================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of l934
For the fiscal year ended January 31, 2009 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 (I.R.S. Employer
of incorporation or Identification Number)
organization)
3295 College Street
Beaumont, Texas 77701
(Address of Principal Executive Offices)
(409) 832-1696
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which Registered
------------------- ------------------------------------
Common Stock, par value $0.01 per share The NASDAQ Global Select Market, Inc
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes [ ] No [ x ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [ x ]
Indicate by check mark whether the registrant (1) 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One): Large accelerated filer [ ] Accelerated filer [ x ] Non-accelerated filer
[ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates as of July 31, 2008, was approximately $209.7 million based on
the closing price of the registrant's common stock as reported on the NASDAQ
Global Select Market, Inc.
There were 22,444,240 shares of common stock, $0.01 par value per share,
outstanding on March 23, 2009.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Definitive Proxy Statement for the Annual Meeting of
Stockholders to be held June 2, 2009 (incorporated herein by reference in Part
III).
================================================================================
TABLE OF CONTENTS
Page
----
PART I
------
ITEM 1. BUSINESS............................................................3
ITEM 1A. RISK FACTORS......................................................19
ITEM 1B. UNRESOLVED STAFF COMMENTS.........................................28
ITEM 2. PROPERTIES.........................................................28
ITEM 3. LEGAL PROCEEDINGS..................................................28
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................28
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES..............29
ITEM 6. SELECTED FINANCIAL DATA............................................30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........................................31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................................57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE........................................83
ITEM 9A. CONTROLS AND PROCEDURES.........................................83
ITEM 9B. OTHER INFORMATION...............................................84
PART III
--------
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE............85
ITEM 11. EXECUTIVE COMPENSATION............................................85
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.................................85
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE......................................................85
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................85
PART IV
-------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES........................86
SIGNATURES.................................................................87
EXHIBIT INDEX..............................................................88
2
PART I
ITEM 1. BUSINESS.
Unless the context indicates otherwise, references to "we," "us," and
"our" refer to the consolidated business operations of Conn's, Inc. and all of
its direct and indirect subsidiaries, limited liability companies and limited
partnerships.
Overview
We are a specialty retailer of home appliances and consumer electronics.
We sell home appliances including refrigerators, freezers, washers, dryers,
dishwashers and ranges, and a variety of consumer electronics including LCD,
plasma and DLP televisions, camcorders, digital cameras, computers and computer
accessories, Blu-ray and DVD players, video game equipment, portable audio, MP3
players, GPS devices and home theater products. We also sell home office
equipment, lawn and garden equipment, mattresses and furniture and we continue
to introduce additional product categories for the home and for consumer
entertainment to help increase same store sales and to respond to our customers'
product needs. We offer over 3,500 product items, or SKUs, at good-better-best
price points representing such brands as General Electric, Whirlpool,
Electrolux, Frigidaire, Friedrich, Maytag, LG, Mitsubishi, Samsung, Sony,
Toshiba, Bose, Canon, JVC, Serta, Simmons, Spring Air, Ashley, Lane, Broyhill,
Franklin, Hewlett Packard, Compaq, Poulan, Husqvarna and Toro. Based on revenue
in 2007, as reported in Twice, This Week in Consumer Electronics, we were the
9th largest retailer of home appliances and the 41st largest retailer of
consumer electronics in the United States.
We began as a small plumbing and heating business in 1890. We began
selling home appliances to the retail market in 1937 through one store located
in Beaumont, Texas. We opened our second store in 1959 and have since grown to
75 stores. We have been known for providing excellent customer service for over
118 years. We believe that our customer-focused business strategies make us an
attractive alternative to appliance and electronics superstores, department
stores and other national, regional and local retailers. We strive to provide
our customers with:
o a high level of customer service;
o highly trained and knowledgeable sales personnel;
o a broad range of competitively priced, customer-driven, brand name
products;
o flexible financing alternatives through our proprietary credit
programs;
o next day delivery capabilities; and
o outstanding product repair service.
We believe that these strategies drive repeat purchases and enable us to
generate substantial brand name recognition and customer loyalty. During fiscal
2009, approximately 67% of our credit customers, based on the number of invoices
written, were repeat customers.
In 1994, we realigned and added to our management team, enhanced our
infrastructure and refined our operating strategy to position ourselves for
future growth. From fiscal 1994 to fiscal 1999, we selectively grew our store
base from 21 to 26 stores while improving operating margins from 5.2% to 8.7%.
Since fiscal 1999, we have generated significant growth in our number of stores,
revenue and profitability. Specifically:
o we have grown from 26 stores to 75 stores, an increase of over 188%,
with plans to continue our store development in the future;
o total revenues have grown 280%, at a compounded annual rate of
14.3%, from $234.5 million in fiscal 1999, to $890.8 million in
fiscal 2009;
3
o our operating margin has averaged 8.0% since fiscal 1999, including
the impacts of the non-cash fair value decreases recorded during
fiscal years 2008 and 2009; it was 4.8% for fiscal 2009; and
o our same store sales growth from fiscal 1999 through fiscal 2009 has
averaged 7.5%; it was 2.0% for fiscal 2009. See additional discussion
about same store sales under Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Our principal executive offices are located at 3295 College Street,
Beaumont, Texas 77701. Our telephone number is (409) 832-1696, and our corporate
website is www.conns.com. We do not intend for information contained on our
website to be part of this Form 10-K.
Industry Overview
The home appliance and consumer electronics industry includes major home
appliances, small appliances, home office equipment and software, LCD, plasma
and DLP televisions, and audio, video and portable electronics. Sellers of home
appliances and consumer electronics include large appliance and electronics
superstores, national chains, small regional chains, single-store operators,
appliance and consumer electronics departments of selected department and
discount stores and home improvement centers.
Based on data published in Twice, a weekly magazine dedicated to the home
appliances and consumer electronics industry in the United States, the top 100
major appliance retailers reported sales of approximately $23.8 billion in 2007,
down approximately 0.5% from reported sales in 2006 of approximately $23.9
billion. The retail appliance market is large and concentrated among a few major
dealers. Sears has been the leader in the retail appliance market, with a market
share of the top 100 retailers of approximately 35% in 2007 and 37% in 2006.
Lowe's and Home Depot held the second and third place positions, respectively,
in national market share in 2007. Based on revenue in 2007, we were the 9th
largest retailer of home appliances in the United States.
In the home appliance market, many factors drive growth, including
consumer confidence, economic conditions, household formations and new product
introductions. Product design and innovation is rapidly becoming a key driver of
growth in this market. Products recently introduced include high efficiency,
front-loading laundry appliances and three door refrigerators, and variations on
these products, including new features. Additionally, product appearance,
including new color options and stainless steel appliances, is stimulating
consumer interest.
As measured by Twice, the top 100 consumer electronics retailers in the
United States reported equipment and software sales of $124.9 billion in 2007, a
10.5% increase from the $113.1 billion reported in 2006. According to the
Consumer Electronics Association, or CEA, total industry manufacturer sales of
consumer electronics products in the world, are projected to exceed $700 billion
by 2009, up 4.9% from $658 billion in 2008. The consumer electronics market is
highly fragmented. We estimate, based on data provided in Twice, that the two
largest consumer electronics superstore chains together accounted for
approximately 36% of the total electronics sales attributable to the 100 largest
retailers in 2007. Based on revenue in 2007, we were the 41st largest retailer
of consumer electronics in the United States. New entrants in both the home
appliances and consumer electronics industries have been successful in gaining
market share by offering similar product selections at lower prices.
Technological advancements and the introduction of new products have
largely driven growth in the consumer electronics market. Recently, industry
growth has been fueled primarily by the introduction of products that
incorporate digital technology, such as high definition flat-panel and
projection televisions, Blu-ray and traditional DVD players, digital cameras and
camcorders, digital stereo receivers, satellite technology and MP3 products.
Digital products offer significant advantages over their analog counterparts,
including better clarity and quality of video and audio, durability of recording
and compatibility with computers. Due to these advantages, we believe that
digital technology will continue to drive industry growth as consumers replace
their analog products with digital products. We believe the following product
advancements will continue to fuel growth in the consumer electronics industry
and that they offer us the potential for significant sales growth:
4
o Digital Television (DTV and High Definition TV). The Federal
Communications Commission has set a date of June 12, 2009, for all
commercial television stations to transition from broadcasting analog
signals to digital signals. To view a digital transmission, consumers
will need either a digital television or a set-top box converter
capable of converting the digital broadcast for viewing on an analog
set. According to the International CES, the world's largest consumer
technology tradeshow, as the switch to digital television nears, sales
of DTVs will approach 35 million in 2009, with DTV being the largest
category within the Consumer Electronics market, representing 15
percent of total industry sales. We believe the high clarity digital
flat-panel televisions in both LCD and plasma formats has increased
the quality and sophistication of these entertainment products and
will be a key driver of digital television growth as more digital and
high definition content is made available either through traditional
distribution methods or through emerging content delivery systems. As
prices continue to drop on such products, they become increasingly
attractive to larger and more diverse groups of consumers.
o Digital Versatile Disc (DVD). According to the CDRinfo, an online
publication dedicated to CD, DVD, and other related optical media
technology, the DVD player has been the fastest growing consumer
electronics product in history. First introduced in March 1997, DVD
players are currently in 91% of U.S. homes. We believe newer
technology, such as Blu-ray high definition DVD, and portable players
will continue to drive consumer interest in this entertainment
category. Twice projects in 2009, revenues of Blu-ray devices around
$1.2 billion.
Business Strategy
Our objective is to be the leading specialty retailer of home appliances
and consumer electronics in each of our markets. We strive to achieve this
objective through a continuing focus on superior execution in five key areas:
merchandising, consumer credit, distribution, product service and training.
Successful execution in each area relies on the following strategies:
o Offering a broad range of customer-driven, brand name products. We
offer a comprehensive selection of high-quality, brand name
merchandise to our customers at guaranteed low prices. Consistent with
our good-better-best merchandising strategy, we offer a wide range of
product selections from entry-level models through high-end models. We
maintain strong relationships with the approximately 150 manufacturers
and distributors that enable us to offer over 3,500 SKUs our
customers. Our principal suppliers include General Electric,
Whirlpool, Frigidaire, Maytag, LG, Mitsubishi, Samsung, Sony, Toshiba,
Hitachi, Serta, Ashley, Bose, Friedrich, Lane, Hewlett Packard,
Compaq, Poulan, Husqvarna and Toro.
o Offering flexible financing alternatives through our proprietary
credit programs. In the last three years, we financed, on average,
approximately 61% of our retail sales through our internal credit
programs. We believe our credit programs expand our potential customer
base, increase our sales revenue and enhance customer loyalty by
providing our customers immediate access to financing alternatives
that our competitors typically do not offer. Our credit department
makes all credit decisions internally, entirely independent of our
sales personnel. We provide special consideration to customers with
credit history with us. Before extending credit, we consider our loss
experience by product category and the customer's credit worthiness in
determining the down payment amount and other credit terms. This
facilitates product sales while keeping our credit risk within an
acceptable o range. We provide a full range of credit products,
including interest-free programs for the highest credit quality
customers and our secondary portfolio for our credit-challenged
customers. The secondary portfolio, which has generally lower average
credit scores than our primary portfolio, undergoes more intense
internal underwriting scrutiny to mitigate the inherently greater
risk, including address and employment verification and reference
checks. Approximately 58% of our customers who have active credit
accounts with us take advantage of our in-store payment option and
come to our stores each month to make their payments, which we believe
results in additional sales to these customers. We contact customers
with past due accounts daily and attempt to work with them to collect
payments in times of financial difficulty or periods of economic
downturn. Our experience in credit underwriting and the collections
process has enabled us to achieve an average net loss ratio of 3.1%
over the past three years on the credit portfolio that we manage,
including receivables transferred to our Qualifying Special Purpose
Entity or QSPE.
o Maintaining next day distribution capabilities. We maintain four
regional distribution centers and four other related facilities that
cover all of the major markets in which we operate. These facilities
are part of a sophisticated inventory management system that also
includes a fleet of approximately 90 transfer and delivery vehicles
that service all of our markets. Our distribution operations enable us
to deliver products on the day after the sale for approximately 93% of
our customers who scheduled delivery during that timeframe.
5
o Providing outstanding product repair service. We service every product
that we sell, and we service only the products that we sell. In this
way, we can assure our customers that they will receive our service
technicians' exclusive attention to their product repair needs. All of
our service centers are authorized factory service facilities that
provide trained technicians to offer in-home diagnostic and repair
service utilizing a fleet of approximately 130 service vehicles as
well as on-site service and repairs for products that cannot be
repaired in the customer's home.
o Developing and retaining highly trained and knowledgeable sales
personnel. We require all sales personnel to specialize in home
appliances or consumer electronics. Some of our sales associates
qualify in more than one specialty. This specialized approach allows
the sales person to focus on specific product categories and become an
expert in selling and using products in those categories. New sales
personnel must complete an intensive classroom training program and
additional time riding in a delivery truck and a service truck to
observe how we serve our customers after the sale is made.
o Providing a high level of customer service. We endeavor to maintain a
very high level of customer service as a key component of our culture,
which has resulted in average customer satisfaction levels of
approximately 90% over the past three years. We measure customer
satisfaction on the sales floor, in our delivery operation and in our
service department by sending survey cards to all customers to whom we
have delivered or installed a product or made a service call. Our
customer service resolution department attempts to address all
customer complaints within 48 hours of receipt.
Store Development and Growth Strategy
In addition to executing our business strategy, we intend to continue
to achieve profitable, controlled growth by increasing same store sales, opening
new stores and updating, expanding or relocating our existing stores.
o Increasing same store sales. We plan to continue to increase our same
store sales by:
o continuing to offer quality products at competitive prices;
o re-merchandising our product offerings in response to changes in
consumer interest and demand;
o adding new merchandise to our existing product lines;
o training our sales personnel to increase sales closing rates;
o updating our stores as needed;
o continuing to promote sales of computers and smaller
electronics, such as video game equipment and GPS devices,
including the expansion of high margin accessory items;
o continuing to provide a high level of customer service in sales,
delivery and servicing of our products; and
o increasing sales of our merchandise, finance products, service
maintenance agreements and credit insurance through direct mail
and in-store credit promotion programs.
6
o Opening new stores. While we have no new stores currently under
development for fiscal 2010, we intend to take advantage of our
reliable infrastructure and proven store model to continue to open new
stores in the future, dependent upon future capital availability. This
infrastructure includes our proprietary management information
systems, training processes, distribution network, merchandising
capabilities, supplier relationships, product service capabilities and
centralized credit approval and collection management processes. We
intend to expand our store base in existing, adjacent and new markets,
as follows:
o Existing and adjacent markets. We intend to increase our market
presence by opening new stores in our existing markets and in
adjacent markets as we identify the need and opportunity. New
store openings in these locations will allow us to maximize
opportunity in those markets and leverage our existing
distribution network, advertising presence, brand name
recognition and reputation. In fiscal 2009, we opened new stores
in Dallas, Lufkin, Houston and South Texas.
o New markets. During fiscal 2008 we opened our first store in
Oklahoma and opened two additional stores in the market during
fiscal 2009. We intend to consider new markets over the next
several fiscal years. We intend to first address markets in
states in which we currently operate. We expect that new store
growth will include major metropolitan markets in Texas and have
also identified a number of smaller markets within Texas,
Louisiana and Oklahoma in which we expect to explore new store
opportunities. Our long-term growth plans include markets in
other areas of significant population density in neighboring
states.
o Updating, expanding or relocating existing stores. Over the last three
years, we have updated, expanded or relocated many of our stores. We
continue to update our prototype store model and implement it at new
locations and in existing locations in which the market demands
support the required design changes. As we continue to add new stores
or update or replace existing stores, we intend to modify our floor
plan to include elements of this new model. We continuously evaluate
our existing and potential sites to ensure our stores are in the best
possible locations and relocate stores that are not properly
positioned. We typically lease rather than purchase our stores to
retain the flexibility of managing our financial commitment to a
location if we later decide that the store is performing below our
standards or the market would be better served by a relocation. After
updating, expanding or relocating a store, we expect to increase same
store sales at the store.
The addition of new stores and new and expanded product categories
have played, and we believe will continue to play, a significant role in our
continued growth and success. We currently operate 75 retail stores located in
Texas, Louisiana and Oklahoma. We opened six stores in fiscal 2006 and seven
stores in each of fiscal 2008 and 2009. Additionally, we relocated three stores
during fiscal 2009. While we have no new stores currently under development for
fiscal 2010, we plan to continue our store development program in the future,
with a long-range plan of increasing the store count by approximately 10% each
year, and will continue to update a portion of our existing stores each year. We
believe that continuing our strategies of updating existing stores, growing our
store base and locating our stores in desirable geographic markets are essential
for our future success.
Customers
We do not have a significant concentration of sales with any
individual customer and, therefore, the loss of any one customer would not have
a material impact on our business. No single customer accounts for more than 10%
of our total revenues; in fact, no single customer accounted for more than
$500,000 (less than 0.1%) of our total revenue of $890.8 million during the year
ended January 31, 2009.
7
Products and Merchandising
Product Categories. Each of our stores sells the major categories of
products shown below. The following table, which has been adjusted from previous
filings to ensure comparability, presents a summary of total revenues for the
years ended January 31, 2007, 2008, and 2009:
Year Ended January 31,
-----------------------------------------------
2007 2008 2009
--------------- --------------- ---------------
Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------
Consumer electronics.................................................................$218,350 28.6% $244,872 29.7% $305,056 34.2%
Home appliances...................................................................... 230,950 30.4 223,877 27.2 221,474 24.9
Track................................................................................ 90,329 11.9 101,289 12.3 109,799 12.3
Furniture and mattresses............................................................. 51,078 6.7 62,797 7.6 68,869 7.7
Lawn and garden...................................................................... 16,741 2.2 20,914 2.5 21,132 2.4
Delivery............................................................................. 11,380 1.5 12,524 1.5 12,423 1.4
Other................................................................................ 5,131 0.7 5,298 0.7 4,976 0.6
-------- ------ -------- ------ -------- ------
Total product sales............................................................... 623,959 82.0 671,571 81.5 743,729 83.5
Service maintenance agreement
commissions........................................................................ 30,567 4.0 36,424 4.4 40,199 4.5
Service revenues..................................................................... 22,411 3.0 22,997 2.8 21,121 2.4
-------- ------ -------- ------ -------- ------
Total net sales................................................................... 676,937 89.0 730,992 88.7 805,049 90.4
Finance charges and other (1)........................................................ 83,720 11.0 93,136 11.3 85,701 9.6
-------- ------ -------- ------ -------- ------
Total revenues....................................................................$760,657 100.0% $824,128 100.0% $890,750 100.0%
======== ====== ======== ====== ======== ======
Note (1) - Includes non-cash fair value adjustments reducing interests in
securitized assets by $4.8 million and $24.5 million, in the years ended January
31, 2008 and 2009, respectively.
Within these major product categories (excluding service maintenance agreements,
service revenues and delivery and installation), we offer our customers over
3,500 SKUs in a wide range of price points. Most of these products are
manufactured by brand name companies, including General Electric, Whirlpool,
Electrolux, Frigidaire, Friedrich, Maytag, LG, Mitsubishi, Samsung, Sony,
Toshiba, Bose, Canon, JVC, Serta, Simmons, Spring Air, Ashley, Lane, Broyhill,
Franklin, Hewlett Packard, Compaq, Poulan, Husqvarna and Toro. As part of our
good-better-best merchandising strategy, our customers are able to choose from
products ranging from low-end to mid- to high-end models in each of our key
product categories, as follows:
Category Products Selected Brands
-------- -------- ---------------
Home appliances Refrigerators, freezers, washers, dryers, General Electric, Frigidaire, Whirlpool,
ranges, dishwashers, built-ins, air Maytag, LG, KitchenAid, Sharp, Friedrich,
conditioners and vacuum cleaners Roper, Hoover and Eureka
Consumer electronics LCD, plasma, and DLP televisions, and home Sony, Samsung, Mitsubishi, LG, Toshiba,
theater systems Yamaha and Bose
Track Computers, computer peripherals, Hewlett Packard, Compaq, Sony, Canon,
camcorders, digital cameras, DVD players, Garmin, Nintendo, Microsoft and Yamaha
audio components, compact disc players, GPS
devices, video game equipment, speakers and
portable electronics (e.g. mp3 players)
Other Lawn and garden, furniture and mattresses Poulan, Husqvarna, Toro, Weedeater, Ashley,
Broyhill, Lane, Franklin, Spring Air,
Simmons and Serta
8
Purchasing. We purchase products from over 150 manufacturers and
distributors. Our agreements with these manufacturers and distributors typically
cover a one or two year time period, are renewable at the option of the parties
and are terminable upon 30 days written notice by either party. Similar to other
specialty retailers, we purchase a significant portion of our total inventory
from a limited number of vendors. During fiscal 2009, 56.9% of our total
inventory purchases were from five vendors, including 19.3%, 11.5% and 9.9% of
our total inventory purchases from Samsung, Whirlpool and Sony, respectively.
The loss of any one or more of these key vendors or our failure to establish and
maintain relationships with these and other vendors could have a material
adverse effect on our results of operations and financial condition. We have no
indication that any of our suppliers will discontinue selling us merchandise. We
have not experienced significant difficulty in maintaining adequate sources of
merchandise, and we generally expect that adequate sources of merchandise will
continue to exist for the types of products we sell.
Merchandising Strategy. We focus on providing a comprehensive selection
of high-quality merchandise to appeal to a broad range of potential customers.
Consistent with our good-better-best merchandising strategy, we offer a wide
range of product selections from entry-level models through high-end models. We
primarily sell brand name warranted merchandise. Our established relationships
with major appliance and electronic vendors and our affiliation with NATM, a
major buying group with $3.8 billion in purchases annually, give us purchasing
power that allows us to offer custom-featured appliances and electronics and
provides us a competitive selling advantage over other independent retailers. As
part of our merchandising strategy, we operate three clearance centers with two
in Houston and one in Dallas to help sell damaged, used or discontinued
merchandise.
Pricing. We emphasize competitive pricing on all of our products and
maintain a low price guarantee that is valid in all markets for 10 to 30 days
after the sale, depending on the product. At most of our stores, to print an
invoice that contains pricing other than the price maintained within our
computer system, sales personnel must call a special "hotline" number at the
corporate office for approval. Personnel staffing this hotline number are
familiar with competitor pricing and are authorized to make price adjustments to
fulfill our low price guarantee when a customer presents acceptable proof of the
competitor's lower price. This centralized function allows us to maintain
control of pricing and gross margins, and to store and retrieve pricing data of
our competitors.
Customer Service
We focus on customer service as a key component of our strategy. We
believe our next day delivery option is one of the keys to our success.
Additionally, we attempt to answer and resolve all customer complaints within 48
hours of receipt. We track customer complaints by individual salesperson,
delivery person and service technician. We send out over 38,000 customer
satisfaction survey cards each month covering all deliveries and service calls.
Based upon a response rate from our customers of approximately 16%, we
consistently report an average customer satisfaction level of approximately 90%.
9
Store Operations
Stores. We currently operate 75 retail and clearance stores located in
Texas, Louisiana and Oklahoma. We recently closed our clearance center in San
Antonio, Texas, to provide additional space for the expansion of our credit
collection center, which was located in the same facility. The following table
illustrates our markets, the number of freestanding and strip mall stores in
each market and the calendar year in which we opened our first store in each
market:
Number of Stores
----------------
Stand Strip
Market Alone Mall
- ------------------------------------------------------------------------------------------------------------------- -------- -------
Houston............................................................................................................ 6 17
San Antonio/Austin................................................................................................. 5 9
Golden Triangle (Beaumont, Port Arthur, Lufkin and Orange, Texas
and Lake Charles, Louisiana).................................................................................. 1 5
Baton Rouge/Lafayette.............................................................................................. 1 4
Corpus Christi..................................................................................................... 1 0
Dallas/Fort Worth.................................................................................................. 1 18
South Texas........................................................................................................ 1 3
Oklahoma........................................................................................................... 0 3
-------- -------
Total.............................................................................................................. 16 59
======== =======
Our stores have an average selling space of approximately 22,000 square
feet, plus a rear storage area averaging approximately 5,500 square feet for
fast-moving or smaller products that customers prefer to carry out rather than
wait for in-home delivery. Three of our stores are clearance centers for
discontinued product models and damaged merchandise, returns and repossessed
product located in our Houston and Dallas markets and contain 40,800 square feet
of combined selling space. All stores are open from 10:00 a.m. to 9:30 p.m.
Monday through Friday, from 9:00 a.m. to 9:30 p.m. on Saturday, and from 11:00
a.m. to 7:00 p.m. on Sunday. We also offer extended store hours during the
holiday selling season.
Approximately 79% our stores are located in strip shopping centers and
regional malls, with the balance being stand-alone buildings in "power centers"
of big box consumer retail stores. All of our locations have parking available
immediately adjacent to the store's front entrance. Our storefronts have a
distinctive front that guides the customer to the entrance of the store. Inside
the store, a large colorful tile track circles the interior floor of the store.
One side of the track leads the customer to major appliances, while the other
side of the track leads the customer to a large display of television and home
theater products. The inside of the track contains various home office and
consumer electronic products such as computers, laptops, printers, Blu-ray and
DVD players, camcorders, digital cameras, MP3 players, video game equipment and
GPS devices. Mattresses, furniture and lawn and garden equipment displays occupy
the rear of the sales floor. To reach the cashier's desk at the center of the
track area, our customers must walk past our products. We believe this increases
sales to customers who have purchased products from us on credit in the past and
who return to our stores to make their monthly credit payments.
We have updated many of our stores in the last three years. We expect to
continue to update our stores as needed to address each store's specific needs.
All of our updated stores, as well as our new stores, include modern interior
selling spaces featuring attractive signage and display areas specifically
designed for each major product type. Our prototype store for future expansion
has from 20,000 to 25,000 square feet of retail selling space, which
approximates the average size of our existing stores and a rear storage area of
between 5,000 and 7,000 square feet. Our investment to update our stores has
averaged approximately $96,800 per store over the past three years, and as a
result of the updating, we expect to increase same store sales at those stores.
Over the last three years, we have invested approximately $5.4 million updating,
refurbishing or relocating our existing stores. We have recently updated 13
stores and have 17 stores in the process of being updated, with the plan to
spend an average of approximately $250,000 per store.
Site Selection. Our stores are typically located adjacent to freeways or
major travel arteries and in the vicinity of major retail shopping areas. We
prefer to locate our stores in areas where our prominent storefront will be the
anchor of the shopping center or readily visible from major thoroughfares. We
also attempt to locate our stores in the vicinity of major home appliance and
electronics superstores. We have typically entered major metropolitan markets
where we can potentially support at least 10 to 12 stores. We believe this
number of stores allows us to optimize advertising and distribution costs. We
have and may continue to elect to experiment with opening lower numbers of new
stores in smaller communities where customer demand for products and services
outweighs any extra cost. Other factors we consider when evaluating potential
markets include the distance from our distribution centers, our existing store
locations and store locations of our competitors and population, demographics
and growth potential of the market.
10
Store Economics. We lease 70 of our 75 current store locations, with an
average monthly rent of $20,900. Our average per store investment for the 19 new
leased stores we have opened in the last three years was approximately $1.4
million, including leasehold improvements, fixtures and equipment and inventory
(net of accounts payable). Our total investment for the location that was built
in the last two years totaled approximately $4.6 million, including land,
buildings, fixtures and equipment and inventory (net of accounts payable). For
these new stores, excluding the clearance center, the net sales per store have
averaged $0.6 million per month.
Our new stores have typically been profitable on an operating basis
within their first three to six months of operation and, on average, have
returned our net cash investment in 20 months or less. We consider a new store
to be successful if it achieves $8 million to $9 million in sales volume and 4%
to 7% in operating margins before other ancillary revenues and allocations of
overhead and advertising in the first full year of operation. We expect
successful stores that have matured, which generally occurs after two to three
years of operations, to generate annual sales of approximately $12 million to
$15 million and 9% to 12% in operating margins before other ancillary revenues
and overhead and allocations. However, depending on the credit and insurance
penetration of an individual store, we believe that a store that does not
achieve these levels of sales can still contribute significantly to our pretax
margin.
Personnel and Compensation. We staff a typical store with a store
manager, an assistant manager, an average of 20 sales personnel and other
support staff including cashiers and/or porters based on store size and
location. Managers have an average tenure with us exceeding five years and
typically have prior sales floor experience. In addition to store managers, we
have seven district managers that generally oversee from seven to ten stores in
each market. Our senior retail management personnel generally have six to twenty
years of sales experience.
We compensate the majority of our sales associates on a straight
commission arrangement, while we generally compensate store managers on a salary
basis plus incentives and cashiers at an hourly rate. In some instances, store
managers receive earned commissions plus base salary. We believe that because
our store compensation plans are tied to sales, they generally provide us an
advantage in attracting and retaining highly motivated employees.
Training. New sales personnel must complete an intensive classroom
training program. We then require them to spend additional time riding in
delivery and service trucks to gain an understanding of how we serve our
customers after the sale is made. Installation and delivery staff and service
personnel receive training through an on-the-job program in which individuals
are assigned to an experienced installation and delivery or service employee as
helpers prior to working alone. In addition, our employees benefit from on-site
training conducted by many of our vendors.
We attempt to identify store manager candidates early in their careers
with us and place them in a defined program of training. They generally first
attend our in-house training program, which provides guidance and direction for
the development of managerial and supervisory skills. They then attend a Dale
Carnegie(R) certified management course that helps solidify their management
knowledge and builds upon their internal training. After completion of these
training programs, manager candidates work as assistant managers for six to
twelve months and are then allowed to manage one of our smaller stores, where
they are supervised closely by the store's district manager. We give new
managers an opportunity to operate larger stores as they become more proficient
in their management skills. Each store manager attends mandatory training
sessions on a monthly basis and also attends bi-weekly sales training meetings
where participants receive and discuss new product information.
11
Marketing
We design our marketing and advertising programs to increase our brand
name recognition, educate consumers about our products and services and generate
customer traffic in order to increase sales. We conduct our advertising programs
primarily through newspapers, radio and television stations, direct mail,
telephone and our website. Our promotional programs include the use of
discounts, rebates, product bundling and no-interest financing plans.
Our website, www.conns.com, provides customers the ability to purchase
our products on-line, offers information about our selection of products and
provides useful information to the consumer on pricing, features and benefits
for each product, in addition to required corporate governance information. Our
website also allows the customers residing in the markets in which we operate
retail locations to apply and be considered for credit. The website currently
averages approximately 7,800 visits per day from potential and existing
customers and during fiscal 2009 was a source of credit applications. The
website is linked to a call center, allowing us to better assist customers with
their credit and product needs.
Distribution and Inventory Management
We typically locate our stores in close proximity of our four regional
distribution centers located in Houston, San Antonio, Dallas and Beaumont, Texas
and smaller cross-dock facilities in Austin and Harlingen, Texas, Lafayette,
Louisiana and Oklahoma City, Oklahoma. This enables us to deliver products to
our customers quickly, reduces inventory requirements at the individual stores
and facilitates regionalized inventory and accounting controls.
In our retail stores we maintain an inventory of fast-moving items and
products that the customer is likely to carry out of the store. Our
sophisticated Distribution Inventory Sales computer system and the use of
scanning technology in our distribution centers allow us to determine, on a
real-time basis, the exact location of any product we sell. If we do not have a
product at the desired retail store at the time of sale, we can provide it
through our distribution system on a next day basis.
We maintain a fleet of tractors and trailers that allow us to move
products from market to market and from distribution centers to stores to meet
customer needs. Our fleet of home delivery vehicles enables our highly-trained
delivery and installation specialists to quickly complete the sales process,
enhancing customer service. We receive a delivery fee based on the products sold
and the services needed to complete the delivery. Additionally, we are able to
complete deliveries to our customers on the day after the sale for approximately
93% of our customers who have scheduled delivery during that timeframe.
Finance Operations
General. We sell our products for cash or for payment through major
credit cards, in addition to offering our customers several financing
alternatives through our proprietary credit programs. In the last three fiscal
years, we financed, on average, approximately 61% of our retail sales through
one of our two credit programs. We offer our customers a choice of installment
payment plans and revolving credit plans through our primary credit portfolio.
We also offer an installment program through our secondary credit portfolio to a
limited number of customers who do not qualify for credit under our primary
credit portfolio. Additionally, the most credit worthy customers in our primary
credit portfolio may be eligible for no-interest financing plans.
12
The following table shows our product and service maintenance agreements
sales, net of returns and allowances, by method of payment for the periods
indicated.
Year Ended January 31,
-----------------------------------------------
2007 2008 2009
--------------- --------------- ---------------
Amount % Amount % Amount %
-------- ------ -------- ------ -------- ------
Cash and other credit cards..........................................................$274,533 42.0% $267,931 37.8% $293,131 37.4%
Primary credit portfolio:
Installment....................................................................... 262,653 40.1 340,274 48.1 390,040 49.8
Revolving......................................................................... 43,225 6.6 34,025 4.8 23,105 2.9
Secondary credit portfolio........................................................... 74,115 11.3 65,765 9.3 77,652 9.9
-------- ------ -------- ------ -------- ------
Total.............................................................................$654,526 100.0% $707,995 100.0% $783,928 100.0%
======== ====== ======== ====== ======== ======
Credit Approval. Our credit programs are managed by our centralized
credit underwriting department staff, independent of sales personnel. As part of
our centralized credit approval process, we have developed a proprietary
standardized scoring model that provides preliminary credit decisions, including
down payment amounts and credit terms, based on both customer and product risk.
The weighted average origination credit score of the receivables included in the
portfolio was 608 at January 31, 2009, excluding bankruptcy accounts and
accounts that had no credit score. While we automatically approve some credit
applications from customers, approximately 87% of all of our credit decisions
are based on evaluation of the customer's creditworthiness by a qualified credit
grader. As of January 31, 2009, we employed over 530 full-time and part-time
employees who focus on credit approval, collections and credit customer service.
Employees in these operational areas are trained to follow our strict
methodology in approving credit, collecting our accounts, and charging off any
uncollectible accounts based on pre-determined aging criteria, depending on
their area of responsibility.
Part of our ability to control delinquency and net charge-off is based on
the level of down payments that we require and the purchase money security
interest that we obtain in the product financed, which reduce our credit risk
and increase our customers' ability and willingness to meet their future
obligations. We require the customer to provide or purchase proof of credit
property insurance coverage to offset potential losses relating to theft or
damage of the product financed.
Installment accounts are paid over a specified period of time with set
monthly payments. Revolving accounts provide customers with a specified amount
which the customer may borrow, repay and re-borrow so long as the credit limit
is not exceeded. Most of our installment accounts provide for payment over 12 to
36 months, with the average account in the primary credit portfolio remaining
outstanding for approximately 13 to 15 months. Our revolving accounts remain
outstanding approximately 12 to 14 months. During fiscal 2009, approximately 30%
of the applications approved under the primary program were approved
automatically through our computer system based on the customer's credit
history. The remaining applications, of both new and repeat customers, are sent
to an experienced in-house credit grader.
We created our secondary credit portfolio program to meet the needs of
those customers who do not qualify for credit under our primary program,
typically due to past credit problems or lack of credit history. If we cannot
approve a customer's application for credit under our primary portfolio, we
automatically send the application to the credit staff of our secondary
portfolio for further consideration, using stricter underwriting criteria. The
additional requirements include verification of employment and recent work
history, reference checks and higher required down payment levels. We offer only
the installment program to those customers that qualify under these stricter
underwriting criteria, and these customers are not eligible for our no-interest
programs. An experienced, in-house credit grader administers the credit approval
process for all applications received under our secondary portfolio program.
Most of the installment accounts approved under this program provide for
repayment over 12 to 36 months, with the average account was remaining
outstanding for approximately 19 to 21 months.
13
The following tables present, for comparison purposes, information
regarding our two credit portfolios.
Primary Portfolio (1)
----------------------------------------------
Year Ended January 31,
----------------------------------------------
2007 2008 2009
--------------- -------------- ---------------
(total outstanding balance in thousands)
Total outstanding balance (period end).............................................. $ 435,607 $ 511,586 $ 589,922
Average outstanding customer balance................................................ $ 1,250 $ 1,287 $ 1,403
Number of active accounts (period end).............................................. 348,593 397,606 420,585
Total applications processed (2).................................................... 778,784 826,327 850,538
Percent of retail sales financed.................................................... 46.7% 52.9% 58.5%
Total applications approved......................................................... 45.8% 49.8% 50.0%
Average down payment................................................................ 10.6% 7.4% 5.9%
Average interest spread (3)......................................................... 11.0% 12.9% 12.4%
--------------- -------------- ---------------
Secondary Portfolio (1)
---------------------------------------------
Year Ended January 31,
----------------------------------------------
2007 2008 2009
--------------- -------------- ---------------
(total outstanding balance in thousands)
Total outstanding balance (period end)..............................................$ 133,944 $ 143,281 $ 163,591
Average outstanding customer balance................................................$ 1,212 $ 1,264 $ 1,394
Number of active accounts (period end).............................................. 110,472 113,316 117,372
Total applications processed (2).................................................... 404,543 376,879 386,126
Percent of retail sales financed.................................................... 11.3% 9.3% 8.4%
Total applications approved......................................................... 32.1% 29.8% 29.4%
Average down payment................................................................ 25.1% 24.4% 20.5%
Average interest spread (3)......................................................... 13.5% 14.0% 13.7%
Combined Portfolio (1)
-------------------------------------------
Year Ended January 31,
-------------------------------------------
2007 2008 2009
-------------- ------------- --------------
(total outstanding balance in thousands)
Total outstanding balance (period end).............................................. $ 569,551 $ 654,867 $ 753,513
Average outstanding customer balance................................................ $ 1,241 $ 1,282 $ 1,401
Number of active accounts (period end).............................................. 459,065 510,922 537,957
Total applications processed (2).................................................... 1,183,327 1,203,206 1,236,664
Percent of retail sales financed.................................................... 58.0% 62.2% 62.6%
Total applications approved......................................................... 41.7% 43.5% 43.6%
Average down payment................................................................ 13.7% 9.9% 8.2%
Average interest spread (3)......................................................... 11.5% 13.2% 12.7%
- ---------------------------
(1) The Portfolios consist of owned and sold receivables.
(2) Unapproved credit applications in the primary portfolio are automatically
referred to the secondary portfolio.
(3) Difference between the average interest rate yield on the portfolio and the
average cost of funds under our financing programs plus the allocated
interest related to funds required to finance the credit enhancement
portion of the portfolio. Also reflects the loss of interest income
resulting from interest free promotional programs.
Credit Quality. We closely monitor the credit portfolios to identify
delinquent accounts early and dedicate resources to contacting customers
concerning past due accounts. We believe that our unique underwriting model,
secured interest in the products financed, required down payments, local
presence, ability to work with customers and flexible financing alternatives
contribute to the historically low net charge-off rates on these portfolios. In
addition, our customers have the opportunity to make their monthly payments in
our stores, and approximately 58% our active credit accounts did so at some time
during the last 12 months. We believe that these factors help us maintain a
relationship with the customer that keeps losses low while encouraging repeat
purchases.
14
Our collection activities involve a combination of efforts that take
place in our corporate office and San Antonio collection centers, and outside
collection efforts that involve a visit by one of our credit counselors to the
customer's home. We maintain a predictive dialer system and letter campaign that
helps us contact between 30,000 and 35,000 delinquent customers daily. We also
maintain an experienced skip-trace department that utilizes current technology
to locate customers who have moved and left no forwarding address. Our outside
collectors provide on-site contact with the customer to assist in the collection
process or, if needed, to voluntarily repossess the product in the event of
non-payment. Repossessions are made when it is clear that the customer is
unwilling to establish a reasonable payment program. Our legal department
represents us in bankruptcy proceedings and filing of delinquency judgment
claims and helps handle any legal issues associated with the collection process.
Generally, we deem an account to be uncollectible and charge it off if
the account is 120 days or more past due and we have not received a payment in
the last seven months. Over the last 36 months, we have recovered approximately
11% of charged-off amounts through our collection activities. The income that we
realize from the receivables portfolio that we manage depends on a number of
factors, including expected credit losses. Therefore, it is to our advantage to
maintain a low delinquency rate and net loss ratio on the credit portfolios.
Our accounting and credit staff consistently monitor trends in
charge-offs by examining the various characteristics of the charge-offs,
including store of origination, product type, customer credit information, down
payment amounts and other identifying information. We track our charge-offs both
gross, before recoveries, and net, after recoveries. We periodically adjust our
credit granting, collection and charge-off policies based on this information.
The following tables reflects the performance of our two credit
portfolios, net of unearned interest.
Primary Portfolio (1) Secondary Portfolio (1)
----------------------------- -----------------------------
Year Ended January 31, Year Ended January 31,
----------------------------- -----------------------------
2007 2008 2009 2007 2008 2009
--------- --------- --------- --------- --------- ---------
(dollars in thousands) (dollars in thousands)
Total outstanding balance (period end)...................................$435,607 $511,586 $589,922 $133,944 $143,281 $163,591
Average total outstanding balance........................................$417,747 $465,429 $538,673 $116,749 $141,202 $157,529
Account balances over 60 days old (period end)...........................$ 26,024 $ 31,558 $ 35,153 $ 11,638 $ 18,220 $ 19,988
Percent of balances over 60 days old to total
outstanding (period end)............................................... 6.0% 6.2% 6.0% 8.7% 12.7% 12.2%
Bad debt write-offs (net of recoveries)..................................$ 13,507 $ 12,429 $ 15,071 $ 3,896 $ 4,989 $ 7,291
Percent of write-offs (net) to average outstanding (2)................... 3.2% 2.7% 2.8% 3.3% 3.5% 4.6%
Combined Portfolio (1)
-----------------------------
Year Ended January 31,
-----------------------------
2007 2008 2009
--------- --------- ---------
(dollars in thousands)
Total outstanding balance (period end).................................................................$569,551 $654,867 $753,513
Average total outstanding balance......................................................................$534,496 $606,631 $696,202
Account balances over 60 days old (period end).........................................................$ 37,662 $ 49,778 $ 55,141
Percent of balances over 60 days old to total
outstanding (period end)............................................................................. 6.6% 7.6% 7.3%
Bad debt write-offs (net of recoveries)................................................................$ 17,403 $ 17,418 $ 22,362
Percent of write-offs (net) to average outstanding (2)................................................. 3.3% 2.9% 3.2%
- -------------------
(1) The Portfolios consists of owned and sold receivables.
(2) The fiscal year ended January 31, 2007, was impacted by the
disruption to our credit collection operations caused by Hurricane
Rita.
15
The following table presents information regarding the growth of our
combined credit portfolios, including unearned interest.
Year Ended January 31,
--------------------------------
2007 2008 2009
---------- ---------- ----------
(dollars in thousands)
Beginning balance.................................................................................. $ 620,736 $ 675,253 $ 780,318
New receivables financed........................................................................... 511,158 616,983 698,265
Revolving finance charges.......................................................................... 3,892 3,838 3,734
Returns on account................................................................................. (5,465) (6,851) (8,082)
Collections on account............................................................................. (437,665) (491,487) (545,096)
Accounts charged off............................................................................... (19,538) (19,622) (24,754)
Recoveries of charge-offs.......................................................................... 2,135 2,204 2,392
---------- ---------- ----------
Ending balance..................................................................................... 675,253 780,318 906,777
Less unearned interest at end of period............................................................ (105,702) (125,451) (153,264)
---------- ---------- ----------
Total portfolio, net............................................................................... $ 569,551 $ 654,867 $ 753,513
========== ========== ==========
Product Support Services
Credit Insurance. Acting as agents for unaffiliated insurance companies,
we sell credit life, credit disability, credit involuntary unemployment and
credit property insurance at all of our stores. These products cover payment of
the customer's credit account in the event of the customer's death, disability
or involuntary unemployment or if the financed property is lost or damaged. We
receive sales commissions from the unaffiliated insurance company at the time we
sell the coverage, and we receive retrospective commissions, which are
additional commissions paid by the insurance carrier if insurance claims are
less than earned premiums.
We require proof of property insurance on all installment credit
purchases, although we do not require that customers purchase this insurance
from us. During fiscal 2009, approximately 68.3% of our credit customers
purchased one or more of the credit insurance products we offer, and
approximately 16.5% purchased all of the insurance products we offer. Commission
revenues from the sale of credit insurance contracts represented approximately
2.4%, 2.6% and 2.3% of total revenues for fiscal years 2007, 2008 and 2009,
respectively.
Warranty Service. We provide service for all of the products we sell and
only for the products we sell. Customers purchased service maintenance
agreements on products representing approximately 49.8% of our total retail
sales for fiscal 2009. These agreements broaden and extend the period of covered
manufacturer warranty service for up to five years from the date of purchase,
depending on the product, and cover certain items during the manufacturer's
warranty period. These agreements are sold at the time the product is purchased.
Customers may finance the cost of the agreements along with the purchase price
of the associated product. We contact the customer prior to the expiration of
the service maintenance period to provide them the opportunity to renew the
period of warranty coverage.
We have contracts with unaffiliated third party insurers that issue the
service maintenance agreements to cover the costs of repairs performed under
these agreements. The initial service contract is between the customer and the
independent insurance company, but we are the insurance company's first choice
to provide service when it is needed. We receive a commission on the sale of the
contract, which is recognized in revenues at the time of the sale, and we
receive retrospective commissions, which are additional commissions paid by the
insurance carrier over time if repair claims are less than earned premiums.
Additionally, we bill the insurance company for the cost of the service work
that we perform. We are the obligor under renewal contracts sold after the
primary warranty and third party service maintenance agreements expire. Under
renewal contracts we recognize revenues received, and direct selling expenses
incurred, over the life of the contracts, and expense the cost of the service
work performed as products are repaired.
Of the 15,000 repairs, on average, that we perform each month,
approximately 45.4% are covered under service maintenance agreements,
approximately 42.2% are covered by manufacturer warranties and the remainder are
cash and customer accommodation repairs. Revenues from the sale of service
maintenance agreements represented approximately 4.5%, 5.0% and 5.0% of net
sales during fiscal years 2007, 2008 and 2009, respectively.
16
Management Information Systems
We have a fully integrated management information system that tracks, on
a real-time basis, point-of-sale information, inventory receipt and
distribution, merchandise movement and financial information. The management
information system also includes a local area network that connects all
corporate users to e-mail, scheduling and various servers. All of our facilities
are linked by a wide-area network that provides communication for in-house
credit authorization and real-time capture of sales and merchandise movement at
the store level. In our distribution centers, we use wireless terminals to
assist in receiving, stock put-away, stock movement, order filling, cycle
counting and inventory management. At our stores, we currently use desktop
terminals to provide sales, and inventory receiving, transferring and
maintenance capabilities.
Our integrated management information system also includes extensive
functionality for management of the complete credit portfolio life cycle as well
as functionality for the management of product service. The credit system
provides in-house credit underwriting, new account set up and tracking, credit
portfolio reporting, collections, credit employee productivity metrics,
skip-tracing, and bankruptcy, fraud and legal account management. The service
system provides for service order processing, warranty claims processing, parts
inventory management, technician scheduling and dispatch, technician performance
metrics and customer satisfaction measurement. The sales, credit and service
systems share a common customer and product sold database.
Our point of sale system uses an IBM Series i5 hardware system that runs
on the i5OS operating system. This system enables us to use a variety of readily
available applications in conjunction with software that supports the system.
All of our current business application software, except our website,
accounting, human resources and credit legal systems, has been developed
in-house by our management information system employees. We believe our
management information systems efficiently support our current operations and
provide a foundation for future growth.
We employ Nortel telephone switches and state of the art Avaya predictive
dialers, as well as a redundant data network and cable plant, to improve the
efficiency of our collection and overall corporate communication efforts.
As part of our ongoing system availability protection and disaster
recovery planning, we have implemented a secondary IBM Series i5 system. We
installed and implemented the back-up IBM Series i5 system in our corporate
offices to provide the ability to switch production processing from the primary
system to the secondary system within thirty minutes should the primary system
become disabled or unreachable. The two machines are kept synchronized utilizing
third party software. This backup system provides "high availability" of the
production processing environment. The primary IBM Series i5 system is
geographically removed from our corporate office for purposes of disaster
recovery and security. Our disaster recovery plan worked as designed during our
evacuation from our corporate headquarters in Beaumont, Texas, due to Hurricane
Rita in September 2005, and Hurricanes Gustav and Ike in September 2008. While
we were displaced, our store, distribution and service operations that were not
impacted by the hurricane continued to have normal system availability and
functionality.
Competition
According to Twice, total industry manufacturer sales of home appliances
and consumer electronics products in the United States, including imports, to
the top 100 dealers were estimated to be $23.8 billion and $124.9 billion,
respectively, in 2007. The retail home appliance market is large and
concentrated among a few major suppliers. Sears has historically been the leader
in the retail home appliance market, with a market share among the top 100
retailers of approximately 37% in 2006 and 35% in 2007. The consumer electronics
market is highly fragmented. We estimate that the two largest consumer
electronics superstore chains accounted for approximately 36% of the total
electronics sales attributable to the 100 largest retailers in 2007. However,
new entrants in both industries have been successful in gaining market share by
offering similar product selections at lower prices.
As reported by Twice, based upon revenue in 2007, we were the 9th largest
retailer of home appliances and the 41st largest retailer of consumer
electronics. Our competitors include national mass merchants such as Sears and
Wal-Mart, specialized national retailers such as Best Buy, home improvement
stores such as Lowe's and Home Depot, and locally-owned regional or independent
retail specialty stores. The availability and convenience of the Internet is
increasing as a competitive factor in our industry.
17
We compete primarily based on enhanced customer service through our
unique sales force training and product knowledge, next day delivery
capabilities, proprietary in-house credit program, guaranteed low prices and
product repair service.
Regulation
The extension of credit to consumers is a highly regulated area of our
business. Numerous federal and state laws impose disclosure and other
requirements on the origination, servicing and enforcement of credit accounts.
These laws include, but are not limited to, the Federal Truth in Lending Act,
Equal Credit Opportunity Act and Federal Trade Commission Act. State laws impose
limitations on the maximum amount of finance charges that we can charge and also
impose other restrictions on consumer creditors, such as us, including
restrictions on collection and enforcement. We routinely review our contracts
and procedures to ensure compliance with applicable consumer credit laws.
Failure on our part to comply with applicable laws could expose us to
substantial penalties and claims for damages and, in certain circumstances, may
require us to refund finance charges already paid and to forego finance charges
not yet paid under non-complying contracts. We believe that we are in
substantial compliance with all applicable federal and state consumer credit and
collection laws.
Our sale of credit life, credit disability, credit involuntary
unemployment and credit property insurance products is also highly regulated.
State laws currently impose disclosure obligations with respect to our sales of
credit and other insurance products similar to those required by the Federal
Truth in Lending Act, impose restrictions on the amount of premiums that we may
charge and require licensing of certain of our employees and operating entities.
We believe we are in substantial compliance with all applicable laws and
regulations relating to our credit insurance business.
Employees
As of January 31, 2009, we had approximately 3,120 full-time employees
and 115 part-time employees, of which approximately 1,350 were sales personnel.
We offer a comprehensive benefits package including health, life, short and long
term disability, and dental insurance coverage as well as a 401(k) plan,
employee stock purchase plan, paid vacation and holiday pay, for eligible
employees. None of our employees are covered by collective bargaining agreements
and we believe our employee relations are good. Conn's has a formal dispute
resolution plan that requires mandatory arbitration for employment related
issues.
Tradenames and Trademarks
We have registered the trademarks "Conn's" and our logos.
Available Information
We are subject to reporting requirements of the Securities Exchange Act
of 1934, or the Exchange Act, and its rules and regulations. The Exchange Act
requires us to file reports, proxy and other information statements and other
information with the Securities and Exchange Commission (SEC). Copies of these
reports, proxy statements and other information can be inspected and copied at
the SEC Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549. You
may obtain information on the operation of the Public Reference Room by calling
the SEC at 1-800-SEC-0330. You may also obtain these materials electronically by
accessing the SEC's home page on the internet at www.sec.gov.
Our board has adopted a code of business conduct and ethics for our
employees, a code of ethics for our chief executive officer and senior financial
professionals and a code of business conduct and ethics for our board of
directors. A copy of these codes are published on our website at www.conns.com
under "Investor Relations." We intend to make all required disclosures
concerning any amendments to, or waivers from, these codes on our website. In
addition, we make available, free of charge on our internet website, our Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form
8-K, and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file this material with, or furnish it to, the SEC. You may
review these documents, under the heading "Conn's Investor Relations," by
accessing our website at www.conns.com.
18
ITEM 1A. RISK FACTORS.
An investment in our common stock involves risks and uncertainties. You
should consider carefully the following information about these risks and
uncertainties before buying shares of our common stock. The occurrence of any of
the risks described below could adversely affect our business prospects,
financial condition or results of operations. In that case, the trading price of
our stock could decline, and you could lose all or part of the value of your
investment.
Our success depends on our ability to open and operate profitably new stores in
existing, adjacent and new geographic markets.
While we have no new store openings planned currently, we expect to
continue our expansion in the future. Future new stores that we open may not be
profitable or meet our goals. Any of these circumstances could have a material
adverse effect on our financial results. There are a number of factors that
could affect our ability to open and operate new stores consistent with our
business plan, including:
o competition in existing, adjacent and new markets;
o competitive conditions, consumer tastes and discretionary
spending patterns in adjacent and new markets that are different
from those in our existing markets;
o a lack of consumer demand for our products or financing programs
at levels that can support new store growth;
o inability to make customer financing programs available that
allow consumer to purchase products at levels that can support
new store growth;
o limitations created by covenants and conditions under our credit
facilities and our asset-backed securitization program;
o the availability of additional financial resources;
o the substantial outlay of financial resources required to open
new stores and the possibility that we may recognize little or no
related benefit;
o an inability or unwillingness of vendors to supply product on a
timely basis at competitive prices;
o the failure to open enough stores in new markets to achieve a
sufficient market presence;
o the inability to identify suitable sites and to negotiate
acceptable leases for these sites;
o unfamiliarity with local real estate markets and demographics in
adjacent and new markets;
o problems in adapting our distribution and other operational and
management systems to an expanded network of stores;
o difficulties associated with the hiring, training and retention
of additional skilled personnel, including store managers; and
o higher costs for print, radio and television advertising.
These factors may also affect the ability of any newly opened stores to
achieve sales and profitability levels comparable with our existing stores or to
become profitable at all.
19
If we are unable to manage our growing business, our revenues may not increase
as anticipated, our cost of operations may rise and our profitability may
decline.
We face many business risks associated with growing companies, including
the risk that our management, financial controls and information systems will be
inadequate to support our planned expansion. Our growth plans will require
management to expend significant time and effort and additional resources to
ensure the continuing adequacy of our financial controls, operating procedures,
information systems, product purchasing, warehousing and distribution systems
and employee training programs. We cannot predict whether we will be able to
manage effectively these increased demands or respond on a timely basis to the
changing demands that our planned expansion will impose on our management,
financial controls and information systems. If we fail to manage successfully
the challenges our growth poses, do not continue to improve these systems and
controls or encounter unexpected difficulties during our expansion, our
business, financial condition, operating results or cash flows could be
materially adversely affected.
The inability to obtain funding for our credit operations through securitization
facilities or other sources may adversely affect our business and expansion
plans.
We finance our customer receivables through asset-backed securitization
facilities and an asset based loan facility that together provide $660 million
in financing commitments, as of January 31, 2009. The securitization facilities
provide two separate series of asset-backed notes that allowed us, as of January
31, 2009, to borrow up to $450 million to finance customer receivables. Under
each note series, we transfer customer receivables to a qualifying special
purpose entity we formed for this purpose, in exchange for cash and subordinated
securities. The qualifying special purpose entity, in turn, issues notes
collateralized by these receivables that entitle the holders of the notes to
participate in certain cash flows from these receivables. The 2002 Series A
program is a $300 million variable funding note, of which $292.5 million was
drawn as of January 31, 2009. The 2002 Series A program consists of a $100
million 364-day tranche that is up for renewal in August 2009, and a $200
million tranche that is annually renewable, at our option, until September 2012.
Initial indications are that at least a portion of the $100 million 364-day
commitment will not be renewed in August 2009. If that is the case, any
borrowings outstanding in excess of any portion of the commitment that is
renewed, if any, would be required to be paid down using the proceeds from
collections on the receivables portfolio. Our current plan is to reduce the
balance outstanding under this commitment before the maturity date. As such, we
will fund new receivables generated using our existing cash flows, borrowings on
our asset based loan facility and may be required to obtain new sources of
financing to fund growth in our credit operations. The 2006 Series A program
consists of $150 million in private bond placements that will require scheduled
principal payments beginning in September 2010. These bonds were recently
downgraded by the rating agency that originally rated the bonds, which may make
it more difficult for us to issue medium-term bonds in the future if the ratings
are not subsequently raised. The asset based loan facility is a syndicated
revolving bank facility that provides a $210 million of borrowing capacity, of
which $84.6 million was drawn, including outstanding letters of credit, as of
January 31, 2009, and matures in August 2011.
Our ability to raise additional capital through further securitization
transactions or other debt or equity transactions, and to do so on economically
favorable terms, depends in large part on factors that are beyond our control.
These factors include:
o conditions in the securities and finance markets generally;
o economic conditions;
o conditions in the markets for securitized instruments, or other
debt or equity instruments;
o the credit quality and performance of our customer receivables;
o our overall sales performance and profitability;
o our ability to obtain financial support for required credit
enhancement;
o our ability to adequately service our financial instruments;
20
o the absence of any material downgrading or withdrawal of ratings
given to our securities previously issued in securitizations;
o our ability to meet debt covenant requirements; and
o prevailing interest rates.
Our ability to finance customer receivables under our current financing
facilities depends on our continued compliance with covenants relating to our
business and our customer receivables. If these programs reach their capacity or
if availability under the borrowing base calculations is reduced, or otherwise
becomes unavailable, and we are unable to arrange substitute securitization
facilities or other sources of financing, we may have to limit the amount of
credit that we make available through our customer finance programs. This may
adversely affect revenues and results of operations. Further, our inability to
obtain funding through securitization facilities or other sources may adversely
affect the profitability of outstanding accounts under our credit programs if
existing customers fail to repay outstanding credit due to our refusal to grant
additional credit.
Additionally, the inability of any of the financial institutions
providing our financing facilities to fund their commitment could adversely
affect our ability to fund our credit programs, capital expenditures and other
general corporate needs.
An increase in interest rates may adversely affect our profitability.
The interest rates on our bank credit facility and the 2002 Series A
program under our asset-backed securitization facility fluctuate up or down
based upon the LIBOR rate, the prime rate of our administrative agent or the
federal funds rate in the case of the bank credit facility and the commercial
paper rate in the case of the 2002 Series A program. Additionally, the level of
interest rates in the market in general will impact the interest rate on
medium-term notes issued under our asset-backed securitization facility or other
debt instruments issued, if any. To the extent that such rates increase, the
fair value of our interests in securitized assets could decline and our interest
expense could increase, which may result in a decrease in our profitability.
We have significant future capital needs which we may be unable to fund, and we
may need additional funding sooner than currently anticipated.
We will need substantial capital to finance our future expansion plans,
including funds for capital expenditures, pre-opening costs and initial
operating losses related to new store openings, and growth in the accounts
receivable portfolio. We may not be able to obtain additional financing on
acceptable terms. If adequate funds are not available, we will have to curtail
projected growth, which could materially adversely affect our business,
financial condition, operating results or cash flows.
We estimate that capital expenditures during fiscal 2010 will be
approximately $10 million to $15 million and that capital expenditures during
future years may exceed this amount. Our capital expenditure plan for 2010 could
increase, depending the availability of capital to fund new store openings and
accounts receivable portfolio growth. We expect that cash provided by operating
activities and available borrowings under our credit facilities will be
sufficient to fund our operations, store expansion and updating activities and
capital expenditure programs for at least 12 months. However, this may not be
the case. We may be required to seek additional capital earlier than anticipated
if future cash flows from operations fail to meet our expectations and costs or
capital expenditures exceed anticipated amounts.
21
A decrease in our credit sales or a decline in credit quality could lead to a
decrease in our product sales and profitability.
In the last three fiscal years, we financed, on average, approximately
61% of our retail sales through our internal credit programs. Our ability to
provide credit as a financing alternative for our customers depends on many
factors, including the quality of our accounts receivable portfolio. Payments on
some of our credit accounts become delinquent from time to time, and some
accounts end up in default, due to several factors, such as general and local
economic conditions, including the impact of rising interest rates and
unemployment rates. As we expand into new markets, we will obtain new credit
accounts that may present a higher risk than our existing credit accounts since
new credit customers do not have an established credit history with us. A
general decline in the quality of our accounts receivable portfolio could lead
to a reduction of available credit provided through our finance operations, if
the advance rates used or eligible receivable balances included in the borrowing
base calculations are reduced, and thus our funding available to finance new
receivables is reduced. As a result, if we are required to reduce the amount of
credit we grant to our customers, we might sell fewer products, which could
adversely affect our earnings. Further, because approximately 58% of our credit
customers make their credit account payments in our stores, any decrease in
credit sales could reduce traffic in our stores and lower our revenues. A
decline in the credit quality of our credit accounts could also cause an
increase in our credit losses, which could result in a decrease in our
securitization income or increase the provision for bad debts on our statement
of operations and result in an adverse effect on our earnings. A decline in
credit quality could also lead to stricter underwriting criteria which might
have a negative impact on sales.
A downturn in the economy may affect consumer purchases of discretionary items,
which could reduce our net sales or profit margins.
A portion of our sales represent discretionary spending by our
customers. Many factors affect spending, including regional or world events,
war, conditions in financial markets, general business conditions, interest
rates, inflation, energy and gasoline prices, consumer debt levels, the
availability of consumer credit, taxation, unemployment trends and other matters
that influence consumer confidence and spending. Our customers' purchases of
discretionary items, including our products, could decline during periods when
disposable income is lower or periods of actual or perceived unfavorable
economic conditions. If this occurs, our net sales and profitability could
decline.
While we have benefited recently from our operations being concentrated
in the Texas, Louisiana and Oklahoma region, recent turmoil in the national
economy, including instability in the financial markets, declining consumer
confidence and falling oil prices will present significant challenges to our
operations in the coming quarters. Specifically, future sales volumes, gross
profit margins and credit portfolio performance could be negatively impacted,
and thus negatively impact our overall profitability and liquidity.
We face significant competition from national, regional, local and Internet
retailers of home appliances and consumer electronics.
The retail market for consumer electronics is highly fragmented and
intensely competitive and the market for home appliances is concentrated among a
few major dealers. We currently compete against a diverse group of retailers,
including national mass merchants such as Sears, Wal-Mart, Target, Sam's Club
and Costco, specialized national retailers such as Best Buy, home improvement
stores such as Lowe's and Home Depot, and locally-owned regional or independent
retail specialty stores that sell home appliances and consumer electronics
similar, and often identical, to those we sell. We also compete with retailers
that market products through store catalogs and the Internet. In addition, there
are few barriers to entry into our current and contemplated markets, and new
competitors may enter our current or future markets at any time.
We may not be able to compete successfully against existing and future
competitors. Some of our competitors have financial resources that are
substantially greater than ours and may be able to purchase inventory at lower
costs and better sustain economic downturns. As a result, our sales may decline
if we cannot offer competitive prices to our customers or we may be required to
accept lower profit margins. Our competitors may respond more quickly to new or
emerging technologies and may have greater resources to devote to promotion and
sale of products and services. If two or more competitors consolidate their
businesses or enter into strategic partnerships, they may be able to compete
more effectively against us.
22
Our existing competitors or new entrants into our industry may use a
number of different strategies to compete against us, including:
o expansion by our existing competitors or entry by new competitors
into markets where we currently operate;
o the decreased size of flat-panel televisions allowing new
entrants to display and sell the product;
o lower pricing;
o aggressive advertising and marketing;
o extension of credit to customers on terms more favorable than we
offer;
o larger store size, which may result in greater operational
efficiencies, or innovative store formats; and
o adoption of improved retail sales methods.
Competition from any of these sources could cause us to lose market
share, revenues and customers, increase expenditures or reduce prices, any of
which could have a material adverse effect on our results of operations.
If new products are not introduced or consumers do not accept new products, our
sales may decline.
Our ability to maintain and increase revenues depends to a large extent
on the periodic introduction and availability of new products and technologies.
We believe that the introduction and continued growth in consumer acceptance of
new products, such as digital Blu-ray players and digital, high-definition
televisions, will have a significant impact on our ability to increase revenues.
These products are subject to significant technological changes and pricing
limitations and are subject to the actions and cooperation of third parties,
such as movie distributors and television and radio broadcasters, all of which
could affect the success of these and other new consumer electronics
technologies. It is possible that new products will never achieve widespread
consumer acceptance.
If we fail to anticipate changes in consumer preferences, our sales may decline.
Our products must appeal to a broad range of consumers whose preferences
cannot be predicted with certainty and are subject to change. Our success
depends upon our ability to anticipate and respond in a timely manner to trends
in consumer preferences relating to home appliances and consumer electronics. If
we fail to identify and respond to these changes, our sales of these products
may decline. In addition, we often make commitments to purchase products from
our vendors up to six months in advance of proposed delivery dates. Significant
deviation from the projected demand for products that we sell may have a
material adverse effect on our results of operations and financial condition,
either from lost sales or lower margins due to the need to reduce prices to
dispose of excess inventory.
A disruption in our relationships with, or in the operations of, any of our key
suppliers could cause our sales to decline.
The success of our business and growth strategies depends to a
significant degree on our relationships with our suppliers, particularly our
brand name suppliers such as General Electric, Whirlpool, Electrolux,
Frigidaire, Friedrich, Maytag, LG, Mitsubishi, Samsung, Sony, Toshiba, Bose,
Canon, JVC, Serta, Simmons, Spring Air, Ashley, Lane, Broyhill, Franklin,
Hewlett Packard, Compaq, Poulan, Husqvarna and Toro. We do not have long term
supply agreements or exclusive arrangements with the majority of our vendors. We
typically order our inventory and repair parts through the issuance of
individual purchase orders to vendors. We also rely on our suppliers for
cooperative advertising support. We may be subject to rationing by suppliers
with respect to a number of limited distribution items. In addition, we rely
heavily on a relatively small number of suppliers. Our top five suppliers
represented 56.9% of our purchases for fiscal 2009, and the top two suppliers
represented approximately 30.8% of our total purchases. The loss of any one or
more of these key vendors or failure to establish and maintain relationships
with these and other vendors, and limitations on the availability of inventory
or repair parts could have a material adverse effect on our results of
operations and financial condition. If one of our vendors were to go out of
business, it could have a material adverse effect on our results of operations
and financial condition if it is unable to fund amounts due to us, including
payments due for returns of product and warranty claims.
23
Our ability to enter new markets successfully depends, to a significant
extent, on the willingness and ability of our vendors to supply merchandise to
additional warehouses or stores. If vendors are unwilling or unable to supply
some or all of their products to us at acceptable prices in one or more markets,
our results of operations and financial condition could be materially adversely
affected.
Furthermore, we rely on credit from vendors to purchase our products. As
of January 31, 2009, we had $57.8 million in accounts payable and $96.0 million
in merchandise inventories. A substantial change in credit terms from vendors or
vendors' willingness to extend credit to us, including providing inventory under
consignment arrangements, would reduce our ability to obtain the merchandise
that we sell, which could have a material adverse effect on our sales and
results of operations.
Our vendors also supply us with marketing funds and volume rebates. If
our vendors fail to continue these incentives it could have a material adverse
effect on our sales and results of operations.
You should not rely on our comparable store sales as an indication of our future
results of operations because they fluctuate significantly.
Our historical same store sales growth figures have fluctuated
significantly from quarter to quarter. For example, same store sales growth for
each of the quarters of fiscal 2009 were 1.0%, -1.4%, -5.8%, and 12.5%,
respectively. A number of factors have historically affected, and will continue
to affect, our comparable store sales results, including:
o changes in competition;
o general economic conditions;
o new product introductions;
o consumer trends;
o changes in our merchandise mix;
o changes in the relative sales price points of our major product
categories;
o ability to offer credit programs attractive to our customers;
o the impact of our new stores on our existing stores, including
potential decreases in existing stores' sales as a result of
opening new stores;
o weather conditions in our markets;
o timing of promotional events;
o timing, location and participants of major sporting events; and
o our ability to execute our business strategy effectively.
Changes in our quarterly and annual comparable store sales results could
cause the price of our common stock to fluctuate significantly.
Because we experience seasonal fluctuations in our sales, our quarterly results
will fluctuate, which could adversely affect our common stock price.
We experience seasonal fluctuations in our net sales and operating
results. In fiscal 2009, we generated 30.5% of our net sales and 49.1% of our
net income in the fiscal quarter ended January 31 (which included the holiday
selling season). We also incur significant additional expenses during this
fiscal quarter due to higher purchase volumes and increased staffing. If we
miscalculate the demand for our products generally or for our product mix during
the fiscal quarter ending January 31, our net sales could decline, resulting in
excess inventory or increased sales discounts to sell excess inventory, which
could harm our financial performance. A shortfall in expected net sales,
combined with our significant additional expenses during this fiscal quarter,
could cause a significant decline in our operating results. This could adversely
affect our common stock price.
24
Our business could be adversely affected by changes in consumer protection laws
and regulations.
Federal and state consumer protection laws and regulations, such as the
Fair Credit Reporting Act, limit the manner in which we may offer and extend
credit. Since we finance a substantial portion of our sales, any adverse change
in the regulation of consumer credit could adversely affect our total revenues
and gross margins. For example, new laws or regulations could limit the amount
of interest or fees that may be charged on consumer credit accounts or restrict
our ability to collect on account balances, which would have a material adverse
effect on our earnings. Compliance with existing and future laws or regulations
could require us to make material expenditures, in particular personnel training
costs, or otherwise adversely affect our business or financial results. Failure
to comply with these laws or regulations, even if inadvertent, could result in
negative publicity, fines or additional licensing expenses, any of which could
have an adverse effect on our results of operations and stock price.
Pending litigation relating to the sale of credit insurance and the sale of
service maintenance agreements in the retail industry could adversely affect our
business.
We understand that states' attorneys general and private plaintiffs have
filed lawsuits against other retailers relating to improper practices conducted
in connection with the sale of credit insurance in several jurisdictions around
the country. We offer credit insurance in all of our stores and require the
customer to purchase property insurance from us or from a third party provider,
at their election, in connection with sales of merchandise on installment
credit; therefore, similar litigation could be brought against us. While we
believe we are in full compliance with applicable laws and regulations, if we
are found liable in any future lawsuit regarding credit insurance or service
maintenance agreements, we could be required to pay substantial damages or incur
substantial costs as part of an out-of-court settlement, either of which could
have a material adverse effect on our results of operations and stock price.
Recently, the Texas Attorney General initiated a civil investigative review
under the Texas Deceptive Trade Practices and Consumer Protection Act regarding
our service maintenance agreement business activities. An adverse judgment or
any negative publicity associated with our service maintenance agreements or any
potential credit insurance litigation could also affect our reputation, which
could have a negative impact on sales.
If we lose key management or are unable to attract and retain the qualified
sales and credit granting and collection personnel required for our business,
our operating results could suffer.
Our future success depends to a significant degree on the skills,
experience and continued service of our key executives or the identification of
suitable successors for them. If we lose the services of any of these
individuals, or if one or more of them or other key personnel decide to join a
competitor or otherwise compete directly or indirectly with us, and we are
unable to identify a suitable successor, our business and operations could be
harmed, and we could have difficulty in implementing our strategy. In addition,
as our business grows, we will need to locate, hire and retain additional
qualified sales personnel in a timely manner and develop, train and manage an
increasing number of management level sales associates and other employees.
Additionally, if we are unable to attract and retain qualified credit granting
and collection personnel, our ability to perform quality underwriting of new
credit transactions or maintain workloads for our collections personnel at a
manageable level, our operations could be adversely impacted and result in
higher delinquency and net charge-offs on our credit portfolio. Competition for
qualified employees could require us to pay higher wages to attract a sufficient
number of employees, and increases in the federal minimum wage or other employee
benefits costs could increase our operating expenses. If we are unable to
attract and retain personnel as needed in the future, our net sales growth and
operating results could suffer.
Because our stores are located in Texas, Louisiana and Oklahoma, we are subject
to regional risks.
Our 75 stores are located exclusively in Texas, Louisiana and Oklahoma.
This subjects us to regional risks, such as the economy, weather conditions,
hurricanes and other natural disasters. If the region suffered an economic
downturn or other adverse regional event, there could be an adverse impact on
our net sales and profitability and our ability to implement our planned
expansion program. Several of our competitors operate stores across the United
States and thus are not as vulnerable to the risks of operating in one region.
25
Our information technology infrastructure is vulnerable to damage that could
harm our business.
Our ability to operate our business from day to day, in particular our
ability to manage our credit operations and inventory levels, largely depends on
the efficient operation of our computer hardware and software systems. We use
management information systems to track inventory information at the store
level, communicate customer information, aggregate daily sales information and
manage our credit portfolio. These systems and our operations are subject to
damage or interruption from:
o power loss, computer systems failures and Internet,
telecommunications or data network failures;
o operator negligence or improper operation by, or supervision of,
employees;
o physical and electronic loss of data or security breaches,
misappropriation and similar events;
o computer viruses;
o intentional acts of vandalism and similar events; and
o hurricanes, fires, floods and other natural disasters.
The software that we have developed to use in our daily operations may
contain undetected errors that could cause our network to fail or our expenses
to increase. Any failure due to any of these causes, if it is not supported by
our disaster recovery plan, could cause an interruption in our operations and
result in reduced net sales and profitability.
If we are unable to maintain our insurance licenses in the states we operate,
our profitability could suffer.
We derive a significant portion of our revenues and operating income
from the sale of various insurance products to our customers. These products
include credit insurance, service maintenance agreements and product replacement
policies. If for any reason we were unable to maintain our insurance licenses in
the states we operate our operating results could suffer.
If we are unable to maintain our current insurance coverage for our service
maintenance agreements, our customers could incur additional costs and our
repair expenses could increase, which could adversely affect our financial
condition and results of operations.
There are a limited number of insurance carriers that provide coverage
for our service maintenance agreements. If insurance becomes unavailable from
our current carriers for any reason, we may be unable to provide replacement
coverage on the same terms, if at all. Even if we are able to obtain replacement
coverage, higher premiums could have an adverse impact on our profitability if
we are unable to pass along the increased cost of such coverage to our
customers. Inability to obtain insurance coverage for our service maintenance
agreements could cause fluctuations in our repair expenses and greater
volatility of earnings.
If we are unable to maintain group credit insurance policies from insurance
carriers, which allow us to offer their credit insurance products to our
customers purchasing on credit, our revenues could be reduced and bad debts
might increase.
There are a limited number of insurance carriers that provide credit
insurance coverage for sale to our customers. If credit insurance becomes
unavailable for any reason we may be unable to offer replacement coverage on the
same terms, if at all. Even if we are able to obtain replacement coverage, it
may be at higher rates or reduced coverage, which could affect the customer
acceptance of these products, reduce our revenues or increase our credit losses.
26
Changes in premium and commission rates allowed by regulators on our credit
insurance and service maintenance agreements as allowed by the laws and
regulations in the states in which we operate could affect our revenues.
We derive a significant portion of our revenues and operating income
from the sale of various insurance products to our customers. These products
include credit insurance and service maintenance agreements. If the rate we are
allowed to charge on those products declines, our operating results could
suffer.
Changes in trade regulations, currency fluctuations and other factors beyond our
control could affect our business.
A significant portion of our inventory is manufactured overseas and in
Mexico. Changes in trade regulations, currency fluctuations or other factors
beyond our control may increase the cost of items we purchase or create
shortages of these items, which in turn could have a material adverse effect on
our results of operations and financial condition. Conversely, significant
reductions in the cost of these items in U.S. dollars may cause a significant
reduction in the retail prices of those products, resulting in a material
adverse effect on our sales, margins or competitive position. In addition,
commissions earned on both our credit insurance and service maintenance
agreement products could be adversely affected by changes in statutory premium
rates, commission rates, adverse claims experience and other factors.
We may be unable to protect our intellectual property rights, which could impair
our name and reputation.
We believe that our success and ability to compete depends in part on
consumer identification of the name "Conn's." We have registered the trademarks
"Conn's" and our logo. We intend to protect vigorously our trademark against
infringement or misappropriation by others. A third party, however, could
attempt to misappropriate our intellectual property in the future. The
enforcement of our proprietary rights through litigation could result in
substantial costs to us that could have a material adverse effect on our
financial condition or results of operations.
Failure to protect the security of our customer's information could expose us to
litigation, judgments for damages and undermine the trust placed with us by our
customers.
We capture, transmit, handle and store sensitive information, which
involves certain inherent security risks. Such risks include, among other
things, the interception of by persons outside the Company or by our own
employees. While we believe we have taken appropriate steps to protect
confidential information, there can be no assurance that we can prevent the
compromise of our customers' data or other confidential information. If such a
breach should occur at Conn's, it could have a severe negative impact on our
business and results of operations.
Any changes in the tax laws of the states in which we operate could affect our
state tax liabilities. Additionally, beginning operations in new states could
also affect our state tax liabilities.
As we experienced in fiscal year 2008 with the change in the Texas
tax law, legislation could be introduced at any time that changes our state tax
liabilities in a way that has an adverse impact on our results of operations.
The Texas margin tax increased our effective rate from approximately 35.3%,
before its introduction, to 38.1% in fiscal year 2009. Our recent commencement
of operations in Oklahoma and the potential to enter new states in the future
could adversely affect our results of operations, dependent upon the tax laws in
place in those states.
Significant volatility in oil and gasoline prices could affect our customers'
determination to drive to our stores, and cause us to raise our delivery
charges.
Significant volatility in oil and gasoline prices could adversely
affect our customers' shopping decisions and patterns. We rely heavily on our
internal distribution system and our next day delivery policy to satisfy our
customers' needs and desires, and increases in oil and gasoline prices could
result in increased distribution charges. Such increases may not significantly
affect our competitors.
27
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
The following summarizes the geographic location of our stores,
warehouse and distribution centers and corporate facilities by major market
area:
Leases
With
Options
Total Storage Expiring
No. of Leased Square Square Beyond
Geographic Location Locations Facilities Feet Feet 10 Years
- ------------------------------------------------------------------------------- ---------- ----------- -----------------------------
Golden Triangle District (1).................................................... 6 6 189,531 40,655 5
Louisiana District.............................................................. 5 5 148,628 38,394 4
Houston District................................................................ 23 21 583,962 99,474 17
San Antonio/Austin District..................................................... 14 14 427,372 83,434 14
Corpus Christi.................................................................. 2 1 92,149 23,619 1
South Texas..................................................................... 3 3 91,697 15,484 3
Oklahoma District............................................................... 3 3 87,216 18,969 3
Dallas District................................................................. 19 17 557,801 98,059 17
---------- ----------- --------- --------- ---------
Store Totals................................................................. 75 70 2,178,356 418,088 64
Warehouse/Distribution Centers.................................................. 7 5 753,314 753,314 1
Service Centers................................................................. 5 3 162,603 162,603 1
Corporate Offices............................................................... 2 2 146,783 30,000 1
---------- ----------- --------- --------- ---------
Total........................................................................ 89 80 3,241,056 1,364,005 67
========== =========== ========= ========= =========
- ---------------
(1) Includes one store in Lake Charles, Louisiana.
ITEM 3. LEGAL PROCEEDINGS.
We are involved in routine litigation incidental to our business from
time to time. We do not expect the outcome of any of the routine litigation to
have a material effect on our financial condition or results of operation.
However, the results of their proceedings cannot be predicted with certainty,
and changes in facts and circumstances could impact our estimate of reserves for
litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 2009.
28
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
What is the principal market for our common stock?
The principal market for our common stock is the NASDAQ Global Select
Market. Our common stock is listed on the NASDAQ Global Select Market under the
symbol "CONN." Information regarding the high and low sales prices for our
common stock for each quarterly period within the two most recent fiscal years
as reported on NASDAQ is summarized as follows:
High Low
--------- --------
Quarter ended April 30, 2007..................................$ 28.27 $ 22.66
Quarter ended July 31, 2007...................................$ 32.19 $ 24.35
Quarter ended October 31, 2007................................$ 28.54 $ 19.60
Quarter ended January 31, 2008................................$ 25.87 $ 14.05
Quarter ended April 30, 2008..................................$ 20.27 $ 11.50
Quarter ended July 31, 2008...................................$ 19.00 $ 13.64
Quarter ended October 31, 2008................................$ 25.27 $ 10.49
Quarter ended January 31, 2009................................$ 13.66 $ 4.64
How many common stockholders do we have?
As of March 16, 2009, we had approximately 51 common stockholders of
record and an estimated 4,000 beneficial owners of our common stock.
Did we declare any cash dividends in fiscal 2008 or fiscal 2009?
No cash dividends were paid in fiscal 2008 or 2009. We do not anticipate
paying dividends in the foreseeable future. Any future payment of dividends will
be at the discretion of the Board of Directors and will depend upon our results
of operations, financial condition, cash requirements and other factors deemed
relevant by the Board of Directors, including the terms of our indebtedness.
Provisions in agreements governing our long-term indebtedness restrict the
amount of dividends that we may pay to our stockholders. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
Has the Company had any sales of unregistered securities during the last year?
The Company has had no sales of unregistered securities during fiscal
2009.
Has the Company purchased any of its securities during the past quarter?
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. No repurchases were made during the year
ended January 31, 2009, and our board of directors has terminated the repurchase
program.
29
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended January 31,
-------------------------------------------------
2005 2006 2007 2008 2009
--------- --------- --------- --------- ---------
(dollars and shares in thousands, except per
share amounts)
(A) (B)
Statement of Operations:
Total revenues.................................................................. $565,821 $701,148 $760,657 $824,128 $890,750
Operating expense:
Cost of goods sold, including warehousing and
occupancy cost.................................................................. 339,887 427,843 473,064 517,166 590,061
Selling, general and administrative expense..................................... 173,349 208,259 224,979 245,317 253,813
Provision for bad debts......................................................... 2,589 1,133 1,476 1,908 4,273
--------- --------- --------- --------- ---------
Total operating expense......................................................... 515,825 637,235 699,519 764,391 848,147
--------- --------- --------- --------- ---------
Operating income................................................................ 49,996 63,913 61,138 59,737 42,603
Interest (income) expense, net and minority interest............................ 2,477 400 (676) (515) 961
Other (income) expense.......................................................... 126 69 (772) (943) 117
--------- --------- --------- --------- ---------
Earnings before income taxes.................................................... 47,393 63,444 62,586 61,195 41,525
Provision for income taxes...................................................... 16,706 22,341 22,275 21,509 15,833
--------- --------- --------- --------- ---------
Net income...................................................................... $ 30,687 $ 41,103 $ 40,311 $ 39,686 $ 25,692
========= ========= ========= ========= =========
Earnings per common share:
Basic.................................................................... $ 1.32 $ 1.76 $ 1.70 $ 1.71 $ 1.15
Diluted.................................................................. $ 1.30 $ 1.71 $ 1.66 $ 1.68 $ 1.14
Average common shares outstanding:
Basic.................................................................... 23,192 23,412 23,663 23,193 22,413
Diluted.................................................................. 23,646 24,088 24,289 23,673 22,577
Other Financial Data:
Stores open at end of period.................................................... 50 56 62 69 76
Same store sales growth (1)..................................................... 3.6% 16.9% 3.6% 3.2% 2.0%
Inventory turns (2)............................................................. 5.9 6.1 5.7 5.7 6.0
Gross margin percentage (3)..................................................... 39.9% 39.0% 37.8% 37.2% 33.8%
Operating margin (4)............................................................ 8.8% 9.1% 8.0% 7.2% 4.8%
Ratio of earnings to fixed charges (5).......................................... 6.0 8.1 7.4 6.6 3.9
Return on average equity (6).................................................... 22.2% 17.7% 14.7% 13.3% 8.0%
Capital expenditures............................................................ $ 19,619 $ 18,490 $ 18,425 $ 18,955 $ 17,597
Balance Sheet Data:
Working capital................................................................. $156,006 $190,073 $220,740 $233,773 $279,071
Total assets.................................................................... 276,716 355,617 389,947 382,852 516,338
Total debt...................................................................... 10,532 136 198 119 62,917
Total stockholders' equity...................................................... 208,734 255,861 292,528 304,418 334,150
- ----------------------
(1) Same store sales growth is calculated by comparing the reported sales
by store for all stores that were open throughout a period to
reported sales by store for all stores that were open throughout the
prior period. Sales from closed stores have been removed from each
period. Sales from relocated stores have been included in each period
because each such store was relocated within the same general
geographic market. Sales from expanded stores have been included in
each period.
(2) Inventory turns are defined as the cost of goods sold, excluding
warehousing and occupancy cost, divided by the average product
inventory balance, excluding consigned goods.
(3) Gross margin percentage is defined as total revenues less cost of
goods and parts sold, including warehousing and occupancy cost,
divided by total revenues.
(4) Operating margin is defined as operating income divided by total
revenues.
(5) Ratio of earning to fixed charges is calculated as income before
income taxes plus fixed charges, divided by fixed charges. Fixed
charges consist of the sum of interest expensed and capitalized,
amortized premiums, discounts and capitalized expenses related to
indebtedness and an estimate of the interest within rental expense.
(6) Return on average equity is calculated as current period net income
divided by the average of the beginning and ending equity.
(A) Fiscal 2008 revenues, and operating, pretax and net income were
impacted by a non-cash fair value adjustment of $4.8 million which
reduced the fair value of our interests in securitized assets.
(B) Fiscal 2009 revenues, and operating, pretax and net income were
impacted by a non-cash fair value adjustment of $24.5 million which
reduced the fair value of our interests in securitized assets.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward-Looking Statements
This report contains forward-looking statements. We sometimes use words
such as "believe," "may," "will," "estimate," "continue," "anticipate,"
"intend," "expect," "project" and similar expressions, as they relate to us, our
management and our industry, to identify forward-looking statements.
Forward-looking statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends and other future
events. We have based our forward-looking statements largely on our current
expectations and projections about future events and financial trends affecting
our business. Actual results may differ materially. Some of the risks,
uncertainties and assumptions about us that may cause actual results to differ
from these forward-looking statements include, but are not limited to:
o the success of our growth strategy and plans regarding opening
new stores and entering adjacent and new markets, including our
plans to continue expanding into existing markets;
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 introduce additional product categories;
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 ability to fund our operations, capital expenditures, debt
repayment and expansion from cash flows from operations,
borrowings from our revolving line of credit and proceeds from
securitizations, and proceeds for accessing debt or equity
markets;
o our ability and our QSPE's ability to obtain additional funding
for the purpose of funding the receivables generated by us,
including limitations on the ability of the QSPE to obtain
financing through its commercial paper-based funding sources and
its ability to maintain the current credit rating issued by a
recognized statistical rating organization;
o our ability and our QSPE's ability to meet debt covenant
requirements;
o the cost or terms of any renewed or replacement credit
facilities;
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 our 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 technological and market developments, growth trends and
projected sales in the home appliance and consumer electronics
industry, including, with respect to digital products like
Blu-ray players, HDTV, GPS devices, home networking devices and
other new products, and our ability to capitalize on such
growth;
o the potential for price erosion or lower unit sales points that
could result in declines in revenues;
31
o the effect of changes in 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;
o the ability to attract and retain qualified personnel;
o both the 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 and their ability to provide
products at competitive prices and support sales of their
products through their rebate and discount programs;
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 potential to record an impairment of our goodwill after
completing our required annual assessment, or at any other time
that an impairment indicator exists;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o changes in our stock price or the number of shares we have
outstanding;
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;
o general economic conditions in the regions in which we operate;
and
o the outcome of litigation or government investigations affecting
our business.
Additional important factors that could cause our actual results to
differ materially from our expectations are discussed under "Risk Factors" in
this Form 10-K. In light of these risks, uncertainties and assumptions, the
forward-looking events and circumstances discussed in this report might not
happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
All forward-looking statements attributable to us, or to persons acting
on our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
We intend the following discussion and analysis to provide you with a
better understanding of our financial condition and performance in the indicated
periods, including an analysis of those key factors that contributed to our
financial condition and performance and that are, or are expected to be, the key
drivers of our business.
Through our 75 retail stores, we provide products and services to our
customers in seven primary market areas, including Houston, San Antonio/Austin,
Dallas/Fort Worth, southern Louisiana, Southeast and South Texas and Oklahoma.
Products and services offered through retail sales outlets include home
appliances, consumer electronics, home office equipment, lawn and garden
products, mattresses, furniture, service maintenance agreements, customer credit
programs, including installment and revolving credit account programs, and
various credit insurance products. These activities are supported through our
extensive service, warehouse and distribution system. Our stores bear the
"Conn's" name, after our founder's family, and deliver the same products and
services to our customers. All of our stores follow the same procedures and
methods in managing their operations. The Company's management evaluates
performance and allocates resources based on the operating results of the retail
stores and considers the credit programs, service contracts and distribution
system to be an integral part of the Company's retail operations.
32
Presented below is a diagram setting forth our five cornerstones which
represent, in our view, the five components of our sales goal - strong
merchandising systems, flexible credit options for our customers, an extensive
warehousing and distribution system, a service system to support our customers
needs during and beyond the product warranty periods, and our uniquely,
well-trained employees in each area. Each of these systems combine to create a
"nuts and bolts" support system for our customers needs and desires. Each of
these systems is discussed at length in the Business section of this report.
Merchadising
|
|
Credit
|
|
Distribution
|
|
Service
|
|
Training
|
|
Drive
|
|
Sales
We, of course, derive the majority of our revenues from our product and
service maintenance agreement sales. However, unlike many of our competitors, we
provide in-house credit options for our customers' product purchases. In the
last three years, we have financed, on average, approximately 61% of our retail
sales through these programs. In turn, we finance substantially all of our
customer receivables from these credit options through a revolving credit
facility and an asset-backed securitization facility. See "Business - Finance
Operations" for a detailed discussion of our in-house credit programs and our
sources of funding. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and to issue medium-term
and variable funding notes secured by the receivables to finance its acquisition
of the receivables. We transfer eligible receivables, consisting of retail
installment and revolving account receivables extended to our customers, to the
issuer in exchange for cash and subordinated securities. Customer receivables
funded by our revolving credit facility are retained on our consolidated balance
sheet.
While our warehouse and distribution system does not directly generate
revenues, other than the fees paid by our customers for delivery and
installation of the products to their homes, it is our extra, "value-added"
program that our existing customers have come to rely on, and our new customers
are hopefully sufficiently impressed with to become repeat customers. We derive
revenues from our repair services on the products we sell. Additionally, acting
as an agent for unaffiliated companies, we sell credit insurance to protect our
customers from credit losses due to death, disability, involuntary unemployment
and damage to the products they have purchased; to the extent they do not
already have it.
33
Executive Overview
This overview is intended to provide an executive level overview of our
operations for our fiscal year ended January 31, 2009. A detailed explanation of
the changes in our operations for the fiscal year ended January 31, 2009, as
compared to the prior year is included beginning under Results of Operations.
Our performance during fiscal 2009 was impacted by Hurricanes Gustav and Ike,
which made landfall along the Gulf Coast during September 2008, and negatively
effected our sales and credit portfolio performance. Following are significant
financial items in management's view:
o Our revenues for the fiscal year ended January 31, 2009,
increased by 8.1%, or $66.7 million, from fiscal year 2008, to
$890.8 million due primarily to product sales growth which drove
higher service maintenance agreement commissions. The growth in
our total revenues was partially offset by a higher non-cash
decrease in the fair value of our interests in securitized
assets, which totaled $24.5 million in fiscal 2009, as compared
to $4.8 million in fiscal 2008. The fair value adjustments in
both periods were driven primarily by the volatile financial
market conditions and were not a reflection of the performance of
the sold receivables portfolio. Our same store sales growth rate
for the fiscal year ended January 31, 2009, was 2.0%, versus 3.2%
for fiscal 2008. Additionally, total and same store sales were
negatively effected in fiscal 2009 as a result of 144 store-days
lost due to Hurricanes Gustav and Ike.
o The addition of stores in our existing Dallas/Fort Worth,
Houston, Southeast and South Texas markets and the opening of
three stores in Oklahoma had a positive impact on our revenues.
We achieved approximately $60.6 million of increases in product
sales and service maintenance agreement (SMA) commissions for the
year ended January 31, 2009, from the opening of fourteen new
stores in these markets since February 2007. We have additional
sites under consideration for future development and continue to
evaluate our store opening plans for future periods, in light of
capital availability.
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 fiscal year ended January 31,
2009, $155.8 million, or 21.0%, of our product sales were
financed by deferred interest and "same as cash" plans. We have
been able to reduce the volume of promotional credit as a percent
of product sales, as compared to the prior year. For the
comparable period in the prior year, product sales financed by
deferred interest and "same as cash" sales were $183.1 million,
or 27.3%. 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 was 33.8% for fiscal 2009, a decrease from 37.2%
in fiscal 2008, primarily as a result of the $24.5 million
reduction in the fair value of our interest in securitized assets
in fiscal 2009, as compared to the $4.8 million reduction in the
prior year, and reduced gross margin realized on product sales
from 24.2% in the year ended January 31, 2008, to 22.0% in fiscal
year 2009. The fair value adjustments to our interest in
securitized assets accounted for 140 basis points of the decline
in total gross margin. The product gross margins were negatively
impacted by a highly price competitive retail market.
o Our operating margin decreased to 4.8% in fiscal 2009, from 7.2%
in fiscal 2008, primarily as a result of the $24.5 million
reduction in the fair value of our interests in securitized
assets in fiscal 2009, as compared to the $4.8 million reduction
in the prior year. The fair value adjustments to our interest in
securitized assets accounted for 190 basis points of the decline
in operating margin.
o In fiscal 2009, SG&A expense as a percent of revenues
decreased to 28.5% from 29.8% when compared to the prior
year, primarily from decreases in payroll and payroll
related expenses as a percent of revenues, as well as
reduced advertising expenditures as a percent of revenues.
The decrease in our SG&A expense as a percent of revenues
was negatively affected by the negative impact of the fair
value adjustment on total revenues, with the decrease shown
above being reduced by 60 basis points due to the negative
impact of the fair value adjustments on total revenues.
Additionally, reductions in certain store operating
expenses, including repairs and maintenance and janitorial
services contributed to the improvement. Partially
offsetting these improvements were increases in utilities,
credit data processing and hurricane-related expenses of
$1.4 million.
34
o The provision for bad debts increased to $4.3 million in
fiscal 2009, from $1.9 million in the prior year. This
increase is due to an increase in the balance of customer
receivables retained on our consolidated balance sheet, as
expected, after the completion of our asset-based revolving
credit facility in August 2008, and is not the result of
higher actual or expected net credit charge-offs on the
retained receivables. As opposed to our interests in the
customer receivables transferred to the QSPE, which we
account for at fair value, we are required to record a
reserve for estimated future net credit losses for
receivables retained on our consolidated balance sheet,
which we estimated to be $3.1 million, based on our
historical loss trends.
o Net interest (income) expense has changed from reflecting net
interest income in fiscal 2008 to net interest expense in fiscal
2009, due primarily to the increase in customer receivables
retained on our consolidated balance sheet. As a result, we have
used previously invested cash balances and borrowings under our
revolving credit facility to fund the growth in customer
receivables retained.
o Other income (expense) declined $1.1 million from fiscal 2009 to
fiscal 2008, due to gains recognized on the sales of two
properties in fiscal 2008.
o The provision for income taxes was impacted primarily by the
effect of the non-cash fair value adjustments on taxes for the
state of Texas, which are based on gross margin, instead of
income before taxes.
o Our pretax income for fiscal 2009 decreased by 32.1%, or
approximately $19.7 million, from fiscal 2008. The decrease was
driven primarily by the $24.5 million non-cash reduction in the
fair value of our interest in securitized assets recorded in
fiscal 2009, which was $19.7 million greater than the $4.8
million non-cash fair value adjustment recorded in the prior
year.
o Cash flows used in operations was $42.7 million during fiscal
2009 due primarily to the increased retention of customer
receivables on the our consolidated balance sheet. Prior to the
completion of the revolving asset-based revolving credit facility
in August 2008, virtually all customer receivables were
transferred to and funded by our QSPE, resulting in the net cash
flow activity from these transactions being reported in cash
flows from operating activities. However, for customer
receivables retained on our consolidated balance sheet and funded
by our revolving credit facility, the increase in accounts
receivable is reflected as a use of cash in cash flows from
operating activities, and borrowings on our revolving credit
facility are reflected in cash flows from financing activities.
Operational Changes and Outlook
We have implemented, continued increased focus on, or modified several
initiatives in fiscal 2009 that we believe will positively impact our future
operating results, including:
o Increased promotion of flat panel technology in our stores as the
price point becomes more affordable for our customers; and
o Increased emphasis on the sale of small electronics, including
video game equipment and GPS devices; and
o Increased emphasis on the sales of furniture, and additional
product lines added to this category; and
o A thorough review of our staffing and cost structure to ensure we
are effectively leveraging the infrastructure in place and that
it is sufficient to support our growth plans.
During the year, we opened one new store in the Houston market, two in
the Dallas/Fort Worth market, one in McAllen, Texas, one in Lufkin, Texas and
two in Oklahoma City, Oklahoma. The Dallas/Fort Worth market continues to
perform at the mid-point of our range of expectations and we believe we have
significant upside potential in that market through growth in the existing
stores and our intention to continue to expand the number of stores in that
market. We have additional sites under consideration for future development and
continue to evaluate our store opening plans for future periods, in light of
capital availability.
35
We believe we have benefited and will continue to benefit from the recent
closure of one of our major consumer electronics competitors, Circuit City.
Because of the success of their liquidation sale during February and early March
2009, the growth of our total product and service maintenance agreement sales
has slowed from the pace experienced during the fourth quarter of fiscal 2009.
We believe that their closure will bring new customers into our stores, which
could change the mix of our product sales and amount of credit we grant in
relation to total product sales. Combined with changes we made to tighten our
underwriting criteria and increase required down payments, we have seen a
reduction in the amount of credit granted as a percentage of sales in recent
months. Additionally, as a result of these changes, we have seen the mix between
the primary and secondary receivables portfolios shift to a greater proportion
of the receivables being in the higher quality primary portfolio over the past
two quarters.
While we have benefited recently from our operations being concentrated
in the Texas, Louisiana and Oklahoma region, recent turmoil in the national
economy, including instability in the financial markets, declining consumer
confidence and falling oil prices will present significant challenges to our
operations in the coming quarters. Specifically, future sales volumes, gross
profit margins and credit portfolio performance could be negatively impacted,
and thus impact our overall profitability and liquidity. As a result, while we
will strive to grow our market share, maintain consistent credit portfolio
performance and reduce expenses, we will also work to maintain our access to the
liquidity necessary to maintain our operations through these challenging times.
The consumer electronics industry depends on new products to drive same
store sales increases. Typically, these new products, such as LCD, plasma and
DLP televisions, Blu-ray players, digital cameras, GPS devices and MP3 players
are introduced at relatively high price points that are then gradually reduced
as the product becomes more mainstream. To sustain positive same store sales
growth, unit sales must increase at a rate greater than the decline in product
prices. The affordability of the product helps drive the unit sales growth.
However, as a result of relatively short product life cycles in the consumer
electronics industry, which limit the amount of time available for sales volume
to increase, combined with rapid price erosion in the industry, retailers are
challenged to maintain overall gross margin levels and positive same store
sales. This has historically been our experience, and we continue to adjust our
marketing strategies to address this challenge through the introduction of new
product categories and new products within our existing categories. Over the
past year, our gross margins have been negatively impacted by price competition
on flat panel televisions.
Application of Critical Accounting Policies
In applying the accounting policies that we use to prepare our
consolidated financial statements, we necessarily make accounting estimates that
affect our reported amounts of assets, liabilities, revenues and expenses. Some
of these accounting estimates require us to make assumptions about matters that
are highly uncertain at the time we make the accounting estimates. We base these
assumptions and the resulting estimates on authoritative pronouncements,
historical information and other factors that we believe to be reasonable under
the circumstances, and we evaluate these assumptions and estimates on an ongoing
basis. We could reasonably use different accounting estimates, and changes in
our accounting estimates could occur from period to period, with the result in
each case being a material change in the financial statement presentation of our
financial condition or results of operations. We refer to accounting estimates
of this type as critical accounting estimates. We believe that the critical
accounting estimates discussed below are among those most important to an
understanding of our consolidated financial statements as of January 31, 2009.
Transfers of Financial Assets. We transfer eligible 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 the fair value of
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 an estimate of future net credit
losses associated with the transferred accounts, plus our retained interest in
the transferred receivables, discounted using a return that we estimate 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, changes in the fair
value of our interest are recorded in Finance charges and other. We value our
interest in the cash flows of the QSPE at fair value under the provisions of
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities, and SFAS No. 157, Fair Value Measurements.
36
We estimate the fair value of our 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 our
historical experience, with input from our investment bankers and financial
advisors, include the estimated portfolio yield, net credit loss rate, discount
rate, payment rate and delinquency rate and reflect our judgments about the
assumptions market participants would use in determining fair value. In
determining the cost of borrowings, we use current actual borrowing rates, and
adjust 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 our earnings.
During the twelve months ended January 31, 2009, risk premiums required by
market participants on many investments increased as a result of continued
volatility in the financial markets. Though we do not anticipate any significant
variation in the underlying economics or expected cash flow performance of our
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 risk premiums
included in investment returns we believe a market participant would require if
purchasing our interests. Based on a review of the changes in market risk
premiums during the three months ended April 30, 2008, 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 risk premium. After our review for the three months ended October 31,
2008, we estimated that a market participant would require an additional 700
basis point increase in the required risk premium. At the completion of our
review for the three months ended January 31, 2009, we estimated that a market
participant would require an increase in the required risk premium of
approximately 500 basis points, resulting in a weighted average discount rate of
30% at January 31, 2009, as compared to the 16.5% weighted average discount rate
assumption used at January 31, 2008. The increase in the discount rate has the
effect of deferring income to future periods, but not permanently reducing
securitization income or our earnings, assuming no significant variation in the
future cash flow performance of the securitized credit portfolio. Additionally,
during the three months ended October 31, 2008, as a result of the impact of
general economic conditions on other consumer credit portfolios and the impact
of Hurricanes Gustav and Ike on our expected net charge-off rate, we increased
the weighted average net charge-off rate input that we expect a market
participant would use form 3.25% to 4.00%. If a market participant were to
require a discount rate that is 10% higher than we estimated in the fair value
calculation, the fair value of our Interests in securitized assets would be
decreased by an additional $4.4 million as of January 31, 2009. 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 Interests in securitized assets and Finance charges and other
would have been reduced by $6.6 million as of January 31, 2009. If the
assumption used for estimating credit losses was increased by 10%, the impact to
Finance charges and other would have been a reduction in revenues and pretax
income of $1.8 million as of January 31, 2009.
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the customer takes possession of the product. 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 amounts of service maintenance renewal agreement
revenues deferred at January 31, 2008 and 2009 were $4.4 million and $4.5
million, respectively, and are included in Deferred revenue in the accompanying
consolidated balance sheets. The amounts of service maintenance agreement
revenue recognized for the fiscal years ended January 31, 2007, 2008 and 2009
were $4.7 million, $5.3 million and $5.7 million, respectively.
37
Vendor Allowances. We receive funds from vendors for price protection,
product rebates (earned upon purchase or sale of product), marketing, 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 product sales, the allowances, credits or payments
are recorded as a reduction of cost of goods sold; if the programs are directly
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. We received $27.2 million, $36.1 million and
$46.2 million in vendor allowances during the fiscal year ended January 31,
2007, 2008 and 2009, respectively, of which $7.2 million, $6.6 million and $6.4
million, respectively, represented advertising assistance allowances. Over the
past three years we have received funds from approximately 50 vendors, with the
terms of the programs ranging between one month and one year.
Goodwill. We perform an assessment annually testing for the impairment of
goodwill, or at any other time when impairment indicators exist. While the
current market conditions have caused our market capitalization to fall below
our book value, based on our annual assessment completed during the fourth
quarter of fiscal 2009, we do not believe our goodwill balance is impaired,
supported by our recent and expected growth and profitability. Our conclusion
was based on the fact that the decline in the market capitalization below book
value has been recent and relatively short-term, and the market price of our
stock has risen since the low point reached in early December 2008. To support
our conclusion we completed a discounted cash flow analysis to estimate the fair
value of the Company and compared those results with value indicated by other
data available. We used a 14.1% discount rate in the analysis, and that rate
could be increased 200 basis points before it would result in a value that
indicates that goodwill may be impaired.
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.
Receivables Not Sold. Accounts receivable not eligible for inclusion in the
securitization program are carried on the Company's consolidated balance sheet
in Customer accounts receivable. The Company records the amount of principal on
those receivables that is expected to be collected within the next twelve months
in current assets on its consolidated balance sheet. Those amounts expected to
be collected after 12 months are included in non-current assets. Typically, a
receivable is considered delinquent if a payment has not been received on the
scheduled due date. Generally, an account that is delinquent more than 120 days
and for which no payment has been received in the past seven months will be
charged-off against the allowance and interest accrued subsequent to the last
payment will be reversed. Interest income is accrued using the Rule of 78's
method for installment contracts and the simple interest method for revolving
charge accounts, and is reflected in Finance charges and other. Typically,
interest income is accrued until the contract or account is paid off or
charged-off and we provide an allowance for uncollectible interest. Interest
income is recognized on our "same as cash" promotion accounts based on our
historical experience related to customers that fail to satisfy the requirements
of the interest-free programs. The Company has a secured interest in the
merchandise financed by these receivables and therefore has the opportunity to
recover a portion of the charged-off value.
38
Allowance for Doubtful Accounts. We record an allowance for doubtful
accounts for our Customer accounts receivable, based on our historical loss
experience. The balance in the allowance for doubtful accounts and uncollectible
interest for customer receivables was $0.8 million and $3.9 million, at January
31, 2008 and 2009, respectively. If the historical loss rate used to calculate
the allowance for doubtful accounts were increased by 10% at January 31, 2009,
we would have increased our Provision for bad debts by $0.4 million.
Results of Operations
The following table sets forth certain statement of operations
information as a percentage of total revenues for the periods indicated.
Year ended January 31,
------------------------
2007 2008 2009
-------- ------- -------
Revenues:
Product sales.............................................................................................. 82.0% 81.5% 83.5%
Service maintenance agreement commissions (net)............................................................ 4.0 4.4 4.5
Service revenues........................................................................................... 3.0 2.8 2.4
-------- ------- -------
Total net sales........................................................................................... 89.0 88.7 90.4
-------- ------- -------
Finance charges and other.................................................................................. 11.0 11.9 12.4
Net decrease in fair value................................................................................. 0.0 (0.6) (2.8)
-------- ------- -------
Total finance charges and other........................................................................... 11.0 11.3 9.6
-------- ------- -------
Total revenues............................................................................................ 100.0 100.0 100.0
Cost and expenses:
Cost of goods sold, including warehousing and occupancy costs.............................................. 61.3 61.7 65.2
Cost of parts sold, including warehousing and occupancy costs.............................................. 0.9 1.0 1.1
Selling, general and administrative expense................................................................ 29.6 29.8 28.5
Provision for bad debts.................................................................................... 0.2 0.3 0.4
-------- ------- -------
Total costs and expenses.................................................................................. 92.0 92.8 95.2
-------- ------- -------
Operating income............................................................................................ 8.0 7.2 4.8
Interest (income) expense................................................................................... (0.1) (0.1) 0.1
Other (income) expense...................................................................................... (0.1) (0.1) 0.0
-------- ------- -------
Earnings before income taxes................................................................................ 8.2 7.4 4.7
Provision for income taxes.................................................................................. 2.9 2.6 1.8
-------- ------- -------
Net income.................................................................................................. 5.3% 4.8% 2.9%
======== ======= =======
The table above identifies several changes in our operations for the periods
presented, 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.
The presentation of our gross margins may not be comparable to other
retailers since we include the cost of our in-home delivery service as part of
selling, general and administrative expense. Similarly, we include the cost of
merchandising our products, including amounts related to purchasing the product
in selling, general and administrative expense. It is our understanding that
other retailers may include such costs as part of cost of goods sold.
39
The following table presents certain operations information in dollars
and percentage changes from year to year:
Analysis of Consolidated Statements of Operations
(in thousands except percentages) 2008 vs. 2007 2009 vs. 2008
Year Ended January 31, Incr/(Decr) Incr/(Decr)
----------------------------- ---------------- -------------------
2007 2008 2009 Amount Pct Amount Pct
--------- --------- --------- -------- ------- ---------- --------
Revenues
Product sales....................................................$623,959 $671,571 $743,729 $47,612 7.6% $ 72,158 10.7%
Service maintenance agreement
commissions (net)............................................... 30,567 36,424 40,199 5,857 19.2 3,775 10.4
Service revenues................................................. 22,411 22,997 21,121 586 2.6 (1,876) (8.2)
--------- --------- --------- -------- ----------
Total net sales................................................... 676,937 730,992 805,049 54,055 8.0 74,057 10.1
--------- --------- --------- -------- ----------
Finance charges and other........................................ 83,720 97,941 110,209 14,221 17.0 12,268 12.5
Net decrease in fair value....................................... - (4,805) (24,508) (4,805) N/A (19,703) 410.1
--------- --------- --------- -------- ----------
Total finance charges and other................................... 83,720 93,136 85,701 9,416 11.2 (7,435) (8.0)
--------- --------- --------- -------- ----------
Total revenues.................................................... 760,657 824,128 890,750 63,471 8.3 66,622 8.1
Cost and expenses.................................................
Cost of goods and parts sold...................................... 473,064 517,166 590,061 44,102 9.3 72,895 14.1
--------- --------- --------- -------- ----------
Gross Profit...................................................... 287,593 306,962 300,689 19,369 6.7 (6,273) (2.0)
Gross Margin...................................................... 37.8% 37.2% 33.8%
Selling, general and administrative expense....................... 224,979 245,317 253,813 20,338 9.0 8,496 3.5
Provision for bad debts........................................... 1,476 1,908 4,273 432 29.3 2,365 124.0
--------- --------- --------- -------- ----------
Operating income.................................................. 61,138 59,737 42,603 (1,401) (2.3) (17,134) (28.7)
Operating Margin.................................................. 8.0% 7.2% 4.8%
Interest (income) expense......................................... (676) (515) 961 161 (23.8) 1,476 (286.6)
Other (income) expense............................................ (772) (943) 117 (171) 22.2 1,060 (112.4)
--------- --------- --------- -------- ----------
Pretax Income..................................................... 62,586 61,195 41,525 (1,391) (2.2) (19,670) (32.1)
Provision for income taxes........................................ 22,275 21,509 15,833 (766) (3.4) (5,676) (26.4)
--------- --------- --------- -------- ----------
Net Income........................................................$ 40,311 $ 39,686 $ 25,692 ($625) (1.6)% ($13,994) (35.3)%
========= ========= ========= ======== ==========
Refer to the above Analysis of Consolidated Statements of Operations in
condensed form while reading the operations review on a year by year basis.
Year Ended January 31, 2008 Compared to the Year Ended January 31, 2009
Change
-----------
(Dollars in Millions) 2009 2008 $ %
- ----------------------------------------------------------------------------------
Net sales $805.1 $731.0 74.1 10.1
- ----------------------------------------------------------------------------------
Finance charges and other 110.2 97.9 12.3 12.6
- ----------------------------------------------------------------------------------
Net decrease in fair value (24.5) (4.8)(19.7)410.4
- ----------------------------------------------------------------------------------
Revenues $890.8 $824.1 66.7 8.1
- ----------------------------------------------------------------------------------
The $74.1 million increase in net sales was made up of the following:
o a $13.9 million increase resulted from a same store sales
increase of 2.0%,
o a $60.6 million increase generated by fourteen retail locations
that were not open for twelve consecutive months in each period,
o a $1.5 million increase resulted from a decrease in discounts on
promotional credit sales, and
o a $1.9 million decrease resulted from a decrease in service
revenues.
40
The components of the $74.1 million increase in net sales were a $72.2
million increase in product sales and an $1.9 million net increase in service
maintenance agreement commissions and service revenues. The $72.2 million
increase in product sales resulted from the following:
o approximately $42.3 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 higher-priced high-efficiency laundry items and increases
in price points on furniture and mattresses, partially offset by a
decline in the average price points on lawn and garden, and
o approximately $29.9 million was attributable to increases in unit
sales, due primarily to increased consumer electronics (especially
flat-panel televisions), track and lawn and garden sales, partially
offset by a decline in appliance sales.
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.
Year Ended January 31,
-------------------------------------------------
2008 2009 Percent
---------------------- --------------------------
Category Amount Percent Amount Percent Increase
----------- ---------- ----------- -------------- ------------
Consumer electronics......... $244,872 33.5% $305,056 37.9% 24.6% (1)
Home appliances.............. 223,877 30.6 221,474 27.5 (1.1) (2)
Track........................ 101,289 13.9 109,799 13.6 8.4 (3)
Furniture and mattresses..... 62,797 8.6 68,869 8.6 9.7 (4)
Lawn and garden.............. 20,914 2.9 21,132 2.6 1.0 (5)
Delivery..................... 12,524 1.7 12,423 1.6 (0.8) (6)
Other........................ 5,298 0.7 4,976 0.6 (6.1)
----------- ---------- ----------- --------------
Total product sales..... 671,571 91.9 743,729 92.4 10.7
Service maintenance agreement
commissions............. 36,424 5.0 40,199 5.0 10.4 (7)
Service revenues............. 22,997 3.1 21,121 2.6 (8.2) (8)
----------- ---------- ----------- --------------
Total net sales......... $730,992 100.0% $805,049 100.0% 10.1%
=========== ========== =========== ==============
(1) This increase is due to continued consumer interest in LCD
televisions, which offset declines in projection and plasma
televisions.
(2) The home appliance category declined as increased laundry and air
conditioning sales were offset by lower refrigeration and cooking
sales, as the appliance market in general showed continued
weakness.
(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 video game
equipment, Blu-ray player, laptop computer and GPS device sales,
partially offset by declines in camcorder, camera, MP3 player and
desktop computer sales.
(4) This increase is due to store expansion and a change in our
furniture and mattresses merchandising driven by the multi-vendor
strategy implemented during the prior year.
(5) This category benefited from an increase in sales of generators
in the areas affected by the hurricanes that impacted certain of
our markets and was partially offset by lower sales of lawn care
equipment.
(6) This decrease was due to a reduction in the total number of
deliveries, primarily as customers take advantage of the ability
to carry out smaller flat-panel televisions.
(7) This increase is due to the increase in product sales.
(8) This decrease is driven by a decrease in the number of warranty
service calls performed by our technicians.
41
Change
--------------------
(Dollars in Thousands) 2009 2008 $ %
- --------------------------------------------------------------------------------------------------
Securitization income (including fair value adjustment) $54,273 $69,860 (15,587) (22.3)
- --------------------------------------------------------------------------------------------------
Insurance commissions 20,191 21,397 (1,206) (5.6)
- --------------------------------------------------------------------------------------------------
Interest income and other 11,237 1,879 9,358 498.0
- --------------------------------------------------------------------------------------------------
Finance charges and other $85,701 $93,136 (7,435) (8.0)
- --------------------------------------------------------------------------------------------------
The decline in Securitization income resulted primarily from a $19.7 million
increase in the non-cash fair value adjustment to reduce our Interests in
securitized assets. Additionally, as a result of the completion of our new
revolving credit facility, we are retaining certain new customer receivables
generated on our consolidated balance sheet and not transferring them to the
QSPE. As a result of the reduced transfer of receivables to the QSPE and the
higher discount rate being in the determination of the fair value of the
receivables, Gains on sales of receivables included in Securitization income has
declined to $19.2 million for the year ended January 31, 2009, from $27.0
million for the year ended January 31, 2008. Because of the higher average
balance of our retained interest in the receivables held by the QSPE, as
compared to the same period in the prior year, and increases in the discount
rate assumption used in our fair value calculation, Interest earned on our
retained interest included in Securitization income has increased to $33.9
million for the year ended January 31, 2009, from $23.3 million in the prior
year. Insurance commissions have declined due to lower retrospective
commissions, which were negatively impacted by higher claims filings due to
Hurricanes Gustav and Ike, and lower interest earnings on funds held by the
insurance company for the payment of claims. Interest income and other increased
$9.4 million due primarily to an increase in new customer receivables generated
that are being held on-balance sheet to a balance of $107.8 million at January
31, 2009, from $9.0 million in the prior year. The following table provides key
portfolio performance information for the year ended January 31, 2009 and 2008:
2009 2008
-------------------------------------------- --------------
ABS (a) Owned (b) Total Total
-------------- -------------- -------------- --------------
Interest income and fees (1)................... $ 123,348 $ 9,076 $ 132,424 $ 117,883
Net charge-offs................................ (21,573) - (21,573) (16,492)
Borrowing costs................................ (22,995) - (22,995) (25,798)
-------------- -------------- -------------- --------------
Amounts included in Finance charges and other. 78,780 9,076 87,856 75,593
-------------- -------------- -------------- --------------
Net charge-offs in Provision for bad debts..... - (789) (789) (926)
Borrowing costs................................ - (1,327) (1,327) -
-------------- -------------- -------------- --------------
Net portfolio yield (c)....................... $ 78,780 $ 6,960 $ 85,740 $ 74,667
============== ============== ============== ==============
Average portfolio balance (2).................. $ 651,420 $ 44,782 $ 696,202 $ 606,631
Portfolio yield % annualized (1) / (2)......... 18.9% 20.3% 19.0% 19.4%
Net charge-off % (annualized).................. 3.3% 1.8% 3.2% 2.9%
(a) Off-balance sheet portfolio owned by the QSPE and serviced by the
Company
(b) On-balance sheet portfolio. Charge-off levels will lag the balance
growth.
(c) Consistent with securitization income, exclusive of the fair value
adjustments, for the ABS facility.
Change
--------------------
(Dollars in Millions) 2009 2008 $ %
- ----------------------------------------------------------------------------------------------
Cost of goods sold $580.4 $508.8 71.6 14.1
- ----------------------------------------------------------------------------------------------
Product gross margin percentage 22.0% 24.2% -2.2%
- ----------------------------------------------------------------------------------------------
The product gross margin percentage decreased from the 2008 period to the
2009 period due to pricing pressures in retailing in general, and specifically
in consumer electronics and appliances.
42
Change
--------------------
(Dollars in Millions) 2009 2008 $ %
- ------------------------------------------------------------------------------------------------
Cost of service parts sold $ 9.6 $ 8.4 1.2 14.3
- ------------------------------------------------------------------------------------------------
As a percent of service revenues 45.5% 36.5% 9.0%
- ------------------------------------------------------------------------------------------------
This increase was due primarily to a 22.8% increase in parts sales, which
grew faster than labor sales.
Change
--------------------
(Dollars in Millions) 2009 2008 $ %
- ----------------------------------------------------------------------------------------------
Selling, general and administrative expense $253.8 $245.3 8.5 3.5
- ----------------------------------------------------------------------------------------------
As a percent of total revenues 28.5% 29.8% -1.3%
- ----------------------------------------------------------------------------------------------
The increase in SG&A expense was largely attributable to the addition of new
stores and expenses of approximately $1.4 million, net of estimated insurance
proceeds, that we incurred related to the two hurricanes that occurred during
the year. The decrease in our SG&A expense as a percent of revenues was
negatively affected by the negative impact of the fair value adjustment on total
revenues, with the decrease shown above being reduced by 60 basis points due to
the negative impact of the fair value adjustments on Total revenues. The
improvement in our SG&A expense as a percent of revenues was largely driven by
lower compensation costs in absolute dollars and as a percent of revenues as
compared to the prior year, as well as reduced advertising expense as a percent
of revenues. Additionally, reductions in certain store operating expenses,
including repairs and maintenance and janitorial services contributed to the
improvement. Partially offsetting these improvements were increases in utility,
credit data processing and stock-based compensation expenses.
Change
--------------------
(Dollars in Millions) 2009 2008 $ %
- ------------------------------------------------------------------------------------------------
Provision for bad debts $ 4.3 $ 1.9 2.4 126.3
- ------------------------------------------------------------------------------------------------
As a percent of total revenues 0.48% 0.23% 0.25%
- ------------------------------------------------------------------------------------------------
The provision for bad debts on non-credit portfolio receivables and credit
portfolio receivables retained by us and not eligible to be transferred to the
QSPE increased primarily as a result of increased balances of receivables
retained by us. The increase in customer receivables retained on our
consolidated balance sheet accounted for $3.1 million of the increase, as we
were required to increase the allowance for bad debts, otherwise the provision
for bad debts would have declined. See the notes to the financial statements for
information regarding the performance of the credit portfolio.
Change
--------------------
(Dollars in Thousands) 2009 2008 $ %
- ----------------------------------------------------------------------------------------------
Interest income, net $ 961 $ (515) 1,476 (286.6)
- ----------------------------------------------------------------------------------------------
The increase in net interest expense was a result of interest incurred on
our new revolving credit facility, which is funding the customer receivables
being retained on our consolidated balance sheet. In addition, there was a
decrease in interest income from invested funds due to lower balances of
invested cash and lower interest rates earned on amounts invested.
Change
--------------------
(Dollars in Thousands) 2009 2008 $ %
- ----------------------------------------------------------------------------------------------
Other income $ 117 $ (943) 1,060 (112.4)
- ----------------------------------------------------------------------------------------------
During the year ended January 31, 2008, there were approximately $1.2
million of gains realized, but not recognized, on transactions qualifying for
sale-leaseback accounting that were deferred and are being amortized as a
reduction of rent expense on a straight-line basis over the minimum lease terms.
43
Change
---------------------
(Dollars in Millions) 2009 2008 $ %
- -----------------------------------------------------------------------------------------------
Provision for income taxes $15,833 $21,509 (5,676) (26.4)
- -----------------------------------------------------------------------------------------------
As a percent of income before income taxes 38.1% 35.1% 3.0%
- -----------------------------------------------------------------------------------------------
Due to the large non-cash fair value adjustment reducing our Interests in
securitized assets this period, and the fact that taxes for the state of Texas
are recorded based on gross margin, instead of Income before taxes, the
effective rate was higher during the 2009 period as we did not receive a benefit
for taxes for the state of Texas on the non-cash fair value adjustment. The
fiscal 2008 effective tax rate was reduced by the reversal of previously accrued
Texas margin tax as a result of a legal entity reorganization completed during
that year.
Year Ended January 31, 2007 Compared to the Year Ended January 31, 2008
Change
--------------------
(Dollars in Millions) 2008 2007 $ %
- ---------------------------------------------------------------------------------------------
Net sales $731.0 $676.9 54.1 8.0
- ---------------------------------------------------------------------------------------------
Finance charges and other 97.9 83.7 14.2 17.0
- ---------------------------------------------------------------------------------------------
Net decrease in fair value (4.8) - (4.8) N/A
- ---------------------------------------------------------------------------------------------
Revenues $824.1 $760.6 63.5 8.3
- ---------------------------------------------------------------------------------------------
The $54.1 million increase in net sales was made up of the following:
o a $20.4 million increase resulted from a same store sales increase of
3.2%.
o a $35.0 million increase generated by thirteen retail locations that
were not open for twelve consecutive months in each period,
o a $1.9 million decrease resulted from an increase in discounts on
promotional credit sales, and
o a $0.6 million increase resulted from an increase in service revenues.
The components of the $54.1 million increase in net sales were a $47.6
million increase in product sales and an $6.5 million net increase in service
maintenance agreement commissions and service revenues. The $47.6 million
increase in product sales resulted from the following:
o approximately $4.6 million was attributable to increases in unit
sales, due primarily to increased consumer electronics (especially
flat-panel televisions) and furniture sales, partially offset by a
decline in appliance and track sales, and
o approximately $43.0 million was attributable to an overall increase in
the average unit price. The increase was driven primarily by a change
in the mix of product sales, as consumer electronics, which has the
highest average price, became a larger share of our total product
sales and was partially offset by the $1.9 million increase in
discounts on extended-term promotional credit sales.
44
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.
Year Ended January 31,
-------------------------------------------------
2007 2008
---------------------- -------------------------- Percent
Category Amount Percent Amount Percent Increase
----------- ---------- ----------- -------------- ------------
Consumer electronics......... $218,350 32.3% $244,872 33.5% 12.1% (1)
Home appliances.............. 230,950 34.1 223,877 30.6 (3.1) (2)
Track........................ 90,329 13.3 101,289 13.9 12.1 (3)
Furniture and mattresses..... 51,078 7.5 62,797 8.6 22.9 (4)
Lawn and garden.............. 16,741 2.5 20,914 2.9 24.9 (5)
Delivery..................... 11,380 1.7 12,524 1.7 10.1 (6)
Other........................ 5,131 0.8 5,298 0.7 3.3
----------- ---------- ----------- --------------
Total product sales..... 623,959 92.2 671,571 91.9 7.6
Service maintenance agreement
commissions................. 30,567 4.5 36,424 5.0 19.2 (7)
Service revenues............. 22,411 3.3 22,997 3.1 2.6 (8)
----------- ---------- ----------- --------------
Total net sales......... $676,937 100.0% $730,992 100.0% 8.0%
=========== ========== =========== ==============
(1) This increase is due to increased unit volume in the area of
flat-panel televisions, partially offset by a decline in the sale of
tube and projection televisions.
(2) 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.
(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 is due to the increased emphasis on the sales of
mattresses and furniture, primarily sofas, recliners and entertainment
centers, and new product lines added to the furniture category.
(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 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.
(7) 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.
(8) 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 televisions, etc.).
Change
--------------------
(Dollars in Thousands) 2008 2007 $ %
- ------------------------------------------------------------------------------------------------
Securitization income (including fair value adjustment) $69,860 $62,431 7,429 11.9
- ------------------------------------------------------------------------------------------------
Insurance commissions 21,397 18,667 2,730 14.6
- ------------------------------------------------------------------------------------------------
Interest income and other 1,879 2,622 (743) (28.3)
- ------------------------------------------------------------------------------------------------
Finance charges and other $93,136 $83,720 9,416 11.2
- ------------------------------------------------------------------------------------------------
The increase in Securitization income resulted primarily from an increase in
the balance of receivables transferred to our QSPE and reduced net charge-offs
of receivables in the QSPE receivables portfolio, partially offset by a $4.8
million non-cash fair value adjustment to reduce our Interests in securitized
assets. Insurance commissions increased, driven by the growth in sales and the
growth in the credit portfolio. The following table provides key portfolio
performance information for the year ended January 31, 2008 and 2007:
45
2008 2007
------------------------------------------- --------------
ABS (a) Owned (b) Total Total
-------------- ------------- -------------- --------------
Interest income and fees (1)................... $ 116,954 $ 929 $ 117,883 $ 102,839
Net charge-offs................................ (16,492) - (16,492) (16,576)
Borrowing costs................................ (25,798) - (25,798) (22,584)
-------------- ------------- -------------- --------------
Amounts included in Finance charges and other. 74,664 929 75,593 63,679
-------------- ------------- -------------- --------------
Net charge-offs in Provision for bad debts..... - (926) (926) (828)
Borrowing costs................................ - - - -
-------------- ------------- -------------- --------------
Net portfolio yield (c)....................... $ 74,664 $ 3 $ 74,667 $ 62,851
============== ============= ============== ==============
Average portfolio balance (2).................. $ 597,286 $9,345 $ 606,631 $ 534,496
Portfolio yield % annualized (1) / (2)......... 19.6% 9.9% 19.4% 19.2%
Net charge-off % (annualized).................. 2.8% 9.9% 2.9% 3.3%
(a) Off-balance sheet portfolio owned by the QSPE and serviced by the
Company.
(b) On-balance sheet portfolio. Charge-off levels will lag the balance
growth.
(c) Consistent with securitization income, exclusive of the fair value
adjustments, for the ABS facility.
Change
--------------------
(Dollars in Millions) 2008 2007 $ %
- ----------------------------------------------------------------------------------------------
Cost of goods sold $508.8 $466.3 42.5 9.1
- ----------------------------------------------------------------------------------------------
Product gross margin percentage 24.2% 25.3% -1.1%
- ----------------------------------------------------------------------------------------------
The product gross margin percentage decreased from the 2007 period to the
2008 period due to pricing pressures in retailing in general, and especially on
flat-panel TV's.
Change
--------------------
(Dollars in Millions) 2008 2007 $ %
- ------------------------------------------------------------------------------------------------
Cost of service parts sold $ 8.4 $ 6.8 1.6 23.5
- ------------------------------------------------------------------------------------------------
As a percent of service revenues 36.4% 30.4% 6.0%
- ------------------------------------------------------------------------------------------------
This increase was due primarily to a 22.8% increase in parts sales, which
grew faster than labor sales.
Change
--------------------
(Dollars in Millions) 2008 2007 $ %
- ----------------------------------------------------------------------------------------------
Selling, general and administrative expense $245.3 $225.0 20.3 9.0
- ----------------------------------------------------------------------------------------------
As a percent of total revenues 29.8% 29.6% 0.2%
- ----------------------------------------------------------------------------------------------
The increase in expense as a percentage of total revenues resulted primarily
from increased payroll and payroll related expenses, as a percent of revenues.
Change
--------------------
(Dollars in Millions) 2008 2007 $ %
- ------------------------------------------------------------------------------------------------
Provision for bad debts $ 1.9 $ 1.5 0.4 26.7
- ------------------------------------------------------------------------------------------------
As a percent of total revenues 0.23% 0.19% 0.04%
- ------------------------------------------------------------------------------------------------
The provision for bad debts on non-credit portfolio receivables and credit
portfolio receivables retained by us and not eligible to be transferred to the
QSPE increased primarily as a result of provision adjustments due to increased
net credit losses. Additionally, the provision for bad debts in the year ended
January 31, 2007, benefited from a $0.1 million reserve adjustment related to
the special reserves recorded as a result of the hurricanes in 2005. See the
notes to the financial statements for information regarding the performance of
the credit portfolio.
46
Change
--------------------
(Dollars in Thousands) 2008 2007 $ %
- ----------------------------------------------------------------------------------------------
Interest income, net $ (515) $ (676) 161 (23.8)
- ----------------------------------------------------------------------------------------------
The net decrease in interest income was a result of a decrease in interest
income from invested funds due to lower balances of invested cash and lower
interest rates earned on amounts invested.
Change
--------------------
(Dollars in Thousands) 2008 2007 $ %
- ----------------------------------------------------------------------------------------------
Other income $ (943) $ (772) (171) 22.2
- ----------------------------------------------------------------------------------------------
Both periods included gains recognized on the sales of company assets.
Additionally, during the year ended January 31, 2008, 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.
Change
---------------------
(Dollars in Millions) 2008 2007 $ %
- -------------------------------------------------------------------------------------------------
Provision for income taxes $ 21.5 $ 22.3 (0.8) (3.6)
- -------------------------------------------------------------------------------------------------
As a percent of income before income taxes 35.1% 35.6% -0.4%
- -------------------------------------------------------------------------------------------------
This decrease in taxes was impacted primarily by the 1.4% decrease in pretax
income. Additionally, the effective tax rate declined from 35.6% for the year
ended January 31, 2007, to 35.1% for the year ended January 31, 2008. 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.
Impact of Inflation
We do not believe that inflation has a material effect on our net sales
or results of operations. However, a significant increase in oil and gasoline
prices could adversely affect our customers' shopping decisions and patterns. We
rely heavily on our internal distribution system and our next day delivery
policy to satisfy our customers' needs and desires, and any such significant
increases could result in increased distribution charges. Such increases may not
affect our competitors in the same manner as it affects us.
Seasonality and Quarterly Results of Operations
Our business is somewhat seasonal, with a higher portion of sales and
operating profit realized during the quarter that ends January 31, due primarily
to the holiday selling season. Over the four quarters of fiscal 2009, gross
margins were 35.3%, 36.4%, 29.5% and 33.3%. We recorded reductions in the fair
value of our Interests in securitized assets totaling $24.5 million during
fiscal 2009, which caused both the gross margin and operating margin each
quarter to be reduced. During the same period, operating margins were 7.6%,
7.4%, -5.9% and 7.7%. A portion of the fluctuation in gross margins and
operating margins is due to planned infrastructure cost additions, such as
increased warehouse space and larger stores, additional personnel and systems
required to absorb the significant increase in revenues that we have experienced
over the last several years.
Additionally, quarterly results may fluctuate materially depending on
factors such as the following:
o timing of new product introductions, new store openings and store
relocations;
o sales contributed by new stores;
o increases or decreases in comparable store sales;
o adverse weather conditions;
o shifts in the timing of certain holidays or promotions; and
o changes in our merchandise mix.
47
Results for any quarter are not necessarily indicative of the results
that may be achieved for a full year.
The following tables sets forth certain unaudited quarterly statement of
operations information for the eight quarters ended January 31, 2009. The
unaudited quarterly information has been prepared on a consistent basis and
includes all normal recurring adjustments that management considers necessary
for a fair presentation of the information shown.
Fiscal Year 2009
-----------------------------------------------------------
Quarter Ended
-----------------------------------------------------------
Apr. 30 Jul. 31 Oct. 31 Jan. 31
------------ ------------ ------------- -------------------
(dollars and shares in thousands, except per share amounts)
Revenues
Product sales........................................................ $179,911 $175,240 $ 160,253 $228,325
Service maintenance agreement commissions (net)...................... 9,970 9,911 8,547 11,771
Service revenues..................................................... 5,192 5,488 5,129 5,312
------------ ------------ ------------- -------------------
Total net sales..................................................... 195,073 190,639 173,929 245,408
------------ ------------ ------------- -------------------
Finance charges and other............................................ 26,552 29,105 25,567 28,985
Net increase (decrease) in fair value................................ (3,067) (1,212) (15,750) (4,479)
------------ ------------ ------------- -------------------
Total finance charges and other..................................... 23,485 27,893 9,817 24,506
------------ ------------ ------------- -------------------
Total revenues..................................................... 218,558 218,532 183,746 269,914
.....................................................................
Percent of annual revenues............................................ 24.5% 24.5% 20.6% 30.3%
Cost and expenses
Cost of goods sold, including warehousing and occupancy costs........ 139,058 136,787 127,007 177,571
Cost of service parts sold, including warehousing and occupancy costs 2,330 2,264 2,479 2,565
Selling, general and administrative expense.......................... 60,368 62,900 62,361 68,184
Provision for bad debts.............................................. 259 333 2,802 879
------------ ------------ ------------- -------------------
Total cost and expenses............................................ 202,015 202,284 194,649 249,199
------------ ------------ ------------- -------------------
Operating Income...................................................... 16,543 16,248 (10,903) 20,715
Operating Profit as a % total revenues................................ 7.6% 7.4% -5.9% 7.7%
Interest (income) expense............................................. (15) (85) 468 593
Other (income) expense................................................ (22) 128 (4) 15
------------ ------------ ------------- -------------------
Income before income taxes............................................ 16,580 16,205 (11,367) 20,107
Provision for income taxes............................................ 5,984 5,993 (3,625) 7,481
------------ ------------ ------------- -------------------
Net income............................................................ $ 10,596 $ 10,212 $ (7,742) $ 12,626
============ ============ ============= ===================
Net income as a % of revenue.......................................... 4.8% 4.7% -4.2% 4.7%
Outstanding shares:
Basic........................................................... 22,382 22,407 22,422 22,439
Diluted......................................................... 22,560 22,620 22,422 22,494
Earnings per share:
Basic........................................................... $ 0.47 $ 0.46 $ (0.35) $ 0.56
Diluted......................................................... $ 0.47 $ 0.45 $ (0.35) $ 0.56
48
Fiscal Year 2008
-----------------------------------------------------------
Quarter Ended
-----------------------------------------------------------
Apr. 30 Jul. 31 Oct. 31 Jan. 31
------------ ------------ ------------ --------------------
(dollars and shares in thousands, except per share amounts)
Revenues
Product sales........................................................ $166,639 $163,793 $155,657 $185,482
Service maintenance agreement commissions (net)...................... 9,281 9,071 8,336 9,736
Service revenues..................................................... 5,445 6,137 6,059 5,356
------------ ------------ ------------ --------------------
Total net sales..................................................... 181,365 179,001 170,052 200,574
------------ ------------ ------------ --------------------
Finance charges and other............................................ 23,880 24,997 23,299 25,765
Net increase (decrease) in fair value................................ 65 (471) (3,985) (414)
------------ ------------ ------------ --------------------
Total finance charges and other..................................... 23,945 24,526 19,314 25,351
------------ ------------ ------------ --------------------
Total revenues..................................................... 205,310 203,527 189,366 225,925
Percent of annual revenues............................................ 24.9% 24.7% 23.0% 27.4%
Cost and expenses
Cost of goods sold, including warehousing and occupancy costs........ 124,393 125,297 118,191 140,906
Cost of service parts sold, including warehousing and occupancy costs 1,866 2,123 2,257 2,133
Selling, general and administrative expense.......................... 59,214 62,113 61,928 62,062
Provision for bad debts.............................................. 560 348 582 418
------------ ------------ ------------ --------------------
Total cost and expenses............................................ 186,033 189,881 182,958 205,519
------------ ------------ ------------ --------------------
Operating Income...................................................... 19,277 13,646 6,408 20,406
Operating Profit as a % total revenues................................ 9.4% 6.7% 3.4% 9.0%
Interest (income) expense............................................. (240) (251) (110) 86
Other (income) expense................................................ (831) (55) (34) (23)
------------ ------------ ------------ --------------------
Income before income taxes............................................ 20,348 13,952 6,552 20,343
Provision for income taxes............................................ 7,402 4,295 2,531 7,281
------------ ------------ ------------ --------------------
Net income............................................................ $ 12,946 $ 9,657 $ 4,021 $ 13,062
============ ============ ============ ====================
Net income as a % of revenue.......................................... 6.3% 4.7% 2.1% 5.8%
Outstanding shares:
Basic........................................................... 23,567 23,489 23,077 22,651
Diluted......................................................... 24,121 24,058 23,550 22,976
Earnings per share:
Basic........................................................... $ 0.55 $ 0.41 $ 0.17 $ 0.58
Diluted......................................................... $ 0.54 $ 0.40 $ 0.17 $ 0.57
Liquidity and Capital Resources
We require capital to finance our growth as we increase sales at our
existing stores and add new stores and markets to our operations, which in turn
requires additional working capital for increased receivables and inventory. We
have historically financed our operations through a combination of cash flow
generated from operations and external borrowings, including primarily bank
debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables to our asset-backed securitization facilities.
At January 31, 2009, we had revolving lines of credit in the amount of
$220 million, under which we had $62.9 million in borrowings outstanding, and
had utilized $21.7 million of availability to issue letters of credit. As of
January 31, 2009, we had $31.3 million under our revolving credit facility and
$10 million under an unsecured bank line of credit immediately available to us
for general corporate purposes. In addition to the $31.3 million currently
available under the revolving credit facility, an additional $94.1 million will
become available under the borrowing base calculation as we grow the balance of
eligible receivables retained by us and when there is growth in total eligible
inventory balances. We expect that our cash requirements for the foreseeable
future, including those for our capital expenditure requirements, will be met
with our available lines of credit, together with cash generated from
operations. While we have no new stores currently under development for fiscal
2010, our long-term plans are to grow our store base by approximately 10% a
year, dependent upon future capital availability. We expect we will invest in
inventory, real estate and customer receivables to support the additional stores
and same store sales growth. Depending on market conditions we may, at times,
slow or suspend our new store growth plans, enter into sale-leaseback
transactions to finance our real estate or seek alternative financing sources
for new store expansions and customer receivables growth, including expansion of
existing lines of credit, and accessing new debt or equity markets.
49
On August 14, 2008, we executed a $210 million revolving credit facility
that provides funding based on a borrowing base calculation that includes
accounts receivable and inventory. The borrowing base calculation includes
various reserves against availability, including the ability of the lender to
require additional reserves from time to time. The new facility, which replaced
our $100 million revolving credit facility, matures in August 2011 and bears
interest at LIBOR plus a spread ranging from 225 basis points to 275 basis
points, based on a fixed charge coverage ratio. The spread will be 225 basis
points for the first six months under the new loan agreement, and then will be
subject to adjustment as discussed above. Additionally, the new loan agreement
includes an accordion feature allowing for future expansion of the committed
amount up to $350 million. In conjunction with completing this financing
arrangement, our QSPE amended certain of its borrowing agreements to provide for
the existence of the new revolving credit facility and adjust certain terms of
its borrowing arrangements to current market requirements, including reducing
the advance rate on its variable funding note facility from a maximum of 85% to
a maximum of 76%. As a result of completing the new revolving credit facility, a
larger portion of the accounts receivable we generate will be retained by us and
not sold to the QSPE, and as such will be included in our consolidated balance
sheet.
A summary of the significant financial covenants that govern our
revolving credit facility compared to our actual compliance status at January
31, 2009, is presented below:
Required
Minimum/
Actual Maximum
-------------- ---------------
Fixed charge coverage ratio must exceed required minimum 1.81 to 1.00 1.30 to 1.00
Leverage ratio must be lower than required maximum 2.29 to 1.00 3.50 to 1.00
Cash recovery percentage must exceed required minimum 5.17% 4.75%
Capital expenditures, net must be lower than required maximum $17.4 million $22.0 million
We expect, based on current facts and circumstances, that we will be in
compliance with the above covenants through fiscal 2010. Events of default under
the credit facility include, but are not limited to, subject to grace periods
and notice provisions in certain circumstances, non-payment of principal,
interest or fees; violation of covenants; material inaccuracy of any
representation or warranty; default under or acceleration of certain other
indebtedness; bankruptcy and insolvency events; certain judgments and other
liabilities; certain environmental claims; and a change of control. If an event
of default occurs, the lenders under the credit facility are entitled to take
various actions, including accelerating amounts due under the credit facility
and requiring that all such amounts be immediately paid in full. Our obligations
under the credit facility are secured by all of our and our subsidiaries'
assets, excluding customer receivables owned by the QSPE and certain inventory
subject to vendor floor plan arrangements.
The following is a comparison of our statement of cash flows for our
fiscal years 2008 and 2009:
During the year ended January 31, 2009, net cash used in operating
activities increased to $42.7 million, from $5.6 million used in operating
activities in the twelve months ended January 31, 2008. Operating cash flows for
the current period were impacted primarily by the increased retention of
customer accounts receivable on our consolidated balance sheet and increased
inventories to support newly opened stores, partially offset by an increase in
accounts payable balances, due to the timing of inventory purchases and taking
advantage of payment terms available from our vendors. Prior to the quarter
ended October 31, 2008, virtually all customer accounts receivable were
transferred to and funded by our QSPE, resulting in the net cash flow activity
from these transactions being reported in cash flows from operating activities.
However, the cash flow presentation is different for customer accounts
receivable retained by us and financed through our revolving credit facility,
with the increase in the Accounts receivable balance being reflected as a use of
cash in cash flows from operating activities, and borrowings on our revolving
credit facility being reflected in cash flows from financing activities. As a
result, we expect, as we continue to grow the balance of customer accounts
receivable retained by us, that we will typically report cash flows "used" in
operating activities, with the funding for this activity provided by our
revolving credit facility resulting in us reporting cash "provided" by financing
activities.
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
50
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% of eligible securitized receivables. If
we exceed this 30% 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 21.4% and 17.3%, as of January 31, 2008, and 2009,
respectively. There is no limitation on the amount of deferred interest program
accounts that can be carried as collateral under the revolving credit facility.
The percentage of all managed receivables represented by promotional receivables
was 16.4% as of January 31, 2009, as compared to 19.8% at January 31, 2008. The
weighted average promotional period was 15.1 months and 16.5 months for the
"same as cash" promotional receivables outstanding as of January 31, 2008, and
2009, respectively. The weighted average remaining term on those same
promotional receivables was 10.7 months and 11.2 months as of January 31, 2008,
and 2009, respectively. While overall these promotional receivables have a
shorter weighted average term than non-promotional receivables, we receive less
income on these receivables, resulting in a reduction of the net interest margin
on those receivables.
Net cash used in investing activities increased by $7.4 million, from
$10.0 million used in the fiscal 2008 period to $17.4 million used in the fiscal
2009 period. The net increase in cash used in investing activities resulted
primarily from a decline in proceeds from sales of property and equipment as
compared to the same period in the prior fiscal year. 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.
Net cash from financing activities increased by $81.8 million from $29.9
million used during the year ended January 31, 2008, to $60.9 million provided
during the year ended January 31, 2009, as we terminated our stock repurchase
program in the current fiscal period and increased borrowings under our
revolving credit facility to fund the new customer receivables generated and
retained on our consolidated balance sheet.
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. Through January 31,
2008, we had spent $37.1 million under this authorization to acquire 1,723,205
shares of our common stock, though there were no shares repurchased during the
year ended January 31, 2009, and our Board of Directors has terminated the
repurchase program.
We lease 70 of our 75 stores, and our plans for future store locations
include primarily leases, but do not exclude store ownership. Our capital
expenditures for future new store projects should primarily be for our tenant
improvements to the property leased (including any new distribution centers and
warehouses), the cost of which is approximately $1.6 million per store, and for
our existing store remodels, in the range of $250,000 per store remodel,
depending on store size. In the event we purchase existing properties, our
capital expenditures will depend on the particular property and whether it is
improved when purchased. We are continuously reviewing new relationship and
funding sources and alternatives for new stores, which may include
"sale-leaseback" or direct "purchase-lease" programs, as well as other funding
sources for our purchase and construction of those projects. If we are
successful in these relationship developments, our direct cash needs should
include only our capital expenditures for tenant improvements to leased
properties and our remodel programs for existing stores, but could include full
ownership if it meets our cash investment strategy.
51
The following table reflects outstanding commitments for borrowings and
letters of credit, and the amounts utilized under those commitments, as of
January 31, 2009:
Commitment Expires in Fiscal Year Ending January 31,
-------------------------------------------------------------- Balance at Available at
There January 31, January 31,
2010 2011 2012 2013 2014 after Total 2009 2009
-------- --------- ------- ------- ------- ------- ----------- ------------ -------------
(in thousands)
Revolving Bank Facility (1). $210,000 $210,000 $ 84,650 $ 125,350
Unsecured Line of Credit.... 10,000 10,000 - 10,000
Inventory Financing (2)..... 48,000 48,000 17,658 30,342
-------- --------- ------- ------- ------- ------- ----------- ------------ -------------
Total $58,000 $210,000 $ - $ - $ - $- $268,000 $ 102,308 $ 165,692
======== ========= ======= ======= ======= ======= =========== ============ =============
(1) Includes letter of credit sublimit. There was $21.8 million of letters of
credit issued at January 31, 2009.
(2) Included in accounts payable on the consolidated balance sheet as of
January 31, 2009.
Since we extend credit in connection with a large portion of our retail,
service maintenance and credit insurance sales, in August 2008 we entered into
the $210 million revolving credit facility and in 2002 we created a QSPE to
provide financing for the customer receivables we originate. Both the bank
credit facility and the asset-backed securitization program are significant
factors relative to our ongoing liquidity and our ability to meet the cash needs
associated with the growth of our business. Our inability to use either of these
programs because of a failure to comply with their covenants would adversely
affect our continued growth. Funding of current and future receivables under the
asset-backed securitization program can be adversely affected if we exceed
certain predetermined levels of re-aged receivables, write-offs, bankruptcies or
other ineligible receivable amounts. Given the ongoing turmoil in securitization
market, we have been unable to issue new medium term notes and, as a result,
entered in the bank revolving credit facility discussed above. We are financing
customer receivable portfolio growth through the use of the bank revolving
facility and expect this to be a primary source of funding our customer
receivables portfolio during fiscal 2010. We have received initial indications
that at least a portion of the $100 million revolving securitization facility
that matures in August 2009, will likely not be renewed. If that is the case,
any borrowings outstanding in excess of any portion of the commitment that is
renewed, if any, would be required to be paid down using the proceeds from
collections on the receivables portfolio. Our current plan is to reduce the
balance outstanding under this commitment before the maturity date. As such, we
will fund new receivables generated using our existing cash flows, borrowings on
our asset based loan facility and may be required to obtain new sources of
financing to continue funding the growth in our credit operations.
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, debt or equity
offerings and the QSPE's asset-backed securitization facilities. Based on our
current operating plans, including assuming that all or a portion of the $100
million revolving securitization facility is not renewed in August 2009, we
believe that cash generated from operations, available borrowings under our
revolving credit facility and unsecured credit line, extended vendor terms for
purchases of inventory, acquisition of inventory under consignment arrangements
and cash flows from the QSPE's asset-backed securitization program will be
sufficient to fund our operations, store expansion and updating activities 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 or margins for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional activities;
o changes in inventory requirements based on longer delivery times of the
manufacturers or other requirements which would negatively impact our delivery
and distribution capabilities;
52
o an acceleration of the growth of the credit portfolio;
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 reduced availability under our revolving credit facility as a result of
borrowing base requirements and the impact on the borrowing base calculation of
changes in the performance of the receivables financed by that facility;
o reductions in the capacity or inability to expand the capacity available
for financing our receivables portfolio under existing or replacement QSPE
asset-backed securitization programs or a requirement that we retain a higher
percentage of the credit portfolio under such programs;
o increases in program costs (interest and administrative fees relative to
our receivables portfolio associated with the funding of our receivables);
o increases in personnel costs or other costs for us to stay competitive in
our markets; and
o the inability of our QSPE to get its current variable funding note
facility renewed at its annual maturity date.
If necessary, in addition to available cash balances, cash flow from
operations and borrowing capacity under our revolving facilities, additional
cash to fund our growth and increases in receivables balances could be obtained
by:
o reducing capital expenditures for updates of existing stores or new store
openings;
o taking advantage of longer payment terms and financing available for
inventory purchases;
o utilizing third-party sources to provide financing to our customers;
o reducing operating costs;
o negotiating to expand the capacity available under existing credit
facilities; and
o accessing new debt or equity markets.
We can provide no assurance that we will be able to obtain these sources of
funding on favorable terms, if at all.
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 January 31, 2009, the issuer had issued two series of notes and bonds:
the 2002 Series A variable funding note with a total availability of $300
million 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 $100 million 364-day tranche, and a $200
million tranche that is annually renewable, at our option, until September 2012.
In August 2008, the issuer completed an extension of the maturity date on the
364-day commitment to August 13, 2009. We have received initial indications that
at least a portion of the $100 million revolving securitization facility that
matures in August 2009, will likely not be renewed. If that is the case, any
borrowings outstanding in excess of any portion of the commitment that is
53
renewed, if any, would be required to be paid down using the proceeds from
collections on the receivables portfolio. Our current plan is to reduce the
balance outstanding under this commitment before the maturity date. In
conjunction with the renewal, the cost of borrowings under this $300 million
facility increased and now bear interest at the commercial paper rate plus 250
basis points, in most instances. 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. The net portfolio yield
was 7.9% at January 31, 2009. Private institutional investors, primarily
insurance companies, purchased the 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 January 2009 was 3.4%.
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. 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, or 2006
Series A bond holders, the servicing fee and additional earnings to the extent
they are available.
Currently the 2002 Series A variable funding note permits the issuer to
borrow funds up to $300 million to purchase receivables from us or make
principal payments on other bonds, thereby functioning as a "basket" to
accumulate receivables. As issuer borrowings under the 2002 Series A variable
funding note approach the total commitment, 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. Given the current state of the financial markets, especially with
respect to asset-backed securitization financing, we have been unable to issue
medium-term notes or increase the availability under the existing variable
funding note program. As of January 31, 2009, borrowings under the 2002 Series A
variable funding note were $292.5 million.
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the 2002 Series A note
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 2006 Series A bond
holders could claim the balance in its $6.0 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 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.
54
A summary of the significant financial covenants that govern the 2002
Series A variable funding note compared to actual compliance status at January
31, 2009, is presented below:
Required
Minimum/
As reported Maximum
-------------- ---------------
Issuer interest must exceed required minimum $89.9 million $83.4 million
Gross loss rate must be lower than required maximum (a) 4.7% 10.0%
Serviced portfolio gross loss rate must be lower than required maximum (b) 4.2% 10.0%
Net portfolio yield must exceed required minimum (a) 7.9% 2.0%
Serviced portfolio net portfolio yield must exceed required minimum (b) 9.0% 2.0%
Payment rate must exceed required minimum (a) 6.7% 3.0%
Serviced portfolio payment rate must exceed required minimum (a) 5.17% 4.75%
Consolidated net worth must exceed required minimum $346.8 million $238.1 million
(a) Calculated for those receivables transferred to the QSPE.
(b) Calculated for the total of receivables transferred to the QSPE and
those retained by the Company.
Note: All terms in the above table are defined by the asset backed
securitization program and may or may not agree directly to the financial
statement captions in this document.
We expect, based on current facts and circumstances, that we will be in
compliance with the above covenants through fiscal 2010. Events of default under
the 2002 Series A variable funding note and the 2006 Series A bonds, subject to
grace periods and notice provisions in some circumstances, include, among
others: failure of the issuer to pay principal, interest or fees; violation by
the issuer of any of its covenants or agreements; inaccuracy of any
representation or warranty made by the issuer; certain servicer defaults;
failure of the trustee to have a valid and perfected first priority security
interest in the collateral; default under or acceleration of certain other
indebtedness; bankruptcy and insolvency events; failure to maintain certain loss
ratios and portfolio yield; change of control provisions and certain other
events pertaining to us. The issuer's obligations under the program are secured
by the receivables and proceeds.
Securitization Facilities
We finance most of our customer receivables through asset-backed
securitization facilities
---------------------------
2002 Series A Note
|----> $300 million Commitment
| Credit Rating: P1/A1
| Bank Commercial Paper
Customer Receivables | Conduits
| ---------------------------
|
---------------------- -------------> ---------------------- |
| Retail | | Qualifying | |
| Sales | | Special Purpose | <-----|
| Entity | | Entity | |
| | | ("QSPE") | |
---------------------- <------------- ---------------------- |
|
| ---------------------------
| 2006 Series A Bonds
1. Cash Proceeds | $150 million
2. Subordinated Securities | Private Institutional
3. Right to Receive Cash Flows |----> Investors
Equal to Interest Spread Class A: $90 mm (Baa2)
Class B: $43.3 mm (B2)
Class C: $16.7 mm (Caa1)
---------------------------
55
Certain Transactions
Since 1996, we have leased a retail store location of approximately
19,150 square feet in Houston, Texas from Thomas J. Frank, Sr., our Chairman of
the Board and Chief Executive Officer. The lease provides for base monthly
rental payments of $17,235 plus escrows for taxes, insurance and common area
maintenance expenses of increasing monthly amounts based on expenditures by the
management company operating the shopping center of which this store is a part
through January 31, 2011. We also have an option to renew the lease for two
additional five-year terms. Mr. Frank received total payments under this lease
of $206,820 in fiscal 2007, 2008 and 2009, respectively. Based on market lease
rates for comparable retail space in the area, we believe that the terms of this
lease are no less favorable to us than we could have obtained in an arms' length
transaction at the date of the lease commencement.
We engage the services of Direct Marketing Solutions, Inc., or DMS, for a
substantial portion of our direct mail advertising. Direct Marketing Solutions,
Inc. is partially owned (less than 50%) by SF Holding Corp., members of the
Stephens family, Jon E. M. Jacoby, and Douglas H. Martin. SF Holding Corp. and
the members of the Stephens family are significant shareholders of the Company,
and Messrs. Jacoby and Martin are members of our Board of Directors. The fees we
paid to DMS during fiscal years ended 2007, 2008 and 2009 amounted to
approximately $3.6 million, $2.5 million and $4.0 million, respectively.
We engaged the services of Stephens Inc. to act as our broker under our
stock repurchase program. Stephens Inc. is a shareholder of the Company, and
Doug Martin, an Executive Vice President of Stephens Inc., is a member of our
Board of Directors. During the years ended January 31, 2007 and 2008,
respectively, we incurred fees payable to Stephens Inc. of $5,040 and $46,644,
respectively, related to the purchase of 168,000 and 1,555,205 shares,
respectively of our common stock. We did not repurchase any shares of our common
stock during the year ended January 31, 2009. Based on a review of competitive
bids received from various broker candidates, we believe the terms of this
arrangement are no less favorable than we could have obtained in an arms' length
transaction.
Contractual Obligations
The following table presents a summary of our known contractual
obligations as of January 31, 2009, with respect to the specified categories,
classified by payments due per period.
Payments due by period
-----------------------------------------------
Less Than 1 1-3 3-5 More Than
Total Year Years Years 5 Years
---------- ----------- ----------- --------- -------------
(in thousands)
Long term debt (1)................ $ 62,912 $ 5 $ 62,907 $ - $ -
Operating leases:
Real estate...................... 168,007 21,261 41,811 36,750 68,185
Equipment........................ 6,730 2,504 2,752 850 624
Purchase obligations (2).......... 4,695 2,821 1,874 - -
---------- --------- ----------- --------- -------------
Total contractual cash obligations $242,344 $26,591 $109,344 $37,600 $68,809
========== ========= =========== ========= =============
- ---------------------
(1) If the outstanding balance as of 1/31/09 and the interest rate in effect at
that time were to remain the same over the remaining life of the facility,
interest expense on the facility would be approximately $1.8 million, $1.8
million and $1.0 million for the fiscal years ended January 31, 2010, 2011 and
2012, respectively.
(2) Includes contracts for long-term communication services. Does not include
outstanding purchase orders for merchandise, services or supplies which are
ordered in the normal course of operations and which generally are received and
recorded within 30 days.
56
The following table presents a summary of the known contractual
obligations of our QSPE, as of January 31, 2009, with respect to the specified
categories, classified by payments due per period.
Payments due by period
-----------------------------------------------
More
Less Than 1 1-3 3-5 Than 5
Total Year Years Years Years
----------- ------------ ----------- ----------- ----------
(in thousands)
Long term debt:
Fixed-rate notes (1)............. $171,503 $ 8,748 $140,036 $ 22,719 $ -
Variable rate notes (2).......... 292,500 92,500 - 200,000 -
Operating leases:
Real estate...................... - - - - -
Equipment........................ - - - - -
Purchase obligations.............. - - - - -
----------- ----------- ----------- ----------- ----------
Total contractual cash obligations $464,003 $101,248 $140,036 $222,719 $ -
=========== =========== =========== =========== ==========
- ---------------------
(1) Includes interest payments due on the notes.
(2) The $200 million 2002 Series A variable funding note, that is renewable at
our option until September 2012, is included in the 3-5 Years column. If the
outstanding balance as of 1/31/09 and the interest rate in effect at that time
were to remain the same over the remaining lives of the notes, interest expense
on the notes would be approximately $8.5 million, $6.7 million, $6.7 million and
$4.1 million for the fiscal years ended January 31, 2010, 2011, 2012 and 2013,
respectively.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Interest rates under our revolving credit facility are variable and are
determined, at our option, as the base rate, which is the prime rate plus the
base rate margin, which ranges from 0.25% to 0.75%, or LIBOR plus the LIBOR
margin, which ranges from 2.25% to 2.75%. Interest rates under our QSPE's
variable funding note facility are variable and are determined based on the
commercial paper rate plus a spread of 2.50%. Accordingly, changes in the prime
rate, the commercial paper rate or LIBOR, which are affected by changes in
interest rates generally, will affect the interest rate on, and therefore our
costs under, these credit facilities. We are also exposed to interest rate risk
in determining the fair value of the interest only strip we receive from our
sales of receivables to the QSPE, due to rate variability under the QSPE's
variable funding note discussed above. An increase in interest rates that
reduced the net interest spread under the interest-only strip by 10% would
result in a $6.6 million reduction in the fair value of our Interests in
securitized assets. Since January 31, 2008, our interest rate sensitivity has
increased on the interest only strip as the variable rate portion of the QSPE's
debt has increased from $278.0 million, or 59.4% of its total debt, to $292.5
million, or 66.1% of its total debt. As a result, a 100 basis point increase in
interest rates on the variable rate debt would increase borrowing costs $2.9
million over a 12-month period, based on the balance outstanding at January 31,
2009. Our revolving credit facility also has variable interest rates and at
January 31, 2009 we had $62.9 million outstanding. As a result, a 100 basis
point increase in interest rates on the variable rate debt would increase
borrowing costs $0.6 million over a 12-month period, based on the balance
outstanding at January 31, 2009.
57
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Management's Report on Internal Control Over Financial Reporting..........................................................59
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting......................60
Report of Independent Auditors............................................................................................61
Consolidated Balance Sheets...............................................................................................62
Consolidated Statements of Operations.....................................................................................63
Consolidated Statements of Stockholders' Equity...........................................................................64
Consolidated Statements of Cash Flows.....................................................................................65
Notes to Consolidated Financial Statements................................................................................66
58
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) or Rule
15(d)-15(f) under the Exchange Act. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
Our management (with the participation of our principal executive officer and
our principal financial officer) assessed the effectiveness of our internal
control over financial reporting as of January 31, 2009. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. Based on our assessment and those criteria, management
believes that, as of January 31, 2009, our internal control over financial
reporting is effective.
The effectiveness of our internal control over financial reporting as of January
31, 2009, has been audited by Ernst & Young LLP, an independent registered
public accounting firm, as stated in their report which is included elsewhere
herein.
Conn's, Inc.
Beaumont, Texas
March 24, 2009
/s/ Michael J. Poppe
- -----------------------------
Michael J. Poppe
Chief Financial Officer
/s/ Thomas J. Frank
- -----------------------------
Thomas J. Frank
Chief Executive Officer
59
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Conn's, Inc.
We have audited Conn's, Inc.'s internal control over financial reporting as of
January 31, 2009, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Conn's, Inc.'s management is responsible for
maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management's Report Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Conn's, Inc. maintained, in all material respects, effective
internal control over financial reporting as of January 31, 2009, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Conn's, Inc. as of January 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended January 31, 2009 of Conn's, Inc. and our report
dated March 24, 2009 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 24, 2009
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Conn's, Inc.
We have audited the accompanying consolidated balance sheets of Conn's, Inc. as
of January 31, 2009 and 2008, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended January 31, 2009. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Conn's, Inc. at
January 31, 2009 and 2008, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended January 31, 2009,
in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, on February 1,
2006, the Company changed its method of accounting for share-based compensation.
As discussed in Note 1 to the consolidated financial statements, on February 1,
2007, the Company changed its method of accounting for interests in securitized
assets and its method of accounting for servicing liabilities.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Conn's, Inc.'s internal control over
financial reporting as of January 31, 2009, based on criteria established in
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 24, 2009,
expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 24, 2009
61
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
January 31,
-------------------------
2008 2009
----------- -------------
Assets
Current Assets
Cash and cash equivalents.................................................................. $ 11,015 $ 11,798
Other accounts receivable, net of allowance of $78 and $60, respectively................... 27,977 32,878
Customer accounts receivable, net of allowance of $557 and $2,338, respectively............ 5,133 61,125
Interest in securitized assets............................................................. 178,150 176,543
Inventories................................................................................ 81,495 95,971
Deferred income taxes...................................................................... 2,619 13,354
Prepaid expenses and other assets.......................................................... 4,449 5,933
----------- -------------
Total current assets.................................................................... 310,838 397,602
Non-current customer accounts receivable, net of allowance of $325 and $1,575, respectively 2,990 41,172
Property and equipment
Land...................................................................................... 8,011 7,682
Buildings................................................................................. 13,626 12,011
Equipment and fixtures.................................................................... 17,950 21,670
Transportation equipment.................................................................. 2,741 2,646
Leasehold improvements.................................................................... 74,120 83,361
----------- -------------
Subtotal................................................................................ 116,448 127,370
Less accumulated depreciation.............................................................. (57,195) (64,819)
----------- -------------
Total property and equipment, net..................................................... 59,253 62,551
Goodwill, net.............................................................................. 9,617 9,617
Non-current deferred income tax asset...................................................... - 2,035
Other assets, net.......................................................................... 154 3,652
----------- -------------
Total assets.......................................................................... $ 382,852 $ 516,629
=========== =============
Liabilities and Stockholders' Equity............................
Current Liabilities
Current portion of long-term debt.......................................................... $ 102 $ 5
Accounts payable........................................................................... 28,179 57,809
Accrued compensation and related expenses.................................................. 9,748 11,473
Accrued expenses........................................................................... 21,487 23,703
Income taxes payable....................................................................... 600 4,334
Deferred income taxes...................................................................... - -
Deferred revenues and allowances........................................................... 16,949 21,207
----------- -------------
Total current liabilities............................................................... 77,065 118,531
Long-term debt............................................................................. 17 62,912
Non-current deferred tax liability......................................................... 131 -
Deferred gain on sale of property.......................................................... 1,221 1,036
Stockholders' equity
Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding). - -
Common stock ($0.01 par value, 40,000,000 shares authorized; 24,098,171 and 24,167,445
shares issued at January 31, 2008 and 2009, respectively).............................. 241 242
Additional paid in capital................................................................. 99,514 103,553
Retained earnings.......................................................................... 241,734 267,426
Treasury stock at cost (1,723,205 shares at January 31, 2008 and 2009)..................... (37,071) (37,071)
----------- -------------
Total stockholders' equity.............................................................. 304,418 334,150
----------- -------------
Total liabilities and stockholders' equity............................................ $ 382,852 $ 516,629
=========== =============
See notes to consolidated financial statements.
62
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
Year Ended January 31,
---------------------------------
2007 2008 2009
--------- --------- ------------
Revenues
Product sales....................................................... $623,959 $671,571 $ 743,729
Service maintenance agreement commissions (net)..................... 30,567 36,424 40,199
Service revenues.................................................... 22,411 22,997 21,121
--------- --------- ------------
Total net sales................................................... 676,937 730,992 805,049
--------- --------- ------------
Finance charges and other........................................... 83,720 97,941 110,209
Net decrease in fair value.......................................... - (4,805) (24,508)
--------- --------- ------------
Total finance charges and other................................... 83,720 93,136 85,701
--------- --------- ------------
Total revenues.................................................. 760,657 824,128 890,750
Cost and expenses
Cost of goods sold, including warehousing and occupancy costs....... 466,279 508,787 580,423
Cost of service parts sold, including warehousing and occupancy cost 6,785 8,379 9,638
Selling, general and administrative expense......................... 224,979 245,317 253,813
Provision for bad debts............................................. 1,476 1,908 4,273
--------- --------- ------------
Total cost and expenses......................................... 699,519 764,391 848,147
--------- --------- ------------
Operating income...................................................... 61,138 59,737 42,603
Interest (income) expense............................................. (676) (515) 961
Other (income) expense................................................ (772) (943) 117
--------- --------- ------------
Income before income taxes............................................ 62,586 61,195 41,525
Provision for income taxes............................................ 22,275 21,509 15,833
--------- --------- ------------
Net Income............................................................ $ 40,311 $ 39,686 $ 25,692
========= ========= ============
Earnings per share
Basic............................................................... $ 1.70 $ 1.71 $ 1.15
Diluted............................................................. $ 1.66 $ 1.68 $ 1.14
Average common shares outstanding
Basic............................................................... 23,663 23,193 22,413
Diluted............................................................. 24,289 23,673 22,577
See notes to consolidated financial statements.
63
Conn's, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Accum.
Other
Common Stock Compre- Treasury Stock
----------------- hensive Paid in Retained ------------------
Shares Amount Income Capital Earnings Shares Amount Total
-------- -------- ---------- --------- -------- -------- --------- ----------
Balance January 31, 2006......... 23,572 $ 236 $ 10,492 $ 89,027 $156,106 - $ - $255,861
Exercise of options,
including tax benefit........... 226 2 2,370 2,372
Issuance of common stock under
Employee Stock Purchase Plan.... 12 245 245
Stock-based compensation......... 1,723 1,723
Purchase of treasury stock (168) (3,797) (3,797)
Comprehensive Income:
Net income....................... 40,311 40,311
Adjustment of fair value of
securitized assets (net of
tax of $2,154), net of reclass-
ification adjustments of
$12,732 (net of tax of $7,100) (4,187) (4,187)
----------
Total comprehensive income....... 36,124
-------- -------- ---------- --------- -------- -------- --------- ----------
Balance January 31, 2007......... 23,810 238 6,305 93,365 196,417 (168) (3,797) 292,528
Cumulative effect of changes in
accounting principles........... (6,305) 5,631 (674)
Exercise of options,
including tax benefit........... 279 2 3,241 3,243
Issuance of common stock under
Employee Stock Purchase Plan.... 13 1 247 248
Stock-based compensation......... 2,661 2,661
Purchase of treasury stock....... (1,555) (33,274) (33,274)
Return of shares................. (4)
Net income....................... 39,686 39,686
-------- -------- ---------- --------- -------- -------- --------- ----------
Balance January 31, 2008......... 24,098 241 - 99,514 241,734 (1,723) (37,071) 304,418
Exercise of options,
including tax benefit........... 47 1 614 615
Issuance of common stock under
Employee Stock Purchase Plan.... 22 237 237
Stock-based compensation......... 3,188 3,188
Net income....................... 25,692 25,692
-------- -------- ---------- --------- -------- -------- --------- ----------
Balance January 31, 2009......... 24,167 $ 242 $ - $ 103,553 $267,426 $(1,723) $(37,071) $ 334,150
======== ======== ========== ========= ======== ======== ========= ==========
See notes to consolidated financial statements.
64
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended January 31,
----------------------------------------------
2007 2008 2009
--------------- ------------- -------------
Cash flows from operating activities
Net income ................................................. $ 40,311 $ 39,686 $ 25,692
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ............................................ 12,520 12,441 12,672
Accretion, net .......................................... (461) (758) (110)
Provision for bad debts ................................. 1,476 1,908 4,273
Stock-based compensation ................................ 1,723 2,661 3,188
Gains on interests in securitized assets ................ (23,874) (27,038) (19,170)
Decrease in fair value of interests in securitized
assets ................................................. - 4,805 24,508
Provision for deferred income taxes ..................... (1,080) (747) (12,025)
Loss (gain) from sale of property and equipment ......... (772) (943) 117
Discounts on promotional credit ......................... 5,347 7,236 5,806
Change in operating assets and liabilities:
Customer accounts receivable ............................ (1,578) (819) (99,521)
Other accounts receivable ............................... (8,093) (5,452) (4,846)
Interest in securitized assets .......................... 14,621 (26,299) (8,719)
Inventory ............................................... (13,111) 5,603 (14,476)
Prepaid expenses and other assets ....................... (954) 509 (1,484)
Accounts payable ........................................ 10,108 (22,849) 29,630
Accrued expenses ........................................ (6,569) 1,577 3,941
Income taxes payable .................................... (5,120) (987) 2,857
Deferred revenues and allowances ........................ 4,380 3,832 4,967
--------------- ------------- -------------
Net cash provided by (used in) operating activities ......... 28,874 (5,634) (42,700)
--------------- ------------- -------------
Cash flows from investing activities
Purchase of property and equipment ........................ (18,425) (18,955) (17,597)
Proceeds from sales of property ........................... 2,278 8,921 224
--------------- ------------- -------------
Net cash used in investing activities ....................... (16,147) (10,034) (17,373)
--------------- ------------- -------------
Cash flows from financing activities
Net proceeds from stock issued under employee benefit
plans, including tax benefit ............................. 2,407 3,188 802
Excess tax benefits from stock-based compensation ......... 210 303 50
Purchase of treasury stock ................................ (3,797) (33,274) -
Borrowings under lines of credit .......................... 25,200 40,475 197,156
Payments on lines of credit ............................... (25,200) (40,475) (134,256)
Increase in debt issuance costs ........................... - - (2,794)
Payment of promissory notes ............................... (153) (104) (102)
--------------- ------------- -------------
Net cash provided by (used in) financing activities ......... (1,333) (29,887) 60,856
--------------- ------------- -------------
Net change in cash .......................................... 11,394 (45,555) 783
Cash and cash equivalents
Beginning of the year ..................................... 45,176 56,570 11,015
--------------- ------------- -------------
End of the year ........................................... $ 56,570 $ 11,015 $ 11,798
=============== ============= =============
Supplemental disclosure of cash flow information
Cash interest paid ........................................ $ 366 $ 435 $ 1,117
Cash income taxes paid, net of refunds .................... 28,262 22,935 24,950
Cash interest received from interests in securitized
assets ................................................... 19,055 23,339 33,931
Cash proceeds from new securitizations .................... 338,222 378,699 391,082
Cash flows from servicing fees ............................ 20,997 24,288 25,680
Supplemental disclosure of non-cash activity
Customer receivables exchanged for interests in
securitized assets ....................................... 63,067 63,789 93,860
Amounts reinvested in interests in securitized assets ..... (61,880) (108,067) (111,675)
Purchases of property and equipment with debt financing ... 215 23 -
Sales of property and equipment financed by notes
receivable................................................ - - 1,400
See notes to consolidated financial statements.
65
CONN'S ,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2009
1. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and its subsidiaries, limited liability companies
and limited partnerships, all of which are wholly-owned (the "Company"). Conn's,
Inc. is a holding company with no independent assets or operations other than
its investments in its subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation.
The Company enters into securitization transactions to sell eligible 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.
Business Activities. The Company, through its retail stores, provides
products and services to its customer base in seven primary market areas,
including southern Louisiana, southeast Texas, Houston, South Texas, San
Antonio/Austin, Dallas/Fort Worth and Oklahoma. Products and services offered
through retail sales outlets include home appliances, consumer electronics, home
office equipment, lawn and garden products, mattresses, furniture, service
maintenance agreements, installment and revolving credit account programs, and
various credit insurance products. These activities are supported through an
extensive service, warehouse and distribution system. For the reasons discussed
below, the aggregation of operating companies represent one reportable segment
under SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. Accordingly, the accompanying consolidated financial statements
reflect the operating results of the Company's single reportable segment. The
Company's retail stores bear the "Conn's" name, and deliver the same products
and services to a common customer group. The Company's customers generally are
individuals rather than commercial accounts. All of the retail stores follow the
same procedures and methods in managing their operations. The Company's
management evaluates performance and allocates resources based on the operating
results of the retail stores and considers the credit programs, service
contracts and distribution system to be an integral part of the Company's retail
operations.
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates. See the discussion under Note 2 regarding the change in assumptions
used in the Company's valuation of its Interests in securitized assets.
Vendor Programs. The Company receives funds from vendors for price
protection, product rebates (earned upon purchase or sale of product),
marketing, training and promotional programs which are recorded on the accrual
basis, as a reduction of the related product cost or advertising expense,
according to the nature of the program. The Company accrues rebates based on the
satisfaction of terms of the program and sales of qualifying products even
though funds may not be received until the end of a quarter or year. If the
programs are related to product purchases, the allowances, credits, or payments
are recorded as a reduction of product cost; if the programs are related to
product sales, the allowances, credits or payments are recorded as a reduction
of cost of goods sold; if the programs are directly related to marketing or
promotion 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.
Vendor rebates earned and recorded as a reduction of product cost and cost of
goods sold totaled $20.0 million, $29.5 million and $39.8 million for the years
ended January 31, 2007, 2008 and 2009, respectively. Over the past three years
the Company has received funds from approximately 50 vendors, with the terms of
the programs ranging between one month and one year.
66
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, which is calculated
using the treasury-stock method. The following table sets forth the shares
outstanding for the earnings per share calculations (shares in thousands):
Year Ended January 31,
----------------------------------
2007 2008 2009
----------- ---------- -----------
Common stock outstanding, beginning of period ................... 23,571 23,642 22,375
Weighted average common stock issued in stock
option exercises .............................................. 111 111 29
Weighted average common stock issued to employee
stock purchase plan ........................................... 5 5 9
Less: Weighted average treasury shares purchased ................ (24) (565) -
----------- ---------- -----------
Shares used in computing basic earnings per share ............... 23,663 23,193 22,413
Dilutive effect of stock options, net of assumed repurchase
of treasury stock ............................................. 626 480 164
----------- ---------- -----------
Shares used in computing diluted earnings per share ............. 24,289 23,673 22,577
=========== ========== ===========
During the periods presented, options with an exercise price in excess of
the average market price of the Company's common stock are excluded from the
calculation of the dilutive effect of stock options for diluted earnings per
share calculations. The weighted average number of options not included in the
calculation of the dilutive effect of stock options was 0.2 million, 0.4
million, and 1.2 million for each of the years ended January 31, 2007, 2008, and
2009 respectively.
Cash and Cash Equivalents. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. Credit card deposits in-transit of $1.3 million and $5.3 million,
as of January 31, 2008 and 2009, respectively, are included in cash and cash
equivalents.
Inventories. Inventories consist of finished goods or parts and are
valued at the lower of cost (moving weighted average method) or market.
Property and Equipment. Property and equipment are recorded at cost.
Costs associated with major additions and betterments that increase the value or
extend the lives of assets are capitalized and depreciated. Normal repairs and
maintenance that do not materially improve or extend the lives of the respective
assets are charged to operating expenses as incurred. Depreciation, which
includes amortization of capitalized leases, is computed on the straight-line
method over the estimated useful lives of the assets, or in the case of
leasehold improvements, over the shorter of the estimated useful lives or the
remaining terms of the respective leases. The estimated lives used to compute
depreciation expense are summarized as follows:
Buildings........................................ 30 years
Equipment and fixtures........................... 3 - 5 years
Transportation equipment......................... 3 years
Leasehold improvements........................... 5 - 15 years
Property and equipment are evaluated for impairment at the retail store
level. The Company performs a periodic assessment of assets for impairment.
Additionally, an impairment evaluation is performed whenever events or changes
in circumstances indicate that the carrying amount of the assets might not be
recoverable. The most likely condition that would necessitate an assessment
would be an adverse change in historical and estimated future results of a
retail store's performance. For property and equipment to be held and used, the
Company recognizes an impairment loss if its carrying amount is not recoverable
through its undiscounted cash flows and measures the impairment loss based on
the difference between the carrying amount and fair value. No impairment was
recorded in the years ended January 31, 2007, 2008 or 2009.
67
All gains and losses on sale of assets are included in Other (income)
expense in the consolidated statements of operations.
Year Ended January 31,
----------------------------------
(in thousands of dollars) 2007 2008 2009
- ------------------------------------ ---------- ----------- -----------
Gain (loss) on sale of assets.......... 772 943 (117)
During the year ended January 31, 2007, the Company completed a nonmonetary
transaction in an exchange of real estate assets. As required under Accounting
Principles Board No. 29, Accounting for Nonmonetary Transactions, a gain of $0.7
million was recorded in Other (income) expense. During the year ended January
31, 2008, the Company completed transactions involving certain real estate
assets that qualified for sales-leaseback treatment. As a result, $1.3 million
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.
Receivable Sales and Interests in Securitized Receivables. The Company
enters into securitization transactions to sell eligible customer retail
installment and revolving receivable accounts. In these transactions, the
Company retains interest-only strips and subordinated securities, all of which
are retained interests in the securitized receivables. Securitization income,
which includes, gains and losses on sales of receivables, changes in the fair
value of interests in securitized assets due to assumption changes, impairment
on retained interests, interest income from retained interests and servicing
fees, is included in Finance charges and other in the consolidated statement of
operations. Gains and losses from the sales of receivables are recorded at the
time of the transfer to the QSPE, based on the difference between the fair value
and the carrying amount at that time.
On February 1, 2007, the Company was required to adopt 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, 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 established
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.
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. 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.
68
Prior to February 1, 2007, gain or loss on the sales of the receivables
depended in part on the previous carrying amount of the financial assets
involved in the transfer, allocated between the assets sold and the retained
interests, based on their relative fair value at the date of transfer. Retained
interests were carried at fair value on the Company's consolidated balance sheet
as available-for-sale securities in accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Impairment and interest
income were recognized in accordance with Emerging Issues Task Force (EITF) No.
99-20, Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets.
Receivables Not Sold. Certain receivables are not eligible for inclusion
in the securitization program are carried on the Company's consolidated balance
sheet in Customer accounts receivable. The Company records the amount of
principal on those receivables that is expected to be collected within the next
twelve months in current assets on its consolidated balance sheet. Those amounts
expected to be collected after 12 months are included in non-current assets.
Typically, a receivable is considered delinquent if a payment has not been
received on the scheduled due date. Generally, an account that is delinquent
more than 120 days and for which no payment has been received in the past seven
months will be charged-off against the allowance and interest accrued subsequent
to the last payment will be reversed. Interest income is accrued using the Rule
of 78's method for installment contracts and the simple interest method for
revolving charge accounts, and is reflected in Finance charges and other.
Typically, interest income is accrued until the contract or account is paid off
or charged-off and we provide an allowance for uncollectible interest. Interest
income is recognized on interest-free promotion credit programs based on the
Company's historical experience related to customers that fail to satisfy the
requirements of the interest-free programs. The amount of receivables carried on
the Company's consolidated balance sheet that were past due 90 days or more and
still accruing interest was $1.5 million and $1.9 million at January 31, 2008
and 2009, respectively. The Company has a secured interest in the merchandise
financed by these receivables and therefore has the opportunity to recover a
portion of the charged-off value. (See also Note 3.)
Allowance for Doubtful Accounts. The Company records an allowance for
doubtful accounts for its Customer and Other accounts receivable, based on its
historical loss experience.
Goodwill. Goodwill represents the excess of purchase price over the fair
market value of net assets acquired. The Company performs an assessment annually
regarding the impairment of goodwill, or at any other time when impairment
indicators exist. In fiscal 2007, 2008 and 2009, the Company concluded that
goodwill was not impaired based on its annual impairment testing.
Income Taxes. The Company is subject to U.S. federal income tax as well
as income tax in multiple state jurisdictions. The Company follows the liability
method of accounting for income taxes. Under this method, deferred tax assets
and liabilities are determined based on differences between financial reporting
and tax bases of assets and liabilities and are measured using the tax rates and
laws that are expected be in effect when the differences are expected to
reverse. As elected under FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109 (FIN 48), to the extent
penalties and interest are incurred, the Company records these charges as a
component of its Provision for income taxes. Tax returns for the fiscal years
subsequent to January 31, 2006, remain open for examination by the Company's
major taxing jurisdictions.
Sales Taxes. The Company records and reports all sales taxes collected on
a net basis in the financial statements.
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the customer takes possession of the product. 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 extend beyond one year. The Company sells
service maintenance agreements and credit insurance contracts on behalf of
unrelated third parties. For contracts where third parties are the obligor on
the contract, commissions are recognized in revenues at the time of sale, and in
the case of retrospective commissions, at the time that they are earned. The
Company records a receivable for earned but unremitted retrospective commissions
and reserves for future cancellations of service maintenance agreements and
credit insurance contracts estimated based on historical experience. When the
Company sells service maintenance agreements in which it is deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
Company-obligor service maintenance agreements are renewal contracts which
provide customers protection against product repair costs arising after the
expiration of the manufacturer's warranty and the third-party obligor contracts.
These agreements typically have terms ranging from 12 months to 36 months. These
agreements are separate units of accounting under EITF No. 00-21, Revenue
Arrangements with Multiple Deliverables and are valued based on the agreed upon
retail selling price. The amounts of service maintenance renewal agreement
revenue deferred at January 31, 2008 and 2009, were $4.4 million and $4.5
million, respectively, and are included in Deferred revenue and allowances in
the accompanying consolidated balance sheets. Under the renewal contracts, the
Company defers and amortizes its direct selling expenses over the contract term
and records the cost of the service work performed as products are repaired.
69
The following table presents a reconciliation of the beginning and ending
balances of the deferred revenue on the Company's service maintenance agreements
and the amount of claims paid under those agreements (in thousands):
Reconciliation of deferred revenues on service maintenance
agreements
- ---------------------------------------------------------- Year Ended January 31,
----------------------------
2008 2009
------------- ------------
Balance in deferred revenues at beginning of year .............. $ 3,554 $ 4,368
Revenues earned during the year .............................. (5,262) (5,651)
Revenues deferred on sales of new agreements ................. 6,076 5,761
------------ ------------
Balance in deferred revenues at end of year..................... $ 4,368 $ 4,478
============ ============
Total claims incurred during the year, excludes selling expenses $ 2,449 $ 2,288
============ ============
The classification of the amounts included as Finance charges and other
is summarized as follows (in thousands):
Year Ended January 31,
-----------------------------------------
2007 2008 2009
----------- ----------- -----------
Securitization income:
Servicing fees received ......................... $ 20,997 $ 24,288 $ 25,680
Gains (Losses) on sale of receivables, net ...... 23,874 27,038 19,170
Change in fair value of securitized assets ...... - (4,805) (24,508)
Impairment recorded on retained interests (1) ... (1,495) - -
Interest earned on retained interests ........... 19,055 23,339 33,931
----------- ----------- -----------
Total securitization income ................... 62,431 69,860 54,273
Insurance commissions ............................. 18,667 21,397 20,191
Interest income and fees .......................... 1,113 929 9,076
Other ............................................. 1,509 950 2,161
----------- ----------- -----------
Finance charges and other ..................... $ 83,720 $ 93,136 $ 85,701
=========== =========== ===========
(1) The impairment charge in the year ended January 31, 2007, was due to
higher expected credit losses as a result of the continued impact of the
disruption to our credit operations as a result of Hurricane Rita.
Sales on interest-free promotional credit programs are recognized at the
time the customer takes possession of the product, consistent with the above
stated policy. Considering the short-term nature of interest free programs for
terms less than one year, sales are recorded at full value and are not
discounted. Sales financed by longer-term (18-, 24- and 36-month) interest free
programs are recorded at their net present value in accordance with APB 21,
Interest on Receivables and Payables. The discount to net present value results
in a reduction in net sales, which totaled $5.3 million, $7.2 million and $5.8
million for the years ended January 31, 2007, 2008 and 2009, respectively.
Eligible receivables arising out of the Company's interest-free programs are
transferred to the Company's QSPE, net of the discount, with other qualifying
customer receivables. Customer receivables arising out of the interest-free
programs that are retained by the Company are carried on the consolidated
balance sheet net of the discount, which is amortized into income over the life
of the receivable as an adjustment to Finance charges and other.
70
The Company classifies amounts billed to customers relating to shipping
and handling as revenues. Costs of $21.4 million, $22.0 million and $20.8
million associated with shipping and handling revenues are included in Selling,
general and administrative expense for the years ended January 31, 2007, 2008
and 2009, respectively.
Fair Value of Financial Instruments. The fair value of cash and cash
equivalents, receivables retained on our balance sheet, and notes and accounts
payable approximate their carrying amounts because of the short maturity of
these instruments. The fair value of the Company's interests in securitized
receivables is determined by estimating the present value of future expected
cash flows using management's best estimates of the key assumptions, including
credit losses, forward yield curves and discount rates commensurate with the
risks involved. See Notes 2 and 3. The carrying value of the Company's long-term
debt approximates fair value due to either the time to maturity or the existence
of variable interest rates that approximate current market rate.
Share-Based Compensation. On February 1, 2006, the Company adopted SFAS
No. 123R, Share-Based Payment, using the modified retrospective application
transition method. Under the modified retrospective application transition
method, all prior period financial statements have been adjusted to give effect
to the fair-value-based method of accounting for share-based compensation. The
adoption of the statement impacted the fiscal 2007 financial statements
presented as follows:
o Income before income taxes and Net income was reduced by $1.7
million and $1.4 million, respectively. Basic earnings per share
and Diluted earnings per share were reduced by $.06. Cash flows
from operating activities were reduced by and cash flow from
financing activities were increased by $0.2 million.
For stock option grants after our IPO in November 2003, the Company has
used the Black-Scholes model to determine fair value. Share-based compensation
expense is recorded, net of estimated forfeitures, on a straight-line basis over
the vesting period of the applicable grant. Prior to the IPO, the value of the
options issued was estimated using the minimum valuation option-pricing model.
Since the minimum valuation option-pricing model does not qualify as a fair
value pricing model under FAS 123R, the Company followed the intrinsic value
method of accounting for share-based compensation to employees for these grants,
as prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations.
Self-insurance. The Company is self-insured for certain losses relating
to group health, workers' compensation, automobile, general and product
liability claims. The Company has stop loss coverage to limit the exposure
arising from these claims. Self-insurance losses for claims filed and claims
incurred, but not reported, are accrued based upon the Company's estimates of
the aggregate liability for claims incurred using development factors based on
historical experience.
Expense Classifications. The Company records Cost of goods sold as the
direct cost of products sold, any related out-bound freight costs, and receiving
costs, inspection costs, internal transfer costs, and other costs associated
with the operations of its distribution system. Advertising costs are expensed
as incurred.
Advertising expense included in Selling, general and administrative
expense for the years ended January 31, 2007, 2008 and 2009, was:
Year Ended January 31,
-----------------------------------------
2007 2008 2009
----------- ----------- -----------
(in thousands)
Gross advertising expense .......................... $ 33,680 $ 35,647 $ 36,289
Less:
Vendor rebates ..................................... (7,188) (6,591) (6,440)
----------- ----------- -----------
Net advertising expense in
Selling, general and adminstrative expense ..... $ 26,492 $ 29,056 $ 29,849
=========== =========== ===========
71
In addition, the Company records as Cost of service parts sold the direct
cost of parts used in its service operation and the related inbound freight
costs, purchasing and receiving costs, inspection costs, internal transfer
costs, and other costs associated with the parts distribution operation.
The costs associated with the Company's merchandising function, including
product purchasing, advertising, sales commissions, and all store occupancy
costs are included in Selling, general and administrative expense.
Reclassifications. Certain reclassifications have been made in the prior
years' financial statements to conform to the current year's presentation. $3.0
million of customer receivables outstanding at January 31, 2008, have been
reclassified to non-current assets on the consolidated balance sheet.
2. Fair Value of Interests in Securitized Assets
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 inputs 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 fiscal year ended January 31, 2009, Finance charges and other
included a non-cash decrease in the fair value our Interests in securitized
assets of $24.5 million, reflecting primarily higher risk premiums included in
the discount rate input during the quarters ended April 30, 2008, October 31,
2008, and January 31, 2009, resulting from the volatility in the financial
markets. During the quarters ended April 30, 2008, October 31, 2008, and January
31, 2009, returns required by market participants on many investments increased
significantly as a result of continued volatility in the financial markets.
Though the Company does not anticipate any significant variation in the
underlying economics or expected cash flow performance of the securitized credit
portfolio, it increased the risk premium included in the discount rate input
used in the determination of the fair value of its Interests in securitized
assets to reflect the higher estimated risk premium 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 April 30, 2008,
and discussions with its investment bankers and financial advisors, the Company
estimated that a market participant would require approximately a 300 basis
point increase in the required risk premium. After its review for the three
months ended October 31, 2008, the Company estimated that a market participant
would require an additional 700 basis point increase in the required risk
premium. After its review for the three months ended January 31, 2009, the
Company estimated that a market participant would require an increase in the
required risk premium of approximately 500 basis points. As a result, the
Company increased the weighted average discount rate input from 16.5% at January
31, 2008, to 30.0% at January 31, 2009, after reflecting a 160 basis point
decrease in the risk-free interest rate included in the discount rate input.
Additionally, during the three months ended October 31, 2008, as a result of the
impact of general economic conditions on other consumer credit portfolios and
the impact of Hurricanes Gustav and Ike on its expected net charge-off rate, the
Company increased the weighted average net charge-off rate input that it expects
a market participant would use from 3.25% to 4.00%. These changes, along with
other input changes, contributed to the decrease in fair value for fiscal year
ended January 31, 2009 (see reconciliation of the balance of Interests in
securitized assets below). The changes in fair value resulted in a charge to
Income (loss) before income taxes of $24.5 million, a charge to net income of
$15.9 million, and reduced basic and diluted earnings per share by $0.70, for
the fiscal year ended January 31, 2009, respectively.
The increase in the discount rate has the effect of deferring income to future
periods - not permanently reducing securitization income or the earnings of the
Company, assuming no significant variation in the future cash flow performance
of the securitized credit portfolio. 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 10% higher than estimated in the
Company's calculation, the fair value of its interests in securitized assets
would be decreased by an
72
additional $4.4 million as of January 31, 2009. The Company will continue to
monitor financial market conditions and, each quarter, as it reassesses the
inputs used may adjust its inputs up or down, including the risk premiums a
market participant will use. As the financial markets and general economic
conditions have continued to experience a high-level of volatility, the Company
will likely be required to record additional non-cash gains and losses in future
periods, until such time as financial market and general economic conditions
stabilize.
The following are reconciliations of the beginning and ending balances of
the Interests in securitized assets and the beginning and ending balances of the
servicing liability for the fiscal years ended January 31, 2008 and 2009 (in
thousands):
Reconciliation of Interests in Securitized Assets: 2008 2009
- -------------------------------------------------- ------------- --------------
Balance of Interests in securitized assets at beginning of year ............................ $ 136,848 $ 178,150
Amounts recorded in Finance charges and other:
Gains (losses) associated with change in portfolio balances ........................... 1,130 (473)
------------- --------------
Changes in fair value due to assumption changes:
Fair value increase (decrease) due to change in portfolio yield .................... 585 (1,998)
Fair value increase due to changes in projected interest rates ..................... 2,969 2,770
Fair value decrease due to changes in funding mix .................................. (4,195) (555)
Fair value decrease due to changes in weighted loss rate ........................... (1,233) (4,018)
Fair value increase due to changes in risk-free interest rate
component of the discount rate .................................................. 5,117 2,675
Fair value decrease due to higher risk premium included in discount rate ........... (8,512) (24,993)
Other changes ...................................................................... (521) 2,045
------------- --------------
Net change in fair value due to assumption changes .................................... (5,790) (24,074)
------------- --------------
Net Losses included in Finance charges and other (a) .................................. (4,660) (24,547)
Change in balance of subordinated security and equity interest due to
transfers of receivables ................................................................. 45,962 22,940
------------- --------------
Balance of Interests in securitized assets at end of year .................................. $ 178,150 $ 176,543
============= ==============
Reconciliation of Servicing Liability:
- --------------------------------------
Balance of servicing liability at beginning of year ........................................ $ 1,052 $ 1,197
Amounts recorded in Finance charges and other:
Increase (decrease) associated with change in portfolio balances ...................... 147 (1)
Decrease due to higher discount rate .................................................. (13) (92)
Other changes ......................................................................... 11 54
------------- --------------
Net change included in Finance charges and other (b) .................................. 145 (39)
Balance of servicing liability at end of year .............................................. $ 1,197 $ 1,157
============= ==============
Net decrease in fair value included
in Finance charges and other (a) - (b) ................................................. $ (4,805) $ (24,508)
============= ==============
73
3. Interests in Securitized Receivables
The Company has an agreement to sell customer receivables. As part of
this agreement, the Company sells eligible retail installment contracts and
revolving receivable accounts to a QSPE that pledges the transferred accounts to
a trustee for the benefit of investors. The following table summarizes the
availability of funding under the Company's securitization program at January
31, 2009 (in thousands):
Capacity Utilized Available
----------- ----------- -----------
2002 Series A ........................ $ 300,000 $ 292,500 $ 7,500
2006 Series A - Class A .............. 90,000 90,000 -
2006 Series A - Class B .............. 43,333 43,333 -
2006 Series A - Class C .............. 16,667 16,667 -
----------- ----------- -----------
Total ................................ $ 450,000 $ 442,500 $ 7,500
=========== =========== ===========
The 2002 Series A program functions as a credit facility to fund the
initial transfer of eligible receivables. When the facility approaches a
predetermined amount, the QSPE (Issuer) is required to seek financing to pay
down the outstanding balance in the 2002 Series A variable funding note. The
amount paid down on the facility then becomes available to fund the transfer of
new receivables or to meet required principal payments on other series as they
become due. The new financing could be in the form of additional notes, bonds or
other instruments as the market and transaction documents might allow. The 2002
Series A program, which was decreased from $450 million to $300 million during
the year ended January 31, 2009, is divided into two tranches: a $100 million
364-day tranche that matures in August 2009, and a $200 million tranche that is
renewable annually, at our option, until September 2012. The 2006 Series A
program, which was consummated in August 2006, is non-amortizing for the first
four years and officially matures in April 2017. However, it is expected that
the principal payments, which begin in September 2010, will retire the bonds
prior to that date.
The agreement contains certain covenants requiring the maintenance of
various financial ratios and receivables performance standards. The Issuer was
in compliance with the requirements of the agreement as of January 31, 2009,
and, based on current facts and circumstances, expects to be in compliance
through fiscal 2010. As part of the securitization program, the Company and
Issuer arranged for the issuance of a stand-by letter of credit in the amount of
$20.0 million to provide assurance to the trustee on behalf of the bondholders
that funds collected monthly by the Company, as servicer, will be remitted as
required under the base indenture and other related documents. The letter of
credit expires in August 2011, and the maximum potential amount of future
payments is the face amount of the letter of credit. The letter of credit is
callable, at the option of the trustee, if the Company, as servicer, fails to
make the required monthly payments of the cash collected to the trustee.
Through its retail sales activities, the Company generates customer
retail installment contracts and revolving receivable accounts. The Company
enters into securitization transactions to sell eligible accounts to the QSPE.
In these securitizations, the Company retains servicing responsibilities and
subordinated interests. The Company receives annual servicing fees and other
benefits approximating 3.9% of the outstanding balance and rights to future cash
flows arising after the investors in the securities issued by or on behalf of
the QSPE have received from the trustee all contractually required principal and
interest amounts. The Company records a servicing liability related to the
servicing obligations (See Note 2). The investors and the securitization trustee
have no recourse to the Company's other assets for failure of the individual
customers of the Company and the QSPE to pay when due. The Company's retained
interests are subordinate to the investors' interests, and would not be paid if
the Issuer is unable to repay the amounts due under the 2002 Series A and 2006
Series A programs. Their value is subject to credit, prepayment, and interest
rate risks on the transferred financial assets.
74
The fair values of the Company's interest in securitized assets were as
follows (in thousands):
January 31,
-------------------
2008 2009
-------- --------
Interest-only strip .................................... $ 31,866 $ 31,958
Subordinated securities ................................ 146,284 144,585
-------- --------
Total fair value of interests in securitized assets .... $178,150 $176,543
======== ========
The table below summarizes valuation assumptions used for each period
ending January 31 presented:
2007 2008 2009
------ ------ ------
Net interest spread
Primary installment...................... 12.6% 13.5% 14.5%
Primary revolving........................ 12.6% 13.5% 14.5%
Secondary installment.................... 14.2% 14.0% 14.1%
Expected losses
Primary installment...................... 3.0% 3.3% 3.4%
Primary revolving........................ 3.0% 3.3% 3.4%
Secondary installment.................... 3.0% 3.3% 5.5%
Projected expense
Primary installment...................... 4.1% 4.1% 3.9%
Primary revolving........................ 4.1% 4.1% 3.9%
Secondary installment.................... 4.1% 4.1% 3.9%
Discount rates
Primary installment...................... 13.6% 15.6% 29.2%
Primary revolving........................ 13.6% 15.6% 29.2%
Secondary installment.................... 17.6% 19.6% 33.2%
75
At January 31, 2009, key economic assumptions and the sensitivity of the
current fair value of the interests in securitized assets to immediate 10% and
20% adverse changes in those assumptions are as follows (dollars in thousands):
Primary Primary Secondary
Portfolio Portfolio Portfolio
Installment Revolving Installment
--------------- ---------------- ----------------
Fair value of interest in securitized assets .......... $ 130,292 $ 10,580 $ 35,671
Expected weighted average life ........................ 1.2 years 1.1 years 1.7 years
Net interest spread assumption ........................ 14.5% 14.5% 14.1%
Impact on fair value of 10% adverse change ........ $ 4,554 $ 370 $ 1,631
Impact on fair value of 20% adverse change ........ $ 8,976 $ 729 $ 3,206
Expected losses assumptions ........................... 3.4% 3.4% 5.5%
Impact on fair value of 10% adverse change ........ $ 1,092 $ 89 $ 641
Impact on fair value of 20% adverse change ........ $ 2,175 $ 177 $ 1,271
Projected expense assumption .......................... 3.9% 3.9% 3.9%
Impact on fair value of 10% adverse change ........ $ 1,237 $ 100 $ 479
Impact on fair value of 20% adverse change ........ $ 2,474 $ 201 $ 959
Discount rate assumption .............................. 29.2% 29.2% 33.2%
Impact on fair value of 10% adverse change ........ $ 3,041 $ 247 $ 1,136
Impact on fair value of 20% adverse change ........ $ 5,936 $ 482 $ 2,206
These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10% variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, the
effect of the variation in a particular assumption on the fair value of the
interest-only strip is calculated without changing any other assumption; in
reality, changes in one factor may result in changes in another (i.e. increases
in market interest rates may result in lower prepayments and increased credit
losses), which might magnify or counteract the sensitivities.
76
The following illustration presents quantitative information about the
receivables portfolios managed by the Company (in thousands):
Total Principal Amount of Principal Amount Over
Receivables 60 Days Past Due (1)
January 31, January 31,
---------------------------------- ----------------------------------
2008 2009 2008 2009
-------------- -------------- -------------- --------------
Primary portfolio:
Installment .......................... $ 463,257 $ 551,838 $ 29,997 $ 33,126
Revolving ............................ 48,329 38,084 1,561 2,027
-------------- -------------- -------------- --------------
Subtotal .................................... 511,586 589,922 31,558 35,153
Secondary portfolio:
Installment .......................... 143,281 163,591 18,220 19,988
-------------- -------------- -------------- --------------
Total receivables managed ................... 654,867 753,513 49,778 55,141
Less receivables sold ....................... 645,862 645,715 47,778 52,214
-------------- -------------- -------------- --------------
Receivables not sold ........................ 9,005 107,798 $ 2,000 $ 2,927
============== ==============
Allowance for uncollectible accounts ......... (882) (3,913)
Allowances for promotional credit programs ... - (1,588)
Current portion of customer accounts
receivable, net ........................ 5,133 61,125
-------------- --------------
Non-current customer accounts
receivable, net ........................ $ 2,990 $ 41,172
============== ==============
Average Balances Credit Charge-offs
January 31, January 31, (2)
---------------------------------- ----------------------------------
2008 2009 2008 2009
--------------- --------------- --------------- ---------------
Primary portfolio:
Installment ............... $ 414,558 $ 495,489
Revolving ................. 50,871 43,184
--------------- ---------------
Subtotal ......................... 465,429 538,673 $ 12,429 $ 15,071
Secondary portfolio:
Installment ............... 141,202 157,529 4,989 7,291
--------------- --------------- --------------- ---------------
Total receivables managed ........ 606,631 696,202 17,418 22,362
Less receivables sold ............ 597,286 651,420 16,492 21,573
--------------- --------------- --------------- ---------------
Receivables not sold ............. $ 9,345 $ 44,782 $ 926 $ 789
=============== =============== =============== ===============
(1) Amounts are based on end of period balances.
(2) Amounts represent total credit charge-offs, net of recoveries, on total
receivables.
77
4. Debt and Letters of Credit
On August 14, 2008, the Company entered into a $210 million asset-based
revolving credit facility that provides funding based on a borrowing base
calculation that includes accounts receivable and inventory. The facility
matures in August 2011 and bears interest at LIBOR plus a spread ranging from
225 basis points to 275 basis points, based on a fixed charge coverage ratio. In
addition to the fixed charge coverage ratio, the revolving credit facility
includes a leverage ratio requirement, a minimum receivables cash recovery
percentage requirement, a net capital expenditures limit and combined portfolio
performance covenants. The Company was in compliance with the requirements of
the agreement as of January 31, 2009, and, based on current facts and
circumstances, expects to be in compliance through fiscal 2010. Additionally,
the revolving credit facility restricts the amount of dividends the Company can
pay. The revolving facility is secured by the assets of the Company not
otherwise encumbered.
[Long-term debt consists of the following (in thousands, except repayment
explanations):
January 31,
------------------------------------
2008 2009
---------------- ----------------
Revolving credit facility for $210 million maturing in August 2011 ....................... $ - $ 62,900
Unsecured revolving line of credit for $10 million maturing in September 2009 ............ - -
Promissory notes, due in monthly installments ............................................ 119 17
---------------- ----------------
Total long-term debt ..................................................................... 119 62,917
Less amounts due within one year ......................................................... (102) (5)
---------------- ----------------
Amounts classified as long-term .......................................................... $ 17 $ 62,912
================ ===============
The Company's revolving credit facility provides it the ability to
utilize letters of credit to secure its obligations as the servicer under its
QSPE's asset-backed securitization program, deductibles under the Company's
property and casualty insurance programs and international product purchases,
among other acceptable uses. At January 31, 2009, the Company had outstanding
letters of credit of $21.7 million under this facility. The maximum potential
amount of future payments under these letter of credit facilities is considered
to be the aggregate face amount of each letter of credit commitment, which
totals $21.7 million as of January 31, 2009. As of January 31, 2009, the Company
had approximately $31.3 million under its revolving credit facility, net of
standby letters of credit issued, and $10.0 million under its unsecured bank
line of credit immediately available for general corporate purposes.
Interest expense incurred on notes payable and long-term debt totaled
$0.4, $0.5 and $1.4 million for the years ended January 31, 2007, 2008 and 2009,
respectively. The Company capitalized borrowing costs of $0.3 million, $0.3
million and $0.2 million during the years ended January 31, 2007, 2008 and 2009,
respectively. Aggregate maturities of long-term debt as of January 31 in the
year indicated are as follows (in thousands):
2010 ............................. $ 5
2011 ............................. 5
2012 ............................. 62,905
2013 ............................. 2
-------
Total ............................ $62,917
=======
78
5. Income Taxes
Deferred income taxes reflect the net effects of temporary timing
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets result primarily from
differences between financial and tax methods of accounting for income
recognition on service contracts and residual interests, capitalization of costs
in inventory, and deductions for depreciation and doubtful accounts, and the
fair value of derivatives.
The deferred tax assets and liabilities are summarized as follows (in
thousands):
January 31,
--------------------------------
2008 2009
------------- -------------
Deferred Tax Assets
Allowance for doubtful accounts and warranty and
insurance cancellations ............................... $ 314 $ 2,111
Interest in securitized assets .......................... - 7,352
Deferred revenue ........................................ 2,558 2,059
Stock-based compensation ................................ 1,033 1,654
Property and equipment .................................. 151 1,153
Inventories ............................................. 1,327 802
Accrued vacation and other .............................. 1,501 2,885
------------- -------------
Total deferred tax assets ............................... 6,884 17,725
Deferred Tax Liabilities
Sales tax receivable .................................... (1,026) (395)
Interest in securitized assets .......................... (1,430) -
Goodwill ................................................ (1,372) (1,598)
Other ................................................... (568) (634)
------------- -------------
Total deferred tax liabilities .......................... (4,396) (2,627)
------------- -------------
Net Deferred Tax Asset .................................. $ 2,488 $ 15,098
============= =============
Income taxes were impacted during the years ended January 31, 2007 and
2008, by the replacement of the existing franchise tax in Texas with a taxed
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 retailer and wholesalers is 0.5% on taxable margin.
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 tax. The Company began accruing the margin tax for the entities
that acquired the operations through the mergers in July 2007. Additionally, the
acceleration of certain allowance for doubtful accounts deductions resulted in a
decrease in current tax expense and an increase in deferred tax expense of $1.9
million in fiscal year 2007. During fiscal year 2008, the Company changed its
method of accounting for fixed assets in its tax returns. The change resulted in
a decrease in current tax expense and an increase in deferred tax expense of
approximately $2.7 million. Additionally, the Company changed its method of
accounting for lease expense in its tax returns, which resulted in an increase
in current tax expense and a decrease in deferred tax expense of approximately
$1.4 million. During fiscal year 2009, as a result of the non-cash fair value
adjustments that decreased the Company's Interests in securitized assets, it
recorded an increase in current tax expense and a decrease in deferred tax
expense of $8.7 million.
79
The significant components of income taxes were as follows (in
thousands):
Year Ended January 31,
--------------------------------------
2007 2008 2009
-------- -------- --------
Current:
Federal ........................ $ 22,439 $ 22,264 $ 26,081
State .......................... 916 (8) 1,777
-------- -------- --------
Total current ..................... 23,355 22,256 27,858
Deferred:
Federal ........................ (1,013) (728) (11,825)
State .......................... (67) (19) (200)
-------- -------- --------
Total deferred .................... (1,080) (747) (12,025)
-------- -------- --------
Total tax provision.. ............. $ 22,275 $ 21,509 $ 15,833
======== ======== ========
A reconciliation of the statutory tax rate and the effective tax rate for
each of the periods presented in the statements of operations is as follows:
Year Ended January 31,
-----------------------
2007 2008 2009
------ ------ ----
U.S. Federal statutory rate ........................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal benefit .. 1.0 0.0 2.5
Non-deductible entertainment,
non-deductible stock-based compensation,
tax-free interest income and other .................. (0.4) 0.1 0.6
------ ------ ----
Effective tax rate .................................... 35.6% 35.1% 38.1%
====== ====== ====
6. Leases
The Company leases certain of its facilities and operating equipment from
outside parties and from a stockholder/officer. The real estate leases generally
have initial lease periods of from 5 to 15 years with renewal options at the
discretion of the Company; the equipment leases generally provide for initial
lease terms of three to seven years and provide for a purchase right by the
Company at the end of the lease term at the fair market value of the equipment.
The following is a schedule of future minimum base rental payments
required under the operating leases that have initial non-cancelable lease terms
in excess of one year (in thousands):
Third Related
Year Ended January 31, Party Party Total
- ----------------------------- -------- -------- --------
2010 ........................ $ 23,558 $ 207 $ 23,765
2011 ........................ 22,780 207 22,987
2012 ........................ 21,576 21,576
2013 ........................ 19,664 - 19,664
2014 ........................ 17,936 - 17,936
Thereafter .................. 68,809 - 68,809
-------- -------- --------
Total ....................... $174,323 $ 414 $174,737
======== ======== ========
Total lease expense was approximately $17.3 million, $19.3 million and
$22.6 million for the years ended January 31, 2007, 2008 and 2009, respectively,
including approximately $0.2 million, $0.2 million and $0.2 million paid to
related parties, respectively.
80
Certain of our leases are subject to scheduled minimum rent increases or
escalation provisions, the cost of which is recognized on a straight-line basis
over the minimum lease term. Tenant improvement allowances, when granted by the
lessor, are deferred and amortized as contra-lease expense over the term of the
lease.
7. Share-Based Compensation
The Company has an Incentive Stock Option Plan and a Non-Employee
Director Stock Option Plan to provide for grants of stock options to various
officers, employees and directors, as applicable, at prices equal to the market
value on the date of the grant. The options vest over one to five year periods
(depending on the grant) and expire ten years after the date of grant. At the
Company's annual meeting on May 31, 2006, amendments to the stock option plans
were approved, which increased the shares available under the Incentive Stock
Option Plan to 3,859,767 and increased the shares available under the
Non-Employee Director Stock Option Plan to 600,000. On June 3, 2008, the Company
issued seven non-employee directors 70,000 total options to acquire the
Company's stock at $16.93 per share. At January 31, 2009, the Company had
190,000 options available for grant under the Non-Employee Director Stock Option
Plan.
The Company's Employee Stock Purchase Plan is available to a majority of
the employees of the Company and its subsidiaries, subject to minimum employment
conditions and maximum compensation limitations. At the end of each calendar
quarter, employee contributions are used to acquire shares of common stock at
85% of the lower of the fair market value of the common stock on the first or
last day of the calendar quarter. During the years ended January 31, 2007, 2008
and 2009, the Company issued 11,720, 13,316 and 21,774 shares of common stock,
respectively, to employees participating in the plan, leaving 1,201,115 shares
remaining reserved for future issuance under the plan as of January 31, 2009.
A summary of the Company's Incentive Stock Option Plan activity during
the year ended January 31, 2009 is presented below (shares in thousands):
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Life (in years) Value
-------- ---------- -------------- -----------
Outstanding, beginning of year ..... 1,700 $ 19.25
Granted ............................ 466 6.48
Exercised .......................... (28) (10.32)
Forfeited .......................... (154) (23.75)
-------
Outstanding, end of year ........... 1,984 $ 16.02 6.9 $3.8 million
=======
Exercisable, end of year ........... 1,058 $ 17.24 5.1 $1.1 million
=======
During the years ended January 31, 2007, 2008 and 2009, the Company
recognized total compensation cost for share-based compensation of approximately
$1.7 million, $2.7 million and $3.2 million, respectively, and recognized tax
benefits related to that compensation cost of approximately $0.3 million, $0.5
million, and $0.7 million, respectively.
The assumptions used in stock pricing model and valuation information for
the years ended January 31, 2007, 2008 and 2009 are as follows:
Year Ended January 31,
---------------------------------------------------
2007 2008 2009
---- ---- ----
Weighted average risk free interest rate......................... 4.4% 3.6% 2.5%
Weighted average expected lives in years ........................ 6.4 6.4 6.4
Weighted average volatility...................................... 50.0% 45.0% 50.0%
Expected dividends............................................... - - -
Weighted average grant date fair value of options granted
during the period........................................... $ 12.39 $ 9.94 $ 3.33
Weighted average fair value of options vested during the
period (1).................................................. $ 6.88 $ 8.17 $ 9.13
Total fair value of options vesting during the period (1)........ $1.4 million $2.3 million $2.4 million
Intrinsic value of options exercised during the period........... $3.9 million $3.1 million $0.2 million
(1) Does not include pre-IPO options that were valued using the minimum value
option-pricing method.
81
As provided by Staff Accounting Bulletin No. 107, and amended by Staff
Accounting Bulletin No. 110, which provides guidance relating to share-based
compensation accounting, the Company has used a shortcut method to compute the
weighted average expected life for the stock options granted in the years ended
January 31, 2008 and 2009. The shortcut method is an average based on the
vesting period and the contractual term. The Company uses the shortcut method
due to the lack of adequate historical experience or other comparable
information. The weighted average volatility for the year ended January 31, 2008
was calculated using the average historical volatility of the Company's peer
group and weighted average volatility for the year ended January 31, 2009 was
calculated using the Company's historical volatility. As of January 31, 2009,
the total compensation cost related to non-vested awards not yet recognized
totaled $6.6 million and is expected to be recognized over a weighted average
period of 3.3 years.
8. Significant Vendors
As shown in the table below, a significant portion of the Company's
merchandise purchases for years ended January 31, 2007, 2008 and 2009 were made
from six vendors:
Year Ended January 31,
-----------------------------------------------
Vendor 2007 2008 2009
- -------------------------------- --------------- --------------- -------------
A .............................. 12.7 % 13.0 % 19.3 %
B .............................. 12.1 13.1 11.5
C .............................. 7.1 7.5 9.9
D .............................. 5.3 5.9 9.6
E .............................. 12.9 9.1 6.6
F .............................. 7.1 5.8 6.4
--------------- --------------- -------------
Totals ......................... 57.2 % 54.4 % 63.3 %
=============== =============== =============
9. Related Party Transactions
The Company leases one of its stores from its Chief Executive Officer and
Chairman of the Board, under the terms of a lease it entered prior to becoming a
publicly held company.
The Company engaged the services of Direct Marketing Solutions, Inc.
(DMS), for a substantial portion of its direct mail advertising. DMS, Inc. is
partially owned (less than 50%) by SF Holding Corp., members of the Stephens
family, Jon E. M. Jacoby, and Douglas H. Martin. SF Holding Corp. and the
members of the Stephens family are significant shareholders of the Company, and
Messrs. Jacoby and Martin are members of the Company's Board of Directors. The
fees the Company paid to DMS during the fiscal years ended 2007, 2008 and 2009,
amounted to approximately $3.6 million, $2.5 million and $4.0 million,
respectively.
The Company engaged the services of Stephens Inc. to act as its broker
under its former stock repurchase program. Stephens Inc. is a shareholder of the
Company, and Doug Martin, an Executive Vice President of Stephens Inc., is a
member of the Company's Board of Directors. During the years ended January 31,
2007 and 2008, the Company incurred fees payable to Stephens Inc. of $5,040 and
$46,644, respectively, related to the purchase of 168,000 and 1,555,205 shares,
respectively, of its common stock. There were no shares purchased in fiscal year
2009. Based on a review of competitive bids received from various broker
candidates, the Company believes the terms of this arrangement are no less
favorable than it could have obtained in an arms' length transaction.
82
10. Benefit Plans
The Company has established a defined contribution 401(k) plan for
eligible employees who are at least 21 years old and have completed at least
one-year of service. Employees may contribute up to 20% of their eligible pretax
compensation to the plan. The Company will match 100% of the first 3% of the
employees' contributions and 50% of the next 2% of the employees' contributions.
At its option, the Company may make supplemental contributions to the Plan, but
has not made such contributions in the past three years. The matching
contributions made by the Company totaled $1.8, $2.1 and $1.8 million during the
years ended January 31, 2007, 2008 and 2009, respectively.
11. Contingencies
Legal Proceedings. The Company is involved in routine litigation
incidental to our business from time to time. Currently, the Company does not
expect the outcome of any of this routine litigation to have a material effect
on its financial condition or results of operations. However, the results of
these proceedings cannot be predicted with certainty, and changes in facts and
circumstances could impact the Company's estimate of reserves for litigation.
Insurance. Because of its inventory, vehicle fleet and general
operations, the Company has purchased insurance covering a broad variety of
potential risks. The Company purchases insurance polices covering general
liability, workers compensation, real property, inventory and employment
practices liability, among others. Additionally, the Company has umbrella
policies with an aggregate limit of $50.0 million. The Company has retained a
portion of the risk under these policies and its group health insurance program.
See additional discussion under Note 1. The Company has a $1.7 million letter of
credit outstanding supporting its obligations under the property and casualty
portion of its insurance program.
Service Maintenance Agreement Obligations. The Company sells service
maintenance agreements under which it is the obligor for payment of qualifying
claims. The Company is responsible for administering the program, including
setting the pricing of the agreements sold and paying the claims. The pricing is
set based on historical claims experience and expectations about future claims.
While the Company is unable to estimate maximum potential claim exposure, it has
a history of overall profitability upon the ultimate resolution of agreements
sold. The revenues related to the agreements sold are deferred at the time of
sales and recorded in revenues in the statement of operations over the life of
the agreements. The amounts deferred are reflected on the face of the
consolidated balance sheet in Deferred revenues and allowances, see also Note 1
for additional discussion.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Based on management's evaluation (with the participation of our Chief
Executive Officer (CEO) and Chief Financial Officer (CFO)), as of the end of the
period covered by this report, our CEO and CFO have concluded that our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are
effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and
forms, and is accumulated and communicated to management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure.
Management's Report on Internal Control over Financial Reporting
Please refer to Management's Report on Internal Control over Financial
Reporting under Item 8 of this report.
83
Changes in Internal Controls Over Financial Reporting
There have been no changes in our internal controls over financial
reporting that occurred in the quarter ended January 31, 2009, which have
materially affected, or are reasonably likely to materially affect our internal
controls over financial reporting.
ITEM 9B. OTHER INFORMATION
Adoption of Bonus Program and Other Compensation Changes
On March 24, 2009, the Compensation Committee of our Board of Directors
adopted a cash bonus program for our 2010 fiscal year. Our named executive
officers, as well as certain other executive officers and certain employees, are
eligible to participate in the 2010 bonus program. Below is a description of the
2010 bonus program, as adopted by our Compensation Committee.
The purpose of the 2010 bonus program is to promote the interests of the
Company and its stockholders by providing key employees with financial rewards
upon achievement of specified business objectives, as well as help us attract
and retain key employees by providing attractive compensation opportunities
linked to performance results.
The Compensation Committee established four bonus levels for its 2010
bonus program: Level 1, Level 2, Level 3 and Level 4. Each of the levels
represent the attainment by us of certain operating pre-tax profit targets
established by the Compensation Committee (each, a "Profit Goal"). If we do not
achieve the Level 1 Profit Goal, each named executive officer, other executive
officer or employee awarded a bonus pursuant to the 2010 bonus program will
receive a prorata portion of the Level 1 Profit Goal, determined by the actual
pre-tax profit as a percentage of the Level 1 Profit Level.
The bonuses that may become distributable based upon our achievement of
the Level 1 through Level 4 Profit Goals will be distributed by our Chief
Executive Officer with approval from the Compensation Committee.
Our named executive officers, including our Chief Executive Officer,
certain other executive officers and certain employees will receive a bonus
under the 2010 bonus program that varies based upon our achievement of the Level
1 through Level 4 Profit Goals. The Level 1 bonus amount for each Participant
was established based upon the Compensation Committee's independent evaluation
of his or her relative effect on the Company's performance. The Level 2 bonus is
generally 30.8% greater than the Level 1 bonus, the Level 3 bonus is 64.1%
greater than the Level 1 bonus, and the Level 4 bonus is 100% greater than the
Level 1 bonus.
In addition, we established a contingency bonus pool under the 2010 bonus
program that varies based upon our achievement of the Level 1 through Level 4
Profit Goals and additional funds which may accrue for exceptional performance
beyond the Level 4 Profit Goal. The contingency bonus pool will be distributed
at the discretion of our Chairman and Chief Executive Officer with prior
approval from the Compensation Committee.
Payment of bonuses (if any) is normally made in February after the end of
the performance period during which the bonuses were earned. Except for certain
executive officers who have executive employment agreements, in order to be
eligible for a bonus under the 2010 bonus program, eligible participants must be
employed through the end of fiscal year ending January 31, 2010. Those executive
officers who have executive employment agreements with us are entitled to, under
certain situations, a prorata bonus if they resign or are terminated prior to
the completion of the fiscal year ended January 31, 2010.
Bonuses normally will be paid in cash in a single lump sum, subject to
payroll taxes and tax withholdings.
84
Restoration of Salary and Bonus Opportunities of Executive Vice Chairman
William C. Nylin, Jr. will continue to serve the Company as its
Executive Vice Chairman of the Board, and continues to report to Thomas J.
Frank, our Chief Executive Officer and Chairman. However, due to Dr. Nylin's
continuation of his commitment to the Company and its needs, the board of
directors elected to restore his salary to that of a full time officer of the
Company. Dr. Nylin will continue to be responsible for the Information
Technology and Risk Management functions of the Company.
PART III
The information required by Items 10 through 14 is included in our
definitive Proxy Statement relating to our 2009 Annual Meeting of Stockholders,
and is incorporated herein by reference.
CROSS REFERENCE TO ITEMS 10-14 LOCATED IN THE PROXY STATEMENT
Caption in the Conn's, Inc.
Item 2009 Proxy Statement
------------------------ -------------------------------------
ITEM 10. DIRECTORS, EXECUTIVE BOARD OF DIRECTORS; EXECUTIVE
OFFICERS AND CORPORATE OFFICERS; CORPORATE GOVERNANCE
GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF STOCK OWNERSHIP OF DIRECTORS,
CERTAIN BENEFICIAL OWNERS EXECUTIVE OFFICERS AND PRINCIPAL
AND MANAGEMENT STOCKHOLDERS
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN RELATIONSHIPS AND RELATED
RELATED TRANSACTIONS AND TRANSACTIONS
DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTANT FEES INDEPENDENT PUBLIC ACCOUNTANTS
AND SERVICES
85
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) The following documents are filed as a part of this report:
(1) The financial statements listed in response to Item 8 of
this report are as follows:
Consolidated Balance Sheets as of January 31, 2008 and 2009
Consolidated Statements of Operations for the Years Ended
January 31, 2007, 2008 and 2009
Consolidated Statements of Stockholders' Equity for the
Years Ended January 31, 2007, 2008 and 2009
Consolidated Statements of Cash Flows for the Years Ended
January 31, 2007, 2008 and 2009
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule: Schedule II -- Valuation and
Qualifying Accounts. The financial statement schedule and
the related Report of Independent Registered Public
Accounting Firm should be read in conjunction with the
consolidated financial statements filed as a part of this
report. Financial statement schedules not included in this
report have been omitted because they are not applicable or
the required information is shown in the consolidated
financial statements or notes thereto.
(3) Exhibits: A list of the exhibits filed as part of this
report is set forth in the Index to Exhibits, which
immediately precedes such exhibits and is incorporated
herein by reference.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of l934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CONN'S, INC.
(Registrant)
/s/ Thomas J. Frank, Sr.,
-------------------------------
Date: March 26, 2009 Thomas J. Frank, Sr.
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Thomas J. Frank, Sr. Chairman of the Board and
- ------------------------------- Chief Executive Officer
Thomas J. Frank, Sr. (Principal Executive Officer) March 26, 2009
/s/ Michael J. Poppe Chief Financial Officer
- ------------------------------- (Principal Financial and
Michael J. Poppe Accounting Officer) March 26, 2009
/s/ Marvin D. Brailsford
- -------------------------------
Marvin D. Brailsford Director March 26, 2009
/s/ Timothy L. Frank
- -------------------------------
Timothy L. Frank Director March 26, 2009
/s/ Jon E. M. Jacoby
- -------------------------------
Jon E. M. Jacoby Director March 26, 2009
/s/ Bob L. Martin
- -------------------------------
Bob L. Martin Director March 26, 2009
/s/ Douglas H. Martin
- -------------------------------
Douglas H. Martin Director March 26, 2009
/s/ Dr. William C. Nylin, Jr.
- -------------------------------
Dr. William C. Nylin, Jr. Executive Vice Chairman March 26, 2009
/s/ Scott L. Thompson
- -------------------------------
Scott L. Thompson Director March 26, 2009
/s/ William T. Trawick
- -------------------------------
William T. Trawick Director March 26, 2009
/s/ Theodore M. Wright
- -------------------------------
Theodore M. Wright Director March 26, 2009
87
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
2 Agreement and Plan of Merger dated January 15, 2003, by and among
Conn's, Inc., Conn Appliances, Inc. and Conn's Merger Sub, Inc.
(incorporated herein by reference to Exhibit 2 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on September 23, 2003).
3.1 Certificate of Incorporation of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.1 to Conn's, Inc. registration statement on Form
S-1 (file no. 333-109046) as filed with the Securities and Exchange
Commission on September 23, 2003).
3.1.1 Certificate of Amendment to the Certificate of Incorporation of Conn's,
Inc. dated June 3, 2004 (incorporated herein by reference to Exhibit
3.1.1 to Conn's, Inc. Form 10-Q for the quarterly period ended April
30, 2004 (File No. 000-50421) as filed with the Securities and Exchange
Commission on June 7, 2004).
3.2 Amended and Restated Bylaws of Conn's, Inc. effective as of June 3,
2008 (incorporated herein by reference to Exhibit 3.2.3 to Conn's, Inc.
Form 10-Q for the quarterly period ended April 30, 2008 (File No.
000-50421) as filed with the Securities and Exchange Commission on June
4, 2008).
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
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).
88
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 Loan and Security Agreement dated August 14, 2008, by and among Conn's,
Inc. and the Borrowers thereunder, the Lenders party thereto, Bank of
America, N.A, a national banking association, as Administrative Agent
and Joint Book Runner for the Lenders, referred to as Agent, JPMorgan
Chase Bank, National Association, as Syndication Agent and Joint Book
Runner for the Lenders, and Capital One, N.A., as Co-Documentation
Agent (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 20,2008).
10.9.1 Intercreditor Agreement dated August 14, 2008, by and among Bank of
America, N.A., as the ABL Agent, Wells Fargo Bank, National
Association, as Securitization Trustee, Conn Appliances, Inc. as the
Initial Servicer, Conn Credit Corporation, Inc., as a borrower, Conn
Credit I, L.P., as a borrower and Bank of America, N.A., as Collateral
Agent (incorporated herein by reference to Exhibit 99.5 to Conn's Inc.
Current Report on Form 8-K (File No. 000-50421) as filed with the
Securities and Exchange Commission on August 20,2008).
89
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).
10.11.3 Fourth Supplemental Indenture dated August 14, 2008 by and between Conn
Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.4 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421) as
filed with the Securities and Exchange Commission on August 20, 2008).
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 Supplement No. 1 to Amended and Restated Series 2002-A Supplement dated
August 14, 2008, 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 August 20, 2008).
10.12.2 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 99.3 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).
10.12.3 Second Amended and Restated Note Purchase Agreement dated August 14,
2008 by and between Conn Funding II, L.P., as Issuer, and Wells Fargo
Bank, National Association, as Trustee (incorporated herein by
reference to Exhibit 99.3 to Conn's, Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on August 20, 2008).
10.12.4 Amendment No. 1 to Second Amended and Restated Note Purchase Agreement
dated August 28, 2008 by and between Conn Funding II, L.P., as Issuer,
and Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.12.4 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2008 (File No. 000-50421) as filed
with the Securities and Exchange Commission on August 28, 2008).
90
10.13 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).
10.13.1 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).
10.13.2 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).
10.13.3 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).
10.13.4 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).
10.14 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
10.14.1 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
10.15 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
10.16 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
10.17 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).
10.17.1 Amendment #1 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.17.2 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).
91
10.17.3 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).
10.17.4 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).
10.17.5 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).
10.18 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).
10.18.1 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).
10.19 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).
10.19.1 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).
92
10.20 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).
10.21 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).
11.1 Statement re: computation of earnings per share is included under Note
1 to the financial statements.
12.1 Statement of computation of Ratio of Earnings to Fixed Charge (filed
herewith)
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).
23.1 Consent of Ernst & Young LLP (filed herewith).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) (filed
herewith).
32.1 Section 1350 Certification (Chief Executive Officer and Chief Financial
Officer) (furnished herewith).
99.1 Subcertification by 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).
99.3 Subcertification by President - Retail Division in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.4 Subcertification by President - Credit Division in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.5 Subcertification by Treasurer in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.6 Subcertification by Secretary in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.7 Subcertification of Executive Vice-Chairman of the Board, Chief
Operating Officer, President - Retail Division, President - Credit
Division, 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.
93
Schedule II-Valuation and Qualifying Accounts
Conn's, Inc.
- -----------------------------------------------------------------------------------------------------------------------------------
Col A Col B Col C Col D Col E
- -----------------------------------------------------------------------------------------------------------------------------------
Additions
- -----------------------------------------------------------------------------------------------------------------------------------
Description Balance at Charged Charged Deductions- Balance at
Beginning to Costs to Other Describe(1) End of
of Period and Expenses Accounts- Period
Describe
- -----------------------------------------------------------------------------------------------------------------------------------
Year ended January 31, 2007
Reserves and allowances from asset accounts:
Allowance for doubtful accounts $ 914 1,476 - (1,569) $ 821
Year ended January 31, 2008
Reserves and allowances from asset accounts:
Allowance for doubtful accounts $ 821 1,908 - (1,769) $ 960
Year ended January 31, 2009
Reserves and allowances from asset accounts:
Allowance for doubtful accounts $ 960 4,273 - (1,260) $3,973
(1) Uncollectible accounts written off, net of recoveries
EXHIBIT 12.1
Statement of Computation of Ratio of Earnings to Fixed Charges
Year Ended January 31,
-----------------------------------------------------
2009 2008 2007 2006 2005
-------- -------- -------- -------- --------
Income before minority interest
and income taxes ................... $ 41,525 $ 61,195 $ 62,586 $ 63,444 $ 47,511
Fixed charges ........................ 14,166 10,808 9,776 8,898 9,580
Capitalized interest ................. (164) (252) (299) -- --
-------- -------- -------- -------- --------
Total earnings ....................... $ 55,527 $ 71,751 $ 72,063 $ 72,342 $ 57,091
======== ======== ======== ======== ========
Interest expense
(including capitalized interest) ... $ 1,437 $ 499 $ 375 $ 379 $ 1,297
Amortized premiums and expenses ...... 662 53 53 63 169
Estimated interest within rent expense 12,067 10,256 9,348 8,456 8,114
-------- -------- -------- -------- --------
Total fixed charges .................. $ 14,166 $ 10,808 $ 9,776 $ 8,898 $ 9,580
======== ======== ======== ======== ========
Ratio of earnings to fixed charges ... 3.92 6.64 7.37 8.13 5.96
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration
Statements:
(1) Form S-8 No. 333-111280
(2) Form S-8 No. 333-111281
(3) Form S-8 No. 333-111282
(4) Form S-8 No. 333-111208
(5) Form S-3 No. 333-157390
of our reports dated March 24, 2009, with respect to the consolidated
financial statements and schedule of Conn's, Inc., and the effectiveness of
internal control over financial reporting of Conn's, Inc., included in this
Annual Report (Form 10-K) of Conn's, Inc. for the year ended January 31, 2009.
/s/ Ernst & Young, LLP
Houston, Texas
March 24, 2009
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF EXECUTIVE OFFICER)
I, Thomas J. Frank, Sr., certify that:
1. I have reviewed this annual report on Form 10-K 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: March 26, 2009
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF FINANCIAL OFFICER)
I, Michael J. Poppe, certify that:
1. I have reviewed this annual report on Form 10-K 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/ Michael J. Poppe
----------------------------------------
Michael J. Poppe
Chief Financial Officer
Date: March 26, 2009
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Conn's, Inc. (the "Company") on
Form 10-K for the period ended January 31, 2009 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 Michael J.
Poppe, 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/ Michael J. Poppe
----------------------------------------
Michael J. Poppe
Chief Financial Officer
Dated: March 26, 2009
A signed original of this written statement required by Section 906 has been
provided to Conn's, Inc. and will be retained by Conn's, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request. The foregoing
certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and
is not being filed as part of the Report or as a separate disclosure document.
EXHIBIT 99.1
SUBCERTIFICATION OF 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 annual report on Form 10-K 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: March 26, 2009
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 annual report on Form 10-K 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: March 26, 2009
EXHIBIT 99.3
SUBCERTIFICATION OF PRESIDENT - RETAIL DIVISION IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, David W. Trahan, certify that:
1. I have reviewed this annual report on Form 10-K 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 W. Trahan
----------------------------------------
David W. Trahan
President - Retail Division
Date: March 26, 2009
EXHIBIT 99.4
SUBCERTIFICATION OF PRESIDENT - CREDIT DIVISION IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Reymundo de la Fuente, Jr., certify that:
1. I have reviewed this annual report on Form 10-K 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/ Reymundo de la Fuente, Jr.
----------------------------------------
Reymundo de la Fuente, Jr.
President - Credit Division
Date: March 26, 2009
EXHIBIT 99.5
SUBCERTIFICATION OF TREASURER IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF FINANCIAL OFFICER)
I, David R. Atnip, certify that:
1. I have reviewed this annual report on Form 10-K 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: March 26, 2009
EXHIBIT 99.6
SUBCERTIFICATION OF SECRETARY IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Sydney K. Boone, Jr., certify that:
1. I have reviewed this annual report on Form 10-K 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: March 26, 2009
EXHIBIT 99.7
SUBCERTIFICATION OF EXECUTIVE VICE-CHAIRMAN OF THE BOARD,
CHIEF OPERATING OFFICER, PRESIDENT - RETAIL DIVISION,
PRESIDENT - CREDIT DIVISION, TREASURER AND SECRETARY IN SUPPORT OF
18 U.S.C. SECTION 1350 CERTIFICATION,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Conn's, Inc. (the "Company") on
Form 10-K for the period ended January 31, 2009 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 W. Trahan, President - Retail Division,
Reymundo de la Fuente, Jr., President - Credit Division, 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 W. Trahan
----------------------------------------
David W. Trahan
President - Retail Division
/s/ Reymundo de la Fuente, Jr.
----------------------------------------
Reymundo de la Fuente, Jr.
President - Credit Division
/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: March 26, 2009
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.
