UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2006 Commission File Number 000-50421
CONN'S, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 06-1672840
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [x]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 13, 2006:
Class Outstanding
- -------------------------------------- ------------------
Common stock, $.01 par value per share 23,697,318
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements...........................................................................1
Consolidated Balance Sheets as of January 31, 2006 and July 31, 2006...........................1
Consolidated Statements of Operations for the three and six months ended
July 31, 2005 and 2006.....................................................................2
Consolidated Statement of Stockholders' Equity for the six months ended
July 31, 2006..............................................................................3
Consolidated Statements of Cash Flows for the six months ended
July 31, 2005 and 2006.....................................................................4
Notes to Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................33
Item 4. Controls and Procedures.......................................................................34
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................34
Item 1A. Risk Factors..................................................................................35
Item 4. Submission of Matters to a Vote of Security Holders...........................................35
Item 5. Other Information.............................................................................36
Item 6. Exhibits......................................................................................36
SIGNATURE ..................................................................................................37
i
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(As Adjusted, see Note 1, and As Restated, see Note 8)
January 31, July 31,
2006 2006
----------- -----------
(unaudited)
Assets
Current assets
Cash and cash equivalents .................................... $ 45,176 $ 22,922
Accounts receivable, net ..................................... 23,542 30,390
Interests in securitized assets .............................. 139,282 145,840
Inventories .................................................. 73,987 79,642
Prepaid expenses and other assets ............................ 4,004 3,835
----------- -----------
Total current assets ...................................... 285,991 282,629
Non-current deferred income tax asset ........................... 2,464 3,280
Property and equipment
Land ......................................................... 6,671 8,945
Buildings .................................................... 7,084 9,872
Equipment and fixtures ....................................... 9,612 11,960
Transportation equipment ..................................... 3,284 2,967
Leasehold improvements ....................................... 65,507 67,459
----------- -----------
Subtotal .................................................. 92,158 101,203
Less accumulated depreciation ................................ (37,332) (42,115)
----------- -----------
Total property and equipment, net ......................... 54,826 59,088
Goodwill, net ................................................... 9,617 9,617
Debt issuance costs and other assets, net ....................... 260 340
----------- -----------
Total assets ............................................. $ 353,158 $ 354,954
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt ............................ $ 136 $ --
Accounts payable ............................................. 40,920 37,470
Accrued compensation and related expenses .................... 18,847 7,258
Accrued expenses ............................................. 17,380 18,213
Income taxes payable ......................................... 8,794 182
Deferred income taxes ........................................ 1,343 2,866
Deferred revenues and allowances ............................. 8,498 9,049
----------- -----------
Total current liabilities ................................. 95,918 75,038
Long-term debt .................................................. -- --
Non-current deferred income tax liability ....................... 903 1,031
Deferred gain on sale of property ............................... 476 393
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;
23,571,564 and 23,697,318 shares issued and outstanding
at January 31, 2006 and July 31, 2006, respectively) ....... 236 237
Additional paid-in capital ................................... 89,027 91,299
Accumulated other comprehensive income ....................... 10,492 10,357
Retained earnings ............................................ 156,106 176,599
----------- -----------
Total stockholders' equity ................................ 255,861 278,492
----------- -----------
Total liabilities and stockholders' equity ............. $ 353,158 $ 354,954
=========== ===========
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
(As Adjusted, See Note 1 and As Restated, See Note 8)
Three Months Ended Six Months Ended
July 31, July 31,
2005 2006 2005 2006
--------- --------- --------- ---------
Revenues
Product sales ................................. $ 130,867 $ 150,647 $ 258,142 $ 309,156
Service maintenance agreement commissions, net 7,848 7,063 14,732 15,030
Service revenues .............................. 5,134 5,927 9,909 11,156
--------- --------- --------- ---------
Total net sales ........................... 143,849 163,637 282,783 335,342
Finance charges and other ..................... 20,711 18,567 39,696 39,050
--------- --------- --------- ---------
Total revenues ............................ 164,560 182,204 322,479 374,392
Cost and expenses
Cost of goods sold, including warehousing
and occupancy costs ....................... 103,579 119,756 204,496 245,485
Cost of parts sold, including warehousing
and occupancy costs ....................... 1,236 1,389 2,461 2,954
Selling, general and administrative expense ... 44,950 48,425 84,689 95,089
Provision for bad debts ....................... (137) 390 331 433
--------- --------- --------- ---------
Total cost and expenses ................... 149,628 169,960 291,977 343,961
--------- --------- --------- ---------
Operating income .............................. 14,932 12,244 30,502 30,431
Interest (income) expense, net ................ 59 (187) 414 (371)
Other (income) expense, net ................... 28 (721) 34 (754)
--------- --------- --------- ---------
Income before income taxes .................... 14,845 13,152 30,054 31,556
Provision for income taxes
Current ..................................... 5,564 5,247 13,107 10,333
Deferred .................................... (312) (639) (2,514) 730
--------- --------- --------- ---------
Total provision for income taxes .......... 5,252 4,608 10,593 11,063
--------- --------- --------- ---------
Net income .................................... $ 9,593 $ 8,544 $ 19,461 $ 20,493
========= ========= ========= =========
Earnings per share
Basic ....................................... $ 0.41 $ 0.36 $ 0.83 $ 0.87
Diluted ..................................... $ 0.40 $ 0.35 $ 0.81 $ 0.84
Average common shares outstanding
Basic ....................................... 23,366 23,676 23,337 23,637
Diluted ..................................... 24,012 24,344 23,896 24,355
See notes to consolidated financial statements.
2
Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended July 31, 2006
(unaudited)
(in thousands except descriptive shares)
(As Adjusted, See Note 1 and As Restated, See Note 8)
Accum.
Other
Common Stock Compre- Additional
----------------------- hensive Paid-in Retained
Shares Amount Income Capital Earnings Total
---------- ------------------------- -------------- ------------- ---------------
Balance January 31, 2006.................. 23,572 $ 236 $10,492 $ 89,027 $156,106 $ 255,861
Exercise of options to acquire
120,928 shares of common stock............ 121 1 1,212 1,213
Issuance of 4,826 shares of
common stock under
Employee Stock Purchase Plan............ 4 123 123
Stock-based compensation.................. 802 802
Tax benefit from options exercised........ 135 135
Net income................................ 20,493 20,493
Adjustment of fair value of securitized
assets (including tax benefit of
$119), net of reclassficiation
adjustments of $6,572 (net of
tax of $3,697) ......................... (135) (135)
---------------
Total comprehensive income................ 20,358
---------- ------------------------- -------------- ------------- ---------------
Balance July 31, 2006..................... 23,697 $ 237 $10,357 $ 91,299 $176,599 $ 278,492
========== ========================= ============== ============= ===============
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
(As Adjusted, See Note 1 and As Restated, See Note 8)
Six Months Ended
July 31,
-----------------------
2005 2006
-------- --------
Cash flows from operating activities
Net income ...................................................................... $ 19,461 $ 20,493
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation .................................................................. 5,407 6,100
Amortization .................................................................. (131) (214)
Provision for bad debts ....................................................... 384 433
Stock-based compensation ...................................................... 541 802
Excess tax benefits from stock-based compensation ............................. -- (135)
Discounts on promotional credit ............................................... 536 159
Accretion from interests in securitized assets ................................ (9,439) (10,269)
Provision for deferred income taxes ........................................... (2,514) 730
Loss (Gain) from sale of property and equipment ............................... 34 (754)
Loss from derivatives ......................................................... 69 --
Changes in operating assets and liabilities:
Accounts receivable ........................................................... 2,358 (1,903)
Inventory ..................................................................... 1,500 (5,655)
Prepaid expenses and other assets ............................................. 778 169
Accounts payable .............................................................. 6,598 (3,450)
Accrued expenses .............................................................. 4,713 (10,756)
Income taxes payable .......................................................... -- (10,468)
Deferred revenue and allowances ............................................... 1,101 709
-------- --------
Net cash provided by (used in) operating activities ............................. 31,396 (14,009)
-------- --------
Cash flows from investing activities
Purchase of property and equipment ............................................ (9,964) (11,858)
Proceeds from sales of property ............................................... 13 2,250
-------- --------
Net cash used in investing activities ........................................... (9,951) (9,608)
-------- --------
Cash flows from financing activities
Proceeds from stock issued under employee benefit plans ....................... 1,091 1,471
Excess tax benefits from stock-based compensation ............................. -- 135
Borrowings under lines of credit .............................................. 41,900 8,000
Payments on lines of credit ................................................... (52,400) (8,000)
Increase in debt issuance costs ............................................... -- (107)
Payment of promissory notes ................................................... (14) (136)
-------- --------
Net cash provided by (used in) financing activities ............................. (9,423) 1,363
-------- --------
Net change in cash ............................................................ 12,022 (22,254)
Cash and cash equivalents
Beginning of the year ......................................................... 7,027 45,176
-------- --------
End of period ................................................................... $ 19,049 $ 22,922
======== ========
See notes to consolidated financial statements.
4
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
July 31, 2006
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three and six month
periods ended July 31, 2006 are not necessarily indicative of the results that
may be expected for the year ending January 31, 2007. The financial statements
should be read in conjunction with the Company's (as defined below) audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K/A filed on September 15, 2006.
The Company's balance sheet at January 31, 2006, as adjusted for Statement
of Financial Accounting Standards No. 123R, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial presentation. Please see the Company's Form 10-K/A
for the fiscal year ended January 31, 2006 for a complete presentation of the
audited financial statements at that date, together with all required footnotes,
and for a complete presentation and explanation of the components and
presentations of the financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and its subsidiaries, limited liability companies
and limited partnerships, all of which are wholly-owned (the "Company"). All
material intercompany transactions and balances have been eliminated in
consolidation.
The Company enters into securitization transactions to sell its retail
installment and revolving customer receivables. 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.
The Company's retained interest in the transferred receivables is valued on a
revolving pool basis.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
5
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Three Months Ended Six Months Ended
July 31, July 31,
----------------------------------------------------------
2005 2006 2005 2006
---------- ---------- ---------- ----------
Common stock outstanding, beginning of period ........ 23,351,044 23,665,335 23,267,596 23,571,564
Weighted average common stock issued in stock
option exercises ..................................... 13,699 9,852 67,066 63,465
Weighted average common stock issued to employee
stock purchase plan .................................. 1,040 958 2,451 1,896
---------- ---------- ---------- ----------
Shares used in computing basic earnings per share..... 23,365,783 23,676,145 23,337,113 23,636,925
Dilutive effect of stock options, net of assumed
repurchase of treasury stock ......................... 646,522 667,915 558,719 718,347
---------- ---------- ---------- ----------
Shares used in computing diluted earnings per share... 24,012,305 24,344,060 23,895,832 24,355,272
========== ========== ========== ==========
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. The Company concluded at January 31, 2006 and July 31, 2006
that no impairment of goodwill existed.
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 this statement impacted the financial statements presented as follows:
o For the three months ended July 31, 2005 and 2006, Income before income
taxes was reduced by $0.3 million and $0.4 million, respectively. For
the six months ended July 31, 2005 and 2006, Income before income taxes
was reduced by $0.5 million and $0.8 million, respectively.
o For the three months ended July 31, 2005 and 2006, Net income was
reduced by $0.2 million and $0.3 million, respectively. For the six
months ended July 31, 2005 and 2006, Net income was reduced by $0.4
million and $0.7 million, respectively.
o For the three months ended July 31, 2005 and 2006, Basic earnings per
share was reduced by $.01 and $.01, respectively. For the six months
ended July 31, 2005 and 2006, Basic earnings per share was reduced by
$.02 and $.03, respectively.
o For the three months ended July 31, 2005 and 2006, Diluted earnings per
share was reduced by $.01 and $.01, respectively. For the six months
ended July 31, 2005 and 2006, Diluted earnings per share was reduced by
$.02 and $.03, respectively.
o For the six months ended July 31, 2005 and 2006, Cash flows from
operating activities were reduced by, and Cash flows from investing
activities were increased by, $0.0 and $0.1 million, respectively.
o 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. If compensation expense for the
Company's stock options granted prior to the IPO had been recognized using the
fair value method of accounting under SFAS No. 123, net income
6
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
available for common stockholders for the three months ended July 31, 2005 and
2006 would have decreased by 1.1% and 0.6%, respectively. Net income available
for common stockholders for the six months ended July 31, 2005 and 2006 would
have decreased by 1.1% and 0.5%, respectively. 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):
Three Months Ended Six Months Ended
July 31, July 31,
-----------------------------------------------------------
2005 2006 2005 2006
--------- --------- ---------- ----------
Net income available for common stockholders as reported $ 9,593 $ 8,544 $ 19,461 $ 20,493
Add: Stock-based compensation recorded, net of tax ..... 227 339 448 662
Less: Stock-based compensation, net of tax
for all awards ......................................... (330) (387) (654) (759)
--------- --------- ---------- ----------
Pro forma net income ................................... $ 9,490 $ 8,496 $ 19,255 $ 20,396
========= ========= ========== ==========
Earnings per share-as reported:
Basic .................................................. $ 0.41 $ 0.36 $ 0.83 $ 0.87
Diluted ................................................ $ 0.40 $ 0.35 $ 0.81 $ 0.84
Pro forma earnings per share:
Basic .................................................. $ 0.41 $ 0.36 $ 0.83 $ 0.86
Diluted ................................................ $ 0.40 $ 0.35 $ 0.81 $ 0.84
As of July 31, 2006, the total compensation cost related to non-vested
awards not yet recognized totaled $4.9 million and is expected to be recognized
over a weighted average period of 3.5 years.
Application of APB 21 to Promotional Credit Programs that Exceed One Year in
Duration: The Company offers promotional credit payment plans, on certain
products, that extend beyond one year. In accordance with APB 21, Interest on
Receivables and Payables, such sales are discounted to their fair value
resulting in a reduction in sales and receivables and the amortization of the
discount amount over the term of the deferred interest payment plan. The
difference between the gross sale and the discounted amount is reflected as a
reduction of Product sales in the consolidated statements of operations and the
amount of the discount being amortized in the current period is recorded in
Finance charges and other. For the three months ended July 31, 2005 and 2006,
Product sales were reduced by $1.0 million and $0.7 million, respectively, and
Finance charges and other was increased by $0.6 million and $0.8 million,
respectively, to effect the adjustment to fair value and to reflect the
appropriate amortization of the discount. For the six months ended July 31, 2005
and 2006, Product sales were reduced by $1.6 million and $1.6 million,
respectively, and Finance charges and other was increased by $1.1 million and
$1.5 million, respectively, to effect the adjustment to fair value and to
reflect the appropriate amortization of the discount.
Texas Tax Law Changes. On May 18, 2006, the Governor of Texas signed a tax
bill that modified the existing franchise tax, with the most significant change
being the replacement of the existing base with a tax based on margin. Taxable
margin is generally defined as total federal tax revenues minus the greater of
(a) cost of goods sold or (b) compensation. The tax rate to be paid by retailers
and wholesalers is 0.5% on taxable margin. This will result in an increase in
taxes paid by the Company, as franchise taxes paid have totaled less than
$50,000 per year for the last several years. Partially offsetting this increase
is a reduction in property tax rates that will be phased in during the 2006 and
2007 property tax years.
The tax changes impacted earnings beginning in this quarter. For the quarter
and six months ended July 31, 2006, the Company accrued, net of federal tax
benefit, $118,000 in additional tax liability and recorded approximately $29,000
in deferred tax assets as a result of the new margin tax.
7
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Recent Accounting Pronouncements. In October 2005, FASB Staff Position (FSP)
No. 13-1, Accounting for Rental Costs Incurred during a Construction Period, was
issued. This FSP addresses the accounting for rental costs associated with
operating leases that are incurred during a construction period. It requires
that those costs be recognized as rental expense and included in income from
continuing operations. The guidance in this FSP is to be applied to the first
reporting period beginning after December 15, 2005 and states that a lessee
shall cease capitalizing rental costs as of the effective date of the FSP for
operating lease arrangements entered into prior to the effective date of the
FSP. The Company implemented the guidance in this FSP as of February 1, 2006,
and it did not have a material impact on its financial condition or results of
operations.
Reclassifications. Certain reclassifications have been made in the prior
year's financial statements to conform to current year's presentation.
Specifically, Other (income) expense, which consists of (gain) loss on sales of
property and equipment, is now separately detailed. Previously these amounts
were included in Selling, general and administrative expense. Additionally, 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.
2. Supplemental Disclosure of Revenue and Comprehensive Income
The following is a summary of the classification of the amounts included as
Finance charges and other for the three and six months ended July 31, 2005 and
2006 (in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
----------------------------- ----------------------------
2005 2006 2005 2006
-------------- ------------- ------------- -------------
Securitization income (1) ................. $ 14,994 $ 13,274 $28,299 $ 28,511
Income from receivables not sold .......... 304 323 584 658
Insurance commissions ..................... 4,227 4,729 8,382 8,995
Other ..................................... 1,186 241 2,431 886
-------------- ------------- ------------- -------------
Finance charges and other ................. $ 20,711 $ 18,567 $39,696 $ 39,050
============== ============= ============= =============
(1) Due to the expectation of higher credit losses during the next six months,
resulting primarily from disruption to our credit operations as a result of
Hurrican Rita, a $1.5 million impairment charge was recorded in Securitization
income during the three months ended July 31, 2006. The impairment charge was
based on an estimated average credit charge-off rate of 3.6% over the next six
months. The charge-off rate used in the valuation of the interest in securitized
assets is expected to return to the level of the historical 3.0% charge-off rate
assumption at the beginning of the next fiscal year.
The components of total comprehensive income for the three and six months
ended July 31, 2005 and 2006 are presented in the table below (in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
---------------------------- ---------------------------
2005 2006 2005 2006
------------- ------------- ------------ -------------
Net income ..................................... $ 9,593 $ 8,544 $19,461 $20,493
Unrealized gain on derivative instruments ...... - - 246 -
Taxes on unrealized gain on derivatives ........ - - (86) -
Adjustment of fair value of securitized assets . 2,443 (789) 1,034 (16)
Taxes on adjustment of fair value .............. (857) 145 (363) (119)
------------- ------------- ------------ -------------
Total comprehensive income ..................... $ 11,179 $ 7,900 $20,292 $20,358
============= ============= ============ =============
8
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Supplemental Disclosure Regarding Managed Receivables
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Total Principal Amount of Principal Amount 60 Days
Receivables or More Past Due (1)
---------------------- ----------------------
January 31, July 31, January 31, July 31,
2006 2006 2006 2006
-------- -------- -------- --------
Primary portfolio:
Installment ................. $380,603 $369,611 $ 24,934 $ 20,127
Revolving ................... 41,046 43,793 1,095 959
-------- -------- -------- --------
Subtotal ............................... 421,649 413,404 26,029 21,086
Secondary portfolio:
Installment ................. 98,072 117,268 9,508 9,693
-------- -------- -------- --------
Total receivables managed .............. 519,721 530,672 35,537 30,779
Less receivables sold .................. 509,681 520,256 33,483 29,263
-------- -------- -------- --------
Receivables not sold ................... 10,040 10,416 $ 2,054 $ 1,516
======== ========
Non-customer receivables ............... 13,502 19,974
-------- --------
Total accounts receivable, net $ 23,542 $ 30,390
======== ========
(1) Amounts are based on end of period balances. The principal amount 60 days or
more past due relative to total receivables managed is not necessarily
indicative of relative balances expected at other times during the year due to
seasonal fluctuations in delinquency.
Average Balances Credit Charge-offs (1)
------------------------------- ----------------------------
Three Months Ended Three Months Ended
July 31, July 31,
------------------------------- ----------------------------
2005 2006 2005 2006
--------------- --------------- ------------- -------------
Primary portfolio:
Installment ........... $ 344,728 $ 368,939
Revolving ............. 33,237 43,541
--------------- ---------------
Subtotal ......................... 377,965 412,480 $ 2,539 $ 4,225
Secondary portfolio:
Installment ........... 80,632 113,821 444 830
--------------- --------------- ------------- -------------
Total receivables managed ........ 458,597 526,301 2,983 5,055
Less receivables sold ............ 449,081 515,865 2,801 4,874
--------------- --------------- ------------- -------------
Receivables not sold ............. $ 9,516 $ 10,436 $ 182 $ 181
=============== =============== ============= =============
(1) Amounts represent total loan charge-offs, net of recoveries, on total
receivables. The increased level of credit losses is primarily a result of the
impact on our credit operations of Hurricane Rita that hit the Gulf Coast during
September 2005.
9
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Average Balances Credit Charge-offs (1)
------------------------------- ----------------------------
Six Months Ended Six Months Ended
July 31, July 31,
------------------------------- ----------------------------
2005 2006 2005 2006
--------------- --------------- ------------- -------------
Primary portfolio:
Installment ........... $ 338,315 $ 371,493
Revolving ............. 32,025 42,957
--------------- ---------------
Subtotal ......................... 370,340 414,450 $ 5,110 $ 7,875
Secondary portfolio:
Installment ........... 77,679 109,102 851 1,858
--------------- --------------- ------------- -------------
Total receivables managed ........ 448,019 523,552 5,961 9,733
Less receivables sold ............ 438,533 513,144 5,532 9,399
--------------- --------------- ------------- -------------
Receivables not sold ............. $ 9,486 $ 10,408 $ 429 $ 334
=============== =============== ============= =============
(1) Amounts represent total loan charge-offs, net of recoveries, on total
receivables. The increased level of credit losses is primarily a result of the
impact on our credit operations of Hurricane Rita that hit the Gulf Coast during
September 2005.
4. Fair Value of Derivatives
The Company held interest rate swaps and collars with notional amounts
totaling $20.0 million, which expired on April 15, 2005, and were held for the
purpose of hedging against variable interest rate risk, primarily related to
cash flows from the Company's interest-only strip as well as variable rate debt.
In fiscal 2004, hedge accounting was discontinued for the $20.0 million of
swaps. In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, at the time hedge accounting was discontinued, the
Company began to recognize changes in fair value of the swaps as a reduction to
interest expense and to amortize the amount of accumulated other comprehensive
loss related to those derivatives as interest expense over the period that the
forecasted transactions affected the consolidated statements of operations. As
the swaps expired on April 15, 2005, there was no financial statement impact
during the three months ended July 31, 2005 and 2006. During the six months
ended July 31, 2005 and 2006, the Company reclassified $246,000 and $0,
respectively, of losses previously recorded in accumulated other comprehensive
income into the consolidated statements of operations and recorded $177,000 and
$0, respectively, of interest reductions in the consolidated statements of
operations because of the change in fair value of the swaps.
5. Debt and Letters of Credit
At July 31, 2006, the Company had $48.6 million of its $50 million revolving
credit facility available for borrowings. The amounts utilized under the
revolving credit facility reflected $1.4 million related to letters of credit
issued. 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 June 2007 and has a floating
rate of interest, based on Prime, which equaled 7.75% at July 31, 2006.
The Company utilizes unsecured letters of credit to secure a portion of the
QSPE's asset-backed securitization program, deductibles under the Company's
property and casualty insurance programs and international product purchases. At
both January 31, 2006 and July 31, 2006, the Company had outstanding unsecured
letters of credit of $13.0 million. These letters of credit were issued under
the three following facilities:
10
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o The Company has a $5.0 million sublimit provided under its revolving
line of credit for stand-by and import letters of credit. At July 31,
2006, $1.4 million of letters of credit were outstanding and callable
at the option of the Company's property and casualty insurance carrier
if the Company does not honor its requirement to fund deductible
amounts as billed under its insurance program.
o 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 plans to renew this letter of credit and
increase the amount to $20.0 million in September, 2006.
o The Company obtained a $3.0 million commitment for trade letters of
credit to secure product purchases under an international arrangement.
At July 31, 2006, there was $1.6 million outstanding under this
commitment. The letter of credit commitment has a term of one year and
expires in May 2007. No letter of credit issued under this commitment
can have an expiration date more than 180 days after the commitment
expiration date.
The maximum potential amount of future payments under these letter of credit
facilities is considered to be the aggregate face amount of each letter of
credit commitment, which total $18.0 million as of July 31, 2006.
6. Stock-Based Compensation
The Company originally 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. At
the Company's annual meeting on May 31, 2006, amendments to the stock option
plans were approved, which increased the shares available under the Incentive
Stock Option Plan to 3,859,767 and increased the shares available under the
Non-Employee Director Stock Option Plan to 600,000. 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 July 31, 2006, the Company had 320,000 options
available for grant under the Non-Employee Director Stock Option Plan.
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 six month periods ended July 31, 2005 and 2006,
the Company issued 5,820 and 4,826 shares of common stock, respectively, to
employees participating in the plan, leaving 1,243,099 shares remaining reserved
for future issuance under the plan as of July 31, 2006.
11
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's Incentive Stock Option Plan and the
activity during the six months ended July 31, 2005 and 2006 is presented below
(shares in thousands):
Six Months Ended July 31,
-----------------------------------------------------
2005 2006
--------------------------- -------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------------- ------------- ------------ ------------
Outstanding, beginning of period ............................ 1,666 $ 11.50 1,626 $ 16.31
Granted ..................................................... - - - $ -
Exercised ................................................... (115) $ (8.79) (114) $ (9.63)
Forfeited ................................................... (41) $(14.43) (8) $(19.25)
------------- ------------
Outstanding, end of period .................................. 1,510 $ 11.62 1,504 $ 16.79
============= ============
Options exercisable at end of period ........................ 755 729
Options available for grant ................................. 726 1,761
Intrinsic value of options exercised during the period ...... $1.2 million $2.5 million
Options Outstanding Options Exercisable
---------------------------------------- ------------------------
Weighted
Shares Average Weighted Shares Weighted
Outstanding Remaining Average Exercisable Average
July 31, Contractual Exercise July 31, Exercise
Range of Exercise Prices 2006 Life in Years Price 2006 Price
- -------------------------------------------------------------------- ------------- ------------ ------------ ----------
$8.21-$10.83 ....................................... 617 4.8 $ 8.52 582 $ 8.39
$14.00 -$16.49 ..................................... 286 7.4 $ 14.29 100 $ 14.22
$17.73-$17.73 ...................................... 276 8.3 $ 17.73 47 $ 17.73
$33.88-$33.88 ...................................... 325 9.3 $ 33.88 - $ -
------------- ---------
Total .............................................. 1,504 6.9 $ 16.79 729 $ 9.79
============= =========
Aggregate intrinsic value of exercisable options
at July 31, 2006 ................................. $11.6 million
7. Contingencies
Legal Proceedings. The Company is involved in routine litigation incidental
to its business from time to time. Currently, the Company does not expect the
outcome of any of this routine litigation to have a material affect on its
financial condition 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.
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 typical
term for these agreements is between 12 and 36 months. The pricing is set based
on historical claims experience and expectations about future claims. While the
Company is unable to estimate maximum potential claim exposure, it has a history
of overall profitability upon the ultimate resolution of agreements sold. The
revenues related to the agreements sold are deferred at the time of sale and
recorded in revenues in the statement of operations over the life of the
agreements. The revenues deferred related to these agreements totaled $3.6
million and $3.7 million, respectively, as of January 31, 2006 and July 31,
2006, and are included on the face of the balance sheet in Deferred revenues and
allowances.
12
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Restatement of Financial Statements
The Company has restated its consolidated financial statements for the
quarter and six-monhts ended July 31, 2005 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.
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 quarter and six-months ended July 31, 2005.
Increase in Net Income
Quarter Six Months
ended ended
July 31, July 31,
(Dollars in thousands) 2005 2005
-------- --------
As Previously Reported net income $ 9,097 $ 18,679
Securitization income ........... 765 1,152
Provision for bad debts ......... -- 53
Income tax provision ............ (269) (423)
-------- --------
Total adjustment ................ 496 782
-------- --------
Restated net income ............. $ 9,593 $ 19,461
======== ========
Percent change .................. 5.5% 4.2%
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 quarter and six-months ended July 31, 2005, and Consolidated
Statement of Cash Flows for the six-months ended July 31, 2005.
13
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Quarter ended Six-Months ended
--------------------------- ---------------------------
July 31, 2005 July 31, 2005
--------------------------- ---------------------------
As Previously As Previously
Reported Restated Reported Restated
------------- ----------- ------------- ------------
Finance charges and other ................ $ 20,526 $ 20,711 $ 39,755 $ 39,696
Total revenues ........................... 164,375 164,560 322,538 322,479
Provision for bad debts .................. 443 (137) 1,595 331
Total cost and expenses .................. 150,236 149,628 293,241 291,977
Operating income ......................... 14,139 14,932 29,297 30,502
Income before income taxes ............... 14,080 14,845 28,849 30,054
Total provision for income taxes ......... 4,983 5,252 10,170 10,593
Net Income ............................... 9,097 9,593 18,679 19,461
Earnings per share
Basic .................................... $0.39 $0.41 $0.80 $0.83
Diluted .................................. $0.38 $0.40 $0.78 $0.81
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
Six-Months ended
---------------------------
July 31, 2005
---------------------------
As Previously
Reported Restated
------------- -----------
Cash flows from operating activities
Net income ................................ $ 18,679 $ 19,460
Adjustments to reconcile net income to
net cash provided by
operating activities:
Provision for bad debts.................... 1,595 384
Accretion from interests in securitized
assets................................... (7,120) (9,439)
Provision for deferred income taxes........ (2,936) (2,514)
Change in operating assets
and liabilities:
Accounts receivable........................ 33 2,358
9. Subsequent Events
Credit Facility Amendment. Effective August 28, 2006, the Company entered
into an amendment of its $50 million revolving credit facility with its existing
lenders. The amendment increases the Company's restricted payment capacity,
which includes payments for repurchases of capital stock, from $25 million to
$50 million. There were no other modifications of the Credit Agreement.
Financing Transaction Completed by QSPE. On August 31, 2006, the Company's
QSPE closed and consummated an offering of $150 million in medium term
asset-backed fixed-rate notes. The proceeds of the offering were used by the
QSPE to pay down the balance on its revolving credit facility.
Stock Repurchase Plan. On August 25, 2006, the Company announced the
adoption of a stock repurchase program, approved by the Board of Directors,
authorizing the repurchase of up to $50 million of the Company's common stock.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This report contains forward-looking statements. We sometimes use words
such as "believe," "may," "will," "estimate," "continue," "anticipate,"
"intend," "expect," "project" and similar expressions, as they relate to us, our
management and our industry, to identify forward-looking statements.
Forward-looking statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends and other future
events. We have based our forward-looking statements largely on our current
expectations and projections about future events and financial trends affecting
our business. Actual results may differ materially. Some of the risks,
uncertainties and assumptions about us that may cause actual results to differ
from these forward-looking statements include, but are not limited to:
o the success of our growth strategy and plans regarding opening new
stores and entering adjacent and new markets, including our plans to
continue expanding into the Dallas/Fort Worth Metroplex, and South
Texas;
o our intention to update or expand existing stores;
o our ability to obtain capital for required capital expenditures and
costs related to the opening of new stores or to update or expand
existing stores;
o our cash flows from operations, borrowings from our revolving line
of credit and proceeds from securitizations to fund our operations,
debt repayment and expansion;
o the ability of the QSPE to obtain additional funding for the purpose
of purchasing our receivables;
o rising interest rates may increase our cost of borrowing or reduce
securitization income;
o the potential for deterioration in the delinquency status of the
sold or owned credit portfolios or higher than historical
charge-offs in the portfolios could adversely impact earnings;
o the potential for greater than expected losses in the sold or owned
credit portfolios due to the impact of Hurricane Rita on our credit
operations;
o 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 audio, home networking devices and other new products, and
our ability to capitalize on such growth;
o the potential for price erosion or lower unit sales points that
could result in declines in revenues;
o increasing oil and gas prices could adversely affect our customers'
shopping decisions and patterns, as well as the cost of our delivery
and service operations and our cost of products, if vendors pass on
their additional fuel costs through increased pricing for products;
o 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;
o changes in laws and regulations and/or interest, premium and
commission rates allowed by regulators on our credit, credit
insurance and service maintenance agreements as allowed by those
laws and regulations;
o our relationships with key suppliers;
15
o the adequacy of our distribution and information systems and
management experience to support our expansion plans;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o the potential for market share erosion that could result in reduced
revenues;
o the accuracy of our expectations regarding the similarity or
dissimilarity of our existing markets as compared to new markets we
enter; and
o the outcome of litigation affecting our business.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under "Risk Factors" in our Form
10-K/A filed with the Securities Exchange Commission on September 15, 2006. In
light of these risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this report might not happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
All forward-looking statements attributable to us, or to persons acting on
our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
We intend for the following discussion and analysis to provide you with a
better understanding of our financial condition and performance in the indicated
periods, including an analysis of those key factors that contributed to our
financial condition and performance and that are, or are expected to be, the key
"drivers" of our business.
On 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, and for the quarters ended April 30, 2006 and 2005
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 8 to the financial statements for discussion of the impacts
on the financial statements.
On February 1, 2006, we were required to adopt 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.
We are a specialty retailer that sells major home appliances, including
refrigerators, freezers, washers, dryers and ranges, a variety of consumer
electronics, including projection, plasma, DLP and LCD televisions, camcorders,
VCRs, DVD players, portable audio and home theater products, lawn and garden
products, mattresses and furniture. We also sell home office equipment,
including computers and computer accessories and continue to introduce
additional product categories for the consumer and home to help increase same
store sales and to respond to our customers' product needs. We require all our
sales associates to be knowledgeable of all of our products, but to specialize
in certain specific product categories.
16
We currently operate 58 retail locations in Texas and Louisiana, and have
several other stores under development.
Unlike many of our competitors, we provide flexible in-house credit options
for our customers. In the last three years, we financed, on average,
approximately 57% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and to issue asset-backed
and variable funding notes to third parties. We transfer receivables, consisting
of retail installment and revolving account receivables, extended to our
customers, to the issuer in exchange for cash and subordinated securities. To
finance its acquisition of these receivables, the issuer has issued notes to
third parties.
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements, under
which we are the primary obligor, to protect the customers after the original
manufacturer's warranty or service maintenance agreement has expired.
Our business is moderately seasonal, with a greater proportionate share of
our revenues, pretax and net income realized during the quarter ending January
31, due primarily to the holiday selling season.
Executive Overview
This narrative is intended to provide an executive level overview of our
operations for the three and six months ended July 31, 2006. A detailed
explanation of the changes in our operations for these periods as compared to
the prior year is included under Results of Operations. As explained in that
section, our pretax income for the quarter ended July 31, 2006 decreased
approximately 11.4%, as the decrease in the gross margin percentage offset the
benefit of increased revenues, lower selling, general and administrative
expenses as a percentage of revenues, lower interest expense and higher other
income. Our pretax income for the six months ended July 31, 2006 increased
approximately 5.0%, primarily as a result of higher revenues and gross margin
dollars, lower selling, general and administrative expenses as a percentage of
revenues, lower interest expense and higher other income. Some of the more
specific items impacting our operating and pretax income were:
o Same store sales for the quarter grew 7.2% and for the six months same
store sales grew 11.7% over the same period for the prior year. The
improvement in same store sales growth was due primarily to improved
execution at the store level and effective sales promotions. While we do
not have sufficient information to determine what long-term impact
Hurricanes Rita and Katrina will have on sales in the impacted markets,
excluding the Southeast Texas and Louisiana markets, the same store sales
increase was 3.8% for the quarter and 7.8% for the six months ended in the
other markets we serve. These other markets accounted for 78.9% of same
store Product sales and Service maintenance agreement commissions during
the three months ended July 31, 2006 and 78.5% of same store Product sales
and Service maintenance agreement commissions during the six months ended
July 31, 2006. It is our strategy to continue emphasizing our primary
product categories and focusing on specialty product categories throughout
the balance of fiscal 2007.
o Our entry into the Dallas/Fort Worth and the South Texas markets and the
addition of stores in our existing Houston and San Antonio markets had a
positive impact on our revenues. Approximately $8.7 million and $19.4
million of our product sales and service maintenance agreement commissions
increase for the quarter and six months ended July 31, 2006, respectively,
resulted from the opening of new stores in these markets. Our plans
provide for the opening of additional stores in existing markets during
fiscal 2007 as we focus on opportunities in markets in which we have
existing infrastructure.
17
o 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. For the three months
and six months ended July 31, 2006, $35.7 million, or 23.7%, and $71.1
million, or 23.0%, respectively, in gross product sales were financed by
deferred interest and "same as cash" plans. For the comparable periods in
the prior year gross product sales financed by deferred interest and "same
as cash" sales were $39.8 million, or 30.4% and $80.5 million, or 31.2%.
We expect to increase the use of this type of extended term promotional
credit in the future.
o Our gross margin for the quarter decreased from 36.3% to 33.5% for the
three months ended July 31, 2006 when compared to the same period in the
prior year, primarily as a result of the impact on securitization income
of increased charge-offs in the credit portfolio (see Note 3 to the
Consolidated Financial Statements), reduced front-end and retrospective
Service Maintenance agreement commissions, due to a lower sales
penetration during the period, and a reduction in the gross margin on
product sales to 20.5% in the quarter ended July 31, 2006, from 20.9% in
the prior year. Our gross margin for the six months decreased from 35.8%
to 33.6% for the six months ended July 31, 2006 when compared to the same
period in the prior year, primarily due to the impact on securitization
income of higher charge-offs in the credit portfolio, reduced
retrospective Service Maintenance agreement commissions and a reduction in
the gross margin on product sales to 20.6% for the six months ended July
31, 2006, from 20.8% in the prior year.
o Finance charges and other declined 10.4% for the quarter and 1.6% for the
six months ended July 31, 2006, as compared to the double-digit growth in
Product sales as:
o securitization income, which declined by 12.6% for the quarter and
increased 0.1% for the six months ended July 31, 2006, was impacted
by a 74.0% increase in net credit losses for the quarter and a 69.9%
increase for the six months ended July 31, 2006, due to higher than
expected losses primarily as a result of the disruption to our
credit operations caused by Hurricane Rita. During the three months
ended July 31, 2006, due to the expectation of continued higher
losses over the next six months, we recorded an impairment charge of
$1.5 million, reducing the value of our interest in securitized
assets.
o service maintenance agreement retrospective commissions for the
quarter and the six months ended July 31, 2006 decreased $0.9
million and $1.6 million, respectively, due to a change in the
commission structure resulting in higher front-end commissions,
which are included in Net sales,
o During the three months ended July 31, 2006, we decreased Selling, general
and administrative (SG&A) expense as a percent of revenues to 26.6% from
27.3% when compared to the prior year, primarily from decreases in payroll
and payroll related expenses and net advertising expense as a percent of
revenues. The trends for the six months ended July 31, 2006 are consistent
with those discussed for the three months ended July 31, 2006.
o Operating margin decreased from 9.1% to 6.7% for the three months ended
July 31, 2006 when compared to the same period in the prior year due to
reduced gross margin and increased Provision for bad debts that was
partially offset by our ability to reduce SG&A expenses as a percent of
revenues. The factors above also affected the operating margin for the six
months ended July 31, 2006 which decreased from 9.4% during the same
period last year to 8.1%.
o We adopted SFAS No. 123R, Share-Based Payment, during the quarter ended
April 30, 2006. The adoption resulted in expenses totaling $0.4 million
being recorded to SG&A during the quarter ended July 31, 2006 as compared
to $0.3 million being recorded in the quarter ended July 31, 2005. The
adoption resulted in expenses totaling $0.8 million being recorded to SG&A
during the six months ended July 31, 2006 as compared to $0.5 million
being recorded in the six months ended July 31, 2005.
18
o During the quarter ended July 31, 2006, the Company completed the sale of
a building and the related land, resulting in the recognition of a gain of
$0.7 million, which is reflected in Other (income) expense.
Operational Changes and Resulting Outlook
During the quarter, we opened a new store in the West Houston market and
added a clearance center in Baytown. We have several other locations in Texas
that we believe are promising and, along with new stores in existing
markets, are in various stages of development for opening in fiscal year 2007.
We also continue to look at other markets, including neighboring states for
opportunities.
In its regularly scheduled meeting on August 24, 2006, our Board of
Directors authorized the repurchase of up to $50 million of our common stock,
dependent on market conditions and the price of the stock.
The credit portfolio delinquency and charge-off statistics were negatively
impacted by the effects of Hurricane Rita that hit the Gulf Coast during
September of 2005. The hurricane impacted our customer's ability to pay on their
accounts and hampered our credit collection operations, including payment
processing delays caused by disruption in the mail service. The credit
collection operations were negatively affected by the loss of personnel, as some
employees did not return to work, and by the increase in the number of
delinquent accounts, resulting in increased workloads for the personnel that
returned to work. To address the staffing issues, we have intensified our
recruiting efforts to attract individuals to our Beaumont, Texas collection
center and have opened a second collection center in Dallas, Texas. Non-storm
factors that may have negatively affected delinquencies and charge-offs include
the impact of the bankruptcy law change in October 2005 and other economic
factors on our customers. However, as predicted, the delinquency performance of
the credit portfolio has improved since January 31, 2006, and we expect both the
delinquency and loss rates to return to historical levels over the next six
months. See detail information regarding the delinquency status of the credit
portfolio in Note 3 to the financial statements.
On May 18, 2006, the Governor of Texas signed a tax bill that modifies the
existing franchise tax, with the most significant change being the replacement
of the existing base with a tax based on margin. Taxable margin is generally
defined as total federal tax revenues minus the greater of (a) cost of goods
sold or (b) compensation. The tax rate to be paid by retailers and wholesalers
is 0.5% on taxable margin. This will result in an increase in taxes paid by us,
as franchise taxes paid have totaled less than $50,000 per year for the last
several years. Partially offsetting this increase is a reduction in property tax
rates that will be phased in during the 2006 and 2007 property tax years. The
tax changes impacted earnings beginning in this quarter. For the quarter and six
months ended, we accrued, net of federal tax benefit, $118,000 in additional tax
liability and recorded approximately $29,000 in net deferred tax assets as a
result of the new margin tax. Going forward, we expect our effective tax rate on
Income before income taxes to increase to between 36% and 37%, from average of
35.1% over the past three fiscal years.
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.
19
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 July 31, 2006.
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 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 the difference between the interest earned on customer accounts
and the cost associated with financing and servicing the transferred accounts,
including a provision for bad debts associated with the transferred accounts (on
a revolving pool basis) discounted to a market rate of interest. The gain or
loss recognized on these transactions is based on our best estimates of key
assumptions, including forecasted credit losses based on actual portfolio
experience over the past twelve months, 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 or reductions in rates charged on the
accounts transferred), our interest in securitized assets would have been
reduced by $5.6 million as of July 31, 2006, which may have an adverse affect on
earnings. We recognize income from our interest in these transferred accounts as
gains on the transfer of the asset, interest income and servicing fees. This
income is recorded as Finance charges and other in our consolidated statements
of operations. If the assumption used for estimating credit losses were changed
by 0.5% from 3.0% to 3.5%, the impact to recorded Finance charges and other
would have been a reduction in revenues and pretax income of $2.1 million.
Deferred Taxes. We have net deferred tax liabilities of approximately $0.6
million as of July 31, 2006. If we had assumed that the future tax rate at which
these deferred items would reverse was 50 basis points higher than currently
anticipated, we would have increased the net deferred tax liability and
decreased net income by approximately $9 thousand.
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 July 31, 2006 was $9.6 million.
Property and Equipment. Our accounting policies regarding land, buildings,
equipment and leasehold improvements 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 that 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 as
the cash flows associated with the assets are 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.
20
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the product is delivered to the customer. Such revenues
are recognized net of any adjustments for sales incentive offers such as
discounts, coupons, rebates, or other free products or services and discounts of
promotional credit sales that will extend beyond one year. We sell service
maintenance agreements and credit insurance contracts on behalf of unrelated
third parties. For contracts where the third parties are the obligors on the
contract, commissions are recognized in revenues at the time of sale, and in the
case of retrospective commissions, at the time that they are earned. Where we
sell service maintenance renewal agreements in which we are deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
service maintenance agreements are renewal contracts that provide our customers
protection against product repair costs arising after the expiration of the
manufacturer's warranty and the third party obligor contracts. These agreements
typically range from 12 months to 36 months. These agreements are separate units
of accounting under Emerging Issues Task Force No. 00-21, Revenue Arrangements
with Multiple Deliverables. The amount of service maintenance agreement revenue
deferred at July 31, 2006 and January 31, 2006 was $3.7 million and $3.6
million, respectively, and is included in Deferred revenues and allowances in
the accompanying balance sheets.
Vendor Allowances. We receive funds from vendors for price protection,
product rebates, marketing and training and promotion programs which are
recorded on the accrual basis as a reduction to the related product cost or
advertising expense according to the nature of the program. We accrue rebates
based on the satisfaction of terms of the program and sales of qualifying
products even though funds may not be received until the end of a quarter or
year. If the programs are related to product purchases, the allowances, credits
or payments are recorded as a reduction of product cost; if the programs are
related to promotion or marketing of the product, the allowances, credits, or
payments are recorded as a reduction of advertising expense in the period in
which the expense is incurred.
Accounting for Stock-Based Compensation. We adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, effective February 1, 2006,
using the modified retrospective application transition. This statement
establishes standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services, focusing primarily on
accounting for transactions in which an entity obtains an employee's services.
The statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, based on the grant-date
fair value of the award, and record that cost over the period during which the
employee is required to provide service in exchange for the award. As a result
of the adoption of this pronouncement, we retrospectively adjusted prior
financial statements to record compensation expense, as previously reported in
the notes to our financial statements, for all awards valued using fair-value
based methods. The impact of the adoption of this pronouncement is discussed in
more detail in Note 1 to our financial statements.
Accounting for Leases. The accounting for leases is governed primarily by
SFAS No. 13, Accounting for Leases. As required by the standard, we analyze each
lease, at its inception, to determine whether it should be accounted for as an
operating lease or a capital lease. Additionally, monthly lease expense for each
operating lease is calculated as the average of all payments required under the
minimum lease term, including rent escalations. Generally, the minimum lease
term begins with the date we take possession of the property and ends on the
last day of the minimum lease term, and includes all rent holidays, but excludes
renewal terms that are at our option. Any tenant improvement allowances received
are deferred and amortized into income as a reduction of lease expense on a
straight line basis over the minimum lease term. The amortization of leasehold
improvements is computed on a straight line basis over the shorter of the
remaining lease term or the estimated useful life of the improvements. Effective
February 1, 2006 we implemented the requirements of FASB Staff Position No.
13-1, which addresses the accounting for rental costs associated with operating
leases that are incurred during a construction period. As required by that
guidance, we recognize as rental expense all rental costs associated with ground
or building operating leases that are incurred during a construction period.
That rental expense is included in income from continuing operations and is not
capitalized.
21
Results of Operations
The following table sets forth certain statement of operations information
as a percentage of total revenues for the periods indicated:
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------- ------------------------
2005 2006 2005 2006
------------- ------------ ------------ -----------
Revenues:
Product sales ................................................... 79.5 % 82.6 % 80.0 % 82.6 %
Service maintenance agreement commissions (net) ................. 4.8 3.9 4.6 4.0
Service revenues ................................................ 3.1 3.3 3.1 3.0
------------- ------------ ------------ -----------
Total net sales ............................................... 87.4 89.8 87.7 89.6
Finance charges and other ....................................... 12.6 10.2 12.3 10.4
------------- ------------ ------------ -----------
Total revenues ........................................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of goods sold, including warehousing
and occupancy cost ............................................ 62.9 65.7 63.4 65.6
Cost of parts sold, including warehousing
and occupancy cost ............................................. 0.8 0.8 0.8 0.8
Selling, general and administrative expense 27.3 26.6 26.3 25.4
Provision for bad debts ......................................... (0.1) 0.2 0.1 0.1
------------- ------------ ------------ -----------
Total costs and expenses ................................. 90.9 93.3 90.6 91.9
------------- ------------ ------------ -----------
Operating income ................................................ 9.1 6.7 9.4 8.1
Interest (income) expense, net .................................. 0.1 (0.1) 0.1 (0.1)
Other (income) expense, net ..................................... 0.0 (0.4) 0.0 (0.2)
------------- ------------ ------------ -----------
Income before income taxes ...................................... 9.0 7.2 9.3 8.4
Provision for income taxes ...................................... 3.2 2.5 3.3 2.9
------------- ------------ ------------ -----------
Net income ...................................................... 5.8 % 4.7 % 6.0 % 5.5 %
============= ============ ============ ===========
The table above identifies several changes in our operations for the current
quarter, including changes in revenue and expense categories expressed as a
percentage of revenues. These changes are discussed in the Executive Overview,
and in more detail in the discussion of operating results beginning in the
analysis below.
Same store sales growth is calculated by comparing the reported sales by
store for all stores that were open throughout a period to reported sales by
store for all stores that were open throughout the prior year period. Sales from
closed stores have been removed from each period. Sales from relocated stores
have been included in each period because each store was relocated within the
same general geographic market. Sales from expanded stores have been included in
each period.
The presentation of gross margins may not be comparable to other retailers
since we include the cost of our in-home delivery service as part of Selling,
general and administrative expense. Similarly, we include the cost related to
operating our purchasing function in Selling, general and administrative
expense. It is our understanding that other retailers may include such costs as
part of their cost of goods sold.
22
Three Months Ended July 31, 2006 Compared to Three Months Ended July 31, 2005
Revenues. Total revenues increased by $17.6 million, or 10.7%, from $164.6
million for the three months ended July 31, 2005 to $182.2 million for the three
months ended July 31, 2006. The increase was attributable to increases in net
sales of $19.8 million, or 13.8%, offset by a decrease of $2.1 million, or
10.4%, in finance charges and other revenue.
The $19.8 million increase in net sales was made up of the following:
o a $10.0 million same store sales increase of 7.2%. While we do not
have sufficient information to determine what long-term impact
Hurricanes Rita and Katrina will have on sales in the impacted
markets, excluding the Southeast Texas and Louisiana markets, the
same store sales increase was 3.8% in the other markets we serve.
These other markets accounted for 78.9% of same store Product sales
and Service maintenance agreement commissions during the three
months ended July 31, 2006. Service maintenance agreement (SMA)
sales have declined due to a lower sales penetration. This decline
has been partially offset 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 by approximately $0.6 million, (offsetting this increase is a
decrease in retrospective commissions which is reflected in Finance
charges and other);
o a $8.7 million increase generated by seven retail locations that
were not open for three consecutive months in each period;
o a $0.3 million increase resulted from a decrease in discounts on
extended-term promotional credit sales (those with terms longer than
12 months); and
o a $0.8 million increase resulted from an increase in service
revenues.
The components of the $19.8 million increase in net sales, were a $19.8
million increase in Product sales and a $0.8 million increase in service
revenues offset by a net decrease in service maintenance agreement commissions
of $0.8 million. The $19.8 million increase in product sales resulted from the
following:
o approximately $15.6 million was attributable to increases in unit
sales, due to increased appliances, consumer electronics (especially
plasma and LCD televisions), and furniture sales, partially offset
by a decline in track sales, and
o approximately $4.2 million was attributable to increases in unit
price points. The price point impact was driven by a shift to
higher-priced track items and increased delivery fees, partially
offset by a slight decline in our core product categories as prices
for new technology in those areas erode.
23
The following table presents the makeup of net sales by product category in
each quarter, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Three Months Ended July 31,
----------------------------------------------------------
2005 2006 Percent
---------------------------- ----------------------------
Category Amount Percent Amount Percent Increase
-------------- ----------- -------------- ------------ ---------------
Major home appliances ........................ $ 46,579 32.4 % $ 53,429 32.7 % 14.7 % (1)
Consumer electronics ......................... 39,728 27.6 46,414 28.4 16.8 (1)
Track ........................................ 21,225 14.7 20,257 12.4 (4.6) (2)
Delivery...................................... 2,376 1.7 2,887 1.8 21.5 (3)
Lawn and garden .............................. 5,943 4.1 6,577 4.0 10.7 (4)
Mattresses ................................... 3,095 2.1 4,908 3.0 58.6 (5)
Furniture .................................... 3,772 2.6 8,245 5.0 118.6 (6)
Other ........................................ 8,149 5.7 7,930 4.8 (2.7) (7)
-------------- ----------- -------------- ------------
Total product sales ..................... 130,867 90.9 150,647 92.1 15.1
Service maintenance agreement
commissions ........ ......................... 7,848 5.5 7,063 4.3 (10.0)
Service revenues ............................. 5,134 3.6 5,927 3.6 15.4
-------------- ----------- -------------- ------------
Total net sales ......................... $ 143,849 100.0 % $ 163,637 100.0 % 13.8 %
============== =========== ============== ============
- ----------------------------------
(1) These increases are consistent with overall increase in product
sales and improved unit prices.
(2) The decline in track sales (consisting largely of computers,
computer peripherals, portable electronics and small appliances) is
due primarily to reduced sales of computers, portable televisions
and camcorders.
(3) This increase is due primarily to the increase in total product
sales, as well as an increase in the fees charged for deliveries.
(4) A delayed selling season due to dry weather impacted this category.
(5) This increase is due to increased emphasis on and improved execution
at our stores in the sale of this category.
(6) 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.
(7) The decline in this category, which includes air conditioning, is
due primarily to growing unit volume by emphasizing products with
lower price points to match the competitive environment.
Revenue from Finance charges and other decreased by approximately $2.1
million, or 10.4%, from $20.7 million for the three months ended July 31, 2005
to $18.6 million for the three months ended July 31, 2006. It declined while
product sales grew, due primarily to a decrease in securitization income of $1.9
million, or 12.6% and a $0.9 million decrease in service maintenance agreement
retrospective commissions, partially offset by an increase in insurance
commissions of $0.7 million. Securitization income was impacted primarily by a
74.0% increase in net credit losses in the quarter ended July 31, 2006 as
compared to the quarter ended July 31, 2005. The increased net credit losses
were due to higher than expected losses primarily as a result of the disruption
to our credit operations caused by Hurricane Rita. During the three months ended
July 31, 2006, due to the expectation of continued higher losses over the next
six months, we recorded an impairment charge of $1.5 million, reducing the value
of our interest in securitized assets. This impairment charge is based on an
estimated charge-off rate of approximately 3.6% over the next six months. The
charge-off rate used in the securitized asset valuation is expected to return to
the level of the historical charge-off rate assumption of 3.0% at the beginning
of our next fiscal year. Additionally, securitization income has been negatively
impacted by increased interest cost on the borrowings of the QSPE, due to rising
interest rates, and slower growth in the credit portfolio, which impacts the
interest income earned by the QSPE.
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $16.2 million, or 15.6%, from $103.6 million for the three
months ended July 31, 2005 to $119.8 million for the three months ended July 31,
2006. This increase was slightly higher than the 15.1% increase in Product sales
during the three months ended July 31, 2006. Cost of products sold increased to
79.5% of Product sales in the quarter ended July 31, 2006, as compared to 79.1%
in the quarter ended July 31, 2005. The increase in Cost of goods sold as a
percentage of Product sales was primarily as a result of higher warehousing
costs, which grew faster than sales.
24
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $153,000, or 12.4%, for the three months ended
July 31, 2006 as compared to the three months ended July 31, 2005, due to
increases in parts sales. While Service revenues increased by 15.4% in the
quarter ended July 31, 2006 as compared to the quarter ended July 31, 2005, the
cost of parts sold increased at a slower rate due to improved inventory
management.
Selling, General and Administrative Expense. While Selling, general and
administrative expense increased by $3.4 million, or 7.7%, from $45.0 million
for the three months ended July 31, 2005 to $48.4 million for the three months
ended July 31, 2006, it decreased as a percentage of total revenue from 27.3% to
26.6%. 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. We adopted SFAS No. 123R,
Share-Based Payment, effective February 1, 2006. The adoption resulted in
expenses totaling $0.4 million being recorded to SG&A during the quarter ended
July 31, 2006 as compared to $0.3 million being recorded in the quarter ended
July 31, 2005.
Provision for Bad Debts. The provision for bad debts on non-credit portfolio
receivables and credit portfolio receivables retained by the Company and not
transferred to the QSPE increased by $0.5 million, during the three months ended
July 31, 2006, as compared to the three months ended July 31, 2005, primarily as
a result of provision adjustments that reduced expense in the prior year period,
and increased expense in the current year due to the impact of the hurricanes.
See Note 3 to the financial statements for information regarding the performance
of the credit portfolio.
Interest (Income) Expense, net. Net interest (income) expense improved by
$246,000, from net interest expense of $59,000 for the three months ended July
31, 2005 to net interest income of $187,000 for the three months ended July 31,
2006. The net improvement in interest (income) expense was primarily
attributable to increased interest income from invested funds of approximately
$162,000. The remaining change of $84,000 resulted from lower average
outstanding debt balances and capitalization of interest expense on construction
in progress.
Other (Income) Expense, net. Other (income) expense, net improved by
$749,000, from net expense of $28,000 for the three months ended July 31, 2005,
to net income of $721,000 for the three months ended July 31, 2006. This change
was primarily the result of a $0.7 million gain recognized on the sale of a
building and the related land.
Provision for Income Taxes. The provision for income taxes decreased by $0.6
million, or 12.2%, from $5.3 million for the three months ended July 31, 2005 to
$4.6 million for the three months ended July 31, 2006. The decrease in the
Provision for income taxes is attributable to lower Income before income taxes
and state tax refunds received during the period. The impact of the new Texas
margin tax was partially offset by the one-time benefit of deferred tax assets
recorded as a result of the new tax.
Net Income. As a result of the above factors, Net income decreased $1.1
million, or 10.9%, from $9.6 million for the three months ended July 31, 2005 to
$8.5 million for the three months ended July 31, 2006.
Six Months Ended July 31, 2006 Compared to Six Months Ended July 31, 2005
Revenues. Total revenues increased by $51.9 million, or 16.1%, from $322.5
million for the six months ended July 31, 2005 to $374.4 million for the six
months ended July 31, 2006. The increase was attributable to increases in net
sales of $52.6 million, or 18.6%, and a decrease of $0.7 million, or 1.6%, in
finance charges and other revenue.
The $52.6 million increase in net sales was made up of the following:
o a $31.9 million same store sales increase of 11.7%. While we do not
have sufficient information to determine what long-term impact
Hurricanes Rita and Katrina will have on sales in the impacted
markets, excluding the Southeast Texas and Louisiana markets, the
same store sales increase was 7.8% in the other markets we serve.
These other markets accounted for 78.5% of
25
same store Product sales and Service maintenance agreement
commissions during the six months ended July 31, 2006. Additionally,
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 by approximately
$1.2 million, (offsetting this increase is a decrease in
retrospective commissions which is reflected in Finance charges and
other);
o a $19.5 million increase generated by eight retail locations that
were not open for six consecutive months in each period; and
o a $1.2 million increase resulted from an increase in service
revenues.
The components of the $52.6 million increase in net sales were a $51.0
million increase in product sales and a $1.6 million net increase in service
maintenance agreement commissions and service revenues. The $51.0 million
increase in product sales resulted from the following:
o approximately $33.8 million was attributable to increases in unit
sales, due to increased appliances, consumer electronics (especially
plasma and LCD televisions), and furniture sales, partially offset
by a decline in track sales, and
o approximately $17.2 million was attributable to increases in unit
price points. The price point impact was driven by a shift to
higher-priced track items and increased delivery fees, as well as
consumers selecting higher priced appliance products, including
high-efficiency washers and dryers and stainless kitchen appliances,
partially offset by a slight decline in electronics as prices for
new technology erode.
The following table presents the makeup of net sales by product category in
each quarter, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Six Months Ended July 31,
----------------------------------------------------------
2005 2006 Percent
---------------------------- ----------------------------
Category Amount Percent Amount Percent Increase
-------------- ------------ -------------- ------------- --------------
Major home appliances ...................... $ 93,181 33.0 % $ 115,293 34.4 % 23.7 % (1)
Consumer electronics ....................... 83,381 29.5 100,050 29.8 20.0 (1)
Track 43,965 15.5 43,462 13.0 (1.1) (2)
Delivery.................................... 4,400 1.5 5,759 1.7 30.9 (3)
Lawn and garden ............................ 11,226 4.0 11,693 3.5 4.2 (4)
Mattresses.................................. 6,002 2.1 10,004 3.0 66.7 (5)
Furniture 6,768 2.4 13,650 4.1 101.7 (6)
Other ...................................... 9,219 3.3 9,245 2.7 0.3 (7)
-------------- ------------ -------------- ------------- --------------
Total product sales ................... 258,142 91.3 309,156 92.2 19.8
Service maintenance agreement
commissions 14,732 5.2 15,030 4.5 2.0
Service revenues ........................... 9,909 3.5 11,156 3.3 12.6
-------------- ------------ -------------- ------------- --------------
Total net sales ....................... $ 282,783 100.0 % $ 335,342 100.0 % 18.6 %
============== ============ ============== ============= ==============
- ----------------------------------
(1) These increases are consistent with overall increase in product
sales and improved unit prices.
(2) The decline in track sales (consisting largely of computers,
computer peripherals, portable electronics and small appliances) is
due primarily to reduced sales of computers, portable televisions
and camcorders.
(3) This increase is due primarily to the increase in total product
sales, as well as an increase in the fees charged for deliveries.
(4) A delayed selling season due to dry weather impacted this category.
(5) This increase is due to increased emphasis on and improved execution
at our stores in the sale of this category.
26
(6) 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.
(7) This category, which includes air conditioning, was impacted
significantly as we grew unit volume by emphasizing products with
lower price points to match the competitive environment.
Revenue from Finance charges and other decreased by approximately $0.7
million, or 1.6%, from $39.7 million for the six months ended July 31, 2005, to
$39.0 million for the six months ended July 31, 2006. The slight decrease was
caused by a $1.6 million decrease in service maintenance agreement retrospective
commissions, partially offset by an increase in securitization income of $0.2
million and a $0.7 million increase in insurance commissions and other.
Securitization income was impacted primarily by a 69.9% increase in net credit
losses in the six months ended July 31, 2006 as compared to the six months ended
July 31, 2005. The increased net credit losses were due to higher than expected
losses primarily as a result of the disruption to our credit operations caused
by Hurricane Rita. During the six months ended July 31, 2006, due to the
expectation of continued higher losses over the next six months, we recorded an
impairment charge of $1.5 million, reducing the value of our interest in
securitized assets. This impairment charge is based on an estimated charge-off
rate of approximately 3.6% over the next six months. The charge-off rate used in
the securitized asset valuation is expected to return to the level of the
historical charge-off rate assumption of 3.0% at the beginning of our next
fiscal year. Additionally, securitization income has been negatively impacted by
increased interest cost on the borrowings of the QSPE, due to rising interest
rates, and slower growth in the credit portfolio, which impacts the interest
income earned by the QSPE.
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $41.0 million, or 20.0%, from $204.5 million for the six
months ended July 31, 2005 to $245.5 million for the six months ended July 31,
2006. This increase was slightly higher than the 19.8% increase in Product sales
during the six months ended July 31, 2006. Cost of products sold increased to
79.4% of Product sales in the six months ended July 31, 2006, as compared to
79.2% in the six months ended July 31, 2005. The increase in Cost of goods sold
as a percentage of Product sales was primarily as a result of higher warehousing
costs, which grew faster than sales.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $0.5 million, or 20.0%, for the six months ended
July 31, 2006 as compared to the six months ended July 31, 2005, due to
increases in parts sales. While Service revenues increased by 12.6% in the six
months ended July 31, 2006 as compared to the six months ended July 31, 2005,
the cost of parts sold increased at a faster rate due to reduced margins on
parts sold through our service maintenance agreement program.
Selling, General and Administrative Expense. While Selling, general and
administrative expense increased by $10.4 million, or 12.3%, from $84.7 million
for the six months ended July 31, 2005 to $95.1 million for the six months ended
July 31, 2006, it decreased as a percentage of total revenue from 26.3% to
25.4%. 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. We adopted SFAS No. 123R,
Share-Based Payment, effective February 1, 2006. The adoption resulted in
expenses totaling $0.8 million being recorded to SG&A during the six months
ended July 31, 2006 as compared to $0.5 million being recorded in the six months
ended July 31, 2005.
Provision for Bad Debts. The provision for bad debts on non-credit portfolio
receivables and credit portfolio receivables retained by the Company and not
transferred to the QSPE increased by $0.1 million, during the six months ended
July 31, 2006, as compared to the six months ended July 31, 2005, primarily as a
result of provision adjustments that reduced expense in the prior year period,
and increased expense in the current year due to the impact of the hurricanes.
See Note 3 to the financial statements for information regarding the performance
of the credit portfolio.
27
Interest (Income) Expense, net. Net interest (income) expense improved by
$785,000, from net interest expense of $414,000 for the six months ended July
31, 2005 to net interest income of $371,000 for the six months ended July 31,
2006. The net improvement in interest (income) expense was primarily
attributable to:
o the expiration of $20.0 million of our interest rate hedges and the
discontinuation of hedge accounting resulted in a net decrease in
interest expense of approximately $244,000; and
o increased interest income from invested funds of approximately
$378,000.
The remaining change of $163,000 resulted from lower average outstanding debt
balances and capitalization of interest expense on construction in progress.
Other (Income) Expense, net. Other (income) expense, net improved by
$788,000, from net expense of $34,000 for the six months ended July 31, 2005, to
net income of $754,000 for the six months ended July 31, 2006. This change was
primarily the result of a $0.7 million gain recognized on the sale of a building
and the related land.
Provision for Income Taxes. The provision for income taxes increased by $0.5
million, or 4.4%, from $10.6 million for the six months ended July 31, 2005 to
$11.1 million for the six months ended July 31, 2006. The increase in the
Provision for income taxes is attributable to higher Income before income taxes,
partially offset by state tax refunds received during the period. The impact of
the new Texas margin tax was partially offset by the one-time benefit of
deferred tax assets recorded as a result of the new tax.
Net Income. As a result of the above factors, Net income increased $1.0
million, or 5.3%, from $19.5 million for the six months ended July 31, 2005 to
$20.5 million for the six months ended July 31, 2006.
Liquidity and Capital Resources
Current Activities
Historically we have financed our operations through a combination of cash flow
generated from operations, and external borrowings, including primarily bank
debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables to our asset-backed securitization facilities.
As of July 31, 2006, we had approximately $15.0 million in excess cash, the
majority of which was generated through the operations of the Company. In
addition to the excess cash, we had $48.6 million under the revolving line of
credit, net of standby letters of credit issued, and $8.0 million under our
unsecured bank line of credit available to us for general corporate purposes,
$21.2 million under extended vendor terms for purchases of inventory and $61.0
million in commitments available to our QSPE for the transfer of receivables.
In its regularly scheduled meeting on August 24, 2006, our Board of
Directors authorized the repurchase of up to $50 million of our common stock,
dependent on market conditions and the price of the stock. We expect to fund
these purchases with a combination of excess cash, cash flow from operations,
borrowings under our revolving credit facilities and proceeds from the sale of
owned properties.
Effective August 28, 2006, we entered into an amendment to our $50 million
revolving credit facility with the existing lenders. The amendment increases our
restricted payment capacity, which includes payments for repurchases of capital
stock, from $25 million to $50 million. There were no other modifications of the
Credit Agreement.
28
A summary of the significant financial covenants that govern our bank credit
facility compared to our actual compliance status at July 31, 2006, is presented
below:
Required
Minimum/
Actual Maximum
------------------ -------------------
Debt service coverage ratio must exceed required minimum 4.37 to 1.00 2.00 to 1.00
Total adjusted leverage ratio must be lower than required maximum 1.60 to 1.00 3.00 to 1.00
Consolidated net worth must exceed required minimum $268.1 million $162.0 million
Charge-off ratio must be lower than required maximum 0.03 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
Thirty-day delinquency ratio must be lower than required maximum 0.08 to 1.00 0.13 to 1.00
Note: All terms in the above table are defined by the bank credit facility
and may or may not agree directly to the financial statement captions in
this document.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our bank
credit facility and unsecured credit line, extended vendor terms for purchases
of inventory, acquisition of inventory under consignment arrangements and access
to the unfunded portion of the variable funding portion of the QSPE's
asset-backed securitization program will be sufficient to fund our operations,
store expansion and updating activities and capital programs through at least
January 31, 2007. However, there are several factors that could decrease cash
provided by operating activities, including:
o reduced demand for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional
activities;
o changes in inventory requirements based on longer delivery times of
the manufacturers or other requirements which would negatively
impact our delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under
our current QSPE's asset-backed securitization program as a result
of changes in performance or types of receivables transferred
(promotional versus non-promotional and primary versus secondary
portfolio);
o inability to expand our capacity for financing our receivables
portfolio under new or replacement QSPE asset-backed securitization
programs or a requirement that we retain a higher percentage of the
credit portfolio under such new programs;
o increases in program costs (interest and administrative fees
relative to our receivables portfolio associated with the funding of
our receivables); and
o increases in personnel costs.
During the six months ended July 31, 2006, net cash provided by operating
activities decreased $45.4 million from $31.4 million provided in the 2005
period to $14.0 million used in the 2006 period. The net decrease in cash
provided from operations resulted primarily from the timing of payments of
accounts payable and federal income and employment tax payments. We had obtained
extended payment terms from several of our vendors due to the impact of
hurricanes in the prior fiscal year. Federal income and employment tax payment
deadlines after Hurricane Rita were also deferred until February 28, 2006.
29
Those extended terms ended and deadlines were reached in the six months ended
July 31, 2006 and we were required to satisfy those obligations, which
negatively impacted our operating cash flows by approximately $18.9 million.
Additionally, during the six months ended July 31, 2006, cash flow was used to
increase inventory, as new stores have been added, and to finance growth in the
credit portfolio, as we have been required to increase our retained interest in
the receivables due to the increased credit losses.
As noted above, we offer promotional credit programs to certain customers
that provide for "same as cash" interest free periods of varying terms,
generally three, six, or 12 months; in fiscal year 2005 we increased these terms
to include 18 or 24 months that are eligible to be partially funded through our
asset-backed securitization program. In the second quarter of fiscal 2005, we
began offering deferred interest programs with 36-month terms. In the second
quarter of fiscal 2006, we began offering deferred interest programs with
24-month terms. The three, six, 12, 18, 24 and 36 month "same as cash"
promotional accounts and deferred interest program accounts are eligible for
securitization up to the limits provided for in our securitization agreements.
This limit is currently 30.0% of eligible securitized receivables. If we exceed
this 30.0% limit, we would be required to use some of our other capital
resources to carry the unfunded balances of the receivables for the promotional
period. The percentage of eligible securitized receivables represented by
promotional receivables was 17.0% as of July 31, 2006. At July 31, 2005, this
percentage, computed on a consistent basis with the July 31, 2006 calculation,
would have been 22.4%. The weighted average promotional period was 12.7 months
and 11.5 months for promotional receivables outstanding as of July 31, 2005 and
2006, respectively. The weighted average remaining term on those same
promotional receivables was 8.2 months and 7.2 months, respectively. While
overall these promotional receivables have a much shorter weighted average term
than non-promotional receivables, we receive less income on these receivables,
resulting in a reduction of the net interest margin used in the calculation of
the gain on the sale of receivables.
Net cash used by investing activities decreased by $0.4 million, from $10.0
million for the six months ended July 31, 2005 to $9.6 million for the six
months ended July 31, 2006. The decrease in cash used in investing activities
resulted primarily from the sales of property and equipment, partially offset by
increased purchases of property and equipment. The cash expended for property
and equipment was used primarily for construction of new stores and the
reformatting of existing stores to better support our current product mix. Based
on current plans, we expect to increase expenditures for property and equipment
in fiscal 2007 as we open additional stores, including ownership and development
of shopping centers that will feature our store, as compared to fiscal 2006.
Additionally, we intend to sell and lease-back certain of the properties we
currently own, in order to provide cash flow for funding our growth and stock
repurchase plans.
Net cash from financing activities increased by $10.8 million from $9.4
million used during the six months ended July 31, 2005 to $1.4 million provided
during the six months ended July 31, 2006. The increase in cash provided by
financing activities resulted primarily from decreases in payments on various
debt instruments of $10.5 million. Also benefiting cash flow from financing
activities was increased proceeds from stock issued under employee benefit
plans.
Off-Balance Sheet Financing Arrangements
Since we extend credit in connection with a large portion of our retail,
service maintenance and credit insurance sales, we have created a qualified
special purpose entity, which we refer to as the QSPE or the issuer, to purchase
customer receivables from us and to issue asset-backed and variable funding
notes to third parties to obtain cash for these purchases. We transfer
receivables, consisting of retail installment contracts and revolving accounts
extended to our customers, to the issuer in exchange for cash and subordinated,
unsecured promissory notes. To finance its acquisition of these receivables, the
issuer has issued the notes and bonds described below to third parties. The
unsecured promissory notes issued to us are subordinate to these third party
notes and bonds.
At July 31, 2006, the issuer had issued two series of notes and bonds: a
Series A variable funding note in the amount of $250 million purchased by Three
Pillars Funding LLC and three classes of Series B bonds in the aggregate amount
of $200 million, of which $8.0 million was required to be placed in a restricted
cash account for the benefit of the bondholders. If the net portfolio yield, as
defined by the Series B agreements, falls below 5.0%, then the issuer may be
required to fund a cash reserve in addition to the $8.0 million restricted cash
account. At July 31, 2006, the net portfolio yield was in compliance with this
requirement. Private institutional investors, primarily insurance companies,
purchased the Series B bonds at a weighted fixed rate of 5.25%.
30
In August 2006, the issuer entered into an amendment of the Series A note to
increase the total available funding to $300 million, divided into a $100
million 364-day tranche, and a $200 million tranche that expires in August 2011.
The Company's QSPE closed and consummated an offering, pursuant to Rule 144A and
Regulation S under the Securities Act of 1933, of $150 million of asset-backed
fixed-rate notes (Series 2006A bonds), the net proceeds of which were used
primarily to provide the QSPE with additional capacity, fund the required $6.0
million cash reserve account and to reduce the amount outstanding under the
existing 2002 variable funding note. The proceeds of the new issuance provide
the issuer additional capacity for the purchase of our receivables and to make
the $10 million monthly principal payments on the Series B bonds due beginning
in October 2006. Private institutional investors, primarily insurance companies,
purchased the Series 2006A bonds at a weighted fixed rate of 5.75%.
In August 2006, certain of the existing transaction documents related to the
activities of the QSPE were amended. The following is a summary of the key
amendments:
o increase our consolidated net worth requirement from $30 million to
$150 million;
o add certain return mail procedures to the internal accounting
control procedures and processing functions report delivered by
independent accountants pursuant to the servicing agreement;
o change the definition of "Eligible Installment Contract Receivable"
under the base indenture to allow up to 27.5% of all receivables by
outstanding principal balance to consist of installment contract
receivables of the secondary portfolio (formerly 25% of such
receivables were permitted);
o change the definition of "Eligible Installment Contract Receivable"
and "Eligible Revolving Charge Receivable" under the base indenture
to allow up to 5.0% of the amount or number of installment contract
and revolving charge receivables, whichever occurs first, to have a
maximum repayment period and cash option period exceeding thirty-six
months but no more than forty-eight months (secondary portfolio
maximum term remains thirty-six months);
o change certain definitions under the series supplements for the
Series A notes and the Series B bonds, including changes to the
series supplements for the Series A notes that have the effect of
increasing the current level of funding available to the issuer; and
o provide for the issuer's issuance of additional asset-backed notes
and obtain additional commitments under the Series A notes upon the
occurrence of certain events related to the expiration of any
commitment under the Series A notes or the amount of the commitment
used under the Series A notes.
We continue to service the transferred accounts for the QSPE, and we receive
a monthly servicing fee, so long as we act as servicer, in an amount equal to
..0025% multiplied by the average aggregate principal amount of receivables
serviced 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
in connection with either Three Pillars Funding LLC, the Series B or Series
2006A bond holders, the servicing fee and additional earnings to the extent they
are available.
After August, 2006 amendment, the Series A variable funding note now permits
the issuer to borrow funds up to $300 million to purchase receivables from us,
thereby functioning as a "basket" to accumulate receivables. As issuer
borrowings under the Series A variable funding note approach $300 million, the
issuer is required to request an increase in the Series A amount or issue a new
series of bonds and use the proceeds to pay down the then outstanding balance of
the Series A variable funding note, so that the basket will once again become
available to accumulate new receivables or meet other obligations required under
the transaction documents. As of July 31, 2006, borrowings under the Series A
variable funding note were $189.0 million.
31
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the Series A note,
Series B bonds and Series 2006A bonds due to its inability to collect the
transferred customer accounts, the issuer could not pay the subordinated notes
it has issued to us in partial payment for transferred customer accounts, the
Series B and Series 2006A bond holders could claim the balance in its $14.0
million 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. We plan to renew this
letter of credit and increase the amount to $20.0 million in September, 2006.
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 and Series 2006A bonds, including covenants that restrict,
subject to specified exceptions: the incurrence of non-permitted indebtedness
and other obligations and the granting of additional liens; mergers,
acquisitions, investments and disposition of assets; and the use of proceeds of
the program. The issuer also makes representations and warranties relating to
compliance with certain laws, payment of taxes, maintenance of its separate
legal entity, preservation of its existence, protection of collateral and
financial reporting. In addition, the program requires the issuer to maintain a
minimum net worth.
A summary of the significant financial covenants that govern the Series A
variable funding note compared to actual compliance status at July 31, 2006, is
presented below:
Required
Minimum/
As reported Maximum
------------------- -------------------
Issuer interest must exceed required minimum $47.6 million $42.3 million
Gross loss rate must be lower than required maximum 4.5% 10.0%
Net portfolio yield must exceed required minimum 7.4% 2.0%
Payment rate must exceed required minimum 6.7% 3.0%
Note: All terms in the above table are defined by the asset backed credit
facility and may or may not agree ] directly to the financial statement
captions in this document.
Events of default under the Series A variable funding note and the Series B
and Series 2006A bonds, subject to grace periods and notice provisions in some
circumstances, include, among others: failure of the issuer to pay principal,
interest or fees; violation by the issuer of any of its covenants or agreements;
inaccuracy of any representation or warranty made by the issuer; certain
servicer defaults; failure of the trustee to have a valid and perfected first
priority security interest in the collateral; default under or acceleration of
certain other indebtedness; bankruptcy and insolvency events; failure to
maintain certain loss ratios and portfolio yield; change of control provisions
and certain other events pertaining to us. The issuer's obligations under the
program are secured by the receivables and proceeds.
32
Securitization Facilities
We finance most of our customer
receivables through asset-backed
securitization facilities
[FLOWCHART OMITTED]
Both the bank credit facility and the asset-backed securitization program
are significant factors relative to our ongoing liquidity and our ability to
meet the cash needs associated with the growth of our business. Our inability to
use either of these programs because of a failure to comply with their covenants
would adversely affect our continued growth. Funding of current and future
receivables under the QSPE's asset-backed securitization program can be
adversely affected if we exceed certain predetermined levels of re-aged
receivables, size of the secondary portfolio, the amount of promotional
receivables, write-offs, bankruptcies or other ineligible receivable amounts. If
the funding under the QSPE's asset-backed securitization program was reduced or
terminated, we would have to draw down our bank credit facility more quickly
than we have estimated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates under our bank credit facility (as executed October 31, 2005)
are variable and are determined, at our option, as the base rate, which is the
greater of prime rate or federal funds rate plus 0.50% plus the base rate
margin, which ranges from 0.00% to 0.50%, or LIBOR plus the LIBOR margin, which
ranges from 0.75% to 1.75%. Accordingly, changes in the prime rate, the federal
funds rate or LIBOR, which are affected by changes in interest rates generally,
will affect the interest rate on, and therefore our costs under, our bank credit
facility. We are also exposed to interest rate risk associated with our interest
only strip and the subordinated securities we receive from our sales of
receivables to the QSPE.
We held interest rate swaps and collars with notional amounts totaling $20.0
million which expired on April, 15 2005. The swaps and collars were held for the
purpose of hedging against variable interest rate risk, primarily related to
cash flows from our interest-only strip as well as our variable rate debt. There
have been no material changes in our interest rate risks since January 31, 2006.
33
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of our disclosure controls and
procedures (as defined in 15d-15(e) of the Securities Exchange Act of 1934 (the
"Exchange Act") as of the end of the period covered by this quarterly report.
Based on that evaluation, our management, including our Chief Executive Officer
and our Chief Financial Officer, concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to our Company (including its consolidated subsidiaries) required to be
included in our periodic filings with the Securities and Exchange Commission.
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 prior to the completion of the consolidated
financial statement for quarter ended July 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 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.
As described above, we made changes in internal controls over financial
reporting during the quarter ended July 31, 2006, that materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to our business from time
to time. Currently, we do not expect the outcome of any of this routine
litigation to have a material affect on our financial condition or results of
operation. However, the results of these proceedings cannot be predicted with
certainty, and changes in facts and circumstances could impact our estimate of
reserves for litigation.
34
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended January 31, 2006, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 31, 2006, the following
proposals were submitted to stockholders with the following results:
1. Election of nine directors
Number of Shares
-------------------------------------
For Withheld
--------------- -----------------
Marvin D. Brailsford 21,681,563 521,915
Thomas J. Frank, Sr. 21,430,983 772,495
Jon E. M. Jacoby 21,468,729 734,749
Bob L. Martin 21,515,399 688,079
Douglas H. Martin 21,570,630 632,848
Dr. William C. Nylin, Jr. 21,408,662 794,816
Scott L. Thompson 21,679,181 524,297
William T. Trawick 14,907,089 7,296,389
Theodore M. Wright 21,120,181 1,083,297
2. Approval of an amendment to the Amended and Restated 2003 Incentive Stock
Option Plan to increase the number of shares of common stock that may be issued
under the plan from 2,559,767 to 3,859,767.
Number of Shares
-----------------------
For 17,994,641
Against 1,665,663
Abstain 10,271
Broker Nonvotes 2,532,903
3. Approval of an amendment to the 2003 Non-Employee Directors Stock Option Plan
to increase the number of shares of common stock that may be issued under the
plan from 300,000 to 600,000.
Number of Shares
-----------------------
For 17,156,306
Against 2,504,099
Abstain 10,170
Broker Nonvotes 2,532,903
35
Item 5. Other Information
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors since we last provided
disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule
14A.
The Company expects to reinstate the full salaries of three of its named
officers effective September 16, 2006, who voluntarily took a temporary
reduction in their base salary effective August 16, 2006. The three executives
are Thomas J. Frank, Sr., Chairman of the Board of Directors and Chief Executive
Officer, Dr. William C. Nylin, Jr., the Company's Chief Operating Officer and
Executive Vice Chairman of the Board of Directors and Reymundo de la Fuente,
Senior Vice President - Credit. The base salaries will be reinstated fully to
the levels prior to the voluntary reduction.
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are
listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated
herein by reference.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONN'S, INC.
By: /s/ David L. Rogers
-----------------------------------
David L. Rogers
Chief Financial Officer
(Principal Financial Officer and
duly authorized to sign this
report on behalf of the
registrant)
Date: September 15, 2006
37
INDEX TO EXHIBITS
Exhibit Description
Number
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
38
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).
39
10.9.2 First Amendment to Credit Agreement dated August 28, 2006 by and
between Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc.,
the financial institutions listed on the signature pages thereto,
and JPMorgan Chase Bank, as Administrative Agent (incorporated
herein by reference to Exhibit 10.1 to Conn's Inc. Current Report on
Form 8-K (File No. 000-50421) as filed with the Securities and
Exchange Commission on August 28, 2006).
10.10 Receivables Purchase Agreement dated September 1, 2002, by and among
Conn Funding II, L.P., as Purchaser, Conn Appliances, Inc. and CAI,
L.P., collectively as Originator and Seller, and Conn Funding I,
L.P., as Initial Seller (incorporated herein by reference to Exhibit
10.10 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.10.1 First Amendment to Receivables Purchase Agreement dated August 1,
2006, by and among Conn Funding II, L.P., as Purchaser, Conn
Appliances, Inc. and CAI, L.P., collectively as Originator and
Seller (filed herewith).
10.11 Base Indenture dated September 1, 2002, by and between Conn Funding
II, L.P., as Issuer, and Wells Fargo Bank Minnesota, National
Association, as Trustee (incorporated herein by reference to Exhibit
10.11 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.11. 1 First Supplemental Indenture dated October 29, 2004 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on November 4,
2004).
10.11. 2 Second Supplemental Indenture dated August 1, 2006 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on August 23,
2006).
10.12 Series 2002-A Supplement to Base Indenture dated September 1, 2002,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo
Bank Minnesota, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.12 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).
10.12.1 Amendment to Series 2002-A Supplement dated March 28, 2003, by and
between Conn Funding II, L.P. as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.1 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2005 (File No. 000-50421) as filed
with the Securities and Exchange Commission on April 5, 2005).
10.12.2 Amendment No. 2 to Series 2002-A Supplement dated July 1, 2004, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.2 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2005 (File No. 000-50421) as filed
with the Securities and Exchange Commission on April 5, 2005).
10.12.3 Amendment No. 3 to Series 2002-A Supplement. dated August 1, 2006,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo
Bank, National Association, as Trustee (filed herewith).
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).
40
10.13.1 Amendment to Series 2002-B Supplement dated March 28, 2003, by and
between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13.1 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2005 (File No. 000-50421) as filed
with the Securities and Exchange Commission on April 5, 2005).
10.14 Servicing Agreement dated September 1, 2002, by and among Conn
Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and Wells Fargo
Bank Minnesota, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).
10.14.1 First Amendment to Servicing Agreement dated June 24, 2005, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.1 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2005 (File No. 000-50421) as
filed with the Securities and Exchange Commission on August 30,
2005).
10.14.2 Second Amendment to Servicing Agreement dated November 28, 2005,
by and among Conn Funding II, L.P., as 10.14.2 Issuer, CAI, L.P., as
Servicer, and Wells Fargo Bank, National Association, as Trustee
(incorporated herein by reference to Exhibit 10.14.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
December 1, 2005).
10.14.3 Third Amendment to Servicing Agreement dated May 16, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (filed herewith).
10.14.4 Fourth Amendment to Servicing Agreement dated August 1, 2006, by
and among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer,
and Wells Fargo Bank, National Association, as Trustee (filed
herewith).
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).
41
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).
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).
42
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).
10.23 Series 2006-A Supplement to Base Indenture, dated August 1, 2006, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (filed herewith).
11.1 Statement re: computation of earnings per share is included under
Note 1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (incorporated herein by reference to
Exhibit 21 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
(filed herewith).
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.
43
FIRST AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT
THIS FIRST AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT is made effective
as of August 1, 2006 (this "Amendment"), is among CONN FUNDING II, L.P., as
Purchaser ( the "Purchaser") and CONN APPLIANCES, INC. and CAI, L.P., as
originators and sellers (collectively, the "Originator").
BACKGROUND
A. Reference is made to (i) the Receivables Purchase Agreement dated as of
September 1, 2002 (the "Agreement"), among the Purchaser, the Originator
and Conn Funding II, L.P., as initial seller (the "Initial Seller"), (ii)
the Base Indenture dated as of September 1, 2002, between the Issuer and
the Trustee (the "Base Indenture"), (iii) the Series 2002-A Supplement
dated as of September 1, 2002, between the Issuer and the Trustee (the
"2002-A Supplement") and (iv) the Series 2002-B Supplement dated as of
September 1, 2002, between the Issuer and the Trustee (the "2002-B
Supplement") (each of the Base Indenture, the 2002-A Supplement and the
2002-B Supplement, as amended, restated, supplemented or otherwise
modified through the date hereof, and collectively, the "Indenture").
Capitalized terms used herein but not otherwise defined herein have the
meanings assigned thereto in the Agreement or the Indenture.
B. The Initial Seller dissolved as a limited partnership under Texas law on
July 28, 2006.
C. The Originator and the Purchaser desire to amend the Agreement as set
forth in this Amendment (the "Amending Parties").
D. Section 7.3 of the Note Purchase Agreement, dated as of September 13,
2002, among the Purchaser, the Originator, Three Pillars Funding LLC
(f/k/a Three Pillars Funding Corporation) and SunTrust Capital Markets,
Inc., requires the consent of at least 66-2/3% of the aggregate Note
Principal of all of the Purchaser's Series 2002-A Notes (the "Series
2002-A Required Persons") and the Notice Person for the Series 2002-A
Notes for the execution of this Amendment;
E. Section 10.1 of the Agreement requires that this Amendment be executed by
the Purchaser, the Notice Persons of each Series and the Trustee (together
with the Series 2002-A Required Persons, the "Consenting Parties").
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the Amending Parties hereto agree as
follows:
SECTION 1. Amendments to Article V.
(a) Amendment to Section 5.1. Section 5.1 is hereby amended by replacing
each reference to "the Originator" in subsection (a), clauses (i) and (ii)
thereof with "Consolidated Parent".
(b) Amendments to Section 5.2. Section 5.2(h) is hereby amended by
replacing (i) the first use of the word "its" in such Section with "Consolidated
Parent's" and (ii) the word "Originator" in such Section with "Consolidated
Parent".
SECTION 2. Amendment to Section 6.8. Section 6.8 is hereby amended by replacing
the reference to "Charged-off Receivables" in such Section with "Defaulted
Receivables".
SECTION 3. Conditions to Effectiveness. This Amendment shall become effective as
of August 1, 2006 upon (i) the execution and delivery to the Trustee of
this Amendment by (a) the Amending Parties and (b) the Consenting Parties
(which in the case of the Notice Persons for the Purchaser's Series 2002-B
Notes shall be satisfied upon delivery of the confirmation described in
clause (ii)) and (ii) delivery to the Trustee of written confirmation by
the Rating Agencies that this Amendment will not cause the rating of the
Notes to be downgraded or withdrawn.
SECTION 4. Representations and Warranties. Each of the Originator and the
Purchaser represents and warrants upon and as of the effectiveness of this
Amendment that:
(a) no event or condition has occurred and is continuing which would
constitute a Purchase Termination Event or Incipient Purchase Termination Event;
and
(b) after giving effect to this Amendment, its representations and
warranties set forth in the Agreement and the other Transaction Documents to
which it is a party are true and correct as of the date thereof, as though made
on and as of such date (except to the extent such representations and warranties
relate solely to an earlier date and then as of such earlier date), and such
representations and warranties shall continue to be true and correct (to such
extent) after giving effect to the transactions contemplated hereby.
SECTION 5. Effect of Amendment; Ratification. Except as specifically amended
hereby, the Agreement is hereby ratified and confirmed in all respects,
and all of its provisions shall remain in full force and effect. After
this Amendment becomes effective, all references in the Agreement (or in
any other Transaction Document) to "the Purchase Agreement", "this
Agreement", "hereof", "herein", or words of similar effect, in each case
referring to the Agreement, shall be deemed to be references to the
Agreement as amended hereby. This Amendment shall not be deemed to
expressly or impliedly waive, amend, or supplement any provision of the
Agreement other than as specifically set forth herein.
SECTION 6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, and each
counterpart shall be deemed to be an original, and all such counterparts
shall together constitute but one and the same agreement.
SECTION 7. Governing Law. This Amendment shall be governed by, and construed in
accordance with, the internal laws of the State of New York without regard
to any otherwise applicable conflict of laws principles (other than
Section 5-1401 of the New York General Obligations Law).
2
SECTION 8. Successors and Assigns. This Amendment shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 9. Section Headings. The various headings of this Amendment are inserted
for convenience only and shall not affect the meaning or interpretation of
this Amendment or the Agreement or any provision hereof or thereof.
[REMAINDER OF PAGE INTENTIONALLY BLANK; SIGNATURE PAGES FOLLOW]
3
IN WITNESS WHEREOF, the parties have entered into this Amendment to be
effective as of the date first written above.
CONN FUNDING II, L.P., as Purchaser
By: Conn Funding II GP, L.L.C.,
its general partner
By: /s/ David R. Atnip
--------------------------
Name: David R. Atnip
Title: Treasurer
CONN APPLIANCES, INC., as Originator
By: /s/ David R. Atnip
---------------------------------
Name: David R. Atnip
Title: Treasurer
CAI, L.P., as Originator
By: Conn Appliances, Inc.,
its general partner
By: /s/ David R. Atnip
--------------------------
Name: David R. Atnip
Title: Treasurer
4
Consented to by:
WELLS FARGO BANK,
NATIONAL ASSOCIATION,
not in its individual capacity,
but solely as Trustee
By: /s/ Jason Van Vleet
------------------------------------
Name: Jason Van Vleet
Title: Assistant Vice President
SUNTRUST CAPITAL MARKETS, INC.,
as Administrator and Notice Person for the
Series 2002-A Notes
By: /s/ James R. Bennison
------------------------------------
Name: James R. Bennison
Title: Managing Director
THREE PILLARS FUNDING LLC, as Series 2002-A
Required Person
By: /s/ Doris J. Hearn
------------------------------------
Name: Doris J. Hearn
Title: Vice President
| WELLS FARGO BANK, NATIONAL ASSOCIATION, | ||
| not in its individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ Kristen L. Puttin | |
|
Name: Kristen L. Puttin |
||
| Title: Assistant Vice President | ||
| CONN FUNDING II, L.P., as Issuer | ||
| By: Conn Funding II GP, L.L.C., its general partner | ||
| |
|
|
| By: | /s/ David R. Atnip | |
|
Name: David R. Atnip |
||
| Title: Treasurer | ||
| CONSENTED AND AGREED TO BY: | ||
| THREE PILLARS FUNDING LLC | ||
| |
|
|
| By: | ||
|
Name: |
||
| Title: | ||
| SUNTRUST CAPITAL MARKETS, INC., | ||
| as Administrator | ||
| |
|
|
| By: | ||
|
Name: |
||
| Title: | ||
THIRD AMENDMENT TO SERVICING AGREEMENT
THIS THIRD AMENDMENT TO SERVICING AGREEMENT, dated as of May 16, 2006
(this "Amendment"), is among:
(i) CONN FUNDING II, L.P., as the Issuer (the "Issuer");
(ii) CAI, L.P., as the Servicer (the "Servicer"); and
(iii) WELLS FARGO BANK, NATIONAL ASSOCIATION (successor by merger to
Wells Fargo Bank Minnesota, National Association), as the Trustee (the
"Trustee").
BACKGROUND
A. Reference is made to (i) the Servicing Agreement, dated as of September 1,
2002, among the Issuer, the Servicer and the Trustee (as amended,
restated, supplemented or otherwise modified through the date hereof, the
"Agreement"), (ii) the Base Indenture, dated as of September 1, 2002,
between the Issuer and the Trustee (the "Base Indenture"), (iii) the
Series 2002-A Supplement, dated as of September 1, 2002, between the
Issuer and the Trustee (the "2002-A Supplement") and (iv) the Series
2002-B Supplement, dated as of September 1, 2002, between the Issuer and
the Trustee (the "2002-B Supplement") (each of the Base Indenture, the
2002-A Supplement and the 2002-B Supplement, as amended, restated,
supplemented or otherwise modified through the date hereof, and
collectively, the "Indenture"). Capitalized terms used herein but not
otherwise defined herein have the meanings assigned thereto in the
Agreement or the Indenture.
B. The definition of "Post Office Box" in the Servicing Agreement indicates
that there is only one post office box, number 1687, to which Obligors may
make payments in respect of Receivables, whereas Exhibit E to the
Servicing Agreement indicates that there is a second post office box,
number 3845, to which Obligors may make payments in respect of
Receivables.
C. The Servicer believes that the relocation of the Post Office Box from
Beaumont, Texas, a city prone to hurricanes and tropical storms that could
result in prolonged disruption to mail service and thus a delay in the
processing of Collections, into a region less likely to experience a
hurricane or tropical storm that would result in a significant delay in
receipt of mail service is consistent with its duties under Section
2.02(b) of the Servicing Agreement, which requires the Servicer to service
and administer the Receivables by employing such procedures (including
collection procedures) and degree of care, in each case consistent with
prudent industry standards, as are customarily employed by the Servicer in
servicing and administering contracts and notes owned or serviced by the
Servicer comparable to the Receivables.
D. Pursuant to Section 7.01(a) of the Agreement, an amendment may be effected
to the Servicing Agreement without the consent of any Noteholders to cure
any ambiguity and to correct or supplement any provisions in the Servicing
Agreement which may be inconsistent with any other provisions in the
Servicing Agreement.
E. Whereas the definition of Post Office Box in the Servicing Agreement,
which requires that the Post Office Box be number 1687 (located in
Beaumont, Texas), is both ambiguous (as Exhibit E indicates that there is
an additional post office box) and inconsistent with the terms of Section
2.02(b) of the Servicing Agreement (as the Servicer has determined that
its duties as Servicer require it to move the Post Office Box out of a
region susceptible to delayed mail service as a result of hurricanes and
tropical storms).
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Amendment to the Agreement. The defined term "Post Office Box"
is hereby amended and restated as follows:
"Post Office Box" means, collectively, post office box 77704-1687 and post
office box 77704-3845, and, upon notice to Trustee, each other post office
box opened and maintained by the Issuer or the Servicer for the receipt of
Collections from Obligors and governed by a Post Office Box Agreement
reflecting that such post office box is in the name of the Issuer, as any
such post office boxes may be closed from time to time by the Servicer
with prior written notice to the Trustee (provided that (i) there shall at
all times be at least one post office box open to receive Collections,
(ii) the Servicer takes customary and prudent procedures to notify
Obligors to make payments to such post office box and (iii) the closing or
opening of any post office box is consistent with the servicing standard
set forth in Section 2.02(b)(ii)).
SECTION 2. Conditions to Effectiveness. This Amendment shall become
effective as of the date hereof upon the execution and delivery to the Trustee
of this Amendment by each of the parties hereto.
SECTION 3. Representations and Warranties. Each of the Issuer and Servicer
represents and warrants upon and as of the effectiveness of this Amendment that:
(a) no event or condition has occurred and is continuing which would
constitute a Servicer Default or would constitute a Servicer Default but for the
requirement that notice be given or time elapsed or both;
(b) after giving effect to this Amendment, its representations and
warranties set forth in the Agreement and the other Transaction Documents to
which it is a party are true and correct as of the date hereof, as though made
on and as of such date (except to the extent such representations and warranties
relate solely to an earlier date and then as of such earlier date), and such
representations and warranties shall continue to be true and correct (to such
extent) after giving effect to the transactions contemplated hereby; and
(c) this Amendment will not adversely affect in any material respect the
interests of any Noteholder or any Enhancement Provider.
SECTION 4. Effect of Amendment; Ratification. Except as specifically
amended hereby, the Agreement is hereby ratified and confirmed in all respects,
and all of its provisions shall remain in full force and effect. After this
Amendment becomes effective, all references in the Agreement (or in any other
Transaction Document) to "the Servicing Agreement", "this Agreement", "hereof",
"herein", or words of similar effect, in each case referring to the Agreement,
shall be deemed to be references to the Agreement as amended hereby. This
Amendment shall not be deemed to expressly or impliedly waive, amend, or
supplement any provision of the Agreement other than as specifically set forth
herein.
2
SECTION 5. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, and each
counterpart shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same agreement.
SECTION 6. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the internal laws of the State of New York without
regard to any otherwise applicable conflict of laws principles (other than
Section 5-1401 of the New York General Obligations Law).
SECTION 7. Successors and Assigns. This Amendment shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 8. Section Headings. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of this Amendment or the Agreement or any provision hereof or thereof.
[REMAINDER OF PAGE INTENTIONALLY BLANK; SIGNATURE PAGES FOLLOW]
3
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first written above.
CONN FUNDING II, L.P., as Issuer
By: Conn Funding II GP, L.L.C.,
its general partner
By: /s/ David R. Atnip
---------------------------------
Name: David R. Atnip
Title: Treasurer
CAI, L.P., as Servicer
By: Conn Appliances, Inc.,
its general partner
By: /s/ David R. Atnip
---------------------------------
Name: David R. Atnip
Title: Treasurer
WELLS FARGO BANK, NATIONAL
ASSOCIATION, not in its individual
capacity, but solely as Trustee
By: /s/ Kristen L. Puttin
---------------------------------
Name: Kristen L Puttin
Title: Corporate Trust Officer
4
The undersigned, as the sole holder of the Series 2002-A Variable Funding Asset
Backed Floating Rate Notes of Conn Funding II, L.P., does hereby consent to the
Third Amendment to Servicing Agreement dated May 16, 2006, among Conn Funding
II, L.P., CAI, LP and Wells Fargo Bank, National Association.
THREE PILLARS FUNDING CORPORATION
By: /s/ Doris J. Hearn
-----------------------------------
Name: Doris J. Hearn
-----------------------------------
Title: Vice President
-----------------------------------
FOURTH AMENDMENT TO SERVICING AGREEMENT
THIS FOURTH AMENDMENT TO SERVICING AGREEMENT, made effective as of August
1, 2006 (this "Amendment"), is among:
(i) CONN FUNDING II, L.P., as the Issuer (the "Issuer");
(ii) CAI, L.P., as the Servicer (the "Servicer"); and
(iii) WELLS FARGO BANK, NATIONAL ASSOCIATION (successor by merger to
Wells Fargo Bank Minnesota, National Association), as the Trustee (the
"Trustee").
BACKGROUND
A. Reference is made to (i) the Servicing Agreement, dated as of September 1,
2002, among the Issuer, the Servicer and the Trustee (as amended,
restated, supplemented or otherwise modified through the date hereof, the
"Agreement"), (ii) the Base Indenture, dated as of September 1, 2002,
between the Issuer and the Trustee (the "Base Indenture"), (iii) the
Series 2002-A Supplement, dated as of September 1, 2002, between the
Issuer and the Trustee (the "2002-A Supplement") and (iv) the Series
2002-B Supplement, dated as of September 1, 2002, between the Issuer and
the Trustee (the "2002-B Supplement") (each of the Base Indenture, the
2002-A Supplement and the 2002-B Supplement, as amended, restated,
supplemented or otherwise modified through the date hereof, and
collectively, the "Indenture"). Capitalized terms used herein but not
otherwise defined herein have the meanings assigned thereto in the
Agreement or the Indenture.
B. The parties hereto (the "Amending Parties") desire to further amend the
Agreement as reflected in this Amendment.
C. Pursuant to Section 7.01(b) of the Agreement, this amendment requires the
consent of the Required Persons of each outstanding Series.
D. Section 7.3 of the Note Purchase Agreement dated as of September 13, 2002,
among the Issuer, Conn Appliances, Inc., CAI, L.P., Three Pillars Funding
LLC (f/k/a Three Pillars Funding Corporation) and SunTrust Capital
Markets, Inc., in addition to the consent of the Required Persons of the
Series 2002-A Notes, requires that the Rating Agency Condition be
satisfied as a condition precedent to this Amendment.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
SECTION 1. Amendments to Section 2.04(e) of the Agreement. The Agreement
is hereby amended by amending and restating Section 2.04(e) of the Agreement as
follows:
(e) for so long as CAI is the Servicer, the failure of Consolidated Parent
to maintain Consolidated Net Worth of at least $150,000,000.
SECTION 2. Amendment to Exhibit D of the Agreement. Exhibit D of the
Agreement is hereby amended by amendment and restatement of Exhibit D in its
entirety as attached hereto.
SECTION 3. Conditions to Effectiveness. This Amendment shall become
effective as of August 1, 2006, upon (i) the execution and delivery to the
Trustee of this Amendment by each of the parties hereto, (ii) the receipt of the
consent of the Required Persons of each Series and (iii) the satisfaction of the
Rating Agency Condition.
SECTION 4. Representations and Warranties. Each of the Issuer and Servicer
represents and warrants upon and as of the effectiveness of this Amendment that:
(a) no event or condition has occurred and is continuing which would
constitute a Servicer Default or would constitute a Servicer Default but for the
requirement that notice be given or time elapsed or both; and
(b) after giving effect to this Amendment, its representations and
warranties set forth in the Agreement and the other Transaction Documents to
which it is a party are true and correct as of the date thereof, as though made
on and as of such date (except to the extent such representations and warranties
relate solely to an earlier date and then as of such earlier date), and such
representations and warranties shall continue to be true and correct (to such
extent) after giving effect to the transactions contemplated hereby.
SECTION 5. Effect of Amendment; Ratification. Except as specifically
amended hereby, the Agreement is hereby ratified and confirmed in all respects,
and all of its provisions shall remain in full force and effect. After this
Amendment becomes effective, all references in the Agreement (or in any other
Transaction Document) to "the Servicing Agreement", "this Agreement", "hereof",
"herein", or words of similar effect, in each case referring to the Agreement,
shall be deemed to be references to the Agreement as amended hereby. This
Amendment shall not be deemed to expressly or impliedly waive, amend, or
supplement any provision of the Agreement other than as specifically set forth
herein.
SECTION 6. Counterparts. This Amendment may be executed in any number of
counterparts and by different parties on separate counterparts, and each
counterpart shall be deemed to be an original, and all such counterparts shall
together constitute but one and the same agreement.
SECTION 7. Governing Law. This Amendment shall be governed by, and
construed in accordance with, the internal laws of the State of New York without
regard to any otherwise applicable conflict of laws principles (other than
Section 5-1401 of the New York General Obligations Law).
SECTION 8. Successors and Assigns. This Amendment shall be binding upon
and shall inure to the benefit of the parties hereto and their respective
successors and assigns.
SECTION 9. Section Headings. The various headings of this Amendment are
inserted for convenience only and shall not affect the meaning or interpretation
of this Amendment or the Agreement or any provision hereof or thereof.
2
IN WITNESS WHEREOF, the parties have entered into this Amendment to be
effective as of the date first written above.
CONN FUNDING II, L.P., as Issuer
By: Conn Funding II GP, L.L.C.,
its general partner
By: /s/ David R. Atnip
---------------------------------
Name: David R. Atnip
Title: Treasurer
CAI, L.P., as Servicer
By: Conn Appliances, Inc.,
its general partner
By: /s/ David R. Atnip
---------------------------------
Name: David R. Atnip
Title: Treasurer
WELLS FARGO BANK, NATIONAL
ASSOCIATION, not in its individual
capacity, but solely as Trustee
By: /s/ Jason Van Vleet
---------------------------------
Name: Jason Van Vleet
Title: Assistant Vice President
3
The undersigned, as the sole holder of the Series 2002-A Variable Funding Asset
Backed Floating Rate Notes of Conn Funding II, L.P., does hereby consent to the
Fourth Amendment to Servicing Agreement made effective as of August 1, 2006,
among Conn Funding II, L.P., CAI, LP and Wells Fargo Bank, National Association.
THREE PILLARS FUNDING CORPORATION
By: /s/ Doris J. Hearn
------------------------------
Name: Doris J. Hearn
------------------------------
Title: Vice President
------------------------------
EXHIBIT D
Report of Independent Accountants on
Applying Agreed-Upon Procedures
Management
CAI, L.P., as Originator, Servicer, and Custodian
Conn Funding II, L.P., as Issuer
And
Wells Fargo Bank Minnesota,
National Association, as Trustee
And
SunTrust Capital Markets, Inc.
as Administrator for
Three Pillars Funding Corporation, as Conduit Purchaser
We have performed the procedures enumerated on Exhibit A below, which were
agreed to by the management of CAI, L.P. (the Servicer), Wells Fargo Bank
Minnesota, National Association (the Trustee), and SunTrust Capital Markets,
Inc. (the Administrator), solely to assist the specified users, including the
Servicer, the Administrator, Conn Funding II, L.P. (the Issuer), and Three
Pillars Funding Corporation (the Conduit Purchaser), in their evaluation of the
Servicer's obligations during the period from ( ) to ( ), inclusive, under
Section 2.02(e) of the Servicing Agreement among Conn Funding II, L.P., CAI,
L.P., and Wells Fargo Bank Minnesota, National Association, dated as of
September 1, 2002, and in accordance with the Credit Agreement by and among Conn
Appliances, Inc., and the other Borrowers Hereunder, the Lenders Party Hereto,
and JP Morgan Chase Bank, Bank of America, N.A., and SunTrust Bank (the Credit
Agreement) and the Receivables Purchase Agreement dated as of September 1, 2002,
between Conn Funding II, L.P., Conn Appliances, Inc., CAI, L.P., and Conn
Funding I, L.P. (the Purchase Agreement), as amended through ( ) (the
Servicing Agreement). The Servicer is responsible for the accuracy and
completeness of the accompanying Monthly Report. This agreed-upon procedures
engagement was conducted in accordance with attestation standards established by
the American Institute of Certified Public Accountants. The sufficiency of these
procedures is solely the responsibility of the parties specified in this report.
Consequently, we make no representation regarding the sufficiency of the
procedures described below either for the purpose for which this report has been
requested or for any other purpose.
EXHIBIT A
Scope of Services, Limitations, Specific Additional Understandings
For the purposes of our report:
o "Material Exception" is defined by the Administrator as any difference
between actual and reported data in excess of three percent (3%) and not
resulting from the fact that the interest rate per the data file provided
by the Servicer truncates the interest rate to two decimal places.
o "Monthly Report" represents the Monthly Servicer Report (including the
Monthly Fees and Expenses section) and Monthly Report to Noteholders and
related calculations, represented by "Attachment I" to this Agreed-Upon
Procedures Report.
o "FiServ" represents the Servicer's loan servicing system provided by
Fiserv Solutions, Inc., an independent provider of data processing
outsourcing capabilities and related products and services for financial
institutions.
The procedures will be as follows:
Procedure # 1
Using a random number generator select one Monthly Report from the period of
August 2, 2005 through February 1, 2006, inclusive, and perform the following:
1. Recompute the mathematical accuracy of the calculations in the Monthly
Report.
2. Agree data from the Monthly Report to client-prepared analyses and
third-party documents as provided by the Servicer and used in the
compilation of the Monthly Report.
Procedure # 2
Using a random number generator, select a sample of 100 receivable accounts from
the population of receivable accounts in the data file provided by the Servicer,
which the Servicer has represented to us includes all receivable accounts
entered into from August 2, 2005 through February 1, 2006. For each selected
receivable account, obtain the customer account detail per FiServ and the
applicable retail installment contract or revolving charge account application
from the Servicer and perform the following:
1. Compare the total of payments, principal balance, interest rate, financing
fees, term of loan, and social security number from the data file to
FiServ and the applicable retail installment contract or revolving charge
account application.. For any accounts where the original terms being
reviewed on the original contract are different than terms in FiServ,
review related documented evidence of the written authority of the change
and the applicable Section of the Company's Credit and Collection Policy,
as identified by the Servicer, or such other document as provided by the
Servicer authorizing the change;
2
2. Observe that the applicable retail installment contract or revolving
charge account application included in the receivable files had been
stamped as required by Section 5.1. (n) of the Purchase Agreement; and
3. Observe that the customer contract had been segregated and stored as
required by the Servicing Agreement.
Procedure # 3
Inquire of the Servicer whether the Post Office Box Agreement, as required by
the Servicing Agreement, remains in place and is in effect.
Procedure # 4
1. Using a random number generator, select 15 business days during the period
from August 2, 2005 through February 1, 2006, and compare the Daily
Transfer Schedule of Transfers To/ (From) the Concentration Account to the
applicable funds transfer authorization to determine if the Servicer had
transferred all collections to the Conn's Collection Account within two
business days of receipt, in accordance with Section 2.02(c) (iii) of the
Servicing Agreement.
2. Review the applicable bank statements noting that they correspond to the
depository accounts contemplated in Article 5 of the Base Indenture and
the Series A and B Supplements. Obtain evidence that the Servicer has
determined the depository institution has a certificate of deposit rating
of at least P-1 or better by Moody's.
Procedure # 5
Haphazardly select two Transfer Days as defined by Section 5.15(a) of the Series
A Supplement and 5.15(a) of the Series B Supplement and 5.4 (a) and 5.4 (b) of
the Base Indenture. For each of these days, obtain copies of the instructions
given to the Trustee for the allocation of collections to the Finance Charge
Account and compare them to the allocations as detailed in the Monthly Servicer
Report.
Procedure # 6
On one day during the semi-annual period, on an unannounced basis, physically
observe the gathering and processing of payments at the Servicer's Payment
Processing Center and select an unbiased sample of 50 collections received on
that day.
1. Observe that the 50 collections selected for our sample are all Mail
Payments or In-Store Payments as defined by Section 2.02(c) of the
Servicing Agreement.
3
2. Observe that the payments are all addressed either to the Post Office Box
as defined in the Servicing Agreement or to one of the Conn's Appliances,
Inc.'s business locations.
Procedure # 7
Using a random number generator, select a sample of 25 receivable accounts from
the population of receivable accounts which have been Re-aged as of February 1,
2006 included in the data file provided by the Servicer, which the Servicer has
represented to us includes all receivable accounts entered into since inception
of the Purchase Agreement and Servicing Agreement (both September 1, 2002)
through December 31, 2005, and which had been Re-aged as of the date of the
Monthly Report selected for testing in Procedure # 1. Have the Servicer identify
the program under which the accounts were most recently Re-aged. For each of the
25 receivable accounts selected:
1. Based on the program under which the accounts selected for testing were
most recently Re-aged, compare evidence of management's approval for the
Re-aging to the corresponding program required management approval.
2. Compare the total calculated by the Servicer for receivables extended
beyond 12 months to the amount on Line 32, "Receivables extended beyond 12
months," of the Monthly Report selected in Procedure 1 above. Compare the
total calculated by the Servicer for receivables extended by 7 to 12
months to the amount on Line 33, "Receivables extended by 7 to 12 months,"
of the Monthly Report, and found such amount to be in agreement. Compare
the total calculated by the Servicer for receivables extended by up to 6
months to the amount on Line 34, "Receivables extended by up to 6 months,"
of the Monthly Report.
3. For each installment account selected, compare the original maturity date
per the original retail installment contract to the current maturity date
(as of the date) per the FiServ account detail and recompute the number of
months Re-aged by subtracting the original term from the revised term
included in the data file provided by the Servicer. For each revolving
account selected, divided the December 31, 2005, account balance per the
FiServ account detail by the current monthly payment amount (December 31,
2005) per the FiServ account detail, then subtracted 30, to recompute the
number of months Re-aged.
4. Based on the number of months Re-aged, as recomputed in 2. above, note
that the Servicer included the installment or revolving account in the
proper aging bucket.
Procedure #8
Using a random number generator, select a sample of 25 receivable accounts from
the population of receivable accounts in the data file provided to us by the
Servicer, which the Servicer has represented to us includes all receivable
accounts entered into since inception of the Purchase Agreement and Servicing
Agreement (both September 1, 2002) through February 1, 2006, and which were
charged-off during the period from August 2, 2005 through February 1, 2006. For
each of the 25 receivable accounts:
4
1. Identify the reason for the charge-off as indicated in the account detail
per FiServ.
2. Recompute the number of days the contract was contractually past due at
the time of the charge-off by subtracting the payment due date per the
FiServ records from the charge-off date per FiServ records. Recalculate
the number of days the contract was past due and compare that calculation
to FiServ.
3. Recompute the number of days between the last payment on the account and
the date of the charge-off using the customer account details per FiServ.
Procedure # 9
Using a random number generator, select a sample of 25 receivable accounts from
the population of receivable accounts in the data file provided by the Servicer,
which the Servicer has represented to us includes all receivable accounts
entered into since inception of the Purchase Agreement and Servicing Agreement
(both September 1, 2002) through February 1, 2006, and which are part of a
promotional credit program during the period from August 2, 2005 through
February 1, 2006. For each of the 25 receivable accounts, compare the FICO Score
for such obligor as contained in the credit application as provided by the
Servicer, to the score required by guideline of the promotional credit program
established by the Servicer.
Procedure # 10
Through review of an independent third party's website, Moodys.com, note that
the issuing bank of any Servicer Letters of Credit, as contemplated in Section
5.10 of the Base Indenture, is rated, as of the date of the verification, at
least P-1, or equivalent thereof, by Moody's.
Procedure # 11
On one day during the semi-annual period, on an unannounced basis, physically
observe the gathering and processing of returned mail at the Servicer's Payment
Processing Center and select an unbiased sample of 50 pieces of returned mail
received on that day.
1. Observe that the 50 pieces of returned mail selected for our sample were
addressed to the Obligor of a Receivable as defined in Section 1.1 of the
Base Indenture dated September 1, 2002, as it may have been amended.
2. Identify the purpose of the mailing to the Obligor, identify the
procedures performed and the results of the Servicer in locating and
changing the address on the Servicer's electronic records.
5
Procedure # 12
After January 31, 2007 confirm the occurrence of the Servicer's use of an
independent address verification service for a Retail Installment Contract
Receivables with a balance greater than zero, as of the file date selected by
the Servicer and sample the results of the verification by performing the
following procedures:
1. Obtain the statistics of the data file provided by Servicer, which the
Servicer represents was all Retail Installment Contract Receivables with a
balance greater than zero as of the date submitted, to the independent
verification service and note the number of accounts submitted.
2. Review the billing provided by the independent verification service noting
the number of accounts processed and data responses received from the
Servicer.
3. Obtain the data file of responses received from the independent
verification service and compare the record count to count obtained from
the billing data above, and which the Servicer has represented to us
includes all responses received.
4. Using a random number generator, select a sample of 25 responses from the
population of responses in the data file provided by the Servicer. For
each of the 25 responses determine the nature of the response from
documentation provided by the independent verification service to the
Servicer, and the action taken by the Servicer on each by a review of the
electronic records of the Servicer.
6
|
|
||
|
Definitions
|
|
|
|
SECTION
2.
|
Article
3 of the Base Indenture
|
|
|
SECTION
3.
|
Servicing
Compensation
|
|
|
SECTION
4.
|
Cleanup
Call
|
|
|
SECTION
5.
|
Delivery
and Payment for the Notes
|
|
|
SECTION
6.
|
Form
of Delivery of the Notes; Depository; Denominations;
Transfer
|
|
|
|
Provisions
|
|
|
SECTION
7.
|
Article
5 of Base Indenture
|
|
|
SECTION
8.
|
Article
6 of the Base Indenture
|
|
|
SECTION
9.
|
Series
2006-A Pay Out Events
|
|
|
SECTION
10.
|
Article
7 of the Base Indenture
|
|
|
SECTION
11.
|
[Reserved]
|
|
|
SECTION
12.
|
[Reserved]
|
|
|
SECTION
13.
|
Counterparts
|
|
|
SECTION
14.
|
Governing
Law
|
|
|
SECTION
15.
|
Waiver
of Trial by Jury
|
|
|
SECTION
16.
|
No Petition
|
|
|
SECTION
17.
|
Rights
of the Trustee
|
|
|
EXHIBIT
A-1
|
Form
of Restricted Global Note
|
|
|
EXHIBIT
A-2
|
Form
of Temporary Regulation S Global Note
|
|
|
EXHIBIT
A-3
|
Form
of Permanent Regulation S Global Note
|
|
|
EXHIBIT
B-1
|
Form
of Restricted Global Note
|
|
|
EXHIBIT
B-2
|
Form
of Temporary Regulation S Global Note
|
|
|
EXHIBIT
B-3
|
Form
of Permanent Regulation S Global Note
|
|
|
EXHIBIT
C-1
|
Form
of Restricted Global Note
|
|
|
EXHIBIT
C-2
|
Form
of Temporary Regulation S Global Note
|
|
|
EXHIBIT
C-3
|
Form
of Permanent Regulation S Global Note
|
|
|
EXHIBIT
D
|
Form
of Monthly Noteholders’ Statement
|
|
|
EXHIBIT
E-1
|
Form
of Transfer Certificate
|
|
|
EXHIBIT
E-2
|
Form
of Certificate to be Delivered to Exchange Temporary Regulation S
Global
Note for Permanent Regulation S Global Note
|
|
|
EXHIBIT
E-3
|
Form
of Certificate to Transfer from Restricted Global Note to Temporary
Regulation S Global Note
|
|
|
EXHIBIT
E-4
|
Form
of Certificate to Transfer from Restricted Global Note to Permanent
Regulation S Global Note
|
|
|
EXHIBIT
E-5
|
Form
of Certificate to Transfer from Temporary Regulation S Global Note
to
Restricted Global Note
|
|
|
SCHEDULE
1
|
List
of Proceedings
|
|
|
SCHEDULE
2
|
List
of Trade Names
|
|
| CONN FUNDING II, L.P., as Issuer | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | /s/ David R. Atnip | |
|
Name: David R. Atnip |
||
| Title: Treasurer | ||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ Marianna C. Stershic | |
|
Name: Marianna C. Stershic |
||
| Title: Vice President | ||
|
No.
R144A-1
|
$90,000,000
|
|
CUSIP
No. 207415 AD 2
|
|
|
ISIN
US207415AD21
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: _________________________ |
_______________ 1
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Increase
or decrease in principal amount of this Restricted Global Note due
to
exchanges between the Temporary Regulation S Global Note or the Permanent
Regulation S Global Note and this Restricted Global Note
|
Remaining
principal amount of this Restricted Global Note following such exchange,
or redemption or purchase or cancellation
|
Notation
made by or on behalf of the Issuer
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
No.
TREGS-1
|
$90,000,000
|
|
CUSIP
No. U20772 AD 8
|
|
|
ISIN
USU20772AD85
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
_______________ 2
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Part
of principal amount of this Temporary Regulation S Global Note exchanged
for Notes represented by the Permanent Regulation S Global Note or
the
Restricted Global Note, or redeemed or purchased or
cancelled
|
Part
of principal amount of the Regulation S Global Note exchanged for
Notes
represented by this Temporary Regulation S Global Note
|
Remaining
principal amount of this Temporary Regulation S Global Note following
such
exchange, or redemption or purchase or cancellation
|
Amount
of interest paid with delivery of the Permanent Regulation S Global
Note
|
Notation
made by or on behalf of the Issuer
|
||||
|
___________
|
_______________
|
______________
|
_____________
|
_____________
|
_________
|
||||
|
___________
|
_______________
|
______________
|
____________
|
_____________
|
_________
|
||||
|
___________
|
_______________
|
______________
|
____________
|
_____________
|
_________
|
||||
|
No.
REGS-1
|
$90,000,000
|
|
CUSIP
No. U20772 AD 8
|
|
|
ISIN
USU20772AD85
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
_______________ 3
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Increases
or decreases in principal amount of this Permanent Regulation S Global
Note due to exchanges between the Temporary Regulation S Global Note
or
the Restricted Global Note and this Permanent Regulation S Global
Note
|
Remaining
principal amount of this Permanent Regulation S Global Note following
such
exchange, or redemption or purchase or cancellation
|
Notation
made by or on behalf of the Issuer
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
No.
R144A-1
|
$43,333,000
|
|
CUSIP
No. 207415 AE 0
|
|
|
ISIN
US207415AE04
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
_______________ 4
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Increase
or decrease in principal amount of this Restricted Global Note due
to
exchanges between the Temporary Regulation S Global Note or the Permanent
Regulation S Global Note and this Restricted Global Note
|
Remaining
principal amount of this Restricted Global Note following such exchange,
or redemption or purchase or cancellation
|
Notation
made by or on behalf of the Issuer
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
No.
TREGS
|
$43,333,000
|
|
CUSIP
No. U20772 AE 6
|
|
|
ISIN
USU20772AE68
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
_______________ 5
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Part
of principal amount of this Temporary Regulation S Global Note exchanged
for Notes represented by the Permanent Regulation S Global Note or
the
Restricted Global Note, or redeemed or purchased or
cancelled
|
Part
of principal amount of the Regulation S Global Note exchanged for
Notes
represented by this Temporary Regulation S Global Note
|
Remaining
principal amount of this Temporary Regulation S Global Note following
such
exchange, or redemption or purchase or cancellation
|
Amount
of interest paid with delivery of the Permanent Regulation S Global
Note
|
Notation
made by or on behalf of the Issuer
|
|||
|
___________
|
_______________
|
______________
|
______________
|
_____________
|
_____________
|
|||
|
___________
|
_______________
|
______________
|
______________
|
_____________
|
_____________
|
|||
|
___________
|
_______________
|
______________
|
______________
|
_____________
|
_____________
|
|||
|
No.
REGS-1
|
$43,333,000
|
|
CUSIP
No. U20772 AE 6
|
|
|
ISIN
USU20772AE68
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
______________ 6
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Increases
or decreases in principal amount of this Permanent Regulation S Global
Note due to exchanges between the Temporary Regulation S Global Note
or
the Restricted Global Note and this Permanent Regulation S Global
Note
|
Remaining
principal amount of this Permanent Regulation S Global Note following
such
exchange, or redemption or purchase or cancellation
|
Notation
made by or on behalf of the Issuer
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
No.
R144A-1
|
$16,667,000
|
|
CUSIP
No. 207415 AF 7
|
|
|
ISIN
US207415AF78
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
_______________ 7
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Increase
or decrease in principal amount of this Restricted Global Note due
to
exchanges between the Temporary Regulation S Global Note or the Permanent
Regulation S Global Note and this Restricted Global Note
|
Remaining
principal amount of this Restricted Global Note following such exchange,
or redemption or purchase or cancellation
|
Notation
made by or on behalf of the Issuer
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
__________
|
________________
|
_____________
|
_____________
|
|||
|
No.
TREGS-1
|
$16,667,000
|
|
CUSIP
No. U20772 AF 3
|
|
|
ISIN
USU20772AF34
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
_______________ 8
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Part
of principal amount of this Temporary Regulation S Global Note exchanged
for Notes represented by the Permanent Regulation S Global Note or
the
Restricted Global Note, or redeemed or purchased or
cancelled
|
Part
of principal amount of the Regulation S Global Note exchanged for
Notes
represented by this Temporary Regulation S Global Note
|
Remaining
principal amount of this Temporary Regulation S Global Note following
such
exchange, or redemption or purchase or cancellation
|
Amount
of interest paid with delivery of the Permanent Regulation S Global
Note
|
Notation
made by or on behalf of the Issuer
|
|||||
|
___________
|
_______________
|
______________
|
______________
|
_____________
|
_____________
|
|||||
|
___________
|
_______________
|
______________
|
______________
|
_____________
|
_____________
|
|||||
|
___________
|
_______________
|
______________
|
______________
|
_____________
|
_____________
|
|||||
|
No.
REGS-1
|
$16,667,000
|
|
CUSIP
No. US0772 AF 3
|
|
|
ISIN
USU20772AF34
|
| CONN FUNDING II, L.P. | ||
| |
|
|
| By: | Conn Funding II GP, L.L.C., | |
| its general partner | ||
| |
|
|
| By: | ||
|
Authorized Officer |
||
| Attested to: | |||
| By: | |||
|
Authorized Officer |
|||
| WELLS FARGO BANK, NATIONAL ASSOCIATION, not in its | ||
| individual capacity, but solely as Trustee | ||
| |
|
|
| By: | /s/ | |
|
Authorized
Officer
|
||
| Dated: |
_______________ 9
|
|
|
Signature
Guaranteed:
|
||
|
Date
of exchange, or redemption or purchase or cancellation
|
Increases
or decreases in principal amount of this Permanent Regulation S Global
Note due to exchanges between the Temporary Regulation S Global Note
or
the Restricted Global Note and this Permanent Regulation S Global
Note
|
Remaining
principal amount of this Permanent Regulation S Global Note following
such
exchange, or redemption or purchase or cancellation
|
Notation
made by or on behalf of the Issuer
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
__________
|
______________
|
_____________
|
_____________
|
|||
|
To:
|
Wells
Fargo Bank, National Association,
|
| as Trustee and Registration and Transfer Agent |
| MAC N9311-161 |
| 6th and Marquette |
| Minneapolis, Minnesota 55479-0700 |
| Attention: Corporate Trust Services/Asset-Backed Administration |
|
Re:
|
Conn
Funding II, L.P.-[__]% Asset Backed
|
| Fixed Rate Notes, Class [__], Series 2006-A (CUSIP No. [_________]) |
|
o book-entry
or
|
|
o definitive
form
|
| [INSERT NAME OF TRANSFEROR] | ||
| |
|
|
| Date: | By: | |
|
Name: |
||
| Title | ||
| Yours faithfully, | ||
| [Euroclear/Clearstream], | ||
| |
|
|
| By: | ||
|
Name: |
||
| Title | ||
|
Re:
|
Conn
Funding II, L.P. —[__]% Asset
Backed
|
| Very truly yours, | ||
| [NAME OF HOLDER] | ||
| |
|
|
| By: | ||
|
Authorized Signature |
||
| Dated: _______________, [_______] | ||
|
Re:
|
Conn
Funding II, L.P. (the “Issuer”)
|
| [__]% Asset Backed Fixed Rate |
| Notes, Class [__], Series 2006-A (CUSIP No. [_______]) (the “Notes”) |
| (1) | the offer of the Class [__] Notes was not made to a person in the United States; |
|
(2)
|
(A)
|
at
the time the buy order was originated, the transferee was outside
the
United States or the Transferor and any person acting on its behalf
reasonably believed and believes that the transferee was outside
the
United States, or
|
|
(B)
|
the
transaction was executed in, on or through the facilities of a designated
offshore securities market and neither the Transferor nor any person
acting on its behalf knows that the transaction was prearranged with
a
buyer in the United States;
|
| [INSERT NAME OF TRANSFEROR] | ||
| |
|
|
| By: | ||
|
Name: |
||
| Title | ||
|
Re:
|
Conn
Funding II, L.P. (the “Issuer”)
|
| [__]% Asset Backed Fixed Rate |
| Notes, Class [__], Series 2006-A (CUSIP No. [____]) (the “Notes”) |
|
(2)
|
(A)
|
at
the time the buy order was originated, the transferee was outside
the
United States or the Transferor and any person acting on its behalf
reasonably believed and believes that the transferee was outside
the
United States, or
|
|
(B)
|
the
transaction was executed in, on or through the facilities of a designated
offshore securities market and neither the Transferor nor any person
acting on its behalf knows that the transaction was prearranged with
a
buyer in the United States;
|
| [INSERT NAME OF TRANSFEROR] | ||
| |
|
|
| By: | ||
|
Name: |
||
| Title | ||
|
Re:
|
Conn
Funding II, L.P. (the “Issuer”)
|
| [__]% Asset Backed Fixed Rate |
| Notes, Class [__], Series 2006-A (CUSIP No. [_____]) (the “Notes”) |
| [INSERT NAME OF TRANSFEROR] | ||
| |
|
|
| By: | ||
|
Name: |
||
| Title | ||
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF EXECUTIVE OFFICER)
I, Thomas J. Frank, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ Thomas J. Frank, Sr.
------------------------
Thomas J. Frank, Sr.
Chairman of the Board
and Chief Executive Officer
Date: September 15, 2006
44
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF FINANCIAL OFFICER)
I, David L. Rogers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ David L. Rogers
--------------------
David L. Rogers
Chief Financial Officer
Date: September 15, 2006
45
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company")
on Form 10-Q for the period ended July 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.
46
EXHIBIT 99.1
SUBCERTIFICATION OF CHIEF OPERATING OFFICER IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, William C. Nylin Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ William C. Nylin, Jr.
-------------------------------------
William C. Nylin, Jr.
Executive Vice-Chairman of the Board and
Chief Operating Officer
Date: September 15, 2006
47
EXHIBIT 99.2
SUBCERTIFICATION OF TREASURER IN SUPPORT OF RULE
13a-14(a)/15d-14(a) CERTIFICATION (CHIEF FINANCIAL OFFICER)
I, David R. Atnip, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
/s/ David R. Atnip
-------------------------------
David R. Atnip
Senior Vice President and Treasurer
Date: September 15, 2006
48
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:
6. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
7. 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;
8. 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;
9. 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
10. 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
49
EXHIBIT 99.4
SUBCERTIFICATION OF CHIEF OPERATING OFFICER,
TREASURER AND SECRETARY IN SUPPORT OF
18 U.S.C. SECTION 1350 CERTIFICATION,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company") on
Form 10-Q for the period ended July 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.
Executive Vice-Chairman of the Board and
Chief Operating Officer
/s/ David R. Atnip
------------------------------------------
David R. Atnip
Senior Vice President and Treasurer
/s/ Sydney K. Boone, Jr.
------------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
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.
50