||||||||||||||||
|
Weighted
|
Weighted
|
Weighted
|
|||||||||||||||||
|
Average
|
Average
|
Average
|
|||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
|||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
||||||||||||||
|
Outstanding,
beginning of year
|
1,241
|
$
|
8.34
|
1,531
|
$
|
9.68
|
1,666
|
$
|
11.50
|
||||||||||
|
Granted
|
369
|
14.00
|
387
|
17.43
|
343
|
33.88
|
|||||||||||||
|
Exercised
|
(47
|
)
|
(8.36
|
)
|
(162
|
)
|
(8.72
|
)
|
(271
|
)
|
(8.34
|
)
|
|||||||
|
Canceled
|
(32
|
)
|
(9.15
|
)
|
(90
|
)
|
(11.07
|
)
|
(112
|
)
|
(17.78
|
)
|
|||||||
|
Outstanding,
end of year
|
1,531
|
$
|
9.68
|
1,666
|
$
|
11.50
|
1,626
|
$
|
16.31
|
||||||||||
|
Weighted
average grant date fair value of options granted during
period
|
$
|
4.77
|
$
|
4.97
|
$
|
11.09
|
|||||||||||||
|
Options
exercisable at end of year
|
551
|
712
|
743
|
||||||||||||||||
|
Options
available for grant
|
981
|
684
|
453
|
||||||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||
|
Weighted
|
||||||||||||||||
|
Shares
|
Average
|
Weighted
|
Shares
|
Weighted
|
||||||||||||
|
|
Outstanding
|
Remaining
|
Average
|
Exercisable
|
Average
|
|||||||||||
|
January
31,
|
Contractual
|
Exercise
|
January
31,
|
Exercise
|
||||||||||||
|
Range
of Exercise Prices
|
2006
|
Life
in Years
|
Price
|
2006
|
Price
|
|||||||||||
|
$4.29-$4.29
|
9
|
3.9
|
$
|
4.29
|
9
|
$
|
4.29
|
|||||||||
|
$8.21-$10.83
|
696
|
5.3
|
8.51
|
569
|
8.38
|
|||||||||||
|
$14.00
-$16.49
|
306
|
7.9
|
14.33
|
108
|
14.17
|
|||||||||||
|
$17.73-$17.73
|
288
|
8.9
|
17.73
|
57
|
17.73
|
|||||||||||
|
$33.88-$33.88
|
327
|
9.8
|
33.88
|
-
|
-
|
|||||||||||
|
Total
|
1,626
|
7.3
|
$
|
16.31
|
743
|
$
|
9.88
|
|||||||||
75
8. Significant
Vendors
As
shown
in the table below, a significant portion of the Company’s merchandise purchases
for years ended January 31, 2004, 2005 and 2006 were made from six vendors:
|
Years
Ended January 31,
|
||||||||||
|
Vendor
|
2004
|
2005
|
2006
|
|||||||
|
A
|
15.5
|
%
|
14.2
|
%
|
17.0
|
%
|
||||
|
B
|
11.2
|
13.8
|
12.2
|
|||||||
|
C
|
12.5
|
13.2
|
11.4
|
|||||||
|
D
|
5.7
|
8.0
|
7.8
|
|||||||
|
E
|
4.0
|
6.7
|
6.8
|
|||||||
|
F
|
4.7
|
5.8
|
5.4
|
|||||||
|
Totals
|
53.6
|
%
|
61.7
|
%
|
60.6
|
%
|
||||
As
part
of a program to purchase product inventory from vendors overseas, the Company
was not obligated at January 31, 2006 for under any stand-by letters of
credit.
9. Related
Party Transactions
The
Company leases one of its stores from its Chief Executive Officer and Chairman
of Board, under the terms of a lease it entered prior to becoming a publicly
held company. It also leased six store locations from Specialized Realty
Development Services, LP (“SRDS”), a real estate development company that was
created prior to the Company’s becoming publicly held and was owned by various
members of management and individual investors of Stephens Group, Inc. The
Stephens Group, Inc. is a significant shareholder of the Company. Based on
independent appraisals that were performed on each project that was completed,
the Company believes that the terms of the leases were at least comparable
to
those that could be obtained in an arms’ length transaction. As part of the
ongoing operation of SRDS, the Company received a management fee associated
with
the administrative functions that were provided to SRDS of $5,000, $100,000
and
$6,500 for the years ended January 31, 2004, 2005 and 2006, respectively. As
of
January 31, 2005, the Company no longer leased any properties from SRDS since
it
divested itself of the leased properties. As part of the divestiture, SRDS
reimbursed the Company $75,000 for costs related to lease modifications. As
a
result of the divestiture, the Company’s consolidated balance sheet at January
31, 2005 does not include accounts of SRDS that were previously consolidated
with our financial statements at January 31, 2004. However, the consolidated
statements of operations and cash flows for fiscal 2005 include the operations
and cash flows of SRDS through the dates the sales were completed.
The
Company engaged the services of Direct Marketing Solutions, Inc., or DMS, for
a
substantial portion of its direct mail advertising. Direct Marketing Solutions,
Inc. is partially owned (less than 50%) by the Stephens Group Inc., members
of
the Stephens family, Jon Jacoby, and Doug Martin. The Stephens Group Inc. and
the members of the Stephens family are significant shareholders of the Company,
and Jon Jacoby and Doug Martin are members of the Company’s Board of Directors.
The fees the Company paid to DMS during fiscal years ended 2005 and 2006
amounted to approximately $1.8 million and $4.3 million, respectively. Thomas
J.
Frank, the Chief Executive Officer and Chairman of the Board of Directors owned
a small percentage (0.7%) at the end of fiscal year 2005, but divested his
interest during the first half of fiscal year 2006.
10. Benefit
Plans
The
Company has established a defined contribution 401(k) plan for eligible
employees who are at least 21 years old and have completed at least one-year
of
service. Employees may contribute up to 20% of their eligible pretax
compensation to the plan. The Company will match 100% of the first 3% of the
employees’ contributions and 50% of the next 2% of the employees’ contributions.
Employees at least 50 years of age may make supplemental contributions to the
Plan as defined by current regulations. At its option, the Company may also
make
supplemental contributions to the Plan, but has not made such contributions
in
the past three years. The matching contributions made by the company totaled
$1.2, $1.4 and $1.6 million during the years ended January 31, 2004, 2005 and
2006, respectively.
76
11. Common
and Preferred Stock
The
Company has outstanding 23,571,564 shares of common stock at January 31, 2006,
of which 7,000 shares are restricted as to various vesting rights until July
2006.
As
part
of the Company’s recapitalization and reorganization that took place in 1998, a
total of 213,720 shares of preferred stock were issued in exchange for existing
common stock of the Company; such shares were valued as of the date of the
transaction at $87.18 per share and bore a cumulative dividend of 10% that
was
not payable until declared by the Company’s board of directors. Such cumulative
dividends must be paid before dividends on the common stock can be distributed.
On January 24, 2003, the board of directors declared a preferred stock dividend
as of April 30, 2003 in the amount of $8.8 million ($50.53 per share) contingent
upon the completion of a proposed initial public offering. On December 1, 2003
when the initial public offering was closed, the Company redeemed all preferred
stock and accumulated dividends for 1,711,832 shares of common stock and $1.5
million in cash.
The
table
below reflects the number of preferred shares the Company redeemed during the
periods covered and the total costs of the redemptions including accumulated
dividends (dollars in thousands):
|
Year
ended January 31,
|
Redeemed
|
Costs
|
Dividends
|
|||||||
|
2004
|
174,648
|
$
|
25,420
|
$
|
10,194
|
|||||
|
2005
|
-
|
-
|
-
|
|||||||
|
2006
|
-
|
-
|
-
|
|||||||
12. Contingencies
Legal
Proceedings. The
Company is involved in routine litigation incidental to our business from time
to time. Currently, the Company does not expect the outcome of any of this
routine litigation to have a material effect on its financial condition or
results of operations. 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.
Insurance.
Because
of its inventory, vehicle fleet and general operations, the Company has
purchased insurance covering a broad variety of potential risks. The Company
purchases insurance polices covering general liability, workers compensation,
real property, inventory and employment practices liability, among others.
Additionally, the Company has umbrella policies with an aggregate limit of
$50.0
million. The Company has retained a portion of the risk under these policies
and
its group health insurance program. See additional discussion under Note 1.
The
Company has a $3.0 million letter of credit outstanding supporting its
obligations under the property and casualty portion of its insurance
program.
Service
Maintenance Agreement Obligations.
The
Company sells service maintenance agreements under which it 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 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 sales and recorded in revenues
in
the statement of operations over the life of the agreements. The amounts
deferred are reflected on the face of the balance sheet in “Deferred revenues
and allowances,” see also Note 1 for additional discussion.
13. Restatement
of Financial Statements
The
Company has restated its consolidated financial statements for the years ended
January 31, 2006, 2005 and 2004 to correct for errors in recording interests
in
securitized assets, securitization income and related income tax impacts that
were incorrectly accounted for under U.S. generally accepted accounting
principles, specifically covered by Statement of Financial Accounting Standards
(“SFAS”) No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities
and
Emerging Issues Task Force (“EITF”) No. 99-20, Recognition
of Interest Income and Impairment on Purchased and Retained Beneficial Interest
in Securitized Financial Assets.
77
The
information contained in the financial statements and notes thereto reflect
the
adjustments described herein and the modified retrospective application
transition of the adoption of SFAS No. 123R (see Note 1) and does not reflect
events occurring after March 30, 2006, the date of the original filing of our
Annual Report on Form 10-K for the year ended January 31, 2006, or modify or
update those disclosures that have been affected by subsequent
events.
In
addition to the restatement adjustments discussed above, as a result of the
review, the Company also refined certain of the assumptions used in the
valuation of its interests in securitized assets at fair value. While these
refinements did not result in a change in total securitization income reported,
it did impact the amounts reported for the components of securitization income
in the footnotes to the annual financial statements. Additionally, the changes
resulted in an increase in the total fair value of the interests in securitized
assets reflected on the balance sheet and a related increase in accumulated
other comprehensive income, net of tax.
The
following table sets forth the effects of the adjustments on Net Income for
the
years 2004, 2005 and 2006.
|
Increase
in Net Income
|
||||||||||
|
Years
Ended January 31
|
||||||||||
|
(Dollars
in thousands)
|
2004
|
2005
|
2006
|
|||||||
|
As
Previously Reported net income
|
$
|
24,253
|
$
|
29,516
|
$
|
40,219
|
||||
|
Securitization
income
|
1,221
|
1,777
|
1,362
|
|||||||
|
Income
tax provision
|
(431
|
)
|
(606
|
)
|
(478
|
)
|
||||
|
Total
adjustment
|
790
|
1,171
|
884
|
|||||||
|
Restated
net income
|
$
|
25,043
|
$
|
30,687
|
$
|
41,103
|
||||
|
Percent
change
|
3.3
|
%
|
4.0
|
%
|
2.2
|
%
|
||||
78
The
following tables set forth the effects of the restatement adjustments on
affected line items within our previously reported Consolidated Statement
of
Operations for the years 2004, 2005 and 2006, Consolidated Balance Sheet
as of
January 31, 2005 and 2006, and Consolidated Statements of Cash Flows for
the
years 2004, 2005 and 2006.
|
Conn's,
Inc.
|
|||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|||||||||||||||||||
|
(in
thousands, except share data)
|
|
Years
Ended January
31,
|
|||||||||||||||||||
|
2004
|
2005
|
2006
|
|||||||||||||||||
|
As
Previously
Reported
|
Restated
|
As
Previously
Reported
|
Restated
|
As
Previously
Reported
|
Restated
|
||||||||||||||
|
Finance
charges and other
|
$
|
58,392
|
$
|
57,460
|
$
|
72,857
|
$
|
71,586
|
$
|
81,684
|
$
|
80,410
|
|||||||
|
Total
revenues
|
499,310
|
498,378
|
567,092
|
565,821
|
702,422
|
701,148
|
|||||||||||||
|
Provision
for bad debts
|
4,657
|
2,504
|
5,637
|
2,589
|
3,769
|
1,133
|
|||||||||||||
|
Total
cost and expenses
|
457,651
|
455,498
|
518,999
|
515,951
|
639,940
|
637,304
|
|||||||||||||
|
Operating
income
|
41,659
|
42,880
|
48,093
|
49,870
|
62,482
|
63,844
|
|||||||||||||
|
Income
before minority interest and income taxes
|
37,082
|
38,303
|
45,734
|
47,511
|
62,082
|
63,444
|
|||||||||||||
|
Income
before income taxes
|
37,082
|
38,303
|
45,616
|
47,393
|
62,082
|
63,444
|
|||||||||||||
|
Total
provision for income taxes
|
12,829
|
13,260
|
16,100
|
16,706
|
21,863
|
22,341
|
|||||||||||||
|
Net
Income
|
24,253
|
25,043
|
29,516
|
30,687
|
40,219
|
41,103
|
|||||||||||||
|
Net
income available for common stockholders
|
$
|
22,299
|
$
|
23,089
|
$
|
29,516
|
$
|
30,687
|
$
|
40,219
|
$
|
41,103
|
|||||||
|
Earnings
per share
|
|||||||||||||||||||
|
Basic
|
$
|
1.26
|
$
|
1.30
|
$
|
1.27
|
$
|
1.32
|
$
|
1.72
|
$
|
1.76
|
|||||||
|
Diluted
|
$
|
1.22
|
$
|
1.26
|
$
|
1.25
|
$
|
1.30
|
$
|
1.67
|
$
|
1.71
|
|||||||
79
|
Conn's,
Inc.
|
|||||||||||||
|
CONSOLIDATED
BALANCE SHEETS
|
|||||||||||||
|
(in
thousands, except share data)
|
|||||||||||||
|
January
31, 2005
|
January
31, 2006
|
||||||||||||
|
As
Previously
Reported
|
Restated
|
As
Previously
Reported
|
Restated
|
||||||||||
|
Interests
in securitized assets
|
$
|
105,159
|
$
|
117,159
|
$
|
123,449
|
$
|
139,282
|
|||||
|
Deferred
income taxes
|
5,037
|
825
|
4,971
|
-
|
|||||||||
|
Total
current assets
|
209,849
|
217,637
|
275,129
|
285,991
|
|||||||||
|
Total
assets
|
268,928
|
276,716
|
342,296
|
353,158
|
|||||||||
|
Deferred
income taxes
|
966
|
958
|
757
|
1,343
|
|||||||||
|
Total
current liabilities
|
61,639
|
61,631
|
95,332
|
95,918
|
|||||||||
|
Accumulated
other comprehensive income
|
7,516
|
8,408
|
8,004
|
10,492
|
|||||||||
|
Additional
paid-in capital
|
85,090
|
85,090
|
89,027
|
89,027
|
|||||||||
|
Retained
earnings
|
108,099
|
115,003
|
148,318
|
156,106
|
|||||||||
|
Total
stockholders' equity
|
200,938
|
208,734
|
245,585
|
255,861
|
|||||||||
|
Total
liabilities and stockholders' equity
|
$
|
268,928
|
$
|
276,716
|
$
|
342,296
|
$
|
353,158
|
|||||
|
Conn's,
Inc.
|
|||||||||||||||||||
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|||||||||||||||||||
|
(in
thousands)
|
|||||||||||||||||||
|
Years
Ended January 31,
|
|||||||||||||||||||
|
2004
|
2005
|
2006
|
|||||||||||||||||
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
As
Previously Reported
|
Restated
|
||||||||||||||
|
Cash
flows from operating activities
|
|||||||||||||||||||
|
Net
income
|
$
|
24,253
|
$
|
25,043
|
$
|
29,516
|
$
|
30,687
|
$
|
40,219
|
$
|
41,103
|
|||||||
|
Adjustments
to reconcile net income to
|
|||||||||||||||||||
|
net
cash provided by operating activities:
|
|||||||||||||||||||
|
Provision
for bad debts
|
4,657
|
2,604
|
5,637
|
3,299
|
3,769
|
1,186
|
|||||||||||||
|
Accretion
from interests in securitized assets
|
(12,529
|
)
|
(14,437
|
)
|
(14,892
|
)
|
(16,862
|
)
|
(14,138
|
)
|
(19,454
|
)
|
|||||||
|
Provision
for deferred income taxes
|
(151
|
)
|
280
|
(47
|
)
|
559
|
(1,185
|
)
|
(707
|
)
|
|||||||||
|
Change
in operating assets and liabilities:
|
|||||||||||||||||||
|
Accounts
receivable
|
(11,412
|
)
|
(8,672
|
)
|
(29,339
|
)
|
(26,808
|
)
|
(4,889
|
)
|
1,648
|
||||||||
|
Supplemental
disclosure of cash flow information
|
|||||||||||||||||||
|
Cash
flows from servicing fees
|
11,963
|
12,089
|
14,496
|
15,529
|
17,542
|
18,572
|
|||||||||||||
In
addition, the restatement also resulted in changes to the Consolidated
Statements of Stockholders’ Equity and Notes 1, 2 and 5.
80
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
In
accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act
of
1934, we have evaluated, under the supervision and with the participation
of
management, including our Chief Executive Officer and our Chief Financial
Officer, the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the
Exchange Act) as of the end of the period covered by this annual report.
Based
on that evaluation, in our Annual Report on Form 10-K filed on March 30,
2006,
our Chief Executive Officer and our Chief Financial Officer concluded that,
as
of the end of the period covered by the annual report, our disclosure controls
and procedures were effective in timely alerting them to material information
relating to our business (including our consolidated subsidiaries) required
to
be included in our Exchange Act filings. Subsequently, management identified
a
material weakness in internal control over financial reporting that led to
a
restatement of the consolidated financial statements, as discussed
below.
During
the preparation of our consolidated financial statements for the quarter
ended
July 31, 2006, we identified an issue related to the recording of securitization
income. Based on our discovery and the results of discussions with our
independent accountants and the Audit Committee of the Board of Directors,
it
was determined that a review of our accounting under SFAS No. 140 should
be
completed before the statements for the quarter ended July 31, 2006 were
issued.
The internal review revealed that we had incorrectly reduced securitization
income and the value of our interests in securitized assets by the amount
of
future expected loan losses recorded on the books of the qualifying special
purpose entity that owns the receivables.
As
a
result of the error discussed above and the resulting restatement, management
has concluded that a material weakness in its internal controls over financial
reporting existed as of January 31, 2006. Specifically, controls were not
operating effectively to ensure that the proper accounting and corresponding
consolidated financial statement presentation of securitization income and
the
fair value of interests in securitized assets was consistent with SFAS No.
140.
As a result of this material weakness, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
not
effective at January 31, 2006.
As
of the
date of this filing, we believe we have taken the appropriate action to
remediate the material weakness in our internal control over financial reporting
with respect to accounting for securitization transactions, based on the
following actions taken:
| o |
improved
education and enhanced accounting analysis and reviews designed to
ensure
that all relevant personnel involved in the securitization accounting
understand and account for securitization transactions in compliance
with
SFAS No. 140; and
|
| o |
a
review of our internal financial controls with respect to accounting
for
securitization transactions to ensure compliance with SFAS No.
140.
|
While
we
believe we have taken the steps necessary to remediate this material weakness
relating to our accounting under SFAS No. 140 and related processes, procedures,
and controls, we cannot confirm the effectiveness of our enhanced internal
controls with respect to our accounting under SFAS No. 140 until we and our
independent auditors have conducted sufficient tests. Accordingly, we will
continue to monitor the effectiveness of the processes, procedures, and controls
we have implemented and will make any further changes management determines
appropriate.
Management’s
Report on Internal Control over Financial Reporting
Please
refer to Management’s Report on Internal Control over Financial Reporting on
page 52 of this report.
81
Changes
in Internal Controls Over Financial Reporting
As
previously reported, there were no changes in internal controls over financial
reporting during the quarter ended January 31, 2006, that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting. However, subsequent to April 30, 2006, we discovered
the
material weakness described above and took the remedial actions
described.
ITEM
9B. OTHER INFORMATION
None
PART
III
The
information required by Items 10 through 14 is included in our definitive
Proxy
Statement relating to our 2006 Annual Meeting of Stockholders, and is
incorporated herein by reference.
CROSS
REFERENCE TO ITEMS 10-14 LOCATED IN THE PROXY STATEMENT
|
Item
|
Caption
in the Conn’s, Inc.
2006
Proxy Statement
|
||
|
ITEM
10.
|
DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
|
BOARD
OF DIRECTORS, EXECUTIVE OFFICERS
|
|
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
EXECUTIVE
COMPENSATION
|
|
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
STOCK
OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL
STOCKHOLDERS
|
|
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTION
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
|
|
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
INDEPENDENT
PUBLIC ACCOUNTANTS
|
82
PART
IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
| (a) |
The
following documents are filed as a part of this
report:
|
| (1) |
The
financial statements listed in response to Item 8 of this report
are as
follows:
|
Consolidated
Balance Sheets as of January 31, 2005 and 2006
Consolidated
Statements of Operations for the Years Ended January 31, 2004, 2005 and
2006
Consolidated
Statements of Stockholders’ Equity for the Years Ended January 31, 2004, 2005
and 2006
Consolidated
Statements of Cash Flows for the Years Ended January 31, 2005 and
2006
| (2) |
Financial
Statement Schedule: Report of Independent Auditors on Financial Statement
Schedule for the three years in the period ended January 31, 2006;
Schedule II -- Valuation and Qualifying Accounts. The financial statement
schedule should be read in conjunction with the consolidated financial
statements in our 2006 Annual Report to Stockholders. Financial statement
schedules not included in this report have been omitted because they
are
not applicable or the required information is shown in the consolidated
financial statements or notes thereto.
|
| (3) |
Exhibits:
A list of the exhibits filed as part of this report is set forth
in the
Index to Exhibits, which immediately precedes such exhibits and is
incorporated herein by reference.
|
83
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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. | ||
| (Registrant) | ||
| |
|
|
| Date: September 15, 2006 | By: | /s/ Thomas J. Frank, Sr., |
|
Thomas J. Frank, Sr. |
||
| Chairman of the Board and Chief Executive Officer | ||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been
signed below by the following persons on behalf of the registrant and in
the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
Thomas J. Frank, Sr.
|
Chairman
of the Board and
Chief
Executive Officer
(Principal
Executive Officer)
|
September
15, 2006
|
||
|
Thomas
J. Frank, Sr.
|
||||
|
/s/
David L. Rogers
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
September
15, 2006
|
||
|
David
L. Rogers
|
||||
|
/s/
Marvin D. Brailsford
|
Director
|
September
15, 2006
|
||
|
Marvin
D. Brailsford
|
||||
|
/s/
Jon E. M. Jacoby
|
Director
|
September
15, 2006
|
||
|
Jon
E. M. Jacoby
|
||||
|
/s/
Bob L. Martin
|
Director
|
September
15, 2006
|
||
|
Bob
L. Martin
|
||||
|
/s/
Douglas H. Martin
|
Director
|
September
15, 2006
|
||
|
Douglas
H. Martin
|
||||
|
/s/
Dr. William C. Nylin, Jr.
|
Executive
Vice Chairman and Chief Operating Officer
|
September
15, 2006
|
||
|
Dr.
William C. Nylin, Jr.
|
||||
|
/s/
Scott L. Thompson
|
Director
|
September
15, 2006
|
||
|
Scott
L. Thompson
|
||||
|
/s/
William T. Trawick
|
Director
|
September
15, 2006
|
||
|
William
T. Trawick
|
||||
|
/s/
Theodore M. Wright
|
Director
|
September
15, 2006
|
||
|
Theodore
M. Wright
|
84
EXHIBIT
INDEX
|
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 10.1.1 to Conn’s Form 10-Q
for the quarterly period ended April 30, 2004 (File No. 000-50421)
as
filed with the Securities and Exchange Commission on June 7,
2004).t
|
|
|
10.1.2
|
Form
of Stock Option Agreement (incorporated herein by reference to
Exhibit
10.1.2 to Conn’s, Inc. Form 10-K for the annual period ended January 31,
2005 (File No. 000-50421) as filed with the Securities and Exchange
Commission on April 5, 2005).t
|
|
|
10.2
|
2003
Non-Employee Director Stock Option Plan (incorporated herein by
reference
to Exhibit 10.2 to Conn's, Inc. registration statement on Form
S-1 (file
no. 333-109046)as filed with the Securities and Exchange Commission
on
September 23, 2003).t
|
|
|
10.2.1
|
Form
of Stock Option Agreement (incorporated herein by reference to
Exhibit
10.2.1 to Conn’s, Inc. Form 10-K for the annual period ended January 31,
2005 (File No. 000-50421) as filed with the Securities and Exchange
Commission on April 5, 2005).t
|
|
|
10.3
|
Employee
Stock Purchase Plan (incorporated herein by reference to Exhibit
10.3 to
Conn's, Inc. registration statement on Form S-1 (file no. 333-109046)
as
filed with the Securities and Exchange Commission on September
23,
2003).t
|
85
|
Exhibit
Number
|
Description
|
|
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).
|
86
|
Exhibit
Number
|
Description
|
|
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).
|
|
| 10.11 | 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).
|
|
|
10.12
|
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).
|
|
|
10.13
|
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).
|
87
|
Exhibit
Number
|
Description
|
|
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 July 31, 2005 (File No. 000-50421) as filed with the
Securities and Exchange Commission on August 30, 2005).
|
|
|
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
|
2007
Bonus Program (incorporated herein by reference to Form 8-K (file
no.
000-50421) filed with the Securities and Exchange Commission on
March 30,
2006).t
|
|
|
10.18
|
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
|
|
|
10.19
|
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).
|
|
|
10.19.1
|
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).
|
|
|
10.19.2
|
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).
|
|
|
10.19.3
|
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).
|
|
|
10.19.4
|
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).
|
|
|
10.20
|
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).
|
|
|
10.20.1
|
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).
|
88
|
Exhibit
Number
|
Description
|
|
10.21
|
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).
|
|
|
10.21.1
|
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).
|
|
|
10.22
|
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).
|
|
|
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).
|
|
|
23.1
|
Consent
of Ernst & Young LLP (filed herewith).
|
|
|
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).
|
|
|
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.
|
89
Exhibit
23.1
Consent
of Independent Registered Public Accounting Firm
We
consent to the incorporation by reference in the Registration Statements on
Forms S-8 (Nos. 333-111280, 333-111281, and 333-111282) of our reports
dated March
29,
2006, except for Notes 1, 2, 5 and 13 as to which the date is September 14,
2006,
with
respect to the consolidated financial statements and schedule of Conn's, Inc.,
and our report dated March 29, 2006, except for the effects of the material
weakness described in the sixth paragraph of such report, as to which the date
is September 14, 2006, with respect to Conn’s, Inc. management’s revised
assessment of the effectiveness of internal control over financial reporting
and
the effectiveness of internal control over financial reporting of Conn's, Inc.,
included in this Form 10-K /A.
Ernst
& Young LLP
Houston,
Texas
September
14, 2006
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 annual report on Form 10-K/A 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.
|
| |
|
|
| By: | /s/ Thomas J. Frank, Sr. | |
|
Thomas J. Frank, Sr. |
||
|
Chairman
of the
Board
and Chief Executive Officer
|
||
| Date: September 15, 2006 | ||
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 annual report on Form 10-K/A 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.
|
| |
|
|
| By: | /s/ David L. Rogers | |
|
David L. Rogers |
||
| Chief Financial Officer | ||
| Date: September 15, 2006 | ||
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 Annual Report of Conn's, Inc. (the "Company")
on
Form 10-K/A for the period ended January 31, 2006 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 | ||
Dated:
September 15, 2006
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.
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 annual report on Form 10-K/A 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. |
||
| President and Chief Operating Officer | ||
Date: September
15, 2006
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 annual report on Form 10-K/A 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: September
15, 2006
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 annual report on Form 10-K/A 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: September
15, 2006
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 Annual Report of Conn's, Inc. (the "Company")
on
Form 10-K/A for the period ended January 31, 2006 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.
President
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
Dated:
September 15, 2006
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.
Schedule
II-Valuation and Qualifying Accounts
Conn's,
Inc.
|
Col
A
|
Col
B
|
Col
C
|
Col
D
|
Col
E
|
||||||||||||
|
|
|
Additions
|
|
|||||||||||||
|
Description
|
Balance
at
Beginning
of
Period
|
Charged
to
Costs
and
Expenses
|
Charged
to
Other
Accounts-
Describe
|
Deductions-
Describe1
|
Balance
at
End
of
Period
|
|||||||||||
|
Year
ended January 31, 2004
|
||||||||||||||||
|
Reserves
and allowances from asset accounts:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
117
|
2,504
|
-
|
(702
|
)
|
1,919
|
||||||||||
|
Year
ended January 31, 2005
|
||||||||||||||||
|
Reserves
and allowances from asset accounts:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
1,919
|
2,589
|
-
|
(2,297
|
)
|
2,211
|
||||||||||
|
Year
ended January 31, 2006
|
||||||||||||||||
|
Reserves
and allowances from asset accounts:
|
||||||||||||||||
|
Allowance
for doubtful accounts
|
2,211
|
1,133
|
-
|
(2,430
|
)
|
914
|
||||||||||
1
Uncollectible accounts written off, net of recoveries