UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2007
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 (I.R.S. Employer
incorporation or organization) Identification Number)
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 27, 2007:
Class Outstanding
- ---------------------------------------- -----------------------
Common stock, $.01 par value per share 23,969,814
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements..............................................1
- -------
Consolidated Balance Sheets as of January 31, 2007 and
October 31, 2007................................................1
Consolidated Statements of Operations for the three and
nine months ended October 31, 2006 and 2007.....................2
Consolidated Statement of Stockholders' Equity for the
nine months ended October 31, 2007..............................3
Consolidated Statements of Cash Flows for the nine months
ended October 31, 2006 and 2007.................................4
Notes to Consolidated Financial Statements........................5
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- and Results of Operations......................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......31
- -------
Item 4. Controls and Procedures..........................................31
- -------
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings................................................32
- -------
Item 1A. Risk Factors.....................................................32
- --------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......32
- -------
Item 4. Submission of Matters to a Vote of Security Holders..............33
- -------
Item 5. Other Information................................................33
- -------
Item 6. Exhibits.........................................................33
- -------
SIGNATURE .................................................................34
i
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets January 31, October 31,
2007 2007
------------- -------------
Current assets (unaudited)
Cash and cash equivalents....................... $ 56,570 $ 23,045
Accounts receivable, net........................ 31,448 35,759
Interests in securitized assets................. 136,848 165,236
Inventories..................................... 87,098 97,466
Deferred income taxes........................... 551 2,652
Prepaid expenses and other assets............... 5,247 4,573
------------- -------------
Total current assets.......................... 317,762 328,731
Non-current deferred income tax asset............. 2,920 -
Property and equipment
Land............................................ 9,102 8,011
Buildings....................................... 13,896 13,083
Equipment and fixtures.......................... 13,650 16,672
Transportation equipment........................ 3,022 2,825
Leasehold improvements.......................... 66,761 69,643
------------- -------------
Subtotal...................................... 106,431 110,234
Less accumulated depreciation................... (46,991) (54,872)
------------- -------------
Total property and equipment, net............. 59,440 55,362
Goodwill, net..................................... 9,617 9,617
Debt issuance costs and other assets, net......... 208 167
------------- -------------
Total assets.................................. $ 389,947 $ 393,877
============= =============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt............... $ 110 $ 111
Accounts payable................................ 54,045 43,609
Accrued compensation and related expenses....... 9,234 9,073
Accrued expenses................................ 20,424 23,785
Income taxes payable............................ 3,693 416
Deferred revenues and allowances................ 9,516 13,808
------------- -------------
Total current liabilities..................... 97,022 90,802
Long-term debt.................................... 88 28
Non-current deferred income tax liability......... - 123
Deferred gains on sales of property............... 309 1,314
Stockholders' equity
Preferred stock ($0.01 par value, 1,000,000
shares authorized; none issued or outstanding) - -
Common stock ($0.01 par value, 40,000,000 shares
authorized; 23,809,522 and 23,969,814 shares
issued at January 31, 2007 and October 31,
2007, respectively)............................ 238 240
Additional paid-in capital...................... 93,365 97,235
Accumulated other comprehensive income.......... 6,305 -
Retained earnings............................... 196,417 228,672
Treasury stock, at cost, 168,000 and 1,041,185
shares, respectively........................... (3,797) (24,537)
------------- -------------
Total stockholders' equity.................... 292,528 301,610
------------- -------------
Total liabilities and stockholders' equity.. $ 389,947 $ 393,877
============= =============
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------ ------------------------
2006 2007 2006 2007
----------- ----------- ----------- -----------
Revenues
Product sales.......................................... $ 139,594 $ 155,657 $ 448,750 $ 486,089
Service maintenance agreement commissions, net......... 6,845 8,336 21,875 26,688
Service revenues....................................... 5,951 6,059 17,107 17,641
----------- ----------- ----------- -----------
Total net sales...................................... 152,390 170,052 487,732 530,418
Finance charges and other.............................. 21,303 19,314 60,353 67,785
----------- ----------- ----------- -----------
Total revenues....................................... 173,693 189,366 548,085 598,203
Cost and expenses
Cost of goods sold, including warehousing
and occupancy costs................................... 110,627 125,359 356,112 390,007
Cost of parts sold, including warehousing
and occupancy costs................................... 1,834 2,257 4,788 6,246
Selling, general and administrative expense............ 49,701 54,760 144,790 161,129
Provision for bad debts................................ 526 582 959 1,490
----------- ----------- ----------- -----------
Total cost and expenses.............................. 162,688 182,958 506,649 558,872
----------- ----------- ----------- -----------
Operating income......................................... 11,005 6,408 41,436 39,331
Interest income, net..................................... (141) (110) (512) (601)
Other income, net........................................ (19) (34) (773) (920)
----------- ----------- ----------- -----------
Income before income taxes............................... 11,165 6,552 42,721 40,852
Provision for income taxes............................... 4,011 2,531 15,074 14,228
----------- ----------- ----------- -----------
Net income............................................... $ 7,154 $ 4,021 $ 27,647 $ 26,624
=========== =========== =========== ===========
Earnings per share
Basic.................................................. $ 0.30 $ 0.17 $ 1.17 $ 1.14
Diluted................................................ $ 0.30 $ 0.17 $ 1.14 $ 1.11
Average common shares outstanding
Basic.................................................. 23,698 23,077 23,658 23,375
Diluted................................................ 24,165 23,550 24,318 23,907
See notes to consolidated financial statements.
2
Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended October 31, 2007
(unaudited)
(in thousands, except descriptive shares)
Accum.
Other
Common Stock Compre- Additional
------------------------ hensive Paid-in Retained Treasury
Shares Amount Income Capital Earnings Stock Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance January 31, 2007.............. 23,810 $ 238 $ 6,305 $ 93,365 $ 196,417 $ (3,797) $ 292,528
Cumulative effect of changes
in accounting principles............. (6,305) 5,631 (674)
Exercise of options to
acquire shares of common stock,
incl. tax benefit.................... 151 2 1,866 1,868
Issuance of shares of common stock
under Employee Stock Purchase Plan... 9 185 185
Stock-based compensation.............. 1,819 1,819
Purchase of 873,185 shares of
treasury stock....................... (20,740) (20,740)
Net income............................ 26,624 26,624
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance October 31, 2007.............. 23,970 $ 240 $ - $ 97,235 $ 228,672 $ (24,537) $ 301,610
=========== =========== =========== =========== =========== =========== ===========
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
Nine Months Ended
October 31,
-----------------------------
2006 2007
------------- -------------
Cash flows from operating activities
Net income...................................... $ 27,647 $ 26,624
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation.................................. 9,292 9,421
Amortization.................................. (336) (545)
Provision for bad debts....................... 959 1,490
Stock-based compensation...................... 1,008 1,819
Discounts on promotional credit............... 1,001 742
Gains recognized on sales of receivables...... (14,182) (20,318)
Decrease in fair value of interests in
securitized assets........................... - 4,346
Provision for deferred income taxes........... 292 (788)
Gains from sales of property and equipment.... (773) (920)
Changes in operating assets and liabilities:
Accounts receivable........................... 14,728 (18,956)
Inventory..................................... (3,237) (10,368)
Prepaid expenses and other assets............. (1,436) 674
Accounts payable.............................. (8,634) (10,436)
Accrued expenses.............................. (8,392) 3,200
Income taxes payable.......................... (8,148) (1,173)
Deferred revenue and allowances.............. 1,301 3,578
------------- -------------
Net cash provided by (used in) operating
activities....................................... 11,090 (11,610)
------------- -------------
Cash flows from investing activities
Purchase of property and equipment.............. (15,681) (12,043)
Proceeds from sales of property................. 2,272 8,897
------------- -------------
Net cash used in investing activities............. (13,409) (3,146)
------------- -------------
Cash flows from financing activities
Proceeds from stock issued under employee
benefit plans.................................. 1,695 2,053
Purchase of treasury stock...................... (684) (20,740)
Excess tax benefits from stock-based
compensation................................... 196 2
Borrowings under lines of credit................ 13,400 5,200
Payments on lines of credit..................... (13,400) (5,200)
Borrowings under promissory notes............... 208 -
Payment of promissory notes..................... (145) (84)
------------- -------------
Net cash provided by (used in) financing
activities....................................... 1,270 (18,769)
------------- -------------
Net change in cash................................ (1,049) (33,525)
Cash and cash equivalents
Beginning of the year........................... 45,176 56,570
------------- -------------
End of period................................... $ 44,127 $ 23,045
============= =============
See notes to consolidated financial statements.
4
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
October 31, 2007
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three and nine month
periods ended October 31, 2007, are not necessarily indicative of the results
that may be expected for the year ending January 31, 2008. The financial
statements should be read in conjunction with the Company's (as defined below)
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K filed on March 29, 2007.
The Company's balance sheet at January 31, 2007, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial presentation. Please see the
Company's Form 10-K for the fiscal year ended January 31, 2007, for a complete
presentation of the audited financial statements at that date, together with all
required footnotes, and for a complete presentation and explanation of the
components and presentations of the financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and all of its wholly-owned subsidiaries (the
Company). All material intercompany transactions and balances have been
eliminated in consolidation.
The Company enters into securitization transactions to sell its retail
installment and revolving customer receivables and retains servicing
responsibilities and subordinated interests. These securitization transactions
are accounted for as sales in accordance with Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, as amended by SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, because the Company has relinquished
control of the receivables. Additionally, the Company has transferred the
receivables to a qualifying special purpose entity (QSPE). Accordingly, neither
the transferred receivables nor the accounts of the QSPE are included in the
consolidated financial statements of the Company. The Company's retained
interest in the transferred receivables is valued under the requirements of SFAS
No. 159, The Fair Value Option for Financial Assets and Liabilities, and SFAS
No. 157, Fair Value Measurements.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. See the
discussion under Note 2 regarding the change in the discount rate used in the
Company's valuation of its Interests in securitized assets.
5
Earnings Per Share. In accordance with SFAS No. 128, Earnings per Share, the
Company calculates basic earnings per share by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
include the dilutive effects of any stock options granted, as calculated under
the treasury-stock method. The following table sets forth the shares outstanding
for the earnings per share calculations:
Three Months Ended
October 31,
----------------------------
2006 2007
------------- -------------
Common stock outstanding, net of treasury stock, beginning of
period............................................................ 23,697,318 23,464,538
Weighted average common stock issued in stock option exercises..... 15,100 1,100
Weighted average common stock issued to employee stock purchase
plan.............................................................. 1,184 1,109
Weighted average number of restricted shares forfeited............. - (1,141)
Less: Weighted average treasury shares purchased................... (15,185) (389,056)
------------- -------------
Shares used in computing basic earnings per share.................. 23,698,417 23,076,550
Dilutive effect of stock options, net of assumed repurchase of
treasury stock.................................................... 466,741 473,808
------------- -------------
Shares used in computing diluted earnings per share................ 24,165,158 23,550,358
============= =============
Nine Months Ended
October 31,
----------------------------
2006 2007
------------- -------------
Common stock outstanding, net of treasury stock, beginning of
period............................................................ 23,571,564 23,641,522
Weighted average common stock issued in stock option exercises..... 87,919 85,344
Weighted average common stock issued to employee stock purchase
plan.............................................................. 3,282 4,180
Weighted average number of restricted shares forfeited............. - (385)
Less: Weighted average treasury shares purchased................... (5,117) (355,389)
------------- -------------
Shares used in computing basic earnings per share.................. 23,657,648 23,375,272
Dilutive effect of stock options, net of assumed repurchase of
treasury stock.................................................... 659,870 532,176
------------- -------------
Shares used in computing diluted earnings per share................ 24,317,518 23,907,448
============= =============
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 October 31, 2006 and 2007,
Product sales were reduced by $1.7 million and $1.5 million, respectively, and
Finance charges and other was increased by $0.8 million and $1.5 million,
respectively, to effect the adjustment to fair value and to reflect the
appropriate amortization of the discount. For the nine months ended October 31,
2006 and 2007, Product sales were reduced by $3.3 million and $5.1 million,
respectively, and Finance charges and other was increased by $2.3 million and
$4.3 million, respectively, to effect the adjustment to fair value and to
reflect the appropriate amortization of the discount.
Texas Tax Law Changes. On May 18, 2006, the Governor of Texas signed a tax
bill that modified the existing franchise tax, with the most significant change
being the replacement of the existing base with a tax based on margin. Taxable
margin is generally defined as total federal tax revenues minus the greater of
(a) cost of goods sold or (b) compensation. The tax rate to be paid by retailers
and wholesalers is 0.5% on taxable margin. This will result in an increase in
taxes paid by the Company, as franchise taxes paid have totaled less than
$50,000 per year for the last several years.
During June 2007, the Company completed a reorganization to simplify its
legal entity structure by merging certain of its Texas limited partnerships into
their corporate partners. The reorganization also resulted in the one-time
elimination of the Texas margin tax owed by those partnerships, representing
virtually all of the margin tax owed by the Company. Accordingly, the Company
reversed approximately $0.9 million of accrued Texas margin tax as of June 2007,
net of federal income tax. The Company began accruing the margin tax for the
entities that acquired the operations through the mergers in July 2007.
6
Sale and Leaseback Transactions. During the nine months ended October 31,
2007, the Company completed transactions involving certain real estate assets
that qualify for sales-leaseback treatment. As a result, a portion of the gains
resulting from the transactions are being deferred and amortized as a reduction
of rent expense on a straight-line basis over the minimum lease term. The
deferred gains of $1.3 million recorded during the nine months ended October 31,
2007, are included in Deferred gains on sales of property.
Sales Taxes. The Company records and reports all sales taxes collected on a
net basis in the financial statements.
Reclassifications. Certain reclassifications have been made in the prior
year's financial statements to conform to the current year's presentation.
2. Adoption of New Accounting Pronouncements
On February 1, 2007, the Company was required to adopt SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments. Among other things, this
statement establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation. Additionally, the Company had the option to choose to early adopt
the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. Essentially, the Company had to decide between
bifurcation of the embedded derivative and the fair value option in determining
how it would account for its Interests in securitized assets. The Company
elected to early adopt SFAS No. 159 because it believes it provides a more
easily understood presentation for financial statement users. Historically, the
Company had valued and reported its interests in securitized assets at fair
value, though most changes in the fair value were recorded in Other
comprehensive income. The fair value option simplifies the treatment of changes
in the fair value of the asset, by reflecting all changes in the fair value of
its Interests in securitized assets in current earnings, in Finance charges and
other, beginning February 1, 2007. SFAS Nos. 155 and 159 do not allow for
retrospective application of these changes in accounting principle and, as such,
no adjustments have been made to the amounts disclosed in the financial
statements for periods ending prior to February 1, 2007. However, the balance in
Other comprehensive income, as of January 31, 2007, of $6.3 million, which
represented unrecognized gains on the fair value of the Interests in securitized
assets, was included in a cumulative-effect adjustment that was recorded in
Retained earnings, effective February 1, 2007.
Because of its adoption of SFAS No. 159, effective February 1, 2007, the
Company was required to adopt the provisions of SFAS No. 157, Fair Value
Measurements. This statement establishes a framework for measuring fair value
and defines fair value as "the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date." The Company estimates the fair value of
its Interests in securitized assets using a discounted cash flow model with most
of the inputs used being unobservable inputs. The primary unobservable inputs,
which are derived principally from the Company's historical experience, with
input from its investment bankers and financial advisors, include the estimated
portfolio yield, credit loss rate, discount rate, payment rate and delinquency
rate and reflect the Company's judgments about the assumptions market
participants would use in determining fair value. In determining the cost of
borrowings, the Company uses current actual borrowing rates, and adjusts them,
as appropriate, using interest rate futures data from market sources to project
interest rates over time. Changes in the assumptions over time, including
varying credit portfolio performance, market interest rate changes, market
participant risk premiums required, or a shift in the mix of funding sources,
could result in significant volatility in the fair value of the Interest in
securitized assets, and thus the earnings of the Company.
For the three and nine months ended October 31, 2007, Finance charges and
other included non-cash decreases in the fair value our interests in securitized
assets of $4.0 million and $4.3 million, respectively, reflecting primarily a
higher risk premium added to the discount rate assumption resulting from the
volatility in the financial markets, plus adjustments for other changes in the
fair value assumptions, partially offset by lower interest rates, including the
risk-free interest rate (see reconciliation of the balance of Interests in
securitized assets below). During the three month period ended October 31, 2007,
returns required by market participants on many investments increased
7
significantly as a result of disruption in the asset-backed securities markets
due to increased losses and delinquencies on sub-prime real estate mortgages.
Though the Company does not anticipate any significant variation from the
current earnings and cash flow performance of the securitized credit portfolio,
it increased the risk premium included in the discount rate assumption used in
the determination of the fair value of its interests in securitized assets to
reflect the higher estimated return on investment it believes a market
participant would require if purchasing the asset. Based on a review of the
changes in market risk premiums during the three months ended October 31, 2007,
and discussions with its investment bankers and financial advisors, the Company
estimated that a market participant would require an approximately 300 basis
point increase in the required return. As a result, the Company increased the
weighted average discount rate assumption from 14.3% at July 31, 2007, to 16.4%
at October 31, 2007, after reflecting a 90 basis point decrease in the risk-free
interest rate included in the discount rate assumption. This change in estimate
for the risk premium on the discount rate, net of the change in the risk-free
rate, resulted in a charge to pretax income of $3.7 million, a charge to net
income of $2.4 million, and reduced basic and diluted earnings per share by
$0.10, for the three and nine months ended October 31, 2007. If the credit
operations perform in-line with the assumptions for losses, borrowing costs and
the other portfolio related assumptions, none of which have changed
significantly from those used at July 31, 2007, this increase in the discount
rate will have the effect of deferring income to future periods, but not
permanently reducing securitization income or the earnings of the Company. The
deferred earnings will be recognized in future periods as interest income on the
Interests in securitized assets as the actual cash flows on the receivables are
realized. If a market participant were to require a return on investment that is
100 basis points higher than estimated in the Company's calculation, the fair
value of its interests in securitized assets would be decreased by an additional
$1.7 million. The Company will continue to monitor financial market conditions
and, each quarter, as it reassesses the assumptions used may adjust its
assumptions of the return a market participant will require up or down. As the
discount rate or other assumptions change, the Company expects to record
additional non-cash gains or losses in future periods.
8
The following is a reconciliation of the beginning and ending balances of
the Interests in securitized assets for the three and nine months ended October
31, 2007 (in thousands):
Balance of Interests in securitized assets at July 31, 2007...... $ 166,130
Amounts recorded in Finance charges and other:
Fair value increase associated with change in portfolio
balances.................................................... 118
Fair value increase due to changing portfolio yield.......... 17
Fair value increase due to lower projected interest rates.... 267
Fair value decrease due to changes in funding mix............ (492)
Fair value decrease due to higher portfolio turnover rate.... (191)
Fair value increase due to change in risk-free interest rate
component of discount rate.................................. 1,367
Fair value decrease due to higher risk premium included in
discount rate............................................... (5,034)
Other changes................................................ (51)
-------------
Net Losses included in Finance charges and other............. (3,999)
Change in balance of subordinated security and equity interest
due to transfers of receivables................................. 3,105
-------------
Balance of Interests in securitized assets at October 31, 2007... $ 165,236
=============
Balance of Interests in securitized assets at January 31, 2007... $ 136,848
Amounts recorded in Finance charges and other:
Fair value increase associated with change in portfolio
balances.................................................... 727
Fair value increase due to change in portfolio yield......... 221
Fair value increase due to lower projected interest rates.... 463
Fair value decrease due to higher expected funding mix....... (1,778)
Fair value decrease due to higher portfolio turnover rate.... (634)
Fair value increase due to change in risk-free interest rate
component of discount rate.................................. 1,772
Fair value decrease due to higher risk premium included in
discount rate............................................... (5,034)
Other changes................................................ (83)
-------------
Net Losses included in Finance charges and other............. (4,346)
Change in balance of subordinated security and equity interest
due to transfers of receivables................................. 32,734
-------------
Balance of Interests in securitized assets at October 31, 2007... $ 165,236
=============
Effective February 1, 2007, the Company was required to adopt the provisions
SFAS No. 156, Accounting for Servicing of Financial Assets, an Amendment of FASB
Statement No. 140. This statement requires companies to measure servicing assets
or servicing liabilities at fair value at each reporting date and report changes
in fair value in earnings in the period the changes occur, or amortize servicing
assets or servicing liabilities in proportion to and over the estimated net
servicing income or loss and assess servicing assets or servicing liabilities
for impairment or increased obligation based on the fair value at each reporting
date. The Company receives a servicing fee each month equal to 0.25% of the
average outstanding sold portfolio balance, plus late fees and other customer
fees collected. Servicing fees collected during the three months ended October
31, 2006 and 2007, totaled $5.3 million and $6.2 million, respectively, and are
reflected in Finance charges and other. Servicing fees collected during the nine
months ended October 31, 2006 and 2007, totaled $15.4 million and $17.9 million,
9
respectively, and are reflected in Finance charges and other. In connection with
the adoption of SFAS No. 156 the Company elected to measure its servicing asset
or liability at fair value, and report changes in the fair value in earnings in
the period of change. As such, a $0.7 million cumulative-effect adjustment was
recorded to Retained earnings at February 1, 2007, net of related tax effects,
to recognize a $1.1 million servicing liability. The Company uses a discounted
cash flow model to estimate its servicing liability using the portfolio
performance and discount rate assumptions discussed above, and an estimate of
the servicing fee a market participant would require to service the portfolio.
In developing its estimate, based on the provisions of SFAS No. 157, the Company
reviewed available information regarding the servicing fees received by other
companies and estimated an expected risk premium a market participant would add
to the current fee structure to receive adequate compensation. During the three
and nine months ended October 31, 2007, the Company recorded $15,000 of income
and $45,000 of expense, respectively, in Finance charges and other.
Effective February 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
109 (FIN 48). This statement clarifies the criteria that an individual tax
position must satisfy for some or all of the benefits of that position to be
recognized in a company's financial statements. FIN 48 prescribes a recognition
threshold of more-likely-than-not, and a measurement attribute for all tax
positions taken or expected to be taken on a tax return, in order to be
recognized in the financial statements. No cumulative adjustment was required to
effect the adoption of FIN 48 and the Company currently has no liability accrued
or potential penalties or interest recorded for uncertain tax positions. To the
extent penalties and interest are incurred, the Company records these charges as
a component of its Provision for income taxes. The Company is subject to U.S.
federal income tax as well as income tax in multiple state jurisdictions. Tax
returns for the fiscal years subsequent to January 31, 2004, remain open for
examination by the Company's major taxing jurisdictions.
3. Supplemental Disclosure of Revenue and Comprehensive Income
The following is a summary of the classification of the amounts included as
Finance charges and other for the three and nine months ended October 31, 2006
and 2007 (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2006 2007 2006 2007
--------- --------- --------- ---------
Securitization income........................... $ 16,783 $ 14,115 $ 45,294 $ 50,453
Insurance commissions........................... 4,074 5,114 13,069 15,948
Other........................................... 446 85 1,990 1,384
--------- --------- --------- ---------
Finance charges and other....................... $ 21,303 $ 19,314 $ 60,353 $ 67,785
========= ========= ========= =========
The components of total comprehensive income for the three and nine months
ended October 31, 2006 and 2007, are presented in the table below (in
thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
-------------------- --------------------
2006 2007 2006 2007
--------- --------- --------- ---------
Net income...................................... $ 7,154 $ 4,021 $ 27,647 $ 26,624
Adjustment of fair value of securitized assets.. (6,628) - (6,644) -
Taxes on adjustment of fair value............... 2,395 - 2,276 -
--------- --------- --------- ---------
Total comprehensive income...................... $ 2,921 $ 4,021 $ 23,279 $ 26,624
========= ========= ========= =========
10
4. Supplemental Disclosure Regarding Managed Receivables
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Total Principal Amount Principal Amount 60 Days
of Receivables or More Past Due (1)
------------------------ ------------------------
January 31, October 31, January 31, October 31,
2007 2007 2007 2007
----------- ----------- ----------- -----------
Primary portfolio:
Installment............................ $ 382,482 $ 430,015 $ 24,853 $ 28,673
Revolving.............................. 53,125 48,710 1,171 1,562
----------- ----------- ----------- -----------
Subtotal..................................... 435,607 478,725 26,024 30,235
Secondary portfolio:
Installment............................ 133,944 139,836 11,638 17,468
----------- ----------- ----------- -----------
Total receivables managed.................... 569,551 618,561 37,662 47,703
Less receivables sold........................ 559,619 609,425 35,677 45,579
----------- ----------- ----------- -----------
Receivables not sold......................... 9,932 9,136 $ 1,985 $ 2,124
=========== ===========
Non-customer receivables..................... 21,516 26,623
----------- -----------
Total accounts receivable, net......... $ 31,448 $ 35,759
=========== ===========
(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 Net Credit Charge-offs (1)
------------------------ ------------------------
Three Months Ended Three Months Ended
October 31, October 31,
------------------------ ------------------------
2006 2007 2006 2007
----------- ----------- ----------- -----------
Primary portfolio:
Installment............................ $ 366,440 $ 423,115
Revolving.............................. 46,637 48,930
----------- -----------
Subtotal..................................... 413,077 472,045 $ 2,897 $ 3,407
Secondary portfolio:
Installment............................ 119,884 140,832 906 1,456
----------- ----------- ----------- -----------
Total receivables managed.................... 532,961 612,877 3,803 4,863
Less receivables sold........................ 522,722 603,728 3,517 4,548
----------- ----------- ----------- -----------
Receivables not sold......................... $ 10,239 $ 9,149 $ 286 $ 315
=========== =========== =========== ===========
Average Balances Net Credit Charge-offs (1)
------------------------ ------------------------
Nine Months Ended Nine Months Ended
October 31, October 31,
------------------------ ------------------------
2006 2007 2006 2007
----------- ----------- ----------- -----------
Primary portfolio:
Installment............................ $ 369,660 $ 402,498
Revolving.............................. 44,345 51,325
----------- -----------
Subtotal..................................... 414,005 453,823 $ 10,772 $ 8,900
Secondary portfolio:
Installment............................ 112,598 140,712 2,764 3,337
----------- ----------- ----------- -----------
Total receivables managed.................... 526,603 594,535 13,536 12,237
Less receivables sold........................ 516,263 585,104 12,916 11,552
----------- ----------- ----------- -----------
Receivables not sold......................... $ 10,340 $ 9,431 $ 620 $ 685
=========== =========== =========== ===========
(1) Amounts represent total credit charge-offs, net of recoveries, on total receivables. The
increased level of net credit losses for the nine months ended October 31, 2006, were primarily
a result of the impact on our credit collection operations of Hurricane Rita that hit the Culf
coast during September 2005.
11
5. Debt and Letters of Credit
At October 31, 2007, the Company had $47.6 million of its $50 million
revolving credit facility available for borrowings. The amounts utilized under
the revolving credit facility reflected $2.4 million related to letters of
credit issued under the facility. This credit facility matures in October 2010.
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 2008.
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
October 31, 2007, the Company had outstanding unsecured letters of credit of
$24.2 million. These letters of credit were issued under the three following
separate facilities:
o The Company has a $5.0 million sub limit provided under its revolving
line of credit for stand-by and import letters of credit. At October 31,
2007, $2.4 million of letters of credit were outstanding and callable at
the option of the Company's property and casualty insurance carriers if
the Company does not honor its requirement to fund deductible amounts as
billed under its insurance programs.
o The Company has arranged for a $20.0 million stand-by letter of credit
to provide assurance to the trustee of the asset-backed securitization
program that funds collected by the Company, as the servicer, would be
remitted as required under the base indenture and other related
documents. The letter of credit has a term of one year and expires in
August 2008.
o The Company obtained a $10.0 million commitment for trade letters of
credit to secure product purchases under an international arrangement.
At October 31, 2007, there was $1.8 million outstanding under this
commitment. The letter of credit commitment expires in May 2008. No
letter of credit issued under this commitment can have an expiration
date more than 180 days after the commitment expiration date.
The maximum potential amount of future payments under these letter of credit
facilities is considered to be the aggregate face amount of each letter of
credit commitment, which total $35.0 million as of October 31, 2007.
6. Contingencies
Legal Proceedings. The Company is involved in routine litigation incidental
to its business from time to time. Currently, the Company does not expect the
outcome of any of this routine litigation to have a material affect on its
financial condition, results of operations or cash flows. However, the results
of these proceedings cannot be predicted with certainty, and changes in facts
and circumstances could impact the Company's estimate of reserves for
litigation.
Service Maintenance Agreement Obligations. The Company sells service
maintenance agreements that extend the period of covered warranty service on the
products the Company sells. For certain of the service maintenance agreements
sold, the Company is the obligor for payment of qualifying claims. The Company
is responsible for administering the program, including setting the pricing of
the agreements sold and paying the claims. The typical term for these agreements
is between 12 and 36 months. The pricing is set based on historical claims
experience and expectations about future claims. While the Company is unable to
estimate maximum potential claim exposure, it has a history of overall
profitability upon the ultimate resolution of agreements sold. The revenues
related to the agreements sold are deferred at the time of sale and recorded in
revenues in the statement of operations over the life of the agreements. The
revenues deferred related to these agreements totaled $3.6 million and $4.3
million, respectively, as of January 31, 2007 and October 31, 2007, and are
included on the face of the balance sheet in Deferred revenues and allowances.
12
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 in the Dallas/Fort Worth Metroplex, and South
Texas;
o our ability to open and profitably operate new stores in existing,
adjacent and new geographic markets;
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, including limitations on the ability
of the QSPE to obtain financing through its commercial paper-based
funding sources;
o the effect of rising interest rates that could increase our cost of
borrowing or reduce securitization income;
o the effect of rising interest rates on sub-prime mortgage borrowers
that could impair our customers' ability to make payments on
outstanding credit accounts;
o inability to make customer financing programs available that allow
consumers to purchase products at levels that can support our
growth;
o the potential for deterioration in the delinquency status of the
sold or owned credit portfolios or higher than historical net
charge-offs in the portfolios could adversely impact earnings;
o the long-term effect of the change in bankruptcy laws could effect
net charge-offs in the credit portfolio which could adversely impact
earnings;
o technological and market developments, growth trends and projected
sales in the home appliance and consumer electronics industry,
including, with respect to digital products, DVD players, HDTV,
digital radio, home networking devices and other new products, and
our ability to capitalize on such growth;
o the potential for price erosion or lower unit sales that could
result in declines in revenues;
o higher oil and gas prices that 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;
13
o the ability to attract and retain qualified personnel;
o both short-term and long-term impact of adverse weather conditions
(e.g. hurricanes) that could result in volatility in our revenues
and increased expenses and casualty losses;
o changes in laws and regulations and/or interest, premium and
commission rates allowed by regulators on our credit, credit
insurance and service maintenance agreements as allowed by those
laws and regulations;
o our relationships with key suppliers;
o the adequacy of our distribution and information systems and
management experience to support our expansion plans;
o changes in the assumptions used in the valuation of our interests in
securitized assets at fair value;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o the potential for market share erosion that could result in reduced
revenues;
o the accuracy of our expectations regarding the similarity or
dissimilarity of our existing markets as compared to new markets we
enter; and
o the outcome of litigation affecting our business.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under "Risk Factors" in our Form
10-K filed with the Securities Exchange Commission on March 29, 2007. In light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this report might not happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
All forward-looking statements attributable to us, or to persons acting on
our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
We intend for the following discussion and analysis to provide you with a
better understanding of our financial condition and performance in the indicated
periods, including an analysis of those key factors that contributed to our
financial condition and performance and that are, or are expected to be, the key
"drivers" of our business.
On February 1, 2007, we were required to adopt Statement of Financial
Accounting Standard (SFAS) No. 155, Accounting for Certain Hybrid Financial
Instruments. Among other things, this statement established a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. Additionally, we had the
option to choose to early adopt the provisions of SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. We elected to early adopt
SFAS No. 159 because we believe it provides a more easily understood
presentation for financial statement users. This election resulted in us
including all changes in the fair value of our Interests in securitized assets
in current earnings, in Finance charges and other, beginning February 1, 2007.
Previously, most changes in the fair value of our Interests in securitized
assets were recorded in Other comprehensive income, which was included in
Stockholders' equity. SFAS Nos. 155 and 159 do not allow for retrospective
application of these changes in accounting principle, as such, no adjustments
have been made to the amounts disclosed in the financial statements for periods
14
ending prior to February 1, 2007. Additionally, effective February 1, 2007, we
adopted SFAS No. 157, Fair Value Measurements, which established a framework for
measuring fair value, based on the assumptions we believe market participants
would use to value assets or liabilities to be exchanged. Changes in the
assumptions over time, including varying credit portfolio performance, market
interest rate changes, market participant risk premiums required, or a shift in
the mix of funding sources, could result in significant volatility in the fair
value of the Interest in securitized assets, and thus our earnings.
During the three month period ended October 31, 2007, risk premiums required
by market participants on many investments increased significantly as a result
of disruption in the asset-backed securities markets due to increased losses and
delinquencies in sub-prime real estate mortgages. Though we do not anticipate
any significant variation from the current earnings and cash flow performance of
the securitized credit portfolio, we increased the risk premium included in the
discount rate assumption used in the determination of the fair value of our
interests in securitized assets to reflect the higher estimated return on
investment we believe a market participant would require if purchasing the
asset. Based on a review of the changes in market risk premiums during the three
months ended October 31, 2007, and discussions with our investment bankers and
financial advisors, we estimated that a market participant would require an
approximately 300 basis point increase in the required return. As a result, we
increased the weighted average discount rate assumption from 14.3% at July 31,
2007, to 16.4% at October 31, 2007, after reflecting a 90 basis point decrease
in the risk-free interest rate included in the discount rate assumption. If the
credit operations perform in-line with the assumptions for losses, borrowing
costs and the other portfolio related assumptions, none of which have changed
significantly from those used at July 31, 2007, this increase in the discount
rate will have the effect of deferring income to future periods, but not
permanently reducing securitization income or our earnings. The deferred
earnings will be recognized in future periods as interest income on our
Interests in securitized assets as the actual cash flows on the receivables are
realized. If a market participant were to require a return on investment that is
100 basis points higher than we estimated in the fair value calculation, the
fair value of our interests in securitized assets would be decreased by an
additional $1.7 million.
We were also required to adopt the provisions of SFAS No. 156, Accounting
for Servicing of Financial Assets, effective on February 1, 2007. As a result of
the adoption of this pronouncement, along with the requirements of SFAS No. 157,
we recorded a $1.1 million servicing liability on the balance sheet in Deferred
revenues and allowances. Any changes in the fair value of the liability are
recorded in the period of change in the statement of operations in Finance
charges and other. As with the other changes discussed above, no adjustments
have been made to the financial statements for periods ending prior to February
1, 2007. See the notes to the financial statements for discussion of the impacts
on the financial statements for the three and nine months ended October 31,
2007.
We are a specialty retailer that sells major home appliances, including
refrigerators, freezers, washers, dryers, dishwashers and ranges, a variety of
consumer electronics, including micro-display projection, plasma and LCD
flat-panel televisions, camcorders, digital cameras, DVD players (both standard
and high definition), video game equipment, 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 their home to help
increase same store sales and to respond to our customers' product needs. We
require our sales associates to be knowledgeable of all of our products, but to
specialize in certain specific product categories.
We currently operate 65 retail locations in Texas and Louisiana, and have
several other stores under development.
Unlike many of our competitors, we provide flexible in-house credit options
for our customers. In the last three years, we financed, on average,
approximately 58% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and issue medium-term and
variable funding notes secured by the receivables to third parties to finance
its acquisition of the receivables. We transfer receivables, consisting of
retail installment and revolving account receivables extended to our customers,
to the issuer in exchange for cash and subordinated securities.
15
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements, under
which we are the primary obligor, to protect the customers after the original
manufacturer's warranty or service maintenance agreement has expired.
Our business is moderately seasonal, with a slightly greater share of our
revenues, pretax and net income realized during the quarter ending January 31,
due primarily to the holiday selling season.
Executive Overview
This narrative is intended to provide an executive level overview of our
operations for the three and nine months ended October 31, 2007. A detailed
explanation of the changes in our operations for these periods as compared to
the prior year is included under Results of Operations. As explained in that
section, our pretax income for the quarter ended October 31, 2007, decreased
approximately $4.6 million, or 41.3%, primarily as a result of a $4.0 million
non-cash decrease in the fair value of our interests in securitized assets. Some
of the more specific items impacting our operating and pretax income were:
o Same store sales for the quarter and nine months increased by 6.8% and 3.5%,
respectively, as compared to a 3.7% decrease and 6.5% increase,
respectively, in the prior year.
o The addition of stores in our existing Houston, Dallas/Fort Worth and San
Antonio markets and a new store in Brownsville had a positive impact on our
revenues. We achieved approximately $7.3 million and $27.3 million of
increases in product sales and service maintenance agreement commissions for
the three and nine months ended October 31, 2007, respectively, from the new
stores that were opened in these markets after February 1, 2006. Our plans
provide for the opening of additional stores in and around existing markets
during fiscal 2008 as we focus on leveraging our existing infrastructure.
o Deferred interest and "same as cash" plans continue to be an important part
of our sales promotion plans and are utilized to provide a wide variety of
financing to enable us to appeal to a broader customer base. For the three
and nine months ended October 31, 2007, $55.0 million, or 35.3%, and $143.1
million, or 29.4%, respectively of our product sales were financed by
deferred interest and "same as cash" plans. This volume of promotional
credit as a percent of product sales is consistent with our use of this type
of credit product before the hurricanes in late 2005. For the comparable
periods in the prior year, product sales financed by deferred interest and
"same as cash" sales were $39.5 million, or 28.3% and $105.3 million, or
23.5%, respectively. Our promotional credit programs (same as cash and
deferred interest programs), which require monthly payments, are reserved
for our highest credit quality customers, thereby reducing the overall risk
in the portfolio, and are used primarily to finance sales of our highest
margin products. We expect to continue to offer extended term promotional
credit in the future.
o Our gross margin decreased from 35.3% to 32.6% for the three months ended
October 31, 2007, and from 34.2% to 33.8% for the nine months ended October
31, 2007, when compared to the same period in the prior year. The decline
for the three and nine month periods ended October 31,2007, resulted
primarily from a $4.0 million and $4.3 million, respectively, non-cash
decrease in the fair value of our interests in securitized assets, in
addition to a decrease in product margin. The gross margin would have been
34.0% and 34.2%, excluding the fair value decrease, for the three and nine
months ended October 31, 2007, respectively. The product gross margins
decreased from 20.8% to 19.5% for the three months ended October 31, 2007,
and from 20.6% to 19.8% for the nine months ended October 31, 2007, when
compared to the same period in the prior year, and were negatively impacted
by a highly price competitive retail market, especially on consumer
electronics and appliances. In the nine month period, partially offsetting
these negative impacts, there was a decline in net credit losses, included
in Finance charges and other.
o Finance charges and other decreased 9.3% for the quarter ended October 31,
2007, and increased 12.3% for the nine months ended October 31, 2007, as:
16
o securitization income decreased by 15.9% for the three months ended
October 31, 2007, and increased by 11.4% for the nine months ended
October 31, 2007, respectively. The decline for the three month
period and the slower growth for the nine month period ended October
31, 2007, were driven primarily by the $4.0 million non-cash
decrease in the fair value of our interests in securitized assets,
recorded during the three months ended October 31, 2007. The
decrease in the fair value of our Interests in securitized assets
was primarily a result of an increase in the estimated risk premium
expected by a market participant included in the discount rate
assumption used in the discounted cash flow model used to determine
the fair value of our interests in securitized assets. The risk
premium included in the discount rate assumption was increased due
to the disruption in the financial markets during the period caused
by the sub-prime mortgage issues and is not related to the
performance of the credit portfolio or our credit collection
operations.
o insurance commissions grew 25.5% and 22.0% for the three and nine
months ended October 31, 2007, respectively, primarily as a result
of increased sales. Lower credit charge-offs in the nine months
ended October 31, 2007, which resulted in reduced insurance
cancellations, also benefited insurance commissions.
o During the three months ended October 31, 2007, Selling, general and
administrative (SG&A) expense increased as a percent of revenues to 28.9%
from 28.7% in the prior year period. During the nine months ended October
31, 2007, SG&A increased as a percent of revenues to 26.9% from 26.4%, when
compared to the prior year. Had total revenues for the periods not been
negatively effected by the $4.0 million non-cash decrease in the fair value
of our Interests in securitized assets recorded during the quarter, SG&A as
a percent of revenues would have been 28.3% and 26.7% for the three and nine
month periods, respectively. The 40 basis point decline for the three months
ended October 31, 2007, was driven primarily by lower advertising expense.
o The provision for income taxes for the three months ended October 31, 2007,
was negatively impacted by the Texas margin tax, which is based on gross
margin, and resulted in an increase in our effective tax rate from 35.9% to
38.6%. The provision for income taxes for the nine months ended October 31,
2007, benefited from a $0.9 million reduction attributable to the reversal
of previously accrued Texas margin tax as a result of the legal entity
reorganization completed during the nine months ended October 31, 2007.
Operational Changes and Resulting Outlook
We have under development and expect to open 11 stores by July 31, 2008,
including two replacement stores and a new store in Oklahoma City, Oklahoma. We
have additional sites under consideration for future development.
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. During June 2007, we completed a reorganization to
simplify our legal entity structure, by merging certain of our Texas limited
partnerships into their corporate partners. The reorganization also resulted in
the one-time elimination of the Texas margin tax owed by those partnerships,
representing virtually all of the margin tax owed by us. Accordingly, we
reversed approximately $0.9 million of accrued Texas margin tax as of June 2007,
net of federal tax. The Company began accruing the margin tax for the entities
that acquired the operations through the mergers in July 2007 and expects its
effective tax rate to be between 36.5% and 37.5% in future quarters.
The consumer electronics industry depends on new products to drive same
store sales increases. Typically, these new products, such as high-definition
televisions, DVD players, digital cameras and MP3 players are introduced at
relatively high price points that are then gradually reduced as the product
becomes mainstream. To sustain positive same store sales growth, unit sales must
increase at a rate greater than the decline in product prices. The affordability
of the product helps drive the unit sales growth. However, as a result of
17
relatively short product life cycles in the consumer electronics industry, which
limit the amount of time available for sales volume to increase, combined with
rapid price erosion in the industry, retailers are challenged to maintain
overall gross margin levels and positive same store sales. This has historically
been our experience, and we continue to adjust our marketing strategies to
address this challenge through the introduction of new product categories and
new products within our existing categories.
Application of Critical Accounting Policies
In applying the accounting policies that we use to prepare our consolidated
financial statements, we necessarily make accounting estimates that affect our
reported amounts of assets, liabilities, revenues and expenses. Some of these
accounting estimates require us to make assumptions about matters that are
highly uncertain at the time we make the accounting estimates. We base these
assumptions and the resulting estimates on authoritative pronouncements,
historical information, advice of experts 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 October 31, 2007.
Transfers of Financial Assets. We transfer customer receivables to a QSPE
that issues asset-backed securities to third party lenders using these accounts
as collateral, and we continue to service these accounts after the transfer. We
recognize the sale of these accounts when we relinquish control of the
transferred financial asset in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
as amended by SFAS No. 155, Accounting for Certain Hybrid Financial Instruments.
As we transfer the accounts we record an asset representing our interest in the
cash flows of the QSPE, which is the difference between the interest earned on
customer accounts and the cost associated with financing and servicing the
transferred accounts, including a provision for bad debts associated with the
transferred accounts, plus our retained interest in the transferred receivables,
discounted using a return that would be expected by a third-party investor. We
recognize the income from our interest in these transferred accounts as gains on
the transfer of the asset, interest income and servicing fees. This income is
recorded as Finance charges and other in our consolidated statements of
operations. Additionally, as a result of our adoption of SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities, effective February
1, 2007, we record all changes in the fair value of our Interests in securitized
assets in current earnings, in Finance charges and other. Previously, most
changes in the fair value of our Interests in securitized assets were recorded
in Other comprehensive income. Effective February 1, 2007, we adopted SFAS No.
157, Fair Value Measurements, which established a framework for measuring fair
value, based on the assumptions a company believes market participants would use
to value assets or liabilities to be exchanged. The gain or loss recognized on
the sales of the receivables is based on our best estimates of key assumptions,
including forecasted credit losses, payment rates, forward yield curves, costs
of servicing the accounts and appropriate discount rates, based on our
expectations of the assumptions that a market participant would use. We were
required to adopt the provisions of SFAS No. 156, Accounting for Servicing of
Financial Assets, effective on February 1, 2007. As a result of the adoption of
this pronouncement we recorded a servicing liability on the balance sheet in
Deferred revenues and allowances and any changes in the fair value of the
liability are recorded in the period of change in the statement of operations in
Finance charges and other. We estimate the fair value of our servicing liability
using the portfolio performance and discount rate assumptions discussed above,
and an estimate of the servicing fee a market participant would require to
service the portfolio. The use of different estimates or assumptions in the
valuation of our Interest in securitized assets or servicing liability could
produce different financial results. Additionally, changes in the assumptions
over time, including varying credit portfolio performance, market interest rate
changes or risk premiums required, or a shift in the mix of funding sources,
could result in significant volatility in the fair value of the Interests in
securitized assets, and thus our earnings. During the three month period ended
October 31, 2007, returns required by market participants on many investments
increased significantly as a result of disruption in the asset-backed securities
markets due to increased losses and delinquencies in sub-prime mortgages. Though
we do not anticipate any significant variation from the current earnings and
cash flow performance of the securitized credit portfolio, we increased the risk
premium included in the discount rate assumption used in the determination of
the fair value of our interests in securitized assets to reflect the higher
expected return on investment we believe a market participant would require if
18
purchasing the interests. Based on a review of the changes in market risk
premiums during the three months ended October 31, 2007, and discussions with
our investment bankers and financial advisors, we estimated that a market
participant would require an approximately 300 basis point increase in the
required return. As a result, the Company increased the weighted average
discount rate assumption from 14.3% at July 31, 2007, to 16.4% at October 31,
2007, after reflecting a 90 basis point decrease in the risk-free interest rate
included in the discount rate assumption. If the credit operations perform
in-line with the assumptions for losses, borrowing costs and the other portfolio
related assumptions, none of which have changed significantly from those used at
July 31, 2007, this increase in the discount rate will have the effect of
deferring income to future periods, but not permanently reducing securitization
income or our earnings. If a market participant were to require a return on
investment that is 100 basis points higher than we estimated in the fair value
calculation, the fair value of our interests in securitized assets would be
decreased by an additional $1.7 million. If we had assumed a 10.0% reduction in
net interest spread (which might be caused by rising interest rates or
reductions in rates charged on the accounts transferred), our interest in
securitized assets and Finance charges and other would have been reduced by $6.1
million as of October 31, 2007. If the assumption used for estimating credit
losses was increased by 0.5%, the impact to Finance charges and other would have
been a reduction in revenues and pretax income of $2.3 million.
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 October 31, 2007 and January 31, 2007 was $4.3 million and $3.6
million, respectively, and is included in Deferred revenues and allowances in
the accompanying balance sheets.
Vendor Allowances. We receive funds from vendors for price protection,
product rebates, marketing and training and promotion programs which are
recorded on the accrual basis as a reduction to the related product cost or
advertising expense according to the nature of the program. We accrue rebates
based on the satisfaction of terms of the program and sales of qualifying
products even though funds may not be received until the end of a quarter or
year. If the programs are related to product purchases, the allowances, credits
or payments are recorded as a reduction of product cost; if the programs are
related to promotion or marketing of the product, the allowances, credits, or
payments are recorded as a reduction of advertising expense in the period in
which the expense is incurred.
Accounting for Share-Based Compensation. We adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, effective February 1, 2006,
using the modified retrospective application transition. This statement
establishes standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services, focusing primarily on
accounting for transactions in which an entity obtains an employee's services.
The statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, based on the grant-date
fair value of the award, and record that cost over the period during which the
employee is required to provide service in exchange for the award The fair value
assigned to awards of share-based compensation are based on assumptions about
the risk-free interest rate, average expected life of the award and expected
stock price volatility over the life of the award. The use of different
estimates or assumptions could produce different financial results.
19
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 and any subsequent renewal, to determine whether it
should be accounted for as an operating lease or a capital lease. Additionally,
monthly lease expense for each operating lease is calculated as the average of
all payments required under the minimum lease term, including rent escalations.
Generally, the minimum lease term begins with the date we take possession of the
property and ends on the last day of the minimum lease term, and includes all
rent holidays, but excludes renewal terms that are at our option. Any tenant
improvement allowances received are deferred and amortized into income as a
reduction of lease expense on a straight line basis over the minimum lease term.
The amortization of leasehold improvements is computed on a straight line basis
over the shorter of the remaining lease term or the estimated useful life of the
improvements. For transactions that qualify for treatment as a sale-leaseback,
any gain or loss is deferred and amortized as rent expense on a straight-line
basis over the minimum lease term. Any deferred gain would be included in
Deferred gain on sale of property and any deferred loss would be included in
Other assets on the consolidated balance sheets.
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 Nine Months Ended
October 31, October 31,
------------------ ------------------
2006 2007 2006 2007
-------- -------- -------- --------
Revenues:
Product sales........................................... 80.4 % 82.2 % 81.9 % 81.3 %
Service maintenance agreement commissions (net)......... 3.9 4.4 4.0 4.5
Service revenues........................................ 3.4 3.2 3.1 2.9
-------- -------- -------- --------
Total net sales....................................... 87.7 89.8 89.0 88.7
Finance charges and other............................... 12.3 10.2 11.0 11.3
-------- -------- -------- --------
Total revenues...................................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of goods sold, including warehousing and occupancy
cost................................................... 63.7 66.2 65.0 65.2
Cost of parts sold, including warehousing and occupancy
cost................................................... 1.0 1.2 0.8 1.0
Selling, general and administrative expense............. 28.7 28.9 26.4 26.9
Provision for bad debts................................. 0.3 0.3 0.2 0.3
-------- -------- -------- --------
Total costs and expenses............................ 93.7 96.6 92.4 93.4
-------- -------- -------- --------
Operating income........................................ 6.3 3.4 7.6 6.6
Interest income, net.................................... (0.1) (0.1) (0.1) (0.1)
Other income, net....................................... 0.0 0.0 (0.1) (0.1)
-------- -------- -------- --------
Income before income taxes.............................. 6.4 3.5 7.8 6.8
Provision for income taxes.............................. 2.3 1.4 2.8 2.4
-------- -------- -------- --------
Net income.............................................. 4.1 % 2.1 % 5.0 % 4.4 %
======== ======== ======== ========
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. Additionally, while we include a portion of
our advertising expense in cost of goods sold, we understand that other
retailers may include such costs as part of their Selling, general and
administrative expense.
20
Three Months Ended October 31, 2007 Compared to Three Months Ended October 31,
2006
Revenues. Total revenues increased by $15.7 million, or 9.0%, from $173.7
million for the three months ended October 31, 2006, to $189.4 million for the
three months ended October 31, 2007. The increase was attributable to increases
in net sales of $17.7 million, or 11.6%, and a decrease of $2.0 million, or
9.3%, in finance charges and other revenue.
The $17.7 million increase in net sales was made up of the following:
o a $10.1 million same store sales increase of 6.8%, driven by strength in
consumer electronics, furniture, lawn and garden and track sales;
o a $7.3 million increase generated by six retail locations that were not
open for three consecutive months in each period;
o a $0.2 million increase resulted from a decrease in discounts on
extended-term promotional credit sales (those with terms longer than 12
months); and
o a $0.1 million increase resulted from an increase in service revenues.
The components of the $17.7 million increase in net sales were a $16.1
million increase in Product sales and a $1.6 million increase in service
maintenance agreement commissions and service revenues. The $16.1 million
increase in product sales resulted from the following:
o approximately $8.2 million increase attributable to increases in total
unit sales, due primarily to increased consumer electronics and
furniture sales, and
o approximately $7.9 million increase attributable to an overall increase
in the average unit price. The increase was due primarily to a change in
the mix of product sales, driven by an increase in the consumer
electronics category, which has the highest average price point of any
category, as a percentage of total product sales. Additionally, there
were category price point increases as a result of a shift to
higher-priced high-efficiency laundry items, higher priced tractors and
zero turn radius mowers and increase in laptop computer and video game
equipment sales, partially offset by a decline in the average price
points on our electronics, furniture and mattresses categories.
The $1.6 million increase in service maintenance agreement commissions and
service revenues was driven by increased sales of service maintenance
agreements.
21
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 October 31,
----------------------------------------------
2006 2007
---------------------- ---------------------- Percent
Category Amount Percent Amount Percent Change
----------- --------- ----------- --------- ---------
Major home appliances............ $ 55,080 36.1 % $ 54,209 31.9 % (1.6)% (1)
Consumer electronics............. 46,767 30.7 55,435 32.6 18.5 (2)
Track............................ 18,346 12.0 22,274 13.1 21.4 (3)
Delivery......................... 2,771 1.8 3,090 1.8 11.5 (4)
Lawn and garden.................. 3,995 2.6 5,450 3.2 36.4 (5)
Mattresses....................... 3,601 2.4 4,068 2.4 13.0 (6)
Furniture........................ 7,936 5.3 9,854 5.8 24.2 (7)
Other............................ 1,098 0.7 1,277 0.8 16.3
----------- --------- ----------- ---------
Total product sales.......... 139,594 91.6 155,657 91.6 11.5
Service maintenance agreement
commissions..................... 6,845 4.5 8,336 4.9 21.8 (8)
Service revenues................. 5,951 3.9 6,059 3.5 1.8 (9)
----------- --------- ----------- ---------
Total net sales.............. $ 152,390 100.0 % $ 170,052 100.0 % 11.6 %
=========== ========= =========== =========
_____________________________________
(1) While the industry is down nationally, we expect to outperform the
national trend and are taking steps to improve our performance relative
to merchandising, advertising and promotion of this category.
(2) This increase is due to increased unit volume in the area of flat-panel
and micro-display televisions, partially offset by a decline in the sale
of tube and projection televisions.
(3) The increase in track sales (consisting largely of computers, computer
peripherals, video game equipment, portable electronics and small
appliances) is driven primarily by increased laptop computer and video
game equipment sales and was partially offset by reduced sales of
portable electronics, including camcorders, digital cameras and portable
CRT televisions.
(4) This increase was due to an increase in the delivery fee charged to our
customers, as the total number of deliveries declined slightly as
compared to the prior year.
(5) This category benefited from an increase in the sales of higher priced
lawn and garden equipment, such as zero turn radius mowers and tractors.
(6) This increase is due to the benefit of our change in strategy as we move
to a multi-vendor relationship.
(7) This increase is due to the increased emphasis on the sales of
furniture, primarily sofas, recliners and entertainment centers, and new
products added to this category.
(8) This increase is due to the increase in product sales and increased
sales penetration.
(9) This increase is driven by increased units in operation as we continue
to grow product sales and an increase in the cost of parts used to
repair higher-priced technology (flat-panel and micro-display
televisions, etc.).
Revenues from Finance charges and other decreased by approximately $2.0
million, or 9.3%, from $21.3 million for the three months ended October 31,
2006, to $19.3 million for the three months ended October 31, 2007. The decrease
in Finance charge and other income was comprised of a decline in securitization
income of $2.7 million, an increase in insurance income of $1.0 million and a
decrease in other items of $0.3 million. The securitization income decline of
$2.7 million was due primarily to a non-cash, decrease in the fair value of our
interests in securitized assets, which was partially offset by growth in the
gains on sales and interest on our retained interest due to the growth in the
sold portfolio. The non-cash fair value adjustment of $4.0 million was primarily
a result of the recent turmoil in the financial markets. We increased the risk
premium included in the discount rate assumption in the determination of the
fair value of our interests in securitized assets based on our estimate of the
return we believe a market participant would require if they purchased our
Interests in securitized assets at October 31, 2007. (See the Note 2 to the
financial statements for additional information). Insurance commissions
increased primarily due to increased sales.
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $14.7 million, or 13.3%, from $110.6 million for the three
months ended October 31, 2006, to $125.3 million for the three months ended
October 31, 2007. This increase was due primarily to the 11.5% growth in product
sales during the three months ended October 31, 2007. Cost of products sold was
80.5% of product sales in the quarter ended October 31, 2007, and 79.2% in the
quarter ended October 31, 2006, and was higher due to increased price
competition, especially in the consumer electronics and appliance categories.
22
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $0.4 million, or 23.1%, for the three months ended
October 31, 2007, as compared to the three months ended October 31, 2006,
primarily due to a 19.3% increase in parts sales.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $5.1 million, or 10.2%, from $49.7 million
for the three months ended October 31, 2006, to $54.8 million for the three
months ended October 31, 2007. As a percentage of total revenues, it increased
from 28.7% to 28.9%. The increase, as a percent of revenues was due primarily to
the impact on total revenues of the $4.0 million non-cash decrease in the fair
value of our Interests in securitized assets in the calculation of this ratio.
Had total revenues for the periods not been negatively effected by the $4.0
million non-cash decrease in the fair value of our Interests in securitized
assets, SG&A as a percent of revenues would have been 28.3% for the three month
period. This would have represented a 40 basis point decline in SG&A as a
percentage of revenues, which was driven primarily by reduced advertising
expenses, partially offset by higher medical claims experience.
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 $56,000, during the three months ended
October 31, 2007, as compared to the three months ended October 31, 2006. See
the notes to the financial statements for information regarding the performance
of the credit portfolio.
Interest Income, net. Net interest income decreased by $31,000, from net
interest income of $141,000 for the three months ended October 31, 2006, to net
interest income of $110,000 for the three months ended October 31, 2007. The net
decrease in interest income was primarily attributable to decreased interest
income from invested funds, driven primarily by lower average invested balances.
Provision for Income Taxes. The provision for income taxes decreased by $1.5
million, or 36.9%, from $4.0 million for the three months ended October 31,
2006, to $2.5 million for the three months ended October 31, 2007. The decrease
in the Provision for income taxes is attributable to reduced Income before
taxes. The effective tax rate increased from 35.9% for the three months ended
October 31, 2006, to 38.6% for the three months ended October 31, 2007. Since
the Texas margin tax is based on gross profit and not pretax income, it
negatively impacted the effective tax rate.
23
Nine Months Ended October 31, 2007 Compared to Nine Months Ended October 31,
2006
Revenues. Total revenues increased by $50.1 million, or 9.1%, from $548.1
million for the nine months ended October 31, 2006, to $598.2 million for the
nine months ended October 31, 2007. The increase was attributable to increases
in net sales of $42.7 million, or 8.8%, and $7.4 million, or 12.3%, in finance
charges and other revenue.
The $42.7 million increase in net sales was made up of the following:
o a $16.6 million same store sales increase of 3.5%, driven by strength in
consumer electronics, furniture and lawn and garden sales, partially
offset by declines in appliance and bedding sales. The decline in
appliance same store sales was due to the positive impact in the prior
year period of Hurricanes Rita and Katrina on our sales in the
storm-impacted markets and the overall industry-wide decline in
appliance sales in the current year;
o a $27.3 million increase generated by eight retail locations that were
not open for nine consecutive months in each period;
o a $1.7 million decrease resulted from an increase in discounts on
extended-term promotional credit sales (those with terms longer than 12
months); and
o a $0.5 million increase resulted from an increase in service revenues.
The components of the $42.7 million increase in net sales were a $37.3
million increase in Product sales and a $5.4 million increase in service
maintenance agreement commissions and service revenues. The $37.3 million
increase in product sales resulted from the following:
o approximately $19.0 million increase attributable to increases in total
unit sales, due primarily to increased consumer electronics, furniture
and track sales, partially offset by lower appliance sales, and
o approximately $18.3 million increase attributable to an overall increase
in the average unit price. The increase was due primarily to a change in
the mix of product sales, driven by an increase in the consumer
electronics category, which has the highest average price point of any
category, as a percentage of total product sales. Additionally, there
were category price point increases as a result of a shift to
high-efficiency laundry items and higher priced tractors and zero turn
radius mowers, partially offset by a decline in the average price points
on our furniture and mattresses categories and the $1.7 million increase
in discounts on extended-term promotional credit sales.
The $5.4 million increase in service maintenance agreement commissions and
service revenues was driven by increased sales of service maintenance agreements
and reduced service maintenance agreement cancellations, as credit charge-offs
decreased as compared to the prior year period.
24
The following table presents the makeup of net sales by product category in
each period, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Nine Months Ended October 31,
----------------------------------------------
2006 2007
---------------------- ---------------------- Percent
Category Amount Percent Amount Percent Change
----------- --------- ----------- --------- ---------
Major home appliances............ $ 176,660 36.2 % $ 172,653 32.6 % (2.3)% (1)
Consumer electronics............. 146,824 30.1 167,684 31.6 14.2 (2)
Track............................ 61,856 12.7 65,010 12.3 5.1 (3)
Delivery......................... 8,488 1.8 9,454 1.8 11.4 (4)
Lawn and garden.................. 15,844 3.2 20,161 3.8 27.2 (5)
Mattresses....................... 13,605 2.8 12,709 2.4 (6.6) (6)
Furniture........................ 21,585 4.4 34,415 6.5 59.4 (7)
Other............................ 3,888 0.8 4,003 0.7 3.0
----------- --------- ----------- ---------
Total product sales.......... 448,750 92.0 486,089 91.7 8.3
Service maintenance agreement
commissions..................... 21,875 4.5 26,688 5.0 22.0 (8)
Service revenues................. 17,107 3.5 17,641 3.3 3.1 (9)
----------- --------- ----------- ---------
Total net sales.............. $ 487,732 100.0 % $ 530,418 100.0 % 8.8 %
=========== ========= =========== =========
_____________________________________
(1) While the industry is down nationally, we expect to outperform the
national trend and are taking steps to improve our performance relative
to merchandising, advertising and promotion of this category.
Additionally, we experienced higher than normal demand for these
products in the prior year due to consumers replacing appliances after
Hurricanes Katrina and Rita, especially during the first three months of
the period.
(2) This increase is due to increased unit volume in the area of flat-panel
and micro-display televisions, partially offset by a decline in the sale
of tube and projection televisions.
(3) The increase in track sales (consisting largely of computers, computer
peripherals, video game equipment, portable electronics and small
appliances) is driven primarily by increased laptop computer and video
game equipment sales and was partially offset by reduced sales of
portable electronics, including camcorders, digital cameras and portable
CRT televisions.
(4) This increase was due to an increase in the delivery fee charged to our
customers, as the total number of deliveries declined slightly as
compared to the prior year.
(5) This category benefited from a high level of rainfall in the current
year and an increase in sales of higher priced lawn and garden
equipment, such as zero turn radius mowers and tractors.
(6) This decrease is due to the impact of our change in strategy as we move
to a multi-vendor relationship.
(7) This increase is due to the increased emphasis on the sales of
furniture, primarily sofas, recliners and entertainment centers, and new
products added to this category.
(8) This increase is due to the increase in product sales, increased sales
penetration and decreased SMA cancellations as credit charge-offs
declined as compared to the prior year period.
(9) This increase is driven by increased units in operation as we continue
to grow product sales and an increase in the cost of parts used to
repair higher-priced technology (flat-panel and micro-display
televisions, etc.).
Revenues from Finance charges and other increased by approximately $7.4
million, or 12.3%, from $60.4 million for the nine months ended October 31, 2006
to $67.8 million for the nine months ended October 31, 2007. It increased due
primarily to an increase in securitization income of $5.2 million, or 11.4% and
an increase in insurance commissions of $2.8 million, and a decrease in other
items of $0.6 million. The securitization income, which grew due to growth in
the portfolio and lower net credit losses, was negatively impacted by a
non-cash, decrease in the fair value of our Interests in securitized assets. The
non-cash fair value adjustment of $4.3 million was recorded primarily as a
result of the recent turmoil in the financial markets. We increased the risk
premium included in the discount rate assumption in the determination of the
fair value of our interests in securitized assets based on our estimate of the
return we believe a market participant would require if they purchased our
Interests in securitized assets. (See the Note 2 to the financial statements for
additional information). The securitization income comparison was impacted by a
$1.5 million impairment charge recorded in the prior year for higher projected
credit losses and a 10.5% decrease in net credit losses for the nine months
ended October 31, 2007, due to the impact in the prior year of Hurricane Rita on
our credit collection operations and increased bankruptcy filings due to the new
bankruptcy laws that took effect in October 2005. Our net credit loss rate of
2.7% for the nine months ended October 31, 2007, was in-line with our expected
long-term net loss rate of between 2.5% and 3.0%. Insurance commissions
increased primarily due to increased sales and reduced insurance cancellations
as credit charge-offs declined from the prior year period.
25
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $33.9 million, or 9.5%, from $356.1 million for the nine
months ended October 31, 2006, to $390.0 million for the nine months ended
October 31, 2007. This increase was due primarily to the 8.3% growth in product
sales during the nine months ended October 31, 2007. Cost of products sold was
80.2% of product sales in the nine months ended October 31, 2007, and 79.4% in
the nine months ended October 31, 2006, and was higher due to increased price
competition, especially in the consumer electronics and appliance categories.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $1.5 million, or 30.5%, for the nine months ended
October 31, 2007, as compared to the nine months ended October 31, 2006, due
primarily to a 22.8% increase in parts sales, valuation adjustments on our parts
inventory and realignment of staffing.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $16.3 million, or 11.3%, from $144.8 million
for the nine months ended October 31, 2006, to $161.1 million for the nine
months ended October 31, 2007. As a percentage of total revenues, it increased
from 26.4% to 26.9%. Had total revenues for the nine month period not been
negatively effected by the $4.3 million non-cash decrease in the fair value of
our Interests in securitized assets, SG&A as a percent of revenues would have
been 26.7%. The increase in expense resulted primarily from higher compensation
and employee related expenses and occupancy cost, including property taxes, as a
percent of revenues.
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 nine months ended
October 31, 2007, as compared to the nine months ended October 31, 2006,
primarily as a result of provision adjustments due to increased net credit
losses. Additionally, the provision for bad debts in the nine months ended
October 31, 2006, benefited from a $0.1 million reserve adjustment related to
the special reserves recorded as a result of the hurricanes in 2005. See the
notes to the financial statements for information regarding the performance of
the credit portfolio.
Interest Income, net. Net interest income improved by $89,000, from net
interest income of $512,000 for the nine months ended October 31, 2006 to net
interest income of $601,000 for the nine months ended October 31, 2007. The net
improvement in interest income was primarily attributable to increased interest
income from invested funds, driven by higher yields and higher average invested
balances.
Other Income, net. Other income increased by $147,000, from $773,000 for the
nine months ended October 31, 2006, to $920,000 for the nine months ended
October 31, 2007. Both periods included gains recognized on the sales of company
assets. Additionally, during the nine months ended October 31, 2007, there were
gains realized, but not recognized, on transactions qualifying for
sale-leaseback accounting that have been deferred and will be amortized as a
reduction of rent expense on a straight-line basis over the minimum lease terms.
Provision for Income Taxes. The provision for income taxes decreased by $0.8
million, or 5.6%, from $15.1 million for the nine months ended October 31, 2006,
to $14.3 million for the nine months ended October 31, 2007. This decrease in
taxes was impacted primarily by the 4.4% decrease in pretax income.
Additionally, the effective tax rate declined from 35.3% for the nine months
ended October 31, 2006, to 35.0% for the nine months ended October 31, 2007. The
decrease in the effective tax rate is attributable to the reversal of previously
accrued Texas margin tax as a result of the legal entity reorganization
completed during the three months ended July 31, 2007. In July 2007, we began
accruing margin tax for the entities that acquired the operations through the
mergers completed during the quarter.
26
Liquidity and Capital Resources
Current Activities
Historically we have financed our operations through a combination of cash
flow generated from operations, and external borrowings, including primarily
bank debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables under our asset-backed securitization facilities.
As of October 31, 2007, we had approximately $19.2 million in excess cash,
the majority of which was generated through the operations of the Company, and
was invested in short-term, tax-free instruments. In addition to the excess
cash, we had $47.6 million under our revolving line of credit, net of standby
letters of credit issued, and $8.0 million under our unsecured bank line of
credit available to us for general corporate purposes, $32.6 million under
extended vendor terms for purchases of inventory and $220.0 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. Through October 31, 2007, we had spent $24.5 million under
this authorization to acquire 1,041,185 shares of our common stock.
A summary of the significant financial covenants that govern our bank credit
facility compared to our actual compliance status at October 31, 2007, 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 $298.1 million $202.7 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 0.10 to 1.00 0.13 to 1.00
Note: All terms in the above table are defined by the bank credit facility
and may or may not agree directly to the financial statement captions in
this document.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our bank
credit facility and unsecured credit line, extended vendor terms for purchases
of inventory, acquisition of inventory under consignment arrangements and access
to the unfunded portion of the variable funding portion of the QSPE's
asset-backed securitization program will be sufficient to fund our operations,
store expansion and updating activities, stock repurchases, if any, and capital
programs for at least 12 months. 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;
27
o changes in inventory requirements based on longer delivery times of the
manufacturers or other requirements which would negatively impact our
delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under our
current QSPE's asset-backed securitization program as a result of
changes in performance or types of receivables transferred (promotional
versus non-promotional and primary versus secondary portfolio), or as a
result of a change in the mix of funding sources available to the QSPE,
requiring higher collateral levels, or limitations on the ability of the
QSPE to obtain financing through its commercial paper-based funding
sources;
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 nine months ended October 31, 2007, net cash provided by (used
in) operating activities decreased $22.7 million from $11.1 million provided by
operating activities in the nine months ended October 31, 2006, to $11.6 million
used in the nine months ended October 31, 2007. Operating cash flows for both
periods were negatively impacted by higher than normal payments on accounts
payable and accrued expenses, as discussed below. The cash used in operations
for the nine months ended October 31, 2007, was driven primarily by payments on
accounts payable, which was driven by the timing of receipts of inventory,
increased inventory levels and increased investment in accounts receivable. Our
increased investment in accounts receivable was due primarily to increased
balances in the sold portfolio and a lower funding rate as a percentage of the
sold portfolio. The lower funding rate is primarily the result of the QSPE's pay
down of its 2002 Series B bond issuance. The cash provided by operations for the
nine months ended October 31, 2006, resulted primarily from net income plus
depreciation plus the benefit of the QSPE completing its medium-term bond
issuance in August 2006. The completion of the bond issuance resulted in an
increase in the funding rate, providing additional cash to be advanced to us on
receivables transferred. Offsetting the cash provided was cash used primarily
due to the timing of payments of accounts payable and federal income and
employment taxes, which had been extended due to the impact of hurricanes in the
prior fiscal year. Those extended terms ended and deadlines were reached in the
quarter ended April 30, 2006, and we were required to satisfy those obligations,
negatively impacting our operating cash flows by approximately $18.9 million.
As noted above, we offer promotional credit programs to certain customers
that provide for "same as cash" or deferred interest interest-free periods of
varying terms, generally three, six, 12, 18, 24 and 36 months, and require
monthly payments beginning in the month after the sale. The various "same as
cash" promotional accounts and deferred interest program accounts are eligible
for securitization up to the limits provided for in our securitization
agreements. This limit is currently 30.0% of eligible securitized receivables.
If we exceed this 30.0% limit, we would be required to use some of our other
capital resources to carry the unfunded balances of the receivables for the
promotional period. The percentage of eligible securitized receivables
represented by promotional receivables was 18.2% and 22.5%, as of October 31,
2006 and 2007, respectively. The weighted average promotional period was 11.7
months and 14.8 months for promotional receivables outstanding as of October 31,
2006 and 2007, respectively. The weighted average remaining term on those same
promotional receivables was 7.7 months and 10.7 months as of October 31, 2006
and 2007, respectively. While overall these promotional receivables have a much
shorter weighted average term than non-promotional receivables, we receive less
income on these receivables, resulting in a reduction of the net interest margin
used in the calculation of the gain on the sale of receivables.
Net cash used in investing activities decreased by $10.3 million, from $13.4
million used in the fiscal 2007 period to $3.1 million used in the fiscal 2008
period. The decrease in cash used in investing activities resulted primarily
from the sales of property and equipment, and reduced purchases of property and
equipment in the current fiscal year. We entered into leases for certain of the
properties sold. The cash expended for property and equipment was used primarily
for construction of new stores and the reformatting of existing stores to better
support our current product mix. Based on current plans, we expect to increase
expenditures for property and equipment in the remainder of fiscal 2008 as we
open additional stores.
28
Net cash from financing activities decreased by $20.0 million from $1.3
million provided during the nine months ended October 31, 2006 to $18.7 million
used during the nine months ended October 31, 2007. The increase in cash used by
financing activities resulted primarily from an increase in the cash used to
purchase treasury stock. During the nine months ended October 31, 2007, we used
$20.7 million to purchase 873,185 shares of our common stock.
Off-Balance Sheet Financing Arrangements
Since we extend credit in connection with a large portion of our retail,
service maintenance and credit insurance sales, we have created a qualified
special purpose entity, which we refer to as the QSPE or the issuer, to purchase
customer receivables from us and to issue medium-term and variable funding notes
secured by the receivables 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 October 31, 2007, the issuer had issued three series of notes and bonds:
the 2002 Series A variable funding note with a total availability of $450
million, three classes of 2002 Series B bonds with an aggregate amount
outstanding of $70 million, of which $7.0 million was required to be placed in a
restricted cash account for the benefit of the bondholders, and three classes of
2006 Series A bonds with an aggregate amount outstanding of $150 million, of
which $6.0 million was required to be placed in a restricted cash account for
the benefit of the bondholders. The 2002 Series A variable funding note is
composed of a $250 million 364-day tranche, and a $200 million tranche that
matures in 2011. The 364-day commitment was recently renewed and increased, in
the amount of $150 million, by the note holders until July 31, 2008. The $150
million increase in the commitment will stay in place until the first to occur
of: (i) the QSPE completes a medium-term bond issuance, or (ii) the note is not
renewed by the note holders. At the time of the increase in the note, an
additional bank joined as the second note holder in the facility. If the net
portfolio yield, as defined by agreements, falls below 5.0%, then the issuer may
be required to fund additions to the cash reserves in the restricted cash
accounts. At October 31, 2007, the net portfolio yield was in compliance with
this requirement. Private institutional investors, primarily insurance
companies, purchased the 2002 Series B bonds at a weighted fixed rate of 5.25%
and 2006 Series A bonds at a weighted fixed rate of 5.75%. The weighted average
interest on the variable funding note during the month of October 2007 was
5.94%.
The issuer is currently preparing to market an additional series of fixed
rate bonds, but no assurance can be given that a transaction can be completed on
terms favorable to it. It is currently anticipated that the transaction will be
completed in the first or second quarter of the fiscal year ending January 31,
2009. The proceeds of the new issuance will provide the issuer additional
capacity for the purchase of our receivables. If the issuer is unable to
complete the new bond issuance or increase the total availability under the 2002
Series A variable funding note, then, after its current funding sources are
exhausted, we may have to fund growth in the receivables portfolio until the
issuer can obtain additional funding. At October 31, 2007, the issuer had $220.0
million of available capacity under the 2002 Series A variable funding note to
fund receivables purchases and the required $10 million principal payments on
the 2002 Series B bonds. Additionally, at October 31, 2007, we had $19.2 million
of excess cash and $55.6 million of availability under our revolving credit
facilities, among other liquidity sources, to provide funding, if needed, to
fund receivable portfolio growth.
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
..25% multiplied by the average aggregate principal amount of receivables
serviced, including the amount of average aggregate defaulted receivables. The
issuer records revenues equal to the interest charged to the customer on the
receivables less losses, the cost of funds, the program administration fees paid
in connection with either the 2002 Series A, 2002 Series B or 2006 Series A bond
holders, the servicing fee and additional earnings to the extent they are
available.
29
The 2002 Series A variable funding note permits the issuer to borrow funds
up to $450 million to purchase receivables from us or make principal payments on
other bonds, thereby functioning as a "basket" to accumulate receivables. As
issuer borrowings under the 2002 Series A variable funding note approach $450
million, the issuer is required to request an increase in the 2002 Series A
amount or issue a new series of bonds and use the proceeds to pay down the then
outstanding balance of the 2002 Series A variable funding note, so that the
basket will once again become available to accumulate new receivables or meet
other obligations required under the transaction documents. As of October 31,
2007, borrowings under the 2002 Series A variable funding note were $220.0
million.
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the 2002 Series A
note, 2002 Series B bonds and 2006 Series A bonds due to its inability to
collect the transferred customer accounts, the issuer could not pay the
subordinated notes it has issued to us in partial payment for transferred
customer accounts, and the 2002 Series B and 2006 Series A bond holders could
claim the balance in its $13.0 million restricted cash account. We are also
contingently liable under a $20.0 million letter of credit that secures the
performance of our obligations or services under the servicing agreement as it
relates to the transferred assets that are part of the asset-backed
securitization facility.
The issuer is subject to certain affirmative and negative covenants
contained in the transaction documents governing the 2002 Series A variable
funding note, and the 2002 Series B and 2006 Series A bonds, including covenants
that restrict, subject to specified exceptions: the incurrence of non-permitted
indebtedness and other obligations and the granting of additional liens;
mergers, acquisitions, investments and disposition of assets; and the use of
proceeds of the program. The issuer also makes representations and warranties
relating to compliance with certain laws, payment of taxes, maintenance of its
separate legal entity, preservation of its existence, protection of collateral
and financial reporting. In addition, the program requires the issuer to
maintain a minimum net worth.
A summary of the significant financial covenants that govern the 2002 Series
A variable funding note compared to actual compliance status at October 31,
2007, is presented below:
Required
Minimum/
As reported Maximum
-------------- --------------
Issuer interest must exceed required minimum $70.0 million $68.1 million
Gross loss rate must be lower than required
maximum 3.9% 10.0%
Net portfolio yield must exceed required minimum 7.9% 2.0%
Payment rate must exceed required minimum 6.4% 3.0%
Note: All terms in the above table are defined by the asset backed credit
facility and may or may not agree directly to the financial statement
captions in this document.
Events of default under the 2002 Series A variable funding note and the 2002
Series B and 2006 Series A bonds, subject to grace periods and notice provisions
in some circumstances, include, among others: failure of the issuer to pay
principal, interest or fees; violation by the issuer of any of its covenants or
agreements; inaccuracy of any representation or warranty made by the issuer;
certain servicer defaults; failure of the trustee to have a valid and perfected
first priority security interest in the collateral; default under or
acceleration of certain other indebtedness; bankruptcy and insolvency events;
failure to maintain certain loss ratios and portfolio yield; change of control
provisions and certain other events pertaining to us. The issuer's obligations
under the program are secured by the receivables and proceeds.
30
Securitization Facilities
We finance most of our customer receivables through asset-backed
securitization facilities
----------------------------
| |
| 2002 Series A Note |
---->| $450 million Commitment |
| | $230 million Outstanding |
| | Credit Rating: P1/A1 |
| | Bank Commercial |
| | Paper Conduits |
Customer Receivables | ----------------------------
|
- -------------------------- -----------> -------------------------- | ----------------------------
| | | | | | 2002 Series B Bonds |
| | | Qualifying | | | $70 million |
| Retail | | Special Purpose |<---------->| Private Institutional |
| Sales | | Entity | | | Investors |
| Entity | | ("QSPE") | | | Class A: $42.0 mm (Aaa) |
| | | | | | Class B: $20.2 mm (A2) |
| | | | | | Class C: $7.8 mm (Baa2) |
- -------------------------- <----------- -------------------------- | ----------------------------
|
1. Cash Proceeds | ----------------------------
2. Subordinated Securities | | 2006 Series A Bonds |
3. Right to Receive Cash Flows | | $150 million |
Equal to Interest Spread |--->| Private Institutional |
| Investors |
| Class A: $90 mm (Aaa) |
| Class B: $43.3 mm (A2) |
| Class C: $16.7 mm (Baa2) |
----------------------------
Both the bank credit facility and the asset-backed securitization program
are significant factors relative to our ongoing liquidity and our ability to
meet the cash needs associated with the growth of our business. Our inability to
use either of these programs because of a failure to comply with their covenants
would adversely affect our continued growth. Funding of current and future
receivables under the QSPE's asset-backed securitization program can be
adversely affected if we exceed certain predetermined levels of re-aged
receivables, size of the secondary portfolio, the amount of promotional
receivables, write-offs, bankruptcies or other ineligible receivable amounts. If
the funding under the QSPE's asset-backed securitization program was reduced or
terminated, we would have to draw down our bank credit facility more quickly
than we have estimated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates under our bank credit facility are variable and are
determined, at our option, as the base rate, which is the greater of prime rate
or federal funds rate plus 0.50% plus the base rate margin, which ranges from
0.00% to 0.50%, or LIBOR plus the LIBOR margin, which ranges from 0.75% to
1.75%. Accordingly, changes in the prime rate, the federal funds rate or LIBOR,
which are affected by changes in interest rates generally, will affect the
interest rate on, and therefore our costs under, our bank credit facility. We
are also exposed to interest rate risk through the interest only strip we
receive from our sales of receivables to the QSPE. Since January 31, 2007, our
interest rate sensitivity has increased on the interest only strip as the
variable rate portion of the QSPE's debt has increased from $128.0 million, or
29.2% of its total debt, to $230.0 million, or 51.1% of its total debt.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, regarding the effectiveness of our disclosure controls and procedures
(as defined in 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act) as of the end of the period covered by this quarterly report. Based on that
evaluation, our management, including our Chief Executive Officer and our Chief
Financial Officer, concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to our
Company (including its consolidated subsidiaries) required to be included in our
periodic filings with the Securities and Exchange Commission. There have been no
changes in our internal control over financial reporting that occurred during
the quarter ended October 31, 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to our business from time
to time. Currently, we do not expect the outcome of any of this routine
litigation to have a material affect on our financial condition, results of
operations or cash flows. However, the results of these proceedings cannot be
predicted with certainty, and changes in facts and circumstances could impact
our estimate of reserves for litigation.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended January 31, 2007, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 25, 2006, we announced that our Board of Directors had authorized
a common stock repurchase program, permitting us to purchase, from time to time,
in the open market and in privately negotiated transactions, up to an aggregate
of $50.0 million of our common stock, dependent on market conditions and the
price of the stock.
During the quarter ended October 31, 2007, we made the following repurchases
of our common stock:
Total # of Shares Approximate
Purchased as Dollar Value of
Total # of Average Part of Publicly Shares That May
shares Price Paid Announced Yet Be Purchased
Period purchased per share Programs Under the Programs
------ ----------- ----------- ----------------- --------------------
August 1 - August 31, 2007 292,200 $ 23.35 292,200 $ 30,692,855
September 1 - September 30, 2007 249,900 $ 20.79 249,900 $ 25,498,150
October 1 - October 31, 2007 - $ - - $ 25,498,150
----------- -----------------
Total 542,100 542,100
=========== =================
32
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors since we last provided
disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule
14A.
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are
listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated
herein by reference.
33
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: November 29, 2007
34
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
35
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).
36
10.9.2 First Amendment to Credit Agreement dated August 28, 2006 by and
between Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc.,
the financial institutions listed on the signature pages thereto,
and JPMorgan Chase Bank, as Administrative Agent (incorporated
herein by reference to Exhibit 10.1 to Conn's Inc. Current Report on
Form 8-K (File No. 000-50421) as filed with the Securities and
Exchange Commission on August 28, 2006).
10.10 Receivables Purchase Agreement dated September 1, 2002, by and among
Conn Funding II, L.P., as Purchaser, Conn Appliances, Inc. and CAI,
L.P., collectively as Originator and Seller, and Conn Funding I,
L.P., as Initial Seller (incorporated herein by reference to Exhibit
10.10 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.10.1 First Amendment to Receivables Purchase Agreement dated August 1,
2006, by and among Conn Funding II, L.P., as Purchaser, Conn
Appliances, Inc. and CAI, L.P., collectively as Originator and
Seller (incorporated herein by reference to Exhibit 10.10.1 to
Conn's, Inc. Form 10-Q for the quarterly period ended July 31, 2006
(File No. 000-50421) as filed with the Securities and Exchange
Commission on September 15, 2006).
10.11 Base Indenture dated September 1, 2002, by and between Conn Funding
II, L.P., as Issuer, and Wells Fargo Bank Minnesota, National
Association, as Trustee (incorporated herein by reference to Exhibit
10.11 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.11.1 First Supplemental Indenture dated October 29, 2004 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on November 4,
2004).
10.11.2 Second Supplemental Indenture dated August 1, 2006 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on August 23,
2006).
10.12 Amended and Restated Series 2002-A Supplement dated September 10,
2007, by and between Conn Funding II, L.P., as Issuer, and Wells
Fargo Bank, National Association, as Trustee (incorporated herein by
reference to Exhibit 99.2 to Conn's, Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on September 11, 2007).
10.12.1 Amended and Restated Note Purchase Agreement dated September 10,
2007 by and between Conn Funding II, L.P., as Issuer, and Wells
Fargo Bank, National Association, as Trustee (incorporated herein by
reference to Exhibit 99.2 to Conn's, Inc. Current Report on Form
8-K filed September 11, 2007 (File No. 000-50421) as filed with the
Securities and Exchange Commission on September 11, 2007).
10.13 Series 2002-B Supplement to Base Indenture dated September 1, 2002,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo
Bank Minnesota, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.13 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).
10.13.1 Amendment to Series 2002-B Supplement dated March 28, 2003, by and
between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13.1 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2005 (File No. 000-50421) as filed
with the Securities and Exchange Commission on April 5, 2005).
37
10.14 Servicing Agreement dated September 1, 2002, by and among Conn
Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and Wells Fargo
Bank Minnesota, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).
10.14.1 First Amendment to Servicing Agreement dated June 24, 2005, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.1 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2005 (File No. 000-50421) as
filed with the Securities and Exchange Commission on August 30,
2005).
10.14.2 Second Amendment to Servicing Agreement dated November 28, 2005, by
and among Conn Funding II, L.P., as 10.14.2 Issuer, CAI, L.P., as
Servicer, and Wells Fargo Bank, National Association, as Trustee
(incorporated herein by reference to Exhibit 10.14.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
December 1, 2005).
10.14.3 Third Amendment to Servicing Agreement dated May 16, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.3 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as
filed with the Securities and Exchange Commission on September 15,
2006).
10.14.4 Fourth Amendment to Servicing Agreement dated August 1, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.4 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as
filed with the Securities and Exchange Commission on September 15,
2006).
10.15 Form of Executive Employment Agreement (incorporated herein by
reference to Exhibit 10.15 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on October 29, 2003).t
10.15.1 First Amendment to Executive Employment Agreement between Conn's,
Inc. and Thomas J. Frank, Sr., Approved by the stockholders May 26,
2005 (incorporated herein by reference to Exhibit 10.15.1 to Conn's,
Inc. Form 10-Q for the quarterly period ended July 31, 2005 (file
No. 000-50421) as filed with the Securities and Exchange Commission
on August 30, 2005).t
10.16 Form of Indemnification Agreement (incorporated herein by reference
to Exhibit 10.16 to Conn's, Inc. registration statement on Form S-1
(file no. 333-109046) as filed with the Securities and Exchange
Commission on September 23, 2003).t
10.17 Description of Compensation Payable to Non-Employee Directors
(incorporated herein by reference to Form 8-K (file no. 000-50421)
filed with the Securities and Exchange Commission on June 2, 2005).t
10.18 Dealer Agreement between Conn Appliances, Inc. and Voyager Service
Programs, Inc. effective as of January 1, 1998 (incorporated herein
by reference to Exhibit 10.19 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.1 Amendment #1 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.1 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
38
10.18.2 Amendment #2 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.2 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.3 Amendment #3 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.3 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.4 Amendment #4 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.4 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.5 Amendment #5 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of April 7, 2007 (incorporated herein by
reference to Exhibit 10.18.5 to Conn's, Inc. Form 10-Q for the
quarterly period ended July 31, 2007 (File No. 000-50421) as filed
with the Securities and Exchange Commission on August 30, 2007).
10.19 Service Expense Reimbursement Agreement between Affiliates Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager
Property and Casualty Insurance Company effective July 1, 1998
(incorporated herein by reference to Exhibit 10.20 to Conn's, Inc.
Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
10.19.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI, L.P., Affiliates Insurance Agency, Inc., American Bankers
Life Assurance Company of Florida, Voyager Property & Casualty
Insurance Company, American Bankers Life Assurance Company of
Florida, American Bankers Insurance Company of Florida and American
Bankers General Agency, Inc. effective July 1, 2005 (incorporated
herein by reference to Exhibit 10.20.1 to Conn's, Inc. Form 10-K for
the annual period ended January 31, 2006 (File No. 000-50421) as
filed with the Securities and Exchange Commission on March 30,
2006).
10.20 Service Expense Reimbursement Agreement between CAI Credit Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager
Property and Casualty Insurance Company effective July 1, 1998
(incorporated herein by reference to Exhibit 10.21 to Conn's, Inc.
Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
10.20.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI Credit Insurance Agency, Inc., American Bankers Life
Assurance Company of Florida, Voyager Property & Casualty Insurance
Company, American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company of Florida, American Reliable
Insurance Company, and American Bankers General Agency, Inc.
effective July 1, 2005 (incorporated herein by reference to Exhibit
10.21.1 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on March 30, 2006).
39
10.21 Consolidated Addendum and Amendment to Service Expense Reimbursement
Agreements by and among Certain Member Companies of Assurant
Solutions, CAI Credit Insurance Agency, Inc. and Affiliates
Insurance Agency, Inc. effective April 1, 2004 (incorporated herein
by reference to Exhibit 10.22 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.22 Series 2006-A Supplement to Base Indenture, dated August 1, 2006, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference
to Exhibit 10.23 to Conn's, Inc. Form 10-Q for the quarterly period
ended July 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on September 15, 2006).
10.23 Fourth Amended and Restated Subordination and Priority Agreement,
dated August 31, 2006, by and among Bank of America, N.A. and
JPMorgan Chase Bank, as Agent, and Conn Appliances, Inc. and/or its
subsidiary CAI, L.P (incorporated herein by reference to Exhibit
10.24 to Conn's, Inc. Form 10-Q for the quarterly period ended
October 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on November 30, 2006).
10.23.1 Fourth Amended and Restated Security Agreement, dated August 31,
2006, by and among Conn Appliances, Inc. and CAI, L.P. and Bank of
America, N.A. (incorporated herein by reference to Exhibit 10.24.1
to Conn's, Inc. Form 10-Q for the quarterly period ended October 31,
2006 (File No. 000-50421) as filed with the Securities and Exchange
Commission on November 30, 2006).
10.24 Letter of Credit and Reimbursement Agreement, dated September 1,
2002, by and among CAI, L.P., Conn Funding II, L.P. and SunTrust
Bank (incorporated herein by reference to Exhibit 10.25 to Conn's,
Inc. Form 10-Q for the quarterly period ended October 31, 2006 (File
No. 000-50421) as filed with the Securities and Exchange Commission
on November 30, 2006).
10.24.1 Amendment to Standby Letter of Credit dated August 23, 2006, by and
among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(incorporated herein by reference to Exhibit 10.25.1 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
November 30, 2006).
10.24.2 Amendment to Standby Letter of Credit dated September 20, 2006, by
and among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(incorporated herein by reference to Exhibit 10.25.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
November 30, 2006).
11.1 Statement re: computation of earnings per share is included under
Note 1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (incorporated herein by reference to
Exhibit 21 to Conn's, Inc. Form 10-Q for the quarterly period ended
July 31, 2007 (File No. 000-50421) as filed with the Securities and
Exchange Commission on August 30, 2007).
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 Executive Vice-Chairman of the Board in support
of Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
99.2 Subcertification by Chief Operating Officer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
40
99.3 Subcertification by Treasurer in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.4 Subcertification by Secretary in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.5 Subcertification of Executive Vice-Chairman of the Board, 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.
41
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: November 29, 2007
42
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: November 29, 2007
43
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 October 31, 2007 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, Thomas J. Frank,
Sr., Chairman of the Board and Chief Executive Officer of the Company and David
L. Rogers, Chief Financial Officer of the Company, hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Thomas J. Frank, Sr.
-----------------------------------------
Thomas J. Frank, Sr.
Chairman of the Board and
Chief Executive Officer
/s/ David L. Rogers
-----------------------------------------
David L. Rogers
Chief Financial Officer
Dated: November 29, 2007
A signed original of this written statement required by Section 906 has been
provided to Conn's, Inc. and will be retained by Conn's, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request. The foregoing
certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and
is not being filed as part of the Report or as a separate disclosure document.
44
EXHIBIT 99.1
SUBCERTIFICATION OF EXECUTIVE VICE-CHAIRMAN OF THE BOARD 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
Date: November 29, 2007
45
EXHIBIT 99.2
SUBCERTIFICATION OF CHIEF OPERATING OFFICER IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Timothy L. Frank, 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/ Timothy L. Frank
-----------------------------------------
Timothy L. Frank
President and Chief Operating Officer
Date: November 29, 2007
46
EXHIBIT 99.3
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: November 29, 2007
47
EXHIBIT 99.4
SUBCERTIFICATION OF SECRETARY IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Sydney K. Boone, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Sydney K. Boone, Jr.
-----------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Date: November 29, 2007
48
EXHIBIT 99.5
SUBCERTIFICATION OF EXECUTIVE VICE CHAIRMAN OF THE BOARD,
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 October 31, 2007 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, William C. Nylin,
Jr., Executive Vice-Chairman of the Board, Timothy L. Frank, 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
/s/ Timothy L. Frank
-----------------------------------------
Timothy L. Frank
President and Chief Operating Officer
/s/ David R. Atnip
-----------------------------------------
David R. Atnip
Senior Vice President and Treasurer
/s/ Sydney K. Boone, Jr.
-----------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Dated: November 29, 2007
A signed original of this written statement has been provided to Conn's, Inc.
and will be retained by Conn's, Inc. The foregoing certification is being
furnished solely to support certifications pursuant to 18 U.S.C. Section 1350
and is not being filed as part of the Report or as a separate disclosure
document.
49
