UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
October 31, 2006 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 organization) Identification Number)
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ x ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One):
Large accelerated filer [ ] Accelerated filer [ x ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act). Yes [ ] No [ x ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 27, 2006:
Class Outstanding
- ------------------------------------------------ --------------------------
Common stock, $.01 par value per share 23,735,622
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements...........................................................................1
- -------
Consolidated Balance Sheets as of January 31, 2006 and October 31, 2006........................1
Consolidated Statements of Operations for the three and nine months ended
October 31, 2005 and 2006..................................................................2
Consolidated Statement of Stockholders' Equity for the nine months ended
October 31, 2006...........................................................................3
Consolidated Statements of Cash Flows for the nine months ended
October 31, 2005 and 2006..................................................................4
Notes to Consolidated Financial Statements.....................................................5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................................................16
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................................35
- -------
Item 4. Controls and Procedures.......................................................................35
- -------
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................36
- -------
Item 1A. Risk Factors..................................................................................36
- --------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................36
- -------
Item 5. Other Information.............................................................................36
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Item 6. Exhibits......................................................................................36
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SIGNATURE ..................................................................................................37
i
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(As Adjusted, see Note 1, and As Restated, see Note 8)
Assets January 31, October 31,
2006 2006
------------ -----------
Current assets (unaudited)
Cash and cash equivalents....................................................................... $ 45,176 $ 44,127
Accounts receivable, net........................................................................ 23,542 30,570
Interests in securitized assets................................................................. 139,282 123,104
Inventories..................................................................................... 73,987 77,224
Deferred income taxes........................................................................... - 186
Prepaid expenses and other assets............................................................... 4,004 5,440
----------- -----------
Total current assets...................................................................... 285,991 280,651
Non-current deferred income tax asset............................................................ 1,561 2,016
Property and equipment...........................................................................
Land............................................................................................ 6,671 9,025
Buildings....................................................................................... 7,084 11,935
Equipment and fixtures.......................................................................... 9,612 12,686
Transportation equipment........................................................................ 3,284 2,942
Leasehold improvements.......................................................................... 65,507 67,945
----------- -----------
Subtotal.................................................................................. 92,158 104,533
Less accumulated depreciation................................................................... (37,332) (44,817)
----------- -----------
Total property and equipment, net......................................................... 54,826 59,716
Goodwill, net.................................................................................... 9,617 9,617
Debt issuance costs and other assets, net........................................................ 260 221
----------- -----------
Total assets............................................................................. $352,255 $352,221
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt............................................................... $ 136 $ 83
Accounts payable................................................................................ 40,920 32,286
Accrued compensation and related expenses....................................................... 18,847 7,519
Accrued expenses................................................................................ 17,380 20,316
Income taxes payable............................................................................ 8,794 450
Deferred income taxes........................................................................... 1,343 -
Deferred revenues and allowances................................................................ 8,498 9,549
----------- -----------
Total current liabilities................................................................. 95,918 70,203
Long-term debt................................................................................... - 116
Deferred gain on sale of property................................................................ 476 351
Stockholders' equity
Preferred stock ($0.01 par value, 1,000,000 shares authorized;..................................
none issued or outstanding).................................................................. - -
Common stock ($0.01 par value, 40,000,000 shares authorized;....................................
23,571,564 and 23,735,122 shares issued and outstanding....................................
at January 31, 2006 and October 31, 2006, respectively).................................... 236 237
Additional paid-in capital...................................................................... 89,027 92,121
Accumulated other comprehensive income.......................................................... 10,492 6,124
Retained earnings............................................................................... 156,106 183,753
Treasury stock, at cost, 0 and 33,800 shares, respectively...................................... - (684)
----------- -----------
Total stockholders' equity................................................................ 255,861 281,551
----------- -----------
Total liabilities and stockholders' equity............................................. $352,255 $352,221
=========== ===========
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
(As Adjusted, See Note 1 and As Restated, See Note 8)
Three Months Ended Nine Months Ended
October 31, October 31,
------------------- --------------------
2005 2006 2005 2006
--------- --------- ---------- ---------
Revenues
Product sales..................................................................$140,405 $139,594 $398,547 $448,750
Service maintenance agreement commissions, net................................. 7,506 6,845 22,238 21,875
Service revenues............................................................... 5,157 5,951 15,066 17,107
--------- --------- --------- ---------
Total net sales.............................................................. 153,068 152,390 435,851 487,732
Finance charges and other...................................................... 19,521 21,303 59,217 60,353
--------- --------- --------- ---------
Total revenues............................................................... 172,589 173,693 495,068 548,085
Cost and expenses...............................................................
Cost of goods sold, including warehousing......................................
and occupancy costs........................................................... 110,024 110,627 314,520 356,112
Cost of parts sold, including warehousing......................................
and occupancy costs........................................................... 1,334 1,834 3,795 4,788
Selling, general and administrative expense.................................... 47,152 49,701 131,841 144,790
Provision for bad debts........................................................ 331 526 662 959
--------- --------- --------- ---------
Total cost and expenses...................................................... 158,841 162,688 450,818 506,649
--------- --------- --------- ---------
Operating income................................................................ 13,748 11,005 44,250 41,436
Interest (income) expense, net.................................................. 74 (141) 488 (512)
Other (income) expense, net..................................................... (27) (19) 7 (773)
--------- --------- --------- ---------
Income before income taxes...................................................... 13,701 11,165 43,755 42,721
Provision for income taxes......................................................
Current........................................................................ 5,623 4,449 18,730 14,782
Deferred....................................................................... (777) (438) (3,291) 292
--------- --------- --------- ---------
Total provision for income taxes............................................. 4,846 4,011 15,439 15,074
--------- --------- --------- ---------
Net income......................................................................$ 8,855 $ 7,154 $ 28,316 $ 27,647
========= ========= ========= =========
Earnings per share..............................................................
Basic..........................................................................$ 0.38 $ 0.30 $ 1.21 $ 1.17
Diluted........................................................................$ 0.36 $ 0.30 $ 1.18 $ 1.14
Average common shares outstanding...............................................
Basic.......................................................................... 23,458 23,698 23,378 23,658
Diluted........................................................................ 24,265 24,165 24,020 24,318
See notes to consolidated financial statements.
2
Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended October 31, 2006
(unaudited)
(in thousands except descriptive shares)
(As Adjusted, See Note 1 and As Restated, See Note 8)
Accum.
Other
Common Stock Compre- Additional
-------------- hensive Paid-in Retained Treasury
Shares Amount Income Capital Earnings Stock Total
------- ------ -------- --------- --------- -------- ---------
Balance January 31, 2006................................23,572 $236 $10,492 $89,027 $156,106 $ - $255,861
Exercise of options to
acquire 155,328 shares
of common stock........................................ 155 1 1,510 1,511
Issuance of 8,230 shares of
common stock under
Employee Stock
Purchase Plan.......................................... 8 184 184
Stock-based compensation................................ 1,204 1,204
Purchase of 33,800 shares
of treasury stock...................................... (684) (684)
Tax benefit from
options exercised...................................... 196 196
Net income.............................................. 27,647 27,647
Adjustment of fair value of securitized
assets (including tax benefit of
$2,276), net of reclassification
adjustments of $6,909 (net of
tax of $3,886)......................................... (4,368) (4,368)
---------
Total comprehensive income.............................. 23,279
------- ------ -------- --------- --------- -------- ---------
Balance October 31, 2006................................23,735 $237 $ 6,124 $92,121 $183,753 $(684) $281,551
======= ====== ======== ========= ========= ======== =========
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
(As Adjusted, See Note 1 and As Restated, See Note 8)
Nine Months Ended
October 31,
-------------------
2005 2006
--------- ---------
Cash flows from operating activities
Net income......................................................................................... $ 28,316 $ 27,647
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation...................................................................................... 8,356 9,292
Amortization...................................................................................... (210) (336)
Provision for bad debts........................................................................... 662 959
Stock-based compensation.......................................................................... 785 1,204
Excess tax benefits from stock-based compensation................................................. (23) (196)
Discounts on promotional credit................................................................... 611 1,001
Accretion from interests in securitized assets.................................................... (14,415) (14,182)
Provision for deferred income taxes............................................................... (3,291) 292
Loss (Gain) from sale of property and equipment................................................... 8 (773)
Loss from derivatives............................................................................. 69 -
Changes in operating assets and liabilities:
Accounts receivable............................................................................... 1,277 14,728
Inventory......................................................................................... (9,290) (3,237)
Prepaid expenses and other assets................................................................. (482) (1,436)
Accounts payable.................................................................................. 26,019 (8,634)
Accrued expenses.................................................................................. 8,093 (8,392)
Income taxes payable.............................................................................. 4,493 (8,148)
Deferred revenue and allowances................................................................... 851 1,301
--------- ---------
Net cash provided by operating activities........................................................... 51,829 11,090
--------- ---------
Cash flows from investing activities................................................................
Purchase of property and equipment................................................................. (14,107) (15,681)
Proceeds from sales of property.................................................................... 22 2,272
--------- ---------
Net cash used in investing activities............................................................... (14,085) (13,409)
--------- ---------
Cash flows from financing activities
Proceeds from stock issued under employee benefit plans............................................ 2,022 1,695
Purchase of treasury stock......................................................................... - (684)
Excess tax benefits from stock-based compensation.................................................. 23 196
Borrowings under lines of credit................................................................... 62,300 13,400
Payments on lines of credit........................................................................ (72,800) (13,400)
Increase in debt issuance costs.................................................................... (130) -
Borrowings under promissory notes.................................................................. - 208
Payment of promissory notes........................................................................ (21) (145)
--------- ---------
Net cash provided by (used in) financing activities................................................. (8,606) 1,270
--------- ---------
Net change in cash.................................................................................. 29,138 (1,049)
Cash and cash equivalents..........................................................................
Beginning of the year.............................................................................. 7,027 45,176
--------- ---------
End of period....................................................................................... $ 36,165 $ 44,127
========= =========
See notes to consolidated financial statements.
4
Conn's , Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
October 31, 2006
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three and nine month
periods ended October 31, 2006 are not necessarily indicative of the results
that may be expected for the year ending January 31, 2007. The financial
statements should be read in conjunction with the Company's (as defined below)
audited consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K/A filed on September 15, 2006.
The Company's balance sheet at January 31, 2006, as adjusted for Statement
of Financial Accounting Standards No. 123R, has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial presentation. Please see the Company's Form 10-K/A
for the fiscal year ended January 31, 2006 for a complete presentation of the
audited financial statements at that date, together with all required footnotes,
and for a complete presentation and explanation of the components and
presentations of the financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and its subsidiaries, limited liability companies
and limited partnerships, all of which are wholly-owned (the "Company"). All
material intercompany transactions and balances have been eliminated in
consolidation.
The Company enters into securitization transactions to sell its retail
installment and revolving customer receivables. These securitization
transactions are accounted for as sales in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities because the
Company has relinquished control of the receivables. Additionally, the Company
has transferred such receivables to a qualifying special purpose entity
("QSPE"). Accordingly, neither the transferred receivables nor the accounts of
the QSPE are included in the consolidated financial statements of the Company.
The Company's retained interest in the transferred receivables is valued on a
revolving pool basis.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
5
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Earnings Per Share. In accordance with SFAS No. 128, Earnings per Share, the
Company calculates basic earnings per share by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
include the dilutive effects of any stock options granted calculated under the
treasury-stock method. The following table sets forth the shares outstanding for
the earnings per share calculations:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------ -----------------------
2005 2006 2005 2006
----------- ----------- ----------- -----------
Common stock outstanding, beginning of period..........................23,388,235 23,697,318 23,267,596 23,571,564
Weighted average common stock issued in stock
option exercises...................................................... 68,646 15,100 106,292 87,919
Weighted average common stock issued to employee
stock purchase plan................................................... 866 1,184 3,879 3,282
Weighted average treasury stock purchased.............................. - (15,185) - (5,117)
----------- ----------- ----------- -----------
Shares used in computing basic earnings per share......................23,457,747 23,698,417 23,377,767 23,657,648
Dilutive effect of stock options, net of assumed
repurchase of treasury stock.......................................... 807,565 466,741 642,415 659,870
----------- ----------- ----------- -----------
Shares used in computing diluted earnings per share....................24,265,312 24,165,158 24,020,182 24,317,518
=========== =========== =========== ===========
Goodwill. Goodwill represents the excess of purchase price over the fair
market value of net assets acquired. The Company assesses the potential future
impairment of goodwill on an annual basis, or at any other time when impairment
indicators exist. The Company concluded at January 31, 2006 and October 31, 2006
that no impairment of goodwill existed.
Stock-Based Compensation. On February 1, 2006, the Company adopted SFAS No.
123R, Stock-Based Payment, using the modified retrospective application
transition. Under the modified retrospective application transition, all prior
period financial statements have been adjusted to give effect to the
fair-value-based method of accounting for stock-based compensation. The adoption
of this statement impacted the financial statements presented as follows:
o For the three months ended October 31, 2005 and 2006, Income before
income taxes was reduced by $0.2 million and $0.4 million,
respectively. For the nine months ended October 31, 2005 and 2006,
Income before income taxes was reduced by $0.8 million and $1.2
million, respectively.
o For the three months ended October 31, 2005 and 2006, Net income was
reduced by $0.2 million and $0.3 million, respectively. For the nine
months ended October 31, 2005 and 2006, Net income was reduced by $0.6
million and $1.0 million, respectively.
o For the three months ended October 31, 2005 and 2006, Basic earnings
per share was reduced by $.01 and $.01, respectively. For the nine
months ended October 31, 2005 and 2006, Basic earnings per share was
reduced by $.03 and $.04, respectively.
o For the three months ended October 31, 2005 and 2006, Diluted earnings
per share was reduced by $.01 and $.01, respectively. For the nine
months ended October 31, 2005 and 2006, Diluted earnings per share was
reduced by $.03 and $.04, respectively.
o For the nine months ended October 31, 2005 and 2006, Cash flows from
operating activities were reduced by, and Cash flows from investing
activities were increased by, $0.0 and $0.2 million, respectively.
o As of January 31, 2006, the Current deferred income tax asset
increased $0.3 million, Additional paid-in capital increased $2.0
million and Retained earnings decreased $1.7 million.
For post-IPO stock option grants, the Company has used the Black-Scholes
model to determine fair value. Stock-based compensation expense is recorded, net
of estimated forfeitures, on a straight-line basis over the vesting period of
the applicable grant. Prior to the IPO, the value of the options issued was
estimated using the minimum valuation option-pricing model. Since the minimum
valuation option-pricing model does not qualify as a fair value pricing model
under FAS 123R, the Company follows the intrinsic value method of accounting for
stock-based compensation to employees for these grants, as prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
6
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
to Employees, and related interpretations. If compensation expense for the
Company's stock options granted prior to the IPO had been recognized using the
fair value method of accounting under SFAS No. 123, net income available for
common stockholders for the three months ended October 31, 2005 and 2006 would
have decreased by 0.8% and 0.2%, respectively. Net income available for common
stockholders for the nine months ended October 31, 2005 and 2006 would have
decreased by 1.0% and 0.4%, respectively. The following table presents the
impact to earnings per share as if the Company had adopted the fair value
recognition provisions of SFAS No. 123 (dollars in thousands except per share
data):
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
2005 2006 2005 2006
------- ------- -------- --------
Net income available for common stockholders as reported...............................$8,855 $7,154 $28,316 $27,647
Add: Stock-based compensation recorded, net of tax..................................... 199 332 647 994
Less: Stock-based compensation, net of tax.............................................
for all awards........................................................................ (271) (345) (925) (1,104)
------- ------- -------- --------
Pro forma net income...................................................................$8,783 $7,141 $28,038 $27,537
======= ======= ======== ========
Earnings per share-as reported:
Basic.................................................................................$ 0.38 $ 0.30 $ 1.21 $ 1.17
Diluted...............................................................................$ 0.36 $ 0.30 $ 1.18 $ 1.14
Pro forma earnings per share:..........................................................
Basic.................................................................................$ 0.37 $ 0.30 $ 1.20 $ 1.16
Diluted...............................................................................$ 0.36 $ 0.30 $ 1.17 $ 1.13
As of October 31, 2006, the total compensation cost related to non-vested
awards not yet recognized totaled $4.3 million and is expected to be recognized
over a weighted average period of 3.3 years.
Application of APB 21 to Promotional Credit Programs that Exceed One Year in
Duration: The Company offers promotional credit payment plans, on certain
products, that extend beyond one year. In accordance with APB 21, Interest on
Receivables and Payables, such sales are discounted to their fair value
resulting in a reduction in sales and receivables and the amortization of the
discount amount over the term of the deferred interest payment plan. The
difference between the gross sale and the discounted amount is reflected as a
reduction of Product sales in the consolidated statements of operations and the
amount of the discount being amortized in the current period is recorded in
Finance charges and other. For the three months ended October 31, 2005 and 2006,
Product sales were reduced by $0.7 million and $1.7 million, respectively, and
Finance charges and other was increased by $0.7 million and $0.8 million,
respectively, to effect the adjustment to fair value and to reflect the
appropriate amortization of the discount. For the nine months ended October 31,
2005 and 2006, Product sales were reduced by $2.3 million and $3.3 million,
respectively, and Finance charges and other was increased by $1.7 million and
$2.3 million, respectively, to effect the adjustment to fair value and to
reflect the appropriate amortization of the discount.
Texas Tax Law Changes. On May 18, 2006, the Governor of Texas signed a tax
bill that modified the existing franchise tax, with the most significant change
being the replacement of the existing base with a tax based on margin. Taxable
margin is generally defined as total federal tax revenues minus the greater of
(a) cost of goods sold or (b) compensation. The tax rate to be paid by retailers
and wholesalers is 0.5% on taxable margin. This will result in an increase in
taxes paid by the Company, as franchise taxes paid have totaled less than
$50,000 per year for the last several years.
The tax changes impacted earnings beginning in the quarter ended July 31,
2006. For the quarter and nine months ended October 31, 2006, the Company
accrued, net of federal tax benefit, approximately $173,000 and $290,000,
respectively, in additional tax liability and had initially recorded
approximately $29,000 in deferred tax assets as a result of the new margin tax.
7
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Recent Accounting Pronouncements. In October 2005, FASB Staff Position (FSP)
No. 13-1, Accounting for Rental Costs Incurred during a Construction Period, was
issued. This FSP addresses the accounting for rental costs associated with
operating leases that are incurred during a construction period. It requires
that those costs be recognized as rental expense and included in income from
continuing operations. The guidance in this FSP is to be applied to the first
reporting period beginning after December 15, 2005 and states that a lessee
shall cease capitalizing rental costs as of the effective date of the FSP for
operating lease arrangements entered into prior to the effective date of the
FSP. The Company implemented the guidance in this FSP as of February 1, 2006,
and it did not have a material impact on its financial condition or results of
operations.
In February 2006, SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments, was issued. This statement is an amendment of SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities-a replacement of FASB Statement No. 125. This statement permits
fair value remeasurement for any hybrid financial instrument that contains an
embedded derivative that would otherwise require bifurcation, clarifies which
interest-only strips and principal-only strips are not subject to the
requirements of SFAS No. 133, establishes a requirement to evaluate interests in
securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation, clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives and amends SFAS No.
140 to eliminate the prohibition on a qualifying special-purpose entity from
holding a derivative financial instrument that pertains to a beneficial interest
other than another derivative financial instrument. This statement is effective
for all financial instruments acquired or issued after the beginning of an
entity's first fiscal year that begins after September 15, 2006. The Company is
currently analyzing the impact this statement will have on its financial
condition and results of operations.
In February 2006, the FASB Emerging Issues Task Force issued EITF No. 06-3,
How Sales Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross Versus
Net Presentation). The Task Force reached a consensus that a company should
disclose its accounting policy (i.e., gross or net presentation) regarding
presentation of taxes within the scope of this Issue. If taxes included in gross
revenues are significant, a company should disclose the amount of such taxes for
each period for which an income statement is presented. The consensus is
effective for the first annual or interim reporting period beginning after
December 15, 2006. The disclosures are required for annual and interim financial
statements for each period for which an income statement is presented. The
Company has evaluated the EITF and will disclose its accounting policy regarding
the presentation of sales taxes beginning with the first quarter of fiscal 2008.
In July 2006, FASB Interpretation (FIN) No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for
Income Taxes, was issued. This interpretation clarifies the accounting for
income taxes by prescribing the minimum recognition threshold a tax position is
required to meet before being recognized in the financial statements. The
interpretation is effective for fiscal years beginning after December 15, 2006.
The Company is currently analyzing the impact this statement will have on its
financial condition and results of operations.
In September 2006, SFAS No. 157, Fair Value Measurements, was issued. This
statement clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing an asset or liability.
This statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently analyzing the impact this statement will have on
its financial condition and results of operations.
In September 2006, Staff Accounting Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements, was issued. This bulletin addresses how the effects
of prior year uncorrected errors must be considered in quantifying misstatements
in the current year financial statements. This bulletin is effective for fiscal
years ending after November 15, 2006.
8
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Reclassifications. Certain reclassifications have been made in the prior
year's financial statements to conform to the current year's presentation.
Specifically, Other (income) expense, which consists of (gain) loss on sales of
property and equipment, is now separately detailed. Previously these amounts
were included in Selling, general and administrative expense. Additionally, the
impact of the cancellation of insurance policies on charged-off receivables,
which were previously included in the Provision for bad debts on the
consolidated statements of operations, are now reported as a reduction of
Insurance commissions, which is included in Finance charges and other.
2. Supplemental Disclosure of Revenue and Comprehensive Income
The following is a summary of the classification of the amounts included as
Finance charges and other for the three and nine months ended October 31, 2005
and 2006 (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
----------------- -----------------
2005 2006 2005 2006
-------- -------- -------- --------
Securitization income (1)............................................................$15,146 $16,783 $43,445 $45,294
Income from receivables not sold..................................................... 319 306 903 964
Insurance commissions................................................................ 3,643 4,074 12,025 13,069
Other................................................................................ 413 140 2,844 1,026
-------- -------- -------- --------
Finance charges and other............................................................$19,521 $21,303 $59,217 $60,353
======== ======== ======== ========
(1) Due to the expectation of higher credit losses during the last six months
of the current fiscal year, resulting primarily from disruption to our
credit operations as a result of Hurricane Rita, a $1.5 million impairment
charge was recorded in Securitization income during the three months ended
July 31, 2006. The impairment charge was based on an estimated average
credit charge-off rate of 3.6% over the six month period ending January 31,
2007. The increase in credit losses for three month period was in-line with
our expectations at the time we recorded the impairment charge. The
charge-off rate used in the valuation of the interest in securitized assets
is expected to return to the level of the historical 3.0% charge-off rate
assumption at the beginning of the next fiscal year.
The components of total comprehensive income for the three and nine months
ended October 31, 2005 and 2006 are presented in the table below (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
---------------- -----------------
2005 2006 2005 2006
------- -------- -------- --------
Net income............................................................................$8,855 $ 7,154 $28,316 $27,647
Unrealized gain on derivative instruments............................................. - - 246 -
Taxes on unrealized gain on derivatives............................................... - - (86) -
Adjustment of fair value of securitized assets (1).................................... 891 (6,628) 1,925 (6,644)
Taxes on adjustment of fair value..................................................... (302) 2,395 (665) 2,276
------- -------- -------- --------
Total comprehensive income............................................................$9,444 $ 2,921 $29,736 $23,279
======= ======== ======== ========
(1) As a result of the completion of a new bond issuance by the QSPE, the
discount recorded on the Company's investment was increased to reflect the
impact of the longer term to maturity.
9
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
3. Supplemental Disclosure Regarding Managed Receivables
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Principal Amount
Total Principal 60 Days
Amount of or More Past Due
Receivables (1)
------------------- -----------------
January October January October
31, 31, 31, 31,
2006 2006 2006 2006
--------- --------- -------- --------
Primary portfolio:
Installment............................................................$380,603 $362,117 $24,934 $25,091
Revolving.............................................................. 41,046 51,189 1,095 1,220
--------- --------- -------- --------
Subtotal.......................................................................... 421,649 413,306 26,029 26,311
Secondary portfolio:..............................................................
Installment............................................................ 98,072 122,382 9,508 11,489
--------- --------- -------- --------
Total receivables managed......................................................... 519,721 535,688 35,537 37,800
Less receivables sold............................................................. 509,681 525,723 33,483 35,815
--------- --------- -------- --------
Receivables not sold.............................................................. 10,040 9,965 $ 2,054 $ 1,985
======== ========
Non-customer receivables.......................................................... 13,502 20,605
--------- ---------
Total accounts receivable, net..........................................$ 23,542 $ 30,570
========= =========
(1) Amounts are based on end of period balances. The principal amount 60 days
or more past due relative to total receivables managed is not necessarily
indicative of relative balances expected at other times during the year due
to seasonal fluctuations in delinquency.
Credit Charge-
Average Balances offs (1)
------------------- ---------------
Three Months Three Months
Ended Ended
October 31, October 31,
------------------- ---------------
2005 2006 2005 2006
--------- --------- ------- -------
Primary portfolio:..................................................................
Installment..............................................................$357,015 $366,440
Revolving................................................................ 37,521 46,637
--------- ---------
Subtotal............................................................................ 394,536 413,077 $1,805 $2,897
Secondary portfolio:
Installment.............................................................. 84,994 119,884 448 906
--------- --------- ------- -------
Total receivables managed........................................................... 479,530 532,961 2,253 3,803
Less receivables sold............................................................... 469,586 522,722 2,079 3,517
--------- --------- ------- -------
Receivables not sold................................................................$ 9,944 $ 10,239 $ 174 $ 286
========= ========= ======= =======
(1) Amounts represent total credit charge-offs, net of recoveries, on total
receivables. The increased level of credit losses is primarily a result of
the impact on our credit operations of Hurricane Rita that hit the Gulf
Coast during September 2005.
10
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Credit Charge-
Average Balances offs (1)
------------------- ----------------
Nine Months Nine Months
Ended Ended
October 31, October 31,
------------------- ----------------
2005 2006 2005 2006
--------- --------- ------- --------
Primary portfolio:.................................................................
Installment.............................................................$344,348 $369,660
Revolving............................................................... 33,748 44,345
--------- ---------
Subtotal........................................................................... 378,096 414,005 $6,915 $10,772
Secondary portfolio:
Installment............................................................. 80,060 112,598 1,299 2,764
--------- --------- ------- --------
Total receivables managed.......................................................... 458,156 526,603 8,214 13,536
Less receivables sold.............................................................. 448,513 516,263 7,611 12,916
--------- --------- ------- --------
Receivables not sold...............................................................$ 9,643 $ 10,340 $ 603 $ 620
========= ========= ======= ========
(1) Amounts represent total credit charge-offs, net of recoveries, on total
receivables. The increased level of credit losses is primarily a result of
the impact on our credit operations of Hurricane Rita that hit the Gulf
Coast during September 2005.
4. Fair Value of Derivatives
The Company held interest rate swaps and collars with notional amounts
totaling $20.0 million, which expired on April 15, 2005, and were held for the
purpose of hedging against variable interest rate risk, primarily related to
cash flows from the Company's interest-only strip as well as variable rate debt.
In fiscal 2004, hedge accounting was discontinued for the $20.0 million of
swaps. In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, at the time hedge accounting was discontinued, the
Company began to recognize changes in fair value of the swaps as a reduction to
interest expense and to amortize the amount of accumulated other comprehensive
loss related to those derivatives as interest expense over the period that the
forecasted transactions affected the consolidated statements of operations. As
the swaps expired on April 15, 2005, there was no financial statement impact
during the three months ended October 31, 2005 and 2006. During the nine months
ended October 31, 2005 and 2006, the Company reclassified $246,000 and $0,
respectively, of losses previously recorded in accumulated other comprehensive
income into the consolidated statements of operations and recorded $177,000 and
$0, respectively, of interest reductions in the consolidated statements of
operations because of the change in fair value of the swaps.
5. Debt and Letters of Credit
At October 31, 2006, the Company had $48.1 million of its $50 million
revolving credit facility available for borrowings. The amounts utilized under
the revolving credit facility reflected $1.9 million related to letters of
credit issued. Additionally, there were no amounts outstanding under a
short-term revolving bank agreement that provides up to $8.0 million of
availability on an unsecured basis. This unsecured facility matures in June 2007
and has a floating rate of interest, based on Prime, which equaled 7.75% at
October 31, 2006.
Effective August 28, 2006, the Company entered into an amendment of its $50
million revolving credit facility with its existing lenders. The amendment
increases the Company's restricted payment capacity, which includes payments for
repurchases of capital stock, from $25 million to $50 million. There were no
other modifications of the Credit Agreement.
The Company utilizes unsecured letters of credit to secure a portion of the
QSPE's asset-backed securitization program, deductibles under the Company's
property and casualty insurance programs and international product purchases. At
October 31, 2006, the Company had outstanding unsecured letters of credit of
$23.9 million. These letters of credit were issued under the three following
facilities:
11
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
o The Company has a $5.0 million sublimit provided under its revolving
line of credit for stand-by and import letters of credit. At October
31, 2006, $1.9 million of letters of credit were outstanding and
callable at the option of the Company's property and casualty
insurance carrier if the Company does not honor its requirement to
fund deductible amounts as billed under its insurance program.
o The Company has arranged for a $20.0 million stand-by letter of credit
to provide assurance to the trustee of the asset-backed securitization
program that funds collected by the Company, as the servicer, would be
remitted as required under the base indenture and other related
documents. The letter of credit has a term of one year and expires in
August 2007.
o The Company obtained a $10.0 million commitment for trade letters of
credit to secure product purchases under an international arrangement.
At October 31, 2006, there was $1.9 million outstanding under this
commitment. The letter of credit commitment has a term of one year and
expires in May 2007. No letter of credit issued under this commitment
can have an expiration date more than 180 days after the commitment
expiration date.
The maximum potential amount of future payments under these letter of credit
facilities is considered to be the aggregate face amount of each letter of
credit commitment, which total $35.0 million as of October 31, 2006.
6. Stock-Based Compensation
The Company originally approved an Incentive Stock Option Plan that provides
for a pool of up to 3.5 million options to purchase shares of the Company's
common stock. Such options are to be granted to various officers and employees
at prices equal to the market value on the date of the grant. The options vest
over three or five year periods (depending on the grant) and expire ten years
after the date of grant. As part of the completion of the IPO, the Company
amended the Incentive Stock Option Plan to provide for a total available pool of
2,559,767 options, adopted a Non-Employee Director Stock Option Plan that
included 300,000 options, and adopted an Employee Stock Purchase Plan that
reserved up to 1,267,085 shares of the Company's common stock to be issued. At
the Company's annual meeting on May 31, 2006, amendments to the stock option
plans were approved, which increased the shares available under the Incentive
Stock Option Plan to 3,859,767 and increased the shares available under the
Non-Employee Director Stock Option Plan to 600,000. On November 24, 2003, the
Company issued six non-employee directors 240,000 total options to acquire the
Company's stock at $14.00 per share. On June 3, 2004, the Company issued 40,000
options to acquire the Company's stock at $17.34 per share to a seventh
non-employee director. At October 31, 2006, the Company had 320,000 options
available for grant under the Non-Employee Director Stock Option Plan.
The Employee Stock Purchase Plan is available to a majority of the employees
of the Company and its subsidiaries, subject to minimum employment conditions
and maximum compensation limitations. At the end of each calendar quarter,
employee contributions are used to acquire shares of common stock at 85% of the
lower of the fair market value of the common stock on the first or last day of
the calendar quarter. During the nine month periods ended October 31, 2005 and
2006, the Company issued 8,306 and 8,230 shares of common stock, respectively,
to employees participating in the plan, leaving 1,239,695 shares remaining
reserved for future issuance under the plan as of October 31, 2006.
12
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
A summary of the status of the Company's Incentive Stock Option Plan and the
activity during the nine months ended October 31, 2005 and 2006 is presented
below (shares in thousands):
Nine Months Ended October 31,
-------------------------------------
2005 2006
------------------ ------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- --------
Outstanding, beginning of period................................................... 1,666 $ 11.50 1,626 $ 16.31
Granted............................................................................ - $ - - $ -
Exercised.......................................................................... (220) $ (8.13) (149) $ (9.41)
Forfeited.......................................................................... (79) $(14.75) (26) $(23.82)
--------- ---------
Outstanding, end of period......................................................... 1,367 $ 11.85 1,451 $ 16.87
========= =========
Options exercisable at end of period............................................... 660 705
Options available for grant........................................................ 758 1,779
Intrinsic value of options exercised during the period.........................$3.1 million $2.8 million
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Average
Shares Remaining Weighted Shares Weighted
Outstanding Contractual Average Exercisable Average
October 31, Life in Exercise October 31, Exercise
Range of Exercise Prices 2006 Years Price 2006 Price
- ------------------------------------------------------------------------------ ----------- -------- ----------- --------
$8.21-$10.83 ...................................................... 583 4.6 $ 8.52 557 $ 8.42
$14.00 -$16.49 .................................................... 281 7.2 $14.27 101 $14.22
$17.73 ............................................................ 272 8.1 $17.73 47 $17.73
$33.88 ............................................................ 315 9.1 $33.88 - $ -
----------- -----------
Total............................................................. 1,451 6.7 $16.87 705 $9.87
=========== ===========
Aggregate intrinsic value of exercisable options...................
at October 31, 2006............................................$10.0 million
7. Contingencies
Legal Proceedings. The Company is involved in routine litigation incidental
to its business from time to time. Currently, the Company does not expect the
outcome of any of this routine litigation to have a material affect on its
financial condition or results of operations. However, the results of these
proceedings cannot be predicted with certainty, and changes in facts and
circumstances could impact the Company's estimate of reserves for litigation.
Service Maintenance Agreement Obligations. The Company sells service
maintenance agreements under which it is the obligor for payment of qualifying
claims. The Company is responsible for administering the program, including
setting the pricing of the agreements sold and paying the claims. The typical
term for these agreements is between 12 and 36 months. The pricing is set based
on historical claims experience and expectations about future claims. While the
Company is unable to estimate maximum potential claim exposure, it has a history
of overall profitability upon the ultimate resolution of agreements sold. The
revenues related to the agreements sold are deferred at the time of sale and
recorded in revenues in the statement of operations over the life of the
agreements. The revenues deferred related to these agreements totaled $3.6
million and $3.9 million, respectively, as of January 31, 2006 and October 31,
2006, and are included on the face of the balance sheet in Deferred revenues and
allowances.
13
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
8. Restatement of Financial Statements
The Company restated its consolidated financial statements for the quarter
and nine-months ended October 31, 2005 to correct for errors in recording
interests in securitized assets, securitization income and related income tax
impacts that were incorrectly accounted for under U.S. generally accepted
accounting principles, specifically covered by Statement of Financial Accounting
Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities and Emerging Issues Task Force ("EITF")
No. 99-20, Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interest in Securitized Financial Assets.
The following table sets forth the effects of the adjustments on Net Income
for the quarter and nine-months ended October 31, 2005.
Increase (Decrease) in Net Income
(Dollars in thousands) Nine
Quarter Months
ended ended
October October
31, 31,
2005 2005
------- --------
As Previously Reported net income.............................$8,932 $27,611
Securitization income......................................... (118) 1,034
Provision for bad debts....................................... - 53
Income tax provision.......................................... 41 (382)
------- --------
Total adjustment........................................... (77) 705
------- --------
Restated net income...........................................$8,855 $28,316
======= ========
Percent change -0.9% 2.6%
14
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The following tables set forth the effects of the restatement adjustments
on affected line items within our previously reported Consolidated Statement of
Operations for the quarter and nine-months ended October 31, 2005, and
Consolidated Statement of Cash Flows for the nine-months ended October 31, 2005.
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data)
Quarter ended Nine Months ended
--------------------- ---------------------
October 31, 2005 October 31, 2005
--------------------- ---------------------
As As
Previously Previously
Reported Restated Reported Restated
----------- --------- ----------- ---------
Finance charges and other.................................................... $ 20,237 $ 19,521 $ 59,992 $ 59,217
Total revenues............................................................... 173,305 172,589 495,843 495,068
Provision for bad debts...................................................... 929 331 2,524 662
Total cost and expenses...................................................... 159,412 158,841 452,687 450,818
Operating income............................................................. 13,893 13,748 43,156 44,250
Income before income taxes................................................... 13,819 13,701 42,668 43,755
Total provision for income taxes............................................. 4,887 4,846 15,057 15,439
Net Income................................................................... 8,932 8,855 27,611 28,316
Earnings per share...........................................................
Basic....................................................................... $ 0.38 $ 0.38 $ 1.18 $ 1.21
Diluted..................................................................... $ 0.37 $ 0.36 $ 1.15 $ 1.18
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Nine Months ended
October 31, 2005
---------------------
As
Previously
Reported Restated
----------- ---------
Cash flows from operating activities
Net income......................................................................................... $ 27,611 $ 28,316
Adjustments to reconcile net income to.............................................................
net cash provided by operating activities:.........................................................
Provision for bad debts............................................................................ 2,524 662
Accretion from interests in securitized assets..................................................... (10,667) (14,415)
Provision for deferred income taxes................................................................ (3,673) (3,291)
Change in operating assets and liabilities:........................................................
Accounts receivable................................................................................ (3,246) 1,277
15
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This report contains forward-looking statements. We sometimes use words
such as "believe," "may," "will," "estimate," "continue," "anticipate,"
"intend," "expect," "project" and similar expressions, as they relate to us, our
management and our industry, to identify forward-looking statements.
Forward-looking statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends and other future
events. We have based our forward-looking statements largely on our current
expectations and projections about future events and financial trends affecting
our business. Actual results may differ materially. Some of the risks,
uncertainties and assumptions about us that may cause actual results to differ
from these forward-looking statements include, but are not limited to:
o the success of our growth strategy and plans regarding opening new
stores and entering adjacent and new markets, including our plans to
continue expanding into the Dallas/Fort Worth Metroplex, and South
Texas;
o our intention to update or expand existing stores;
o our ability to obtain capital for required capital expenditures and
costs related to the opening of new stores or to update or expand
existing stores;
o our cash flows from operations, borrowings from our revolving line of
credit and proceeds from securitizations to fund our operations, debt
repayment and expansion;
o the ability of the QSPE to obtain additional funding for the purpose
of purchasing our receivables;
o the effect of rising interest rates that could increase our cost of
borrowing or reduce securitization income;
o the potential for deterioration in the delinquency status of the sold
or owned credit portfolios or higher than historical charge-offs in
the portfolios could adversely impact earnings;
o the potential for greater than expected losses in the sold or owned
credit portfolios due to the impact of Hurricane Rita on our credit
operations;
o the long-term effect of the change in bankruptcy laws could effect
charge-offs in the credit portfolio which could adversely impact
earnings;
o technological and market developments, growth trends and projected
sales in the home appliance and consumer electronics industry,
including, with respect to digital products, DVD players, HDTV,
digital audio, home networking devices and other new products, and our
ability to capitalize on such growth;
o the potential for price erosion or lower unit sales that could result
in declines in revenues;
o higher oil and gas prices could adversely affect our customers'
shopping decisions and patterns, as well as the cost of our delivery
and service operations and our cost of products, if vendors pass on
their additional fuel costs through increased pricing for products;
o the ability to attract and retain qualified personnel;
o both short-term and long-term impact of adverse weather conditions
(e.g. hurricanes) that could result in volatility in our revenues and
increased expenses and casualty losses;
16
o changes in laws and regulations and/or interest, premium and
commission rates allowed by regulators on our credit, credit insurance
and service maintenance agreements as allowed by those laws and
regulations;
o our relationships with key suppliers;
o the adequacy of our distribution and information systems and
management experience to support our expansion plans;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o the potential for market share erosion that could result in reduced
revenues;
o the accuracy of our expectations regarding the similarity or
dissimilarity of our existing markets as compared to new markets we
enter; and
o the outcome of litigation affecting our business.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under "Risk Factors" in our Form
10-K/A filed with the Securities Exchange Commission on September 15, 2006. In
light of these risks, uncertainties and assumptions, the forward-looking events
and circumstances discussed in this report might not happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
All forward-looking statements attributable to us, or to persons acting on
our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
We intend for the following discussion and analysis to provide you with a
better understanding of our financial condition and performance in the indicated
periods, including an analysis of those key factors that contributed to our
financial condition and performance and that are, or are expected to be, the key
"drivers" of our business.
On September 8, 2006, we concluded that our consolidated financial
statements for the years ended January 31, 2006, 2005 and 2004 as well as the
selected financial data for the years ended January 31, 2006, 2005, 2004, 2003,
and July 31, 2001, the six months ended January 31, 2002 and the twelve months
ended January 31, 2002, and for the quarters ended April 30, 2006 and 2005
should be restated to correct for errors in recording interests in securitized
assets, securitization income and related income tax impacts that were
incorrectly accounted for under U.S. generally accepted accounting principles,
specifically covered by Statement of Financial Accounting Standards ("SFAS") No.
140, Accounting for transfers and Servicing of Financial Assets and
Extinguishment of Liabilities and Emerging Issues Task Force ("EITF") No. 99-20,
Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interest in Securitized Financial Assets. The following discussion
has been updated, as appropriate, to reflect the changes to our financial
statements. See Note 8 to the financial statements for discussion of the impacts
on the financial statements.
On February 1, 2006, we were required to adopt Statement of Financial
Accounting Standard No. 123R, Stock-Based Compensation. We elected to use the
modified retrospective application transition, which results in the
retrospective adjustment of all prior period financial statements using the
fair-value-based method of accounting for stock-based compensation. As
applicable, all amounts disclosed in the financial statements and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations have been adjusted accordingly. See Note 1 to the financial
statements for discussion of the impacts on the financial statements.
17
We are a specialty retailer that sells major home appliances, including
refrigerators, freezers, washers, dryers and ranges, a variety of consumer
electronics, including projection, plasma, DLP and LCD televisions, camcorders,
DVD players, portable audio and home theater products, lawn and garden products,
mattresses and furniture. We also sell home office equipment, including
computers and computer accessories and continue to introduce additional product
categories for the consumer and home to help increase same store sales and to
respond to our customers' product needs. We require all our sales associates to
be knowledgeable of all of our products, but to specialize in certain specific
product categories.
We currently operate 60 retail locations in Texas and Louisiana, and have
several other stores under development.
Unlike many of our competitors, we provide flexible in-house credit options
for our customers. In the last three years, we financed, on average,
approximately 57% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and to issue asset-backed
and variable funding notes to third parties. We transfer receivables, consisting
of retail installment and revolving account receivables extended to our
customers, to the issuer in exchange for cash and subordinated securities. To
finance its acquisition of these receivables, the issuer has issued notes to
third parties.
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements, under
which we are the primary obligor, to protect the customers after the original
manufacturer's warranty or service maintenance agreement has expired.
Our business is moderately seasonal, with a slightly greater proportionate
share of our revenues, pretax and net income realized during the quarter ending
January 31, due primarily to the holiday selling season.
Executive Overview
This narrative is intended to provide an executive level overview of our
operations for the three and nine months ended October 31, 2006. A detailed
explanation of the changes in our operations for these periods as compared to
the prior year is included under Results of Operations. As explained in that
section, our pretax income for the quarter ended October 31, 2006 decreased
approximately 18.5%, primarily as a result of higher selling, general and
administrative expenses. Our pretax income for the nine months ended October 31,
2006 decreased approximately 2.4%, primarily as a result of higher selling,
general and administrative expenses, partially offset by higher revenues and
gross margin dollars. Increased interest income and higher other income
partially offset the decline in pretax income. Some of the more specific items
impacting our operating and pretax income were:
o Same store sales for the quarter declined by 3.7% and for the nine months
same store sales grew 6.5% over the same period for the prior year. While
same store sales for the quarter declined, we were able to retain a large
portion of the 23.3% same store sales growth experienced in the prior year
period as a result of Hurricanes Rita and Katrina. The same store sales
increase, in the markets not impacted by Hurricanes Rita and Katrina, was
0.1% for the quarter and 5.4% for the nine months. These other markets
accounted for 79.7% of same store Product sales and Service maintenance
agreement commissions during the three months ended October 31, 2006 and
78.7% of same store Product sales and Service maintenance agreement
commissions during the nine months ended October 31, 2006.
o Our entry into the Dallas/Fort Worth and the South Texas markets and the
addition of stores in our existing Houston and San Antonio markets had a
positive impact on our revenues. We achieved approximately $4.9 million and
$24.1 million of increases in product sales and service maintenance
agreement commissions for the quarter and nine months ended October 31,
2006, respectively, from the new stores that were opened in these markets
after February 1, 2005. Our plans provide for the opening of additional
stores in existing markets during fiscal 2007 as we focus on opportunities
in markets in which we have existing infrastructure.
18
o Deferred interest and "same as cash" plans continue to be an important part
of our sales promotion plans and are utilized to provide a wide variety of
financing to enable us to appeal to a broader customer base. For the three
months and nine months ended October 31, 2006, $42.6 million, or 30.5%, and
$113.7 million, or 25.3%, respectively, in gross product sales were
financed by deferred interest and "same as cash" plans. For the comparable
periods in the prior year gross product sales financed by deferred interest
and "same as cash" sales were $38.5 million, or 27.4% and $119.0 million,
or 29.8%. We expect to continue to offer extended term promotional credit
in the future.
o Our gross margin for the quarter decreased from 35.5% to 35.3% for the
three months ended October 31, 2006 when compared to the same period in the
prior year, primarily as a result of reduced product margins to 20.8% for
the three months ended October 31, 2006, from 21.6% in the prior year, and
reduced front-end and retrospective Service Maintenance agreement
commissions, due to lower sales penetration during the period and higher
claims experience, partially offset by increased Finance charges and other
income. Our gross margin for the nine months decreased from 35.7% to 34.2%
when compared to the same period in the prior year, primarily due to the
impact on securitization income of higher charge-offs in the credit
portfolio, reduced retrospective Service Maintenance agreement commissions
and a reduction in the gross margin on product sales to 20.6% for the nine
months ended October 31, 2006, from 21.1% in the prior year.
o Finance charges and other increased 9.1% for the quarter and 1.9% for the
nine months ended October 31, 2006, as compared to the double-digit Product
sales growth for the nine-months ended October 31, 2006, as:
o securitization income increased by 10.8% and 4.3%, respectively, for
the quarter and nine months ended October 31, 2006. The quarterly
comparison was impacted by the $0.9 million impairment charge recorded
in the prior year period, which reduced the value of our interests in
securitized assets for anticipated higher credit losses due to the
impact of Hurricane Rita on our credit operations and an increase in
bankruptcy filings due to the new bankruptcy laws that took effect in
October 2005. The nine-month comparison was also impacted by a 69.7%
increase in credit losses, due to higher than expected losses
primarily as a result of the disruption to our credit operations
caused by Hurricane Rita. As a result of the increased credit losses
incurred, during the three months ended July 31, 2006, due to the
expectation of continued higher losses over the following six months,
we recorded an impairment charge of $1.5 million, reducing the value
of our interest in securitized assets.
o service maintenance agreement retrospective commissions for the
quarter and the nine months ended October 31, 2006 decreased $0.2
million and $1.7 million, respectively, due to a change in the
commission structure resulting in higher front-end commissions, which
are included in Net sales and higher claims experience.
o During the three months ended October 31, 2006, Selling, general and
administrative (SG&A) expense increased as a percent of revenues to 28.7%
from 27.3% when compared to the prior year, primarily from increased
occupancy cost, property taxes, professional fees related to the financial
restatement, stock-based compensation and other small increases as a
percent of revenues, while the prior year period included approximately
$0.8 million of expenses incurred due to Hurricane Rita. During the nine
months ended October 31, 2006, Selling, general and administrative expense
decreased as a percent of revenues to 26.4% from 26.6% when compared to the
prior year, primarily from reduced net advertising and insurance expenses
as a percent of revenues, partially offset by increased property tax
expense.
o Operating margin decreased from 8.0% to 6.3% for the three months ended
October 31, 2006 when compared to the same period in the prior year due to
reduced gross margin and increased SG&A expense. The factors above also
affected the operating margin for the nine months ended October 31, 2006
which decreased from 9.0% during the same period last year to 7.6%.
19
o We adopted SFAS No. 123R, Share-Based Payment, during the quarter ended
April 30, 2006. The adoption resulted in expenses totaling $0.4 million
being recorded to SG&A during the quarter ended October 31, 2006 as
compared to $0.2 million being recorded in the quarter ended October 31,
2005. The adoption resulted in expenses totaling $1.2 million being
recorded to SG&A during the nine months ended October 31, 2006 as compared
to $0.8 million being recorded in the nine months ended October 31, 2005.
o During the nine months ended October 31, 2006, the Company completed the
sale of a building and the related land, resulting in the recognition of a
gain of $0.7 million, which is reflected in Other (income) expense.
Operational Changes and Resulting Outlook
During the quarter, we opened a new store in the San Antonio market and
during November 2006, we opened a new store in the Dallas/Fort Worth market. We
have several other locations in Texas that we believe are promising and, along
with new stores in existing markets, are in various stages of development for
opening in fiscal year 2007.
The credit portfolio delinquency and charge-off statistics were negatively
impacted by the effects of Hurricane Rita that hit the Gulf Coast during
September of 2005. The hurricane impacted our customer's ability to pay on their
accounts and hampered our credit collection operations, including payment
processing delays caused by disruption in the mail service. The credit
collection operations were negatively affected by the loss of personnel, as some
employees did not return to work, and by the increase in the number of
delinquent accounts, resulting in increased workloads for the personnel that
returned to work. To address the staffing issues, we have intensified our
recruiting efforts to attract individuals to our Beaumont, Texas collection
center and have opened a second collection center in Dallas, Texas. As we added
these new employees, we reassigned our more experienced collectors to handle
later-stage delinquent accounts. The new employees are not collecting with the
same effectiveness as the more experienced collectors and the level of early
stage delinquencies has increased. We believe this will improve as these new
employees receive more training and become more experienced, and as we
re-distribute our more experienced collectors through-out the delinquency
stages. Non-storm factors that may have negatively affected delinquencies and
charge-offs include the impact of the bankruptcy law change in October 2005 and
other economic factors on our customers. Additionally, as the portfolio growth
has slowed to 3.1% for the nine months ended October 31, 2006, from 14.4% for
the prior year period, the 60-day delinquency rate of 7.1% has been negatively
impacted by 80 basis points. Contrary to earlier predictions, the delinquency
performance of the credit portfolio has not improved since January 31, 2006.
However, loss rates have returned to historical levels and we expect the
delinquency rates to return to historical levels over the next six months. If
the delinquency rates do not improve, we may be required to book additional
impairment charges in the future. See detail information regarding the
delinquency status of the credit portfolio in Note 3 to the financial statements
and additional information regarding our accounting for these assets under
Application of Critical Accounting Policies - Transfers of Financial Assets.
On May 18, 2006, the Governor of Texas signed a tax bill that modifies the
existing franchise tax, with the most significant change being the replacement
of the existing base with a tax based on margin. Taxable margin is generally
defined as total federal tax revenues minus the greater of (a) cost of goods
sold or (b) compensation. The tax rate to be paid by retailers and wholesalers
is 0.5% on taxable margin. This will result in an increase in taxes paid by us,
as franchise taxes paid have totaled less than $50,000 per year for the last
several years. The tax changes impacted earnings beginning in the quarter ended
July 31, 2006. For the quarter and nine months ended, we accrued, net of federal
tax benefit, approximately $173,000 and $290,000, respectively, in additional
tax liability and initially recorded approximately $29,000 in net deferred tax
assets as a result of the new margin tax. Going forward, we expect our effective
tax rate on Income before income taxes to increase to between 36% and 37%, from
an average of 35.1% over the past three fiscal years.
The consumer electronics industry depends on new products to drive same
store sales increases. Typically, these new products, such as digital
televisions, DVD players, digital cameras and MP3 players are introduced at
relatively high price points that are then gradually reduced as the product
becomes more mainstream. To sustain positive same store sales growth, unit sales
must increase at a rate greater than the decline in product prices. The
affordability of the product helps drive the unit sales growth. However, as a
result of relatively short product life cycles in the consumer electronics
industry, which limit the amount of time available for sales volume to increase,
combined with rapid price erosion in the industry, retailers are challenged to
maintain overall gross margin levels and positive same store sales. This has
historically been our experience, and we continue to adjust our marketing
strategies to address this challenge through the introduction of new product
categories and new products within our existing categories.
20
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 October 31, 2006.
Transfers of Financial Assets. We transfer customer receivables to the QSPE
that issues asset-backed securities to third party lenders using these accounts
as collateral, and we continue to service these accounts after the transfer. We
recognize the sale of these accounts when we relinquish control of the
transferred financial asset in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
As we transfer the accounts, we record an asset representing the interest only
strip which is the difference between the interest earned on customer accounts
and the cost associated with financing and servicing the transferred accounts,
including a provision for bad debts associated with the transferred accounts (on
a revolving pool basis) discounted to a market rate of interest. The gain or
loss recognized on these transactions is based on our best estimates of key
assumptions, including forecasted credit losses based on actual portfolio
experience over the past twelve months, payment rates, forward yield curves,
costs of servicing the accounts and appropriate discount rates. The use of
different estimates or assumptions could produce different financial results.
For example, if we had assumed a 10.0% reduction in net interest spread (which
might be caused by rising interest rates or reductions in rates charged on the
accounts transferred), our interest in securitized assets would have been
reduced by $5.4 million as of October 31, 2006, which may have an adverse affect
on earnings. We recognize income from our interest in these transferred accounts
as gains on the transfer of the asset, interest income and servicing fees. This
income is recorded as Finance charges and other in our consolidated statements
of operations. If the assumption used for estimating credit losses was increased
by 0.5%, the impact to recorded Finance charges and other would have been a
reduction in revenues and pretax income of $2.0 million.
Deferred Taxes. We have net deferred tax assets of approximately $2.2
million as of October 31, 2006. If we had assumed that the future tax rate at
which these deferred items would reverse was 50 basis points higher than
currently anticipated, we would have increased the net deferred tax asset and
increased net income by approximately $30,000.
Intangible Assets. We have significant intangible assets related primarily
to goodwill. The determination of related estimated useful lives and whether or
not these assets are impaired involves significant judgments. Effective with the
implementation of SFAS 142, we ceased amortizing goodwill and began testing
potential impairment of this asset annually based on judgments regarding ongoing
profitability and cash flow of the underlying assets. Changes in strategy or
market conditions could significantly impact these judgments and require
adjustments to recorded asset balances. For example, if we had reason to believe
that our recorded goodwill had become impaired due to decreases in the fair
market value of the underlying business, we would have to take a charge to
income for that portion of goodwill that we believe is impaired. Our goodwill
balance at October 31, 2006 was $9.6 million.
21
Property and Equipment. Our accounting policies regarding land, buildings,
equipment and leasehold improvements include judgments regarding the estimated
useful lives of such assets, the estimated residual values to which the assets
are depreciated, and the determination as to what constitutes increasing the
life of existing assets. These judgments and estimates may produce materially
different amounts of depreciation and amortization expense that would be
reported if different assumptions were used. These judgments may also impact the
need to recognize an impairment charge on the carrying amount of these assets as
the cash flows associated with the assets are realized. In addition, the actual
life of the asset and residual value may be different from the estimates used to
prepare financial statements in prior periods.
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the product is delivered to the customer. Such revenues
are recognized net of any adjustments for sales incentive offers such as
discounts, coupons, rebates, or other free products or services and discounts of
promotional credit sales that will extend beyond one year. We sell service
maintenance agreements and credit insurance contracts on behalf of unrelated
third parties. For contracts where the third parties are the obligors on the
contract, commissions are recognized in revenues at the time of sale, and in the
case of retrospective commissions, at the time that they are earned. Where we
sell service maintenance renewal agreements in which we are deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
service maintenance agreements are renewal contracts that provide our customers
protection against product repair costs arising after the expiration of the
manufacturer's warranty and the third party obligor contracts. These agreements
typically range from 12 months to 36 months. These agreements are separate units
of accounting under Emerging Issues Task Force No. 00-21, Revenue Arrangements
with Multiple Deliverables. The amount of service maintenance agreement revenue
deferred at October 31, 2006 and January 31, 2006 was $3.9 million and $3.6
million, respectively, and is included in Deferred revenues and allowances in
the accompanying balance sheets.
Vendor Allowances. We receive funds from vendors for price protection,
product rebates, marketing and training and promotion programs which are
recorded on the accrual basis as a reduction to the related product cost or
advertising expense according to the nature of the program. We accrue rebates
based on the satisfaction of terms of the program and sales of qualifying
products even though funds may not be received until the end of a quarter or
year. If the programs are related to product purchases, the allowances, credits
or payments are recorded as a reduction of product cost; if the programs are
related to promotion or marketing of the product, the allowances, credits, or
payments are recorded as a reduction of advertising expense in the period in
which the expense is incurred.
Accounting for Stock-Based Compensation. We adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, effective February 1, 2006,
using the modified retrospective application transition. This statement
establishes standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services, focusing primarily on
accounting for transactions in which an entity obtains an employee's services.
The statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, based on the grant-date
fair value of the award, and record that cost over the period during which the
employee is required to provide service in exchange for the award. As a result
of the adoption of this pronouncement, we retrospectively adjusted prior
financial statements to record compensation expense, as previously reported in
the notes to our financial statements, for all awards valued using fair-value
based methods. The impact of the adoption of this pronouncement is discussed in
more detail in Note 1 to our financial statements.
Accounting for Leases. The accounting for leases is governed primarily by
SFAS No. 13, Accounting for Leases. As required by the standard, we analyze each
lease, at its inception, to determine whether it should be accounted for as an
operating lease or a capital lease. Additionally, monthly lease expense for each
operating lease is calculated as the average of all payments required under the
minimum lease term, including rent escalations. Generally, the minimum lease
term begins with the date we take possession of the property and ends on the
last day of the minimum lease term, and includes all rent holidays, but excludes
renewal terms that are at our option. Any tenant improvement allowances received
are deferred and amortized into income as a reduction of lease expense on a
straight line basis over the minimum lease term. The amortization of leasehold
improvements is computed on a straight line basis over the shorter of the
remaining lease term or the estimated useful life of the improvements. Effective
22
February 1, 2006 we implemented the requirements of FASB Staff Position No.
13-1, which addresses the accounting for rental costs associated with operating
leases that are incurred during a construction period. As required by that
guidance, we recognize as rental expense all rental costs associated with ground
or building operating leases that are incurred during a construction period.
That rental expense is included in income from continuing operations and is not
capitalized.
Results of Operations
The following table sets forth certain statement of operations information
as a percentage of total revenues for the periods indicated:
Three Months Nine Months
Ended Ended
October 31, October 31,
-------------- --------------
2005 2006 2005 2006
------ ------ ------ ------
Revenues:
Product sales......................................................................... 81.4 % 80.4 % 80.5 % 81.9 %
Service maintenance agreement commissions (net)....................................... 4.3 3.9 4.5 4.0
Service revenues...................................................................... 3.0 3.4 3.0 3.1
------ ------ ------ ------
Total net sales..................................................................... 88.7 87.7 88.0 89.0
Finance charges and other............................................................. 11.3 12.3 12.0 11.0
------ ------ ------ ------
Total revenues.................................................................100.0 100.0 100.0 100.0
Costs and expenses:
Cost of goods sold, including warehousing
and occupancy cost................................................................... 63.7 63.7 63.5 65.0
Cost of parts sold, including warehousing
and occupancy cost................................................................... 0.8 1.0 0.8 0.8
Selling, general and administrative expense........................................... 27.3 28.7 26.6 26.4
Provision for bad debts............................................................... 0.2 0.3 0.1 0.2
------ ------ ------ ------
Total costs and expenses....................................................... 92.0 93.7 91.0 92.4
------ ------ ------ ------
Operating income...................................................................... 8.0 6.3 9.0 7.6
Interest (income) expense, net........................................................ 0.0 (0.1) 0.1 (0.1)
Other (income) expense, net........................................................... 0.0 0.0 0.0 (0.1)
------ ------ ------ ------
Income before income taxes............................................................ 8.0 6.4 8.9 7.8
Provision for income taxes............................................................ 2.8 2.3 3.1 2.8
------ ------ ------ ------
Net income............................................................................ 5.2 % 4.1 % 5.8 % 5.0 %
====== ====== ====== ======
The table above identifies several changes in our operations for the current
quarter, including changes in revenue and expense categories expressed as a
percentage of revenues. These changes are discussed in the Executive Overview,
and in more detail in the discussion of operating results beginning in the
analysis below.
Same store sales growth is calculated by comparing the reported sales by
store for all stores that were open throughout a period to reported sales by
store for all stores that were open throughout the prior year period. Sales from
closed stores have been removed from each period. Sales from relocated stores
have been included in each period because each store was relocated within the
same general geographic market. Sales from expanded stores have been included in
each period.
The presentation of gross margins may not be comparable to other retailers
since we include the cost of our in-home delivery service as part of Selling,
general and administrative expense. Similarly, we include the cost related to
operating our purchasing function in Selling, general and administrative
expense. It is our understanding that other retailers may include such costs as
part of their cost of goods sold.
23
Three Months Ended October 31, 2006 Compared to Three Months Ended October 31,
2005
Revenues. Total revenues increased by $1.1 million, or 0.6%, from $172.6
million for the three months ended October 31, 2005 to $173.7 million for the
three months ended October 31, 2006. The increase was attributable to an
increase of $1.8 million, or 9.1%, in finance charges and other revenue, offset
by decreases in net sales of $0.7 million, or 0.4%.
The $0.7 million decrease in net sales was made up of the following:
o a $5.4 million same store sales decrease of 3.7%, which was mitigated
by our ability to retain a large portion of the 23.3% same store sales
growth experienced in the prior year period as a result of Hurricanes
Rita and Katrina. The same store sales increase in the markets not
impacted by Hurricanes Rita and Katrina was 0.1%. These other markets
accounted for 79.7% of same store Product sales and Service
maintenance agreement commissions during the three months ended
October 31, 2006. Service maintenance agreement (SMA) sales have
declined due to lower sales penetration;
o a $4.9 million increase generated by six retail locations that were
not open for three consecutive months in each period;
o a $1.0 million decrease resulted from an increase in discounts on
extended-term promotional credit sales (those with terms longer than
12 months); and
o a $0.8 million increase resulted from an increase in service revenues.
The components of the $0.7 million decrease in net sales, were a $0.8
million decrease in Product sales and a $0.7 million decrease in service
maintenance agreement commissions offset by a net increase in service revenues
of $0.8 million. The $0.8 million decrease in product sales resulted from the
following:
o approximately $7.7 million decrease attributable to decreases in unit
sales, due to decreased appliances (primarily refrigeration), lawn and
garden, and track sales, partially offset by increases in electronics,
furniture and mattresses sales, and
o approximately $6.9 million increase attributable to increases in unit
price points. The price point impact was driven by a shift to
higher-priced high-efficiency laundry items, new higher priced
refrigeration and increased delivery fees, partially offset by a
slight decline in our mattresses and room air categories and the $1.0
million increase in discounts on extended-term promotional credit
sales.
24
The following table presents the makeup of net sales by product category in
each quarter, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Three Months Ended October 31,
------------------------------------
2005 2006
----------------- ----------------- Percent
Category Amount Percent Amount Percent Increase
--------- ------- --------- ------- --------
Major home appliances................................................$ 55,803 36.4 % $ 50,152 32.9 % (10.1)% (1)
Consumer electronics................................................. 41,629 27.2 46,748 30.7 12.3 (2)
Track................................................................ 21,218 13.9 18,358 12.0 (13.5) (3)
Delivery............................................................. 2,561 1.7 2,729 1.8 6.6 (4)
Lawn and garden...................................................... 4,817 3.1 4,002 2.6 (16.9) (5)
Mattresses........................................................... 3,304 2.2 3,606 2.4 9.1 (6)
Furniture............................................................ 3,731 2.4 7,927 5.2 112.5 (7)
Other................................................................ 7,342 4.8 6,072 4.0 (17.3) (8)
--------- ------- --------- -------
Total product sales............................................. 140,405 91.7 139,594 91.6 (0.6)
Service maintenance agreement........................................
commissions.......................................................... 7,506 4.9 6,845 4.5 (8.8) (9)
Service revenues..................................................... 5,157 3.4 5,951 3.9 15.4 (10)
--------- ------- --------- -------
Total net sales.................................................$153,068 100.0 % $152,390 100.0 % (0.4)%
========= ======= ========= =======
- ----------------------------------
(1) This decrease is due to higher than normal demand for these products in the
prior year due to consumers replacing appliances after Hurricanes Katrina
and Rita.
(2) This increase is due to increased unit volume in the area of flat-panel and
micro-display televisions, which also have higher price points than
traditional tube and projection televisions.
(3) The decline in track sales (consisting largely of computers, computer
peripherals, portable electronics and small appliances) is due primarily to
reduced sales of computers and portable CRT televisions.
(4) This increase is due primarily to an increase in the fees charged for
deliveries.
(5) A delayed selling season due to dry weather positively impacted this
category in the prior year.
(6) This increase is due to increased emphasis on and improved merchandising
and execution at our stores in the sale of this category.
(7) This increase is due to the increased emphasis on the sales of furniture,
primarily sofas, recliners and entertainment centers, and new product lines
added to this category.
(8) The decline in this category, which includes air conditioning, is due
primarily to lower price points as the demand for smaller units increased.
(9) This decrease is due to the decrease in product sales and reduced sales
penetration as we introduced products (furniture and mattresses) that are
not SMA-eligible.
(10) This increase is driven by increased units in operation as we continue to
grow product sales and an increase in the prices of parts used to repair
higher-priced technology (flat-panel and micro-display televisions, etc.).
Revenue from Finance charges and other increased by approximately $1.8
million, or 9.1%, from $19.5 million for the three months ended October 31, 2005
to $21.3 million for the three months ended October 31, 2006. It increased while
product sales declined, due primarily to an increase in securitization income of
$1.6 million, or 10.8% and an increase in insurance commissions of $0.4 million,
partially offset by a $0.2 million decrease in service maintenance agreement
retrospective commissions. The securitization income comparison was impacted by
a $0.9 million impairment charge recorded in the quarter ended October 31, 2005.
The impairment charge reduced the value of our interests in securitized assets
for anticipated higher credit losses due to the impact of Hurricane Rita on our
credit operations and increased bankruptcy filings due to the new bankruptcy
laws that took effect in October 2005. During the three months ended July 31,
2006, due to the expectation of continued higher losses over the following six
months, we recorded an impairment charge of $1.5 million, reducing the value of
our interest in securitized assets. The 69.2% increase in net credit losses
experienced during the quarter ended October 31, 2006, was in-line with our
expectations at the time we recorded the impairment charge. This impairment
charge was based on an estimated charge-off rate of approximately 3.6% over the
six month period ending January 31, 2007. The charge-off rate used in the
securitized asset valuation is expected to return to the level of the historical
charge-off rate assumption of 3.0% at the beginning of our next fiscal year.
Additionally, securitization income has been negatively impacted by increased
interest cost on the borrowings of the QSPE, due to rising interest rates, and
slower growth in the credit portfolio, which impacts the interest income earned
by the QSPE.
25
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $0.6 million, or 0.5%, from $110.0 million for the three
months ended October 31, 2005 to $110.6 million for the three months ended
October 31, 2006. This increase was higher than the 0.6% decrease in Product
sales during the three months ended October 31, 2006. Cost of products sold
increased to 79.2% of Product sales in the quarter ended October 31, 2006, as
compared to 78.4% in the quarter ended October 31, 2005. The increase in Cost of
goods sold as a percentage of Product sales was primarily as a result of higher
product and warehousing costs, which grew faster than sales.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $0.5 million, or 37.5%, for the three months ended
October 31, 2006 as compared to the three months ended October 31, 2005, due to
a 41.7% increase in parts sales.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $2.5 million, or 5.4%, from $47.2 million
for the three months ended October 31, 2005 to $49.7 million for the three
months ended October 31, 2006. The increase in expense resulted primarily from
increased occupancy cost, property taxes, and professional fees related to the
financial restatement. The prior year period included approximately $0.8 million
of expenses incurred due to Hurricane Rita. We adopted SFAS No. 123R,
Share-Based Payment, effective February 1, 2006. The adoption resulted in
expenses totaling $0.4 million being recorded to SG&A during the quarter ended
October 31, 2006 as compared to $0.2 million being recorded in the quarter ended
October 31, 2005.
Provision for Bad Debts. The provision for bad debts on non-credit portfolio
receivables and credit portfolio receivables retained by the Company and not
transferred to the QSPE increased by $0.2 million, during the three months ended
October 31, 2006, as compared to the three months ended October 31, 2005,
primarily as a result of provision adjustments due to increased credit losses.
See Note 3 to the financial statements for information regarding the performance
of the credit portfolio.
Interest (Income) Expense, net. Net interest (income) expense improved by
$215,000, from net interest expense of $74,000 for the three months ended
October 31, 2005 to net interest income of $141,000 for the three months ended
October 31, 2006. The net improvement in interest (income) expense was primarily
attributable to increased interest income from invested funds of approximately
$132,000. The remaining change of $83,000 resulted from lower average
outstanding debt balances and capitalization of interest expense on construction
in progress.
Other (Income) Expense, net. Other (income) expense, net declined by $8,000,
from net income of $27,000 for the three months ended October 31, 2005, to net
income of $19,000 for the three months ended October 31, 2006.
Provision for Income Taxes. The provision for income taxes decreased by $0.8
million, or 17.2%, from $4.8 million for the three months ended October 31, 2005
to $4.0 million for the three months ended October 31, 2006. The decrease in the
Provision for income taxes is attributable to lower Income before income taxes
and adjustments to reconcile final tax returns to previous estimates, partially
offset by the impact of the new Texas margin tax. Our effective tax rate
increased to 35.9% from 35.4% due to the impact of the Texas margin tax.
Net Income. As a result of the above factors, Net income decreased $1.7
million, or 19.2%, from $8.9 million for the three months ended October 31, 2005
to $7.2 million for the three months ended October 31, 2006.
Nine Months Ended October 31, 2006 Compared to Nine Months Ended October 31,
2005
Revenues. Total revenues increased by $53.0 million, or 10.7%, from $495.1
million for the nine months ended October 31, 2005 to $548.1 million for the
nine months ended October 31, 2006. The increase was attributable to increases
in net sales of $51.9 million, or 11.9%, and a increase of $1.1 million, or
1.9%, in finance charges and other revenue.
26
The $51.9 million increase in net sales was made up of the following:
o a $26.7 million same store sales increase of 6.5%. The same store
sales increase in the markets not impacted by Hurricanes Rita and
Katrina was 5.4%. These other markets accounted for 78.7% of same
store Product sales and Service maintenance agreement commissions
during the nine months ended October 31, 2006. Additionally, as a
result of changes in the commission structure on our third-party
service maintenance agreement (SMA) contracts, beginning July 2005, we
began realizing the benefit of increased front-end commissions on SMA
sales, which increased net sales by approximately $0.9 million,
(offsetting this increase is a decrease in retrospective commissions
which is reflected in Finance charges and other);
o a $24.1 million increase generated by nine retail locations that were
not open for nine consecutive months in each period;
o a $1.0 million decrease resulted from an increase in discounts on
extended-term promotional credit sales (those with terms longer than
12 months); and
o a $2.1 million increase resulted from an increase in service revenues.
The components of the $51.9 million increase in net sales were a $50.2
million increase in product sales and a $1.7 million net increase in service
maintenance agreement commissions and service revenues. The $50.2 million
increase in product sales resulted from the following:
o approximately $26.4 million was attributable to increases in unit
sales, due to increased appliances, consumer electronics (especially
plasma and LCD televisions), and furniture sales, partially offset by
a decline in track sales, and
o approximately $23.8 million was attributable to increases in unit
price points. The price point impact was driven by a shift to
higher-priced track items and increased delivery fees, as well as
consumers selecting higher priced appliance products, including
high-efficiency washers and dryers and stainless kitchen appliances,
partially offset by a decline in electronics as prices for new
technology erode and the $1.0 million increase in discounts on
extended-term promotional credit sales.
27
The following table presents the makeup of net sales by product category for
each period presented, including service maintenance agreement commissions and
service revenues, expressed both in dollar amounts and as a percent of total net
sales. Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Nine Months Ended October 31,
------------------------------------
2005 2006
----------------- ----------------- Percent
Category Amount Percent Amount Percent Increase
--------- ------- --------- ------- --------
Major home appliances.................................................$148,983 34.2 % $165,445 33.9 % 11.0 % (1)
Consumer electronics.................................................. 125,011 28.7 146,799 30.1 17.4 (1)
Track................................................................. 65,183 15.0 61,820 12.7 (5.2) (2)
Delivery.............................................................. 6,960 1.6 8,488 1.8 22.0 (3)
Lawn and garden....................................................... 16,042 3.7 15,695 3.2 (2.2) (4)
Mattresses............................................................ 9,306 2.1 13,610 2.8 46.2 (5)
Furniture............................................................. 10,500 2.4 21,577 4.4 105.5 (6)
Other................................................................. 16,562 3.8 15,316 3.1 (7.5) (7)
--------- ------- --------- ------- --------
Total product sales.............................................. 398,547 91.5 448,750 92.0 12.6
Service maintenance agreement.........................................
commissions........................................................... 22,238 5.1 21,875 4.5 (1.6) (8)
Service revenues...................................................... 15,066 3.4 17,107 3.5 13.5 (9)
--------- ------- --------- ------- --------
Total net sales..................................................$435,851 100.0 % $487,732 100.0 % 11.9 %
========= ======= ========= ======= ========
- ----------------------------------
(1) These increases are consistent with overall increase in product sales and
improved unit prices.
(2) The decline in track sales (consisting largely of computers, computer
peripherals, portable electronics and small appliances) is due primarily to
reduced sales of computers and portable CRT televisions.
(3) This increase is due primarily to the increase in total product sales, as
well as an increase in the fees charged for deliveries.
(4) A slower late-summer selling season due to dry weather impacted this
category.
(5) This increase is due to increased emphasis on and improved merchandising
and execution at our stores in the sale of this category.
(6) This increase is due to the increased emphasis on the sales of furniture,
primarily sofas, recliners and entertainment centers, and new product lines
added to this category.
(7) The decline in this category, which includes air conditioning, is due
primarily to lower price points as the demand for smaller units increased.
(8) This decrease is due to reduced sales penetration as we introduced products
(furniture and mattresses) that are not SMA-eligible.
(9) This increase is driven by increased units in operation as we continue to
grow product sales and an increase in the prices of parts used to repair
higher-priced technology (flat-panel and micro-display televisions, etc.).
Revenue from Finance charges and other increased by approximately $1.2
million, or 1.9%, from $59.2 million for the nine months ended October 31, 2005,
to $60.4 million for the nine months ended October 31, 2006. The increase was
due to a $1.8 million increase in securitization income and a $1.1 million
increase in insurance commissions, partially offset by a $1.7 million decrease
in service maintenance agreement commissions and other. Securitization income
was impacted by a 69.7% increase in net credit losses in the nine months ended
October 31, 2006 as compared to the nine months ended October 31, 2005. The
increased net credit losses were due to higher than expected losses primarily as
a result of the disruption to our credit operations caused by Hurricane Rita.
During the quarter ended July 31, 2006, due to the expectation of continued
higher losses over the following six months, we recorded an impairment charge of
$1.5 million, reducing the value of our interest in securitized assets. This
impairment charge is based on an estimated charge-off rate of approximately 3.6%
over the six month period. The charge-off rate used in the securitized asset
valuation is expected to return to the level of the historical charge-off rate
assumption of 3.0% at the beginning of our next fiscal year. Securitization
income for the nine months ended October 31, 2005 was impacted by a $0.9 million
impairment charge, which reduced the value of our interests in securitized
assets for anticipated higher credit losses due to the impact of Hurricane Rita
on our credit operations and an increase in bankruptcy filings due to the new
bankruptcy law that took effect in October 2005. Additionally, securitization
income has been negatively impacted by increased interest cost on the borrowings
of the QSPE, due to rising interest rates, and slower growth in the credit
portfolio, which impacts the interest income earned by the QSPE.
28
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $41.6 million, or 13.2%, from $314.5 million for the nine
months ended October 31, 2005 to $356.1 million for the nine months ended
October 31, 2006. This increase was higher than the 12.6% increase in Product
sales during the nine months ended October 31, 2006. Cost of products sold
increased to 79.4% of Product sales in the nine months ended October 31, 2006,
as compared to 78.9% in the nine months ended October 31, 2005. The increase in
Cost of goods sold as a percentage of Product sales was primarily as a result of
higher product and warehousing costs, which grew faster than sales.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $1.0 million, or 26.2%, for the nine months ended
October 31, 2006 as compared to the nine months ended October 31, 2005, due to a
36.6% increase in parts sales.
Selling, General and Administrative Expense. While Selling, general and
administrative expense increased by $13.0 million, or 9.8%, from $131.8 million
for the nine months ended October 31, 2005 to $144.8 million for the nine months
ended October 31, 2006, it decreased as a percentage of total revenue from 26.6%
to 26.4%. The decrease in expense as a percentage of total revenues resulted
primarily from reduced net advertising and insurance expenses as a percent of
revenues, partially offset by increased property tax expense. We adopted SFAS
No. 123R, Share-Based Payment, effective February 1, 2006. The adoption resulted
in expenses totaling $1.2 million being recorded to SG&A during the nine months
ended October 31, 2006 as compared to $0.8 million being recorded in the nine
months ended October 31, 2005.
Provision for Bad Debts. The provision for bad debts on non-credit portfolio
receivables and credit portfolio receivables retained by the Company and not
transferred to the QSPE increased by $0.3 million, during the nine months ended
October 31, 2006, as compared to the nine months ended October 31, 2005,
primarily as a result of provision adjustments due to increased credit losses.
Interest (Income) Expense, net. Net interest (income) expense improved by
$1.0 million, from net interest expense of $0.5 million for the nine months
ended October 31, 2005 to net interest income of $0.5 million for the nine
months ended October 31, 2006. The net improvement in interest (income) expense
was primarily attributable to:
o the expiration of $20.0 million of our interest rate hedges and the
discontinuation of hedge accounting resulted in a net decrease in
interest expense of approximately $244,000; and
o increased interest income from invested funds of approximately
$510,000.
The remaining change of $246,000 resulted from lower average outstanding debt
balances and capitalization of interest expense on construction in progress.
Other (Income) Expense, net. Other (income) expense, net improved by
$780,000, from net expense of $7,000 for the nine months ended October 31, 2005,
to net income of $773,000 for the nine months ended October 31, 2006. This
change was primarily the result of a $0.7 million gain recognized on the sale of
a building and the related land.
Provision for Income Taxes. The provision for income taxes decreased by $0.3
million, or 2.4%, from $15.4 million for the nine months ended October 31, 2005
to $15.1 million for the nine months ended October 31, 2006. The decrease in the
Provision for income taxes is attributable to lower Income before income taxes,
state tax refunds received during the period and adjustments to reconcile final
tax returns to previous estimates, partially offset by additional tax expense
from the new Texas margin tax. The impact of the new Texas margin tax was
partially offset by the one-time benefit of deferred tax assets recorded as a
result of the new tax. Our effective rate for both periods was 35.3% as the
refunds and return adjustments were offset by the impact of the Texas margin
tax.
29
Net Income. As a result of the above factors, Net income decreased $0.7
million, or 2.4%, from $28.3 million for the nine months ended October 31, 2005
to $27.6 million for the nine months ended October 31, 2006.
Liquidity and Capital Resources
Current Activities
Historically we have financed our operations through a combination of cash flow
generated from operations, and external borrowings, including primarily bank
debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables to our asset-backed securitization facilities.
As of October 31, 2006, we had approximately $39.4 million in excess cash, the
majority of which was generated through the operations of the Company. In
addition to the excess cash, we had $48.1 million under our revolving line of
credit, net of standby letters of credit issued, and $8.0 million under our
unsecured bank line of credit available to us for general corporate purposes,
$31.0 million under extended vendor terms for purchases of inventory and $221.0
million in commitments available to our QSPE for the transfer of receivables.
In its regularly scheduled meeting on August 24, 2006, our Board of
Directors authorized the repurchase of up to $50 million of our common stock,
dependent on market conditions and the price of the stock. We expect to fund
these purchases with a combination of excess cash, cash flow from operations,
borrowings under our revolving credit facilities and proceeds from the sale of
owned properties. Through October 31, 2006, we had spent $0.7 million under this
authorization to acquire 33,800 shares of our common stock.
Effective August 28, 2006, we entered into an amendment to our $50 million
revolving credit facility with the existing lenders. The amendment increases our
restricted payment capacity, which includes payments for repurchases of capital
stock, from $25 million to $50 million. There were no other modifications of the
Credit Agreement.
A summary of the significant financial covenants that govern our bank credit
facility compared to our actual compliance status at October 31, 2006, is
presented below:
Required
Minimum/
Actual Maximum
--------------- ----------------
Debt service coverage ratio must exceed required minimum 4.24 to 1.00 2.00 to 1.00
Total adjusted leverage ratio must be lower than required maximum 1.56 to 1.00 3.00 to 1.00
Consolidated net worth must exceed required minimum $275.4 million $168.1 million
Charge-off ratio must be lower than required maximum 0.03 to 1.00 0.06 to 1.00
Extension ratio must be lower than required maximum 0.03 to 1.00 0.05 to 1.00
Thirty-day delinquency ratio must be lower than required maximum 0.09 to 1.00 0.13 to 1.00
Note: All terms in the above table are defined by the bank credit facility
and may or may not agree directly to the financial statement captions in
this document.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our bank
credit facility and unsecured credit line, extended vendor terms for purchases
of inventory, acquisition of inventory under consignment arrangements and access
to the unfunded portion of the variable funding portion of the QSPE's
asset-backed securitization program will be sufficient to fund our operations,
store expansion and updating activities, stock repurchases, if any, and capital
programs through at least January 31, 2007. However, there are several factors
that could decrease cash provided by operating activities, including:
30
o reduced demand for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional
activities;
o changes in inventory requirements based on longer delivery times of
the manufacturers or other requirements which would negatively impact
our delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under
our current QSPE's asset-backed securitization program as a result of
changes in performance or types of receivables transferred
(promotional versus non-promotional and primary versus secondary
portfolio);
o inability to expand our capacity for financing our receivables
portfolio under new or replacement QSPE asset-backed securitization
programs or a requirement that we retain a higher percentage of the
credit portfolio under such new programs;
o increases in program costs (interest and administrative fees relative
to our receivables portfolio associated with the funding of our
receivables); and
o increases in personnel costs.
During the nine months ended October 31, 2006, net cash provided by
operating activities decreased $40.7 million from $51.8 million provided in the
2005 period to $11.1 million used in the 2006 period. The net decrease in cash
provided from operations resulted primarily from the timing of payments of
accounts payable and federal income and employment tax payments. We had obtained
extended payment terms from several of our vendors due to the impact of
hurricanes in the prior fiscal year. Federal income and employment tax payment
deadlines after Hurricane Rita were also deferred until February 28, 2006. Those
extended terms ended and deadlines were reached in the nine months ended October
31, 2006 and we were required to satisfy those obligations, which negatively
impacted our operating cash flows by approximately $18.9 million. Also impacting
accounts payable timing were reduced receipts of product during the month of
October 2006, resulting in payment due dates on much of the on-hand inventory at
October 31, 2006, being met and satisfied. Additionally, during the nine months
ended October 31, 2006, cash flow was benefited by the financing transaction
completed by the QSPE which provided additional cash, which reduced our retained
interest.
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, or 12 months; in fiscal year 2005 we
increased these terms to include 18, 24 and 36 months. The various "same as
cash" promotional accounts and deferred interest program accounts are eligible
for securitization up to the limits provided for in our securitization
agreements. This limit is currently 30.0% of eligible securitized receivables.
If we exceed this 30.0% limit, we would be required to use some of our other
capital resources to carry the unfunded balances of the receivables for the
promotional period. The percentage of eligible securitized receivables
represented by promotional receivables was 18.2% as of October 31, 2006. At
October 31, 2005, this percentage, computed on a consistent basis with the
October 31, 2006 calculation, would have been 20.8%. The weighted average
promotional period was 12.4 months and 11.7 months for promotional receivables
outstanding as of October 31, 2005 and 2006, respectively. The weighted average
remaining term on those same promotional receivables was 7.7 months as of both
October 31, 2005 and 2006. While overall these promotional receivables have a
much shorter weighted average term than non-promotional receivables, we receive
less income on these receivables, resulting in a reduction of the net interest
margin used in the calculation of the gain on the sale of receivables.
Net cash used by investing activities decreased by $0.7 million, from $14.1
million for the nine months ended October 31, 2005 to $13.4 million for the nine
months ended October 31, 2006. The decrease in cash used in investing activities
resulted primarily from the sales of property and equipment, partially offset by
increased purchases of property and equipment. The cash expended for property
and equipment was used primarily for construction of new stores and the
reformatting of existing stores to better support our current product mix. Based
on current plans, we expect to increase expenditures for property and equipment
in fiscal 2007 as we open additional stores, including ownership and development
of shopping centers that will feature our store, as compared to fiscal 2006.
Additionally, we intend to sell and lease-back certain of the properties we
currently own, in order to provide cash flow for funding our growth and stock
repurchase plans.
31
Net cash from financing activities increased by $9.9 million from $8.6
million used during the nine months ended October 31, 2005 to $1.3 million
provided during the nine months ended October 31, 2006. The increase in cash
provided by financing activities resulted primarily from decreases in payments
on various debt instruments of $10.5 million. Also benefiting cash flow from
financing activities was increased proceeds from stock issued under employee
benefit plans. During the nine months ended October 31, 2006, we used $0.7
million to purchase 33,800 shares of our common stock.
Off-Balance Sheet Financing Arrangements
Since we extend credit in connection with a large portion of our retail,
service maintenance and credit insurance sales, we have created a qualified
special purpose entity, which we refer to as the QSPE or the issuer, to purchase
customer receivables from us and to issue asset-backed and variable funding
notes to third parties to obtain cash for these purchases. We transfer
receivables, consisting of retail installment contracts and revolving accounts
extended to our customers, to the issuer in exchange for cash and subordinated,
unsecured promissory notes. To finance its acquisition of these receivables, the
issuer has issued the notes and bonds described below to third parties. The
unsecured promissory notes issued to us are subordinate to these third party
notes and bonds.
In August 2006, the issuer entered into an amendment of the Series A note to
increase the total available funding to $300 million from $250 million, divided
into a $100 million 364-day tranche, and a $200 million tranche that expires in
August 2011. The Company's QSPE closed and consummated an offering, pursuant to
Rule 144A and Regulation S under the Securities Act of 1933, of $150 million of
asset-backed fixed-rate notes (Series 2006A bonds), the net proceeds of which
were used primarily to provide the QSPE with additional capacity, fund a
required $6.0 million cash reserve account and to reduce the amount outstanding
under the existing Series A variable funding note. The proceeds of the new
issuance provide the issuer additional capacity for the purchase of our
receivables and to make the $10 million monthly principal payments due on the
Series B bonds beginning in October 2006.
At October 31, 2006, the issuer had issued three series of notes and bonds:
a Series A variable funding note with a total availability of $300 million
purchased by Three Pillars Funding LLC, three classes of Series B bonds with an
aggregate amount outstanding of $190 million, of which $8.0 million was required
to be placed in a restricted cash account for the benefit of the bondholders,
and three classes of Series 2006A bonds with an aggregate amount outstanding of
$150 million, of which $6.0 million was required to be placed in a restricted
cash account for the benefit of the bondholders. If the net portfolio yield, as
defined by agreements, falls below 5.0%, then the issuer may be required to fund
additions to the cash reserves in the restricted cash accounts. At October 31,
2006, the net portfolio yield was in compliance with this requirement. Private
institutional investors, primarily insurance companies, purchased the Series B
bonds at a weighted fixed rate of 5.25% and Series 2006A bonds at a weighted
fixed rate of 5.75%.
In August 2006, certain of the existing transaction documents related to the
activities of the QSPE were amended. The following is a summary of the key
amendments:
o increase our consolidated net worth requirement from $30 million to
$150 million;
o add certain return mail procedures to the internal accounting control
procedures and processing functions report delivered by independent
accountants pursuant to the servicing agreement;
o change the definition of "Eligible Installment Contract Receivable"
under the base indenture to allow up to 27.5% of all receivables by
outstanding principal balance to consist of installment contract
receivables of the secondary portfolio (formerly 25% of such
receivables were permitted);
o change the definition of "Eligible Installment Contract Receivable"
and "Eligible Revolving Charge Receivable" under the base indenture to
allow up to 5.0% of the amount or number of installment contract and
revolving charge receivables, whichever occurs first, to have a
maximum repayment period and cash option period exceeding thirty-six
months but no more than forty-eight months (secondary portfolio
maximum term remains thirty-six months);
32
o change certain definitions under the series supplements for the Series
A notes and the Series B bonds, including changes to the series
supplements for the Series A notes that have the effect of increasing
the current level of funding available to the issuer; and
o provide for the issuer's issuance of additional asset-backed notes and
obtain additional commitments under the Series A notes upon the
occurrence of certain events related to the expiration of any
commitment under the Series A notes or the amount of the commitment
used under the Series A notes.
We continue to service the transferred accounts for the QSPE, and we receive
a monthly servicing fee, so long as we act as servicer, in an amount equal to
..0025% multiplied by the average aggregate principal amount of receivables
serviced plus the amount of average aggregate defaulted receivables. The issuer
records revenues equal to the interest charged to the customer on the
receivables less losses, the cost of funds, the program administration fees paid
in connection with either Three Pillars Funding LLC, the Series B or Series
2006A bond holders, the servicing fee and additional earnings to the extent they
are available.
After August, 2006 amendment, the Series A variable funding note now permits
the issuer to borrow funds up to $300 million to purchase receivables from us,
thereby functioning as a "basket" to accumulate receivables. As issuer
borrowings under the Series A variable funding note approach $300 million, the
issuer is required to request an increase in the Series A amount or issue a new
series of bonds and use the proceeds to pay down the then outstanding balance of
the Series A variable funding note, so that the basket will once again become
available to accumulate new receivables or meet other obligations required under
the transaction documents. As of October 31, 2006, borrowings under the Series A
variable funding note were $79.0 million.
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the Series A note,
Series B bonds and Series 2006A bonds due to its inability to collect the
transferred customer accounts, the issuer could not pay the subordinated notes
it has issued to us in partial payment for transferred customer accounts, the
Series B and Series 2006A bond holders could claim the balance in its $14.0
million restricted cash account. We are also contingently liable under a $20.0
million letter of credit that secures our performance of our obligations or
services under the servicing agreement as it relates to the transferred assets
that are part of the asset-backed securitization facility.
The issuer is subject to certain affirmative and negative covenants
contained in the transaction documents governing the Series A variable funding
note and the Series B and Series 2006A bonds, including covenants that restrict,
subject to specified exceptions: the incurrence of non-permitted indebtedness
and other obligations and the granting of additional liens; mergers,
acquisitions, investments and disposition of assets; and the use of proceeds of
the program. The issuer also makes representations and warranties relating to
compliance with certain laws, payment of taxes, maintenance of its separate
legal entity, preservation of its existence, protection of collateral and
financial reporting. In addition, the program requires the issuer to maintain a
minimum net worth.
33
A summary of the significant financial covenants that govern the Series A
variable funding note compared to actual compliance status at October 31, 2006,
is presented below:
Required
Minimum/
As reported Maximum
--------------- -------------
Issuer interest must exceed required minimum $46.4 million $43.7 million
Gross loss rate must be lower than required maximum 3.8% 10.0%
Net portfolio yield must exceed required minimum 7.9% 2.0%
Payment rate must exceed required minimum 6.8% 3.0%
Note: All terms in the above table are defined by the asset backed credit
facility and may or may not agree directly to the financial statement
captions in this document.
Events of default under the Series A variable funding note and the Series B
and Series 2006A bonds, subject to grace periods and notice provisions in some
circumstances, include, among others: failure of the issuer to pay principal,
interest or fees; violation by the issuer of any of its covenants or agreements;
inaccuracy of any representation or warranty made by the issuer; certain
servicer defaults; failure of the trustee to have a valid and perfected first
priority security interest in the collateral; default under or acceleration of
certain other indebtedness; bankruptcy and insolvency events; failure to
maintain certain loss ratios and portfolio yield; change of control provisions
and certain other events pertaining to us. The issuer's obligations under the
program are secured by the receivables and proceeds.
Securitization Facilities
We finance most of our customer receivables through asset-backed
securitization facilities
----------------------------
Series A Note
$300 million
Credit Rating: P1/A2
Three Pillars Funding LLC
Customer Receivables |-------------> ----------------------------
|
- ----------------------------- -------------------> ----------------------------------------------------------------------------
Retail Qualifying | Series B Bonds
Sales Special Purpose <--------------> $190 million
Entity Entity | Private Institutional
("QSPE") | Investors
| Class A: $114 mm (Aaa)
| Class B: $54.9 mm (A2)
| Class C: $21.1 mm (Baa2)
- ----------------------------- <------------------- ----------------------------------------------------------------------------
|
1. Cash proceeds | ----------------------------
2. Subordinated Securities | Series 2006A Bonds
3. Right to Receive Cash Flows | $150 million
Equal to Interest Rate Spread --------------> Private Institutional
| Investors
| Class A: $90 mm (Aaa)
| Class B: $43.3 mm (A2)
| Class C: $16.7 mm (Baa2)
----------------------------
Both the bank credit facility and the asset-backed securitization program
are significant factors relative to our ongoing liquidity and our ability to
meet the cash needs associated with the growth of our business. Our inability to
use either of these programs because of a failure to comply with their covenants
would adversely affect our continued growth. Funding of current and future
receivables under the QSPE's asset-backed securitization program can be
adversely affected if we exceed certain predetermined levels of re-aged
receivables, size of the secondary portfolio, the amount of promotional
receivables, write-offs, bankruptcies or other ineligible receivable amounts. If
the funding under the QSPE's asset-backed securitization program was reduced or
terminated, we would have to draw down our bank credit facility more quickly
than we have estimated.
34
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates under our bank credit facility (as executed October 31, 2005)
are variable and are determined, at our option, as the base rate, which is the
greater of prime rate or federal funds rate plus 0.50% plus the base rate
margin, which ranges from 0.00% to 0.50%, or LIBOR plus the LIBOR margin, which
ranges from 0.75% to 1.75%. Accordingly, changes in the prime rate, the federal
funds rate or LIBOR, which are affected by changes in interest rates generally,
will affect the interest rate on, and therefore our costs under, our bank credit
facility. We are also exposed to interest rate risk associated with our interest
only strip and the subordinated securities we receive from our sales of
receivables to the QSPE.
We held interest rate swaps and collars with notional amounts totaling $20.0
million which expired on April, 15 2005. The swaps and collars were held for the
purpose of hedging against variable interest rate risk, primarily related to
cash flows from our interest-only strip as well as our variable rate debt. There
have been no material changes in our interest rate risks since January 31, 2006.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of our disclosure controls and
procedures (as defined in 15d-15(e) of the Securities Exchange Act of 1934 (the
"Exchange Act") as of the end of the period covered by this quarterly report.
Based on that evaluation, our management, including our Chief Executive Officer
and our Chief Financial Officer, concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to our Company (including its consolidated subsidiaries) required to be
included in our periodic filings with the Securities and Exchange Commission.
During the preparation of our consolidated financial statements for the
quarter ended July 31, 2006, we identified an issue related to the recording of
securitization income. Based on our discovery and the results of discussions
with our independent accountants and the Audit Committee of the Board of
Directors, it was determined that a review of our accounting under SFAS No. 140
should be completed before the statements for the quarter ended July 31, 2006
were issued. The internal review revealed that we had incorrectly reduced
securitization income and the value of our interests in securitized assets by
the amount of future expected loan losses recorded on the books of the
qualifying special purpose entity that owns the receivables.
As a result of the error discussed above and the resulting restatement,
management has concluded that a material weakness in its internal controls over
financial reporting existed prior to the completion of the consolidated
financial statement for quarter ended July 31, 2006. Specifically, controls were
not operating effectively to ensure that the proper accounting and corresponding
consolidated financial statement presentation of securitization income and the
fair value of interests in securitized assets was consistent with SFAS No. 140.
As of the date of this filing, we believe we have taken the appropriate
action to remediate the material weakness in our internal control over financial
reporting with respect to accounting for securitization transactions, based on
the following actions taken:
o improved education and enhanced accounting analysis and reviews
designed to ensure that all relevant personnel involved in the
securitization accounting understand and account for securitization
transactions in compliance with SFAS No. 140; and
o a review of our internal financial controls with respect to accounting
for securitization transactions to ensure compliance with SFAS No.
140.
While we believe we have taken the steps necessary to remediate this
material weakness relating to our accounting under SFAS No. 140 and related
processes, procedures, and controls, we cannot confirm the effectiveness of our
enhanced internal controls with respect to our accounting under SFAS No. 140
until we and our independent auditors have conducted sufficient tests.
Accordingly, we will continue to monitor the effectiveness of the processes,
procedures, and controls we have implemented and will make any further changes
management determines appropriate.
35
As described above, we made changes in internal controls over financial
reporting during the quarter ended October 31, 2006, that materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to our business from time
to time. Currently, we do not expect the outcome of any of this routine
litigation to have a material affect on our financial condition or results of
operation. However, the results of these proceedings cannot be predicted with
certainty, and changes in facts and circumstances could impact our estimate of
reserves for litigation.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended January 31, 2006, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 25, 2006, we announced that our Board of Directors had authorized
a common stock repurchase program, permitting us to purchase, from time to time,
in the open market and in privately negotiated transactions, up to an aggregate
of $50.0 million of our common stock, dependent on market conditions and the
price of the stock. During the quarter ended October 31, 2006, we effected the
following repurchases of our common stock.
Total # of
Shares Approximate
Purchased as Dollar Value of
Total # of Average Part of Publicly Shares That May
shares Price Paid Announced Yet Be Purchased
Period purchased per share Programs Under the Programs
- --------------------------------- ---------- ---------- ---------------- -------------------
August 1 - August 31, 2006 - $ - - $50,000,000
September 1 - September 30, 2006 33,800 $20.24 33,800 $49,316,778
October 1 - October 31, 2006 - $ - - $49,316,778
---------- ----------------
Total 33,800 33,800
========== ================
Item 5. Other Information
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors since we last provided
disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule
14A.
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are
listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated
herein by reference.
36
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONN'S, INC.
By: /s/ David L. Rogers
-----------------------------------
David L. Rogers
Chief Financial Officer
(Principal Financial Officer and duly
authorized to sign this report on
behalf of the registrant)
Date: November 30, 2006
37
INDEX TO EXHIBITS
Exhibit
Number Description
- ------ -----------
2 Agreement and Plan of Merger dated January 15, 2003, by and among
Conn's, Inc., Conn Appliances, Inc. and Conn's Merger Sub, Inc.
(incorporated herein by reference to Exhibit 2 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on September 23, 2003).
3.1 Certificate of Incorporation of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.1 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
3.1.1 Certificate of Amendment to the Certificate of Incorporation of
Conn's, Inc. dated June 3, 2004 (incorporated herein by reference to
Exhibit 3.1.1 to Conn's, Inc. Form 10-Q for the quarterly period ended
April 30, 2004 (File No. 000-50421) as filed with the Securities and
Exchange Commission on June 7, 2004).
3.2 Bylaws of Conn's, Inc. (incorporated herein by reference to Exhibit
3.2 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
3.2.1 Amendment to the Bylaws of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.2.1 to Conn's Form 10-Q for the quarterly
period ended April 30, 2004 (File No. 000-50421) as filed with the
Securities and Exchange Commission on June 7, 2004).
4.1 Specimen of certificate for shares of Conn's, Inc.'s common stock
(incorporated herein by reference to Exhibit 4.1 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on October 29, 2003).
10.1 Amended and Restated 2003 Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 10.1 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).(t)
10.1.1 Amendment to the Conn's, Inc. Amended and Restated 2003 Incentive
Stock Option Plan (incorporated herein by reference to Exhibit 10.1.1
to Conn's Form 10-Q for the quarterly period ended April 30, 2004
(File No. 000-50421) as filed with the Securities and Exchange
Commission on June 7, 2004).(t)
10.1.2 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.1.2 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Securities and
Exchange Commission on April 5, 2005).(t)
10.2 2003 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.2 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046)as filed with the Securities and
Exchange Commission on September 23, 2003).(t)
10.2.1 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.2.1 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Securities and
Exchange Commission on April 5, 2005).(t)
10.3 Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 10.3 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).(t)
38
10.4 Conn's 401(k) Retirement Savings Plan (incorporated herein by
reference to Exhibit 10.4 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).(t)
10.5 Shopping Center Lease Agreement dated May 3, 2000, by and between
Beaumont Development Group, L.P., f/k/a Fiesta Mart, Inc., as Lessor,
and CAI, L.P., as Lessee, for the property located at 3295 College
Street, Suite A, Beaumont, Texas (incorporated herein by reference to
Exhibit 10.5 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
10.5.1 First Amendment to Shopping Center Lease Agreement dated September
11, 2001, by and among Beaumont Development Group, L.P., f/k/a Fiesta
Mart, Inc., as Lessor, and CAI, L.P., as Lessee, for the property
located at 3295 College Street, Suite A, Beaumont, Texas (incorporated
herein by reference to Exhibit 10.5.1 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).
10.6 Industrial Real Estate Lease dated June 16, 2000, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.6.1 First Renewal of Lease dated November 24, 2004, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6.1 to Conn's,
Inc. Form 10-K for the annual period ended January 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
April 5, 2005).
10.7 Lease Agreement dated December 5, 2000, by and between Prologis
Development Services, Inc., f/k/a The Northwestern Mutual Life
Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.7.1 Lease Amendment No. 1 dated November 2, 2001, by and between
Prologis Development Services, Inc., f/k/a The Northwestern Mutual
Life Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7.1 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.8 Lease Agreement dated June 24, 2005, by and between Cabot Properties,
Inc. as Lessor, and CAI, L.P., as Lessee, for the property located at
1132 Valwood Parkway, Carrollton, Texas (incorporated herein by
reference to Exhibit 99.1 to Conn's, Inc. Current Report on Form 8-K
(file no. 000-50421) as filed with the Securities and Exchange
Commission on June 29, 2005).
10.9 Credit Agreement dated October 31, 2005, by and among Conn Appliances,
Inc. and the Borrowers thereunder, the Lenders party thereto, JPMorgan
Chase Bank, National Association, as Administrative Agent, Bank of
America, N.A., as Syndication Agent, and SunTrust Bank, as
Documentation Agent (incorporated herein by reference to Exhibit 10.9
to Conn's, Inc. Quarterly Report on Form 10-Q (file no. 000-50421) as
filed with the Securities and Exchange Commission on December 1,
2005).
10.9.1 Letter of Credit Agreement dated November 12, 2004 by and between
Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc., the
financial institutions listed on the signature pages thereto, and
JPMorgan Chase Bank, as Administrative Agent (incorporated herein by
reference to Exhibit 99.2 to Conn's Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on November 17, 2004).
39
10.9.2 First Amendment to Credit Agreement dated August 28, 2006 by and
between Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc.,
the financial institutions listed on the signature pages thereto, and
JPMorgan Chase Bank, as Administrative Agent (incorporated herein by
reference to Exhibit 10.1 to Conn's Inc. Current Report on Form 8-K
(File No. 000-50421) as filed with the Securities and Exchange
Commission on August 28, 2006).
10.10 Receivables Purchase Agreement dated September 1, 2002, by and among
Conn Funding II, L.P., as Purchaser, Conn Appliances, Inc. and CAI,
L.P., collectively as Originator and Seller, and Conn Funding I, L.P.,
as Initial Seller (incorporated herein by reference to Exhibit 10.10
to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.10.1 First Amendment to Receivables Purchase Agreement dated August 1,
2006, by and among Conn Funding II, L.P., as Purchaser, Conn
Appliances, Inc. and CAI, L.P., collectively as Originator and Seller
(incorporated herein by reference to Exhibit 10.10.1 to Conn's, Inc.
Form 10-Q for the quarterly period ended July 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
September 15, 2006).
10.11 Base Indenture dated September 1, 2002, by and between Conn Funding
II, L.P., as Issuer, and Wells Fargo Bank Minnesota, National
Association, as Trustee (incorporated herein by reference to Exhibit
10.11 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.11.1 First Supplemental Indenture dated October 29, 2004 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on November 4,
2004).
10.11.2 Second Supplemental Indenture dated August 1, 2006 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Securities and Exchange Commission on August 23,
2006).
10.12 Series 2002-A Supplement to Base Indenture dated September 1, 2002,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.12.1 Amendment to Series 2002-A Supplement dated March 28, 2003, by and
between Conn Funding II, L.P. as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Securities and Exchange Commission on April 5, 2005).
10.12.2 Amendment No. 2 to Series 2002-A Supplement dated July 1, 2004, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.2 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Securities and Exchange Commission on April 5, 2005).
10.12.3 Amendment No. 3 to Series 2002-A Supplement. dated August 1, 2006,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference to
Exhibit 10.12.3 to Conn's, Inc. Form 10-Q for the quarterly period
ended July 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on September 15, 2006).
40
10.13 Series 2002-B Supplement to Base Indenture dated September 1, 2002,
by and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.13.1 Amendment to Series 2002-B Supplement dated March 28, 2003, by and
between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Securities and Exchange Commission on April 5, 2005).
10.14 Servicing Agreement dated September 1, 2002, by and among Conn
Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and Wells Fargo
Bank Minnesota, National Association, as Trustee (incorporated herein
by reference to Exhibit 10.14 to Conn's, Inc. registration statement
on Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.14.1 First Amendment to Servicing Agreement dated June 24, 2005, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.1 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2005 (File No. 000-50421) as filed
with the Securities and Exchange Commission on August 30, 2005).
10.14.2 Second Amendment to Servicing Agreement dated November 28, 2005, by
and among Conn Funding II, L.P., as 10.14.2 Issuer, CAI, L.P., as
Servicer, and Wells Fargo Bank, National Association, as Trustee
(incorporated herein by reference to Exhibit 10.14.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2005 (File No.
000-50421) as filed with the Securities and Exchange Commission on
December 1, 2005).
10.14.3 Third Amendment to Servicing Agreement dated May 16, 2006, by and
among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer, and
Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.3 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on September 15, 2006).
10.14.4 Fourth Amendment to Servicing Agreement dated August 1, 2006, by
and among Conn Funding II, L.P., as Issuer, CAI, L.P., as Servicer,
and Wells Fargo Bank, National Association, as Trustee (incorporated
herein by reference to Exhibit 10.14.4 to Conn's, Inc. Form 10-Q for
the quarterly period ended July 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on September 15, 2006).
10.15 Form of Executive Employment Agreement (incorporated herein by
reference to Exhibit 10.15 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on October 29, 2003).(t)
10.15.1 First Amendment to Executive Employment Agreement between Conn's,
Inc. and Thomas J. Frank, Sr., Approved by the stockholders May 26,
2005 (incorporated herein by reference to Exhibit 10.15.1 to Conn's,
Inc. Form 10-Q for the quarterly period ended July 31, 2005 (file No.
000-50421) as filed with the Securities and Exchange Commission on
August 30, 2005).(t)
10.16 Form of Indemnification Agreement (incorporated herein by reference
to Exhibit 10.16 to Conn's, Inc. registration statement on Form S-1
(file no. 333-109046) as filed with the Securities and Exchange
Commission on September 23, 2003).(t)
10.17 2007 Bonus Program (incorporated herein by reference to Form 8-K
(file no. 000-50421) filed with the Securities and Exchange Commission
on March 30, 2006).(t)
41
10.18 Description of Compensation Payable to Non-Employee Directors
(incorporated herein by reference to Form 8-K (file no. 000-50421)
filed with the Securities and Exchange Commission on June 2, 2005).(t)
10.19 Dealer Agreement between Conn Appliances, Inc. and Voyager Service
Programs, Inc. effective as of January 1, 1998 (incorporated herein by
reference to Exhibit 10.19 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.19.1 Amendment #1 to Dealer Agreement by and among Conn Appliances,
Inc., CAI, L.P., Federal Warranty Service Corporation and Voyager
Service Programs, Inc. effective as of July 1, 2005 (incorporated
herein by reference to Exhibit 10.19.1 to Conn's, Inc. Form 10-K for
the annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.19.2 Amendment #2 to Dealer Agreement by and among Conn Appliances,
Inc., CAI, L.P., Federal Warranty Service Corporation and Voyager
Service Programs, Inc. effective as of July 1, 2005 (incorporated
herein by reference to Exhibit 10.19.2 to Conn's, Inc. Form 10-K for
the annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.19.3 Amendment #3 to Dealer Agreement by and among Conn Appliances,
Inc., CAI, L.P., Federal Warranty Service Corporation and Voyager
Service Programs, Inc. effective as of July 1, 2005 (incorporated
herein by reference to Exhibit 10.19.3 to Conn's, Inc. Form 10-K for
the annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.19.4 Amendment #4 to Dealer Agreement by and among Conn Appliances,
Inc., CAI, L.P., Federal Warranty Service Corporation and Voyager
Service Programs, Inc. effective as of July 1, 2005 (incorporated
herein by reference to Exhibit 10.19.4 to Conn's, Inc. Form 10-K for
the annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.20 Service Expense Reimbursement Agreement between Affiliates Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager Property
and Casualty Insurance Company effective July 1, 1998 (incorporated
herein by reference to Exhibit 10.20 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.20.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI, L.P., Affiliates Insurance Agency, Inc., American Bankers
Life Assurance Company of Florida, Voyager Property & Casualty
Insurance Company, American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company of Florida and American Bankers
General Agency, Inc. effective July 1, 2005 (incorporated herein by
reference to Exhibit 10.20.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on March 30, 2006).
10.21 Service Expense Reimbursement Agreement between CAI Credit Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager Property
and Casualty Insurance Company effective July 1, 1998 (incorporated
herein by reference to Exhibit 10.21 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
42
10.21.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI Credit Insurance Agency, Inc., American Bankers Life
Assurance Company of Florida, Voyager Property & Casualty Insurance
Company, American Bankers Life Assurance Company of Florida, American
Bankers Insurance Company of Florida, American Reliable Insurance
Company, and American Bankers General Agency, Inc. effective July 1,
2005 (incorporated herein by reference to Exhibit 10.21.1 to Conn's,
Inc. Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
10.22 Consolidated Addendum and Amendment to Service Expense Reimbursement
Agreements by and among Certain Member Companies of Assurant
Solutions, CAI Credit Insurance Agency, Inc. and Affiliates Insurance
Agency, Inc. effective April 1, 2004 (incorporated herein by reference
to Exhibit 10.22 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2006 (File No. 000-50421) as filed with the Securities and
Exchange Commission on March 30, 2006).
10.23 Series 2006-A Supplement to Base Indenture, dated August 1, 2006, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference to
Exhibit 10.23 to Conn's, Inc. Form 10-Q for the quarterly period ended
July 31, 2006 (File No. 000-50421) as filed with the Securities and
Exchange Commission on September 15, 2006).
10.24 Fourth Amended and Restated Subordination and Priority Agreement,
dated August 31, 2006, by and among Bank of America, N.A. and JPMorgan
Chase Bank, as Agent, and Conn Appliances, Inc. and/or its subsidiary
CAI, L.P. (filed herewith).
10.24.1 Fourth Amended and Restated Security Agreement, dated August 31,
2006, by and among Conn Appliances, Inc. and CAI, L.P. and Bank of
America, N.A. (filed herewith).
10.25 Letter of Credit and Reimbursement Agreement, dated September 1,
2002, by and among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(filed herewith).
10.25.1 Amendment to Standby Letter of Credit dated August 23, 2006, by and
among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank (filed
herewith).
10.25.2 Amendment to Standby Letter of Credit dated September 20, 2006, by
and among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank (filed
herewith).
11.1 Statement re: computation of earnings per share is included under Note
1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (incorporated herein by reference to
Exhibit 21 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
(filed herewith).
32.1 Section 1350 Certification (Chief Executive Officer and Chief
Financial Officer) (furnished herewith).
99.1 Subcertification by Chief Operating Officer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.2 Subcertification by Treasurer in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.3 Subcertification by Secretary in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.4 Subcertification of Chief Operating Officer, Treasurer and Secretary
in support of Section 1350 Certifications (Chief Executive Officer and
Chief Financial Officer) (furnished herewith).
43
(t) Management contract or compensatory plan or arrangement.
44
EXHIBIT 10.24
FOURTH AMENDED AND RESTATED
SUBORDINATION AND PRIORITY AGREEMENT
WHEREAS, BANK OF AMERICA, N.A. ("BOA") and JPMORGAN CHASE BANK, as Agent
("CB") (BOA, CB, and the other Lenders (as defined in the Loan Agreement) now or
hereinafter a party to that certain Credit Agreement dated as of October 31,
2005, as amended or restated, the "Loan Agreement"), have filed or intend to
file Uniform Commercial Code financing statements perfecting, and giving notice
of, a security interest in all or some of the property, including but not
limited to, inventory and equipment, chattel paper, contract rights, accounts or
general intangibles of Conn Appliances, Inc., and/or its subsidiary CAI, L.P.
(collectively, "Debtor"), and the proceeds thereof to the extent allowed;
WHEREAS, BOA has agreed to provide Debtor with a secured and uncommitted
import letter of credit line of up to $10,000,000 in the aggregate to
accommodate Debtor's importation of inventory purchases into North America (the
"Import Letter of Credit Line"), and pursuant to such credit facility, Debtor
will execute and deliver from time to time, BOA's form letter of credit
agreement and such other related documents as from time to time in effect in
connection therewith;
WHEREAS, as security for the indebtedness and obligations under the Import
Letter of Credit Line and all renewals and extensions thereof, Debtor has agreed
to execute and deliver to BOA a Third Amended and Restated Security Agreement
covering the inventory purchased by Debtor from the parties listed on attached
Schedule 1 (as Schedule 1 may be amended from time to time as set out in
paragraph number 1 below) with credit support provided by the Import Letter of
Credit Line, together with all products and proceeds thereof (collectively, the
"Prime Collateral"); and
WHEREAS, the parties hereto desire to avoid possible conflicting security
interests, and the priority thereof, arising from the filing of their respective
financing statements under each of the Loan Agreement and the Import Letter of
Credit Line.
NOW, THEREFORE, the parties hereto agree as follows:
1. The Banks hereby (a) consent to Debtor's indebtedness incurred, and the
liens granted on the Prime Collateral granted in favor of BOA, in
connection with the Import Letter of Credit Line, and (b) subordinate their
security interests and liens under the Loan Agreement to the security
interests and liens of BOA under the Import Letter of Credit Line in (i)
the Prime Collateral, whether now owned or acquired in the future by
Debtor, (ii) all proceeds of insurance thereon, and (iii) all identifiable
cash proceeds in the form of money and checks received by any Debtor with
respect thereto which are not commingled with other property of any Debtor;
provided, however, that under no circumstances shall the Prime Collateral
include (x) Purchased Receivables, Related Security, Receivable Files, or
Originator Notes as each is defined in the Receivables Purchase Agreement
dated as of September 1, 2002, between Conn Appliances, Inc., CAI, L.P.,
and Conn Funding I, L.P., as sellers, and Conn Funding II, L.P., as
purchaser, or any products or proceeds thereof; or (y) Transferred Assets
as defined in the Agreement of Sale dated as of January 24, 2001, by and
between Conn Appliances, Inc. and CAI, L.P., as sellers, and Aaron Rents,
as purchaser. All terms used and not otherwise defined herein, which are
defined in Article 9 of the Texas Uniform Commercial Code, shall have the
meanings assigned to them in Article 9 of the Texas Uniform Commercial
Code, as in effect on the date of the filing of any financing statement.
Notwithstanding anything to the contrary herein, Debtor, BOA, CB and the
Banks hereby agree that Debtor may from time to time update the list of
counterparties on Schedule 1 attached hereto by delivering a revised
Schedule 1 to BOA and CB, and, upon the execution of such revised Schedule
1 by BOA and CB, the then current Schedule 1 shall automatically be
replaced in its entirety by such revised Schedule 1.
2. BOA hereby agrees that it shall not at any time during the terms of this
Agreement have a security interest, lien, claim or any type of encumbrance
whatsoever, at law, in equity or by contract, on any property or assets of
any Debtor other than a security interest in the Prime Collateral. To the
extent BOA shall now or hereafter have any security interest, lien, claim
or other encumbrance prohibited by the foregoing sentence, the same is
hereby released and discharged.
3. No party, including without limitation the Debtor, is intended to be a
third party beneficiary of this Agreement. This Agreement shall not
constitute a purchase money security interest notice.
4. Whenever either party hereto shall be required or shall have the right to
give notice to the other party, such notice shall be deemed to have been
given five (5) days after mailing, postage prepaid, by registered or
certified mail, return receipt requested, or upon personal delivery to the
other party at the following address, or such other address as is furnished
in writing by one party to another party:
To:
JPMorgan Chase Bank Bank of America, N.A.
712 Main Street, 5th Floor 700 Louisiana, 7th Floor
Houston, Texas 77002 Houston, Texas 77002
Attn: Manager Houston Commercial Attn: Gary Mingle
5. This agreement is irrevocable by the parties hereto and shall remain in
full force and effect until the earlier of (a) the repayment in full of all
the obligations of the Debtor to the Banks under the Loan Agreement and (b)
the repayment in full of all of the obligations of the Debtor to BOA under
the Import Letter of Credit Line.
6. CB, the Banks and BOA agree this Agreement shall be binding upon and inure
to the benefit of their respective successors and assigns, and shall be
governed by and construed in accordance with the laws of the State of
Texas.
7. This Agreement amends and restates that certain Third Amended and Restated
Subordination and Priority Agreement dated as of June 14, 2006, among BOA,
CB, and Debtor (the "Third Amended and Restated Subordination Agreement"),
as such Third Amended and Restated Subordination and Priority Agreement
amended and restated that certain Second Amended and Restated Subordination
and Priority Agreement dated as of July 11, 2005, among BOA, CB, and Debtor
(the "Second Amended and Restated Subordination Agreement"), as such Second
Amended and Restated Subordination Agreement amended and restated that
certain First Amended and Restated Subordination and Priority Agreement
dated as of June 17, 2004, among BOA, CB, and Debtor (the "First Amended
and Restated Subordination Agreement"), as such First Amended and Restated
Subordination Agreement amended and restated that certain Subordination and
Priority Agreement dated as of March 20, 2003, among BOA, CB, and Debtor
(the "Initial Subordination Agreement"), and shall not be construed to be a
novation of the Third Amended and Restated Subordination Agreement, the
Second Amended and Restated Subordination Agreement, the First Amended and
Restated Subordination Agreement, or the Initial Subordination Agreement.
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IN WITNESS WHEREOF the parties hereto have this 31st day of August 2006,
hereunto have set their hands.
BANK OF AMERICA, N.A.
By: /s/ Gary L. Mingle
--------------------------------------
Gary L. Mingle, Senior Vice President
JPMORGAN CHASE BANK, NATIONAL
ASSOCIATION, AS AGENT FOR THE LENDERS
By: /s/ R. Michael Arnett
--------------------------------------
R. Michael Arnett, Vice President
Acknowledged and Consented to:
CONN APPLIANCES, INC.
By: /s/ David R. Atnip
----------------------------------
David R. Atnip, Treasurer
CAI, L.P.
By: Conn Appliances, Inc., its sole
general partner
By: /s/ David R. Atnip
----------------------------------
David R. Atnip, Treasurer
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EXHIBIT 10.24.1
FOURTH AMENDED AND RESTATED SECURITY AGREEMENT
----------------------------------------------
THIS FOURTH AMENDED AND RESTATED SECURITY AGREEMENT (this "Agreement"),
dated as of August 31, 2006, is by CONN APPLIANCES, INC., a Texas corporation,
and CAI, L.P., a Texas limited partnership (collectively, "Debtor"), for the
benefit of BANK OF AMERICA, N.A., a national banking association ("Secured
Party").
RECITALS
A. Secured Party agreed to provide Debtor with a secured and uncommitted
import letter of credit line of up to $1,200,000 in the aggregate to accommodate
Debtor's importation of inventory purchases into North America, which import
letter of credit line was extended, renewed and increased up to $1,500,000 in
June, 2004, and further extended, renewed and increased up to $3,000,000 in
July, 2005 (the "Existing Import Letter of Credit Line").
B. In connection with the Existing Import Letter of Credit Line, Debtor
executed a Security Agreement dated as of March 20, 2003 (as amended and
restated by the First Amended and Restated Security Agreement dated as of June
17, 2004, as amended and restated by the Second Amended and Restated Security
Agreement dated as of July 11, 2005, and as amended and restated by the Third
Amended and Restated Security Agreement dated as of June 14, 2006) in favor of
Secured Party, granting to Secured Party a first priority security interest in,
and lien upon, the "Collateral" as described therein (collectively, the
"Existing Security Agreement").
C. Debtor and Secured Party have agreed to increase the Existing Import
Letter of Credit Line to provide for a secured and uncommitted import letter of
credit line of up to $10,000,000 in the aggregate (the "Import Letter of Credit
Line").
D. Accordingly, Secured Party and Debtor hereby amend and restate the
Existing Security Agreement in its entirety as follows:
AGREEMENTS
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Debtor covenants and agrees with
Secured Party as follows:
1. Certain Definitions. Capitalized terms used but not defined in this
Agreement have the meaning given them in the UCC (defined below). If the
definition given a term in Chapter 9 of the UCC conflicts with the definition
given that term in any other chapter of the UCC, the Chapter 9 definition shall
control. As used in this Agreement:
Agreement means this Agreement, together with all schedules attached
hereto, and all amendments and modifications to this Agreement or such
schedules.
Collateral is defined in Section 5 of this Agreement.
Credit Agreement Event of Default means an "Event of Default" as
defined in that certain Credit Agreement dated as October 31, 2005, among
Conn Appliances, Inc. and the other Borrowers (as defined therein),
JPMorgan Chase Bank, National Association, as Administrative Agent, Bank of
America, as Syndication Agent, SunTrust Bank, as Documentation Agent, J.P.
Morgan Securities, Inc., as Arranger, and the Lenders (as defined therein)
party thereto, as amended, restated or otherwise modified from time to
time; provided that, the defined term "Credit Agreement Event of Default"
includes without limitation, an event of default under any and all credit
agreements or loan agreements that replace or refinance such Credit
Agreement.
Debtor is defined in the preamble to this Agreement.
Event of Default is defined in Section 11.
Governmental Authority means any (a) (domestic or foreign) judicial,
executive, legislative, or administrative instrumentality, or any agency,
court, department, commission, board, bureau, or other instrumentality,
under any federal, state, county, parish, commonwealth, city, municipal or
other political subdivision, and (b) private mediation or arbitration board
or panel.
Import Letter of Credit Line is defined in Recital A above.
Inventory means any and all inventory purchased from every
counterparty of Debtor with credit support provided by the Import Letter of
Credit Line, including without limitation, the parties listed on attached
Schedule 1 (as such Schedule 1 may be amended from time to time as set out
in Section 3 below), whether now owned or acquired in the future by Debtor,
all proceeds of insurance thereon, and all identifiable cash proceeds in
the form of money and checks received by any Debtor with respect thereto.
Law means all applicable statutes, laws, treaties, ordinances, rules,
regulations, orders, writs, injunctions, decrees, judgments, opinions and
interpretations of any Governmental Authority.
Lien means any lien, mortgage, security interest, pledge, assignment,
charge, title retention agreement or encumbrance of any kind and any other
arrangement for a creditor's claim to be satisfied from assets or proceeds
prior to the claims of other creditors or the owners.
Obligation means all of Debtor's payment and performance obligations
under this Agreement and all other documents and agreements executed in
connection with the Import Letter of Credit Line, including without
limitation, all applications and agreements for the issuance of commercial
letters of credit, and reasonable attorney's fees and expenses incurred by
Secured Party in connection therewith and herewith.
Obligor means "obligor" as such term is defined in the UCC, including
without limitation, any person or entity obligated with respect to any of
the Collateral, whether as a party to a contract, an account debtor or
otherwise.
Rights means rights, remedies, powers, privileges and benefits.
Secured Party is defined in the preamble to this Agreement.
Security Interest means the security interests granted and the
transfers, pledges, and assignments made under Section 3 of this Agreement.
UCC means the Uniform Commercial Code, as adopted and in effect in the
State of Texas from time to time.
2
2. Security For Import Letter of Credit Line. This Agreement is being
executed and delivered to secure the prompt, unconditional, and complete payment
and performance of the Obligation.
3. Security Interest. Subject to the terms and conditions of this
Agreement, Debtor grants to Secured Party a security interest in, and Lien upon,
all of Debtor's right, title, and interest in and to the Collateral and Debtor
transfers, pledges, and assigns as security to Secured Party all Debtor's right,
title, and interest in the Collateral. If the transfer, pledge, or assignment of
any specific item of the Collateral is expressly prohibited by any contract, the
Security Interest shall be effective to the extent allowed by UCC ss.9.406 or
other applicable Law. Notwithstanding anything to the contrary herein, Debtor
and Secured Party hereby agree that Debtor may from time to time update the list
of counterparties on Schedule 1 attached hereto by delivering a revised Schedule
1 to Secured Party, and, upon the execution of such revised Schedule 1 by
Secured Party, the then current Schedule 1 shall automatically be replaced in
its entirety by such revised Schedule 1.
4. No Assumption or Modification. The Security Interest is given as
collateral security only. Secured Party does not assume, and shall not be liable
for, any of Debtor's liabilities, duties, or obligations under or in connection
with the Collateral. Secured Party's acceptance of this Agreement, or its taking
any action in carrying out this Agreement, does not constitute Secured Party's
approval of the Collateral or Secured Party's assumption of any obligation
under, or in connection with, the Collateral. This Agreement does not affect or
modify Debtor's obligations with respect to the Collateral.
5. Collateral. As used in this Agreement, the term "Collateral" means all
of Debtor's right, title and interest in and to Inventory, wherever located,
whether now owned or hereafter acquired by Debtor, together with any and all
proceeds, products, additions to, substitutions for and accessions thereto;
provided, however, that under no circumstances shall the Collateral include (x)
Purchased Receivables, Related Security, Receivable Files, or Originator Notes
as each is defined in the Receivables Purchase Agreement dated as of September
1, 2002, between Conn Appliances, Inc., CAI, L.P., and Conn Funding I, L.P., as
sellers, and Conn Funding II, L.P., as purchaser, or any products or proceeds
thereof; or (y) Transferred Assets as defined in the Agreement of Sale dated as
of January 24, 2001, by and between Conn Appliances, Inc. and CAI, L.P., as
sellers, and Aaron Rents, as purchaser. Subject to the proviso in the preceding
sentence, the description of Collateral contained in this Section 5 includes
after acquired Collateral and proceeds of the Collateral.
6. Fraudulent Conveyance. Notwithstanding any provision of this Agreement
to the contrary, Debtor agrees that if, but for the application of this Section
6, the Obligations or any Security Interest would constitute a preferential
transfer under 11 U.S.C. ss. 547, a fraudulent conveyance under 11 U.S.C. ss.
548 (or any successor section of that Code) or a fraudulent conveyance or
transfer under any state fraudulent conveyance or fraudulent transfer law or
similar Law in effect from time to time (each a "Fraudulent Conveyance"), then
the Obligations and each affected Security Interest will be enforceable to the
maximum extent possible without causing the Obligations or any Security Interest
to be a Fraudulent Conveyance, and shall be deemed to have been automatically
amended to carry out the intent of this Section 6.
7. Representations and Warranties. Debtor represents and warrants to
Secured Party that:
(a) Binding Obligation. This Agreement creates a legal, valid, and
binding security interest in, and Lien upon, the Collateral in favor of Secured
Party and enforceable against Debtor. The Security Interest created under this
Agreement will be duly perfected once the action required for perfection under
applicable Law has been taken. Once perfected, the Security Interest will
constitute a first priority Lien on the Collateral. The creation of the Security
Interest does not require the consent of any third party.
3
(b) Place of Business; Location of Records. The location of Debtor's
chief executive office or principal place of business is set out on Schedule 2.
Debtor's state of organization and its organizational identification number is
set out on Schedule 2. Debtor's books and records concerning the Collateral are
located at its chief executive office or principal place of business. All
Inventory (other than on consignment or in transit) are located until disposed
of in the ordinary course of business) at one or more of the locations set out
on Schedule 2.
(c) No Prior Lien. Debtor has not executed any prior transfer,
assignment, pledge, security interest, Lien or hypothecation covering the
Collateral or any interest in the Collateral other than a subordinated Lien on
the Inventory granted to the lenders under Debtor's senior credit facility with
JP Morgan Chase, as agent for such lenders.
(d) No Defenses. No portion of the Collateral is subject to any setoff,
counterclaim, defense, allowance, or adjustment.
8. Additional Collateral. The delivery at any time by Debtor to Secured
Party of Collateral or of additional specific descriptions of certain Collateral
will constitute a representation and warranty by Debtor to Secured Party under
this Agreement that the representations and warranties in Section 7 are true and
correct with respect to each item of such Collateral.
9. Affirmative Covenants. Debtor further covenants and agrees with Secured
Party that until the Obligation is irrevocably paid and performed in full,
Debtor shall:
(a) Relocation of Office or Books and Records; Change of Name or
Address; and Organizational Structure. Give Secured Party thirty (30) days prior
written notice of (i) any proposed relocation of its principal place of business
or chief executive office, (ii) any proposed relocation of the place where its
books and records relating to the Collateral are kept, and (iii) a change of its
name, organizational structure or taxpayer identification number.
(b) Change in Collateral. Promptly notify Secured Party of any material
change in the Collateral or in any fact or circumstance represented or warranted
by Debtor with respect to any of the Collateral.
(c) Insurance. Debtor shall obtain and maintain insurance upon and
relating to the Inventory insuring against general liability, personal injury
and death, loss by fire and such other hazards, casualties, and contingencies
(including but not limited to fire, lightning, hail, windstorm, explosion,
malicious mischief, and vandalism) as are covered by extended coverage policies
in effect where the such property is located and such other risks as may be
reasonably specified by Secured Party from time to time, all in such amounts and
with such insurers of recognized responsibility as are reasonably acceptable to
Secured Party. Upon request, Debtor shall provide Secured Party with
certificates of insurance in amounts and with deductibles reasonably required by
Secured Party. Secured Party shall have the right, but not the obligation, to
make premium payments, at Debtor's expense, to prevent any cancellation,
endorsement, alteration or reissuance, and such payments shall be accepted by
the insurer to prevent same, provided that, to the extent Secured Party makes
any premium payments or pays any other amount in respect of such insurance
policies, such amount shall become part of the Obligations and shall accrue
interest at the maximum rate permitted by applicable law.
(d) Taxes and Assessments. Debtor shall pay all taxes and assessments
on all of the Collateral when due and upon Secured Party's request, provide
Secured Party with evidence of payment of such taxes. Secured Party shall have
the right, but not the obligation, to pay such taxes or assessments, at Debtor's
expense, to prevent any lien or other legal process from attaching or arising,
provided that, to the extent Secured Party pays any such tax or assessment or
any other amount in respect of such tax or assessment, such amount shall become
part of the Obligation and shall accrue interest at the maximum rate permitted
by applicable law.
4
(e) Record of Collateral. Maintain at its chief executive office or
principal place of business a current record of all of the Collateral and permit
Secured Party or its representatives to inspect and make copies from such
records, and upon Secured Party's request, furnish to Secured Party such
documents, lists, descriptions, certificates, and other information with respect
to the identity, status, condition, terms of, parties to, and value of the
Collateral.
(f) Adverse Claim. Immediately notify Secured Party in writing of any
claim, action, or proceeding challenging the Security Interest or affecting
title to or any loss or casualty, with respect to all or any portion of the
Collateral or the Security Interest and, at Secured Party's request, appear in
and defend any such appropriate action or proceeding at Debtor's sole cost and
expense.
(g) Hold Collateral In Trust. While an Event of Default exists, hold in
trust (and not commingle with its other assets) for Secured Party all Collateral
at any time received by it and promptly deliver same to Secured Party upon
Secured Party's request unless Secured Party at its option gives Debtor written
permission to retain that Collateral. While an Event of Default exists, at
Secured Party's request, the Collateral so retained shall be marked to state
that it is assigned to Secured Party and each instrument shall be endorsed to
the order of Secured Party (but failure to so mark or endorse shall not impair
the Security Interest).
(h) Perform Obligations. Perform all of its obligations under or in
connection with the Collateral in accordance with customary business practices
and applicable Law.
(i) Amendment. Not amend, alter, or modify, or permit the amendment,
alteration or modification of, all or any portion (individually or collectively)
of the Collateral in any adverse manner without Secured Party's prior written
consent.
(j) Impairment of Collateral. Not do or permit any act which would
adversely impair all or any portion of the Collateral.
(k) Default Under Collateral. Immediately notify Secured Party in
writing of any default or event of default by Debtor or, to the best of Debtor's
knowledge, by any other party under or in connection with all or any portion
(individually or collectively) of the Collateral and immediately use its
commercial efforts to remedy the same or immediately demand that the same be
remedied.
(l) Further Assurances. From time to time Debtor shall promptly
execute, authorize, authenticate and deliver to Secured Party all other
assignments, certificates, supplemental documents, and financing statements, and
all other acts Secured Party requests in order to create, evidence, perfect,
continue or maintain the existence and priority of the Security Interest and in
order to perfect the Lien on, and Security Interest in, all future Collateral
including, without limitation, (i) amendments to Schedule 1 and/or Schedule 2,
and (ii) the authentication and filing of such financing statements as Secured
Party may require. A carbon, photographic, or other reproduction of this
Agreement or of any financing statement covering the Collateral or any part
thereof shall be sufficient as a financing statement and may be filed as a
financing statement.
10. Negative Covenants. Debtor further covenants and agrees with Secured
Party that until the Obligation is paid and performed in full, Debtor shall not:
5
(a) Use Violations. Debtor will not use, maintain, operate, or occupy,
or allow the use, maintenance, operation, or occupancy of the Collateral in any
manner which violates any Law.
(b) Alterations. Debtor will not commit or permit any waste of the
Collateral that would diminish its value in any material respect.
(c) Prohibition on Transfer of Property. Debtor will not sell, trade,
transfer, assign, exchange, or otherwise dispose of any of the Collateral except
in the ordinary course of Debtor's business.
(d) No Further Encumbrances. Debtor will not create, place, suffer, or
permit to be created or placed or, through any act or failure to act, acquiesce
in the placing of or allow to remain, any mortgage, pledge, Lien (statutory,
constitutional, or contractual), security interest, encumbrance, or charge on,
or conditional sale or other title retention agreement, regardless of whether
same are expressly subordinate to the Liens of this Agreement with respect to
the Collateral other than Liens incurred under Debtor's senior credit facility.
11. Event of Default; Remedies. Upon the occurrence and during the
continuance of any default under any application and agreement for the issuance
of commercial letter of credit or similar agreement executed and delivered in
connection with the Import Letter of Credit Line, or any breach of this
Agreement, or a Credit Agreement Event of Default (each an "Event of Default"),
Secured Party has the following cumulative rights and remedies under this
Agreement:
(a) Debtor's Agent. Secured Party shall be deemed to be irrevocably
appointed as Debtor's agent and attorney-in-fact with all right and power to
enforce all of Debtor's rights and remedies under or in connection with the
Collateral. All costs, expenses and liabilities incurred and payments made by
Secured Party as Debtor's agent and attorney-in-fact, including, without
limitation, attorney's fees and expenses, shall be considered a loan by Secured
Party to Debtor which shall be repayable on demand and shall accrue interest at
the maximum rate of interest allowed by Law and shall be part of the
indebtedness secured hereby.
(b) Obligors. Secured Party may notify or require each Obligor to make
payment directly to Secured Party and Secured Party may take control of the
proceeds paid to Debtor. Until Secured Party elects to exercise these Rights,
Debtor is authorized to collect and enforce the Collateral and to retain and
expend all payments made on the Collateral. After Secured Party elects to
exercise these rights, Secured Party shall have the Right in its own name or in
the name of Debtor to (i) compromise or extend time of payment with respect to
all or any portion of the Collateral for such amounts and upon such terms as
Secured Party may reasonably determine, (ii) demand, collect, receive, receipt
for, sue for, compound, and give acquittance for any and all amounts due or to
become due with respect to Collateral, (iii) take control of cash and other
proceeds of any Collateral, (iv) endorse Debtor's name on any notes,
acceptances, checks, drafts, money orders, or other evidences of payment on
Collateral that may come into Secured Party's possession, (v) sign Debtor's name
on any invoice or bill of lading relating to any Collateral, on any drafts
against Obligors or other Persons making payment with respect to Collateral, on
assignments and verifications of accounts or other Collateral and on notices to
Obligors making payment with respect to Collateral, (vi) send requests for
verification of obligations to any Obligor, and (vii) do all other acts and
things reasonably necessary to carry out the intent of this Agreement. If any
Obligor fails to make payment on any Collateral when due, Secured Party is
authorized, in its sole discretion, either in its own name or in Debtor's name,
to take such action as Secured Party shall deem appropriate for the collection
of any amounts owed with respect to Collateral or upon which a delinquency
exists. Regardless of any other provision of this Agreement, Secured Party shall
not be liable for its failure to collect, or for its failure to exercise
diligence in the collection of, any amounts owed with respect to Collateral, nor
shall he be under any duty whatsoever to anyone except Debtor to account for
funds that it shall actually receive under this Agreement. A receipt if given by
Secured Party to any Obligor shall be a full and complete release, discharge,
and acquittance to such Obligor, to the extent of any amount so paid to Secured
Party. Secured Party may apply or set off amounts paid on Collateral and the
deposits against any liability of Debtor to Secured Party.
6
(c) UCC Rights. Secured Party may exercise any and all Rights available
to a secured party under the UCC, in addition to any and all other Rights
afforded by this Agreement, at law, in equity, or otherwise, including, without
limitation, (i) requiring Debtor to assemble all or part of the Collateral and
make it available to Secured Party at a place to be designated by Secured Party
which is reasonably convenient to Debtor and Secured Party, (ii) applying by
appropriate judicial proceedings for appointment of a receiver for all or part
of the Collateral, (iii) applying to the Obligation then due and payable any
cash held by Secured Party, (iv) reducing any claim to judgment, (v) exercising
the rights of offset against the interest of Debtor in and to every account and
other property of Debtor in Secured Party's possession to the extent of the full
amount of the Obligation then due and payable, (vi) foreclosing the Security
Interest and any other liens Secured Party may have or otherwise realize upon
any and all of the rights Secured Party may have in and to the Collateral, or
any part thereof, and (vii) bringing suit or other proceedings before any
Governmental Authority either for specific performance of any covenant or
condition contained herein or in aid of the exercise of any right granted to
Secured Party hereunder.
(d) Notice. Reasonable notification of the time and place of any public
sale of the Collateral, or reasonable notification of the time after which any
private sale or other intended disposition of the Collateral is to be made,
shall be sent to Debtor and to any other Person entitled to notice under the
UCC, provided that, if any of the Collateral threatens to decline speedily in
value or is of the type customarily sold on a recognized market, Secured Party
may sell or otherwise dispose of the Collateral without notification,
advertisement, or other notice of any kind. It is agreed that notice sent or
given not fewer than ten (10) calendar days prior to the taking of the action to
which the notice relates is reasonable notification and notice for the purposes
of this subsection. It shall not be necessary that the Collateral be at the
location of the sale.
(e) Application of Proceeds. Secured Party shall apply the proceeds of
any sale, casualty, condemnation or other disposition of the Collateral as
follows: first, to the payment of all its expenses incurred in retaking,
holding, and preparing any of the Collateral for sale(s) or other disposition,
in arranging for such sale(s) or other disposition, and in actually selling or
disposing of the same (all of which is part of the Obligation); second, toward
repayment of amounts expended by Secured Party under Section 12 of this
Agreement; and third, toward payment of the balance of the Obligations in the
order and manner as Secured Party elects.
(f) Sale. Secured Party's sale of less than all the Collateral shall
not exhaust Secured Party's Rights under this Agreement and Secured Party is
specifically empowered to make successive sales until all the Collateral is
sold. If the proceeds of a sale of less than all the Collateral shall be less
than the Obligations, this Agreement and the Security Interest shall remain in
full force and effect as to the unsold portion of the Collateral just as though
no sale had been made. In the event any sale under this Agreement is not
completed or is, in Secured Party's reasonable opinion, defective, such sale
shall not exhaust Secured Party's rights under this Agreement and Secured Party
shall have the right to cause a subsequent sale or sales to be made. Any and all
statements of fact or other recitals made in any bill of sale or assignment or
other instrument evidencing any foreclosure sale under this Agreement as to
nonpayment of the Obligations, or as to the occurrence of any Event of Default,
or as to Secured Party's having declared all of such Obligation to be due and
payable, or as to notice of time, place and terms of sale and the properties to
be sold having been duly given, or as to any other act or thing having been duly
done by Secured Party, shall be taken as prima facie evidence of the truth of
the facts so stated and recited. Secured Party may appoint or delegate any one
or more Persons as agent to perform any act or acts necessary or incident to any
sale held by Secured Party, including the sending of notices and the conduct of
sale, but such acts must be done in the name and on behalf of Secured Party.
6
(g) Existence of Event of Default. Regarding the existence of any Event
of Default for purposes of this Agreement, Debtor agrees that the Obligors on
any Collateral may rely upon written certification from Secured Party that such
an Event of Default exists. Debtor expressly agrees that Secured Party shall not
be liable to Debtor for any claims, damages, costs, expenses or causes of action
of any nature whatsoever in connection with, arising out of, or related to
Secured Party's exercise of any rights, powers or remedies under this Agreement.
12. Other Rights of Secured Party.
(a) Performance. In the event Debtor fails to preserve the priority of
the Security Interest in any of the Collateral, or, upon the occurrence and
during the continuance of an Event of Default, otherwise fails to perform any of
its obligations hereunder with respect to the Collateral, then Secured Party may
(but is not required to) prosecute or defend any suits in relation to the
Collateral or take any other action which Debtor is required to take under this
Agreement or applicable Law, but has failed to take. Any sum which may be
reasonably expended or paid by Secured Party under this subparagraph (including,
without limitation, court costs and attorneys' fees and expenses) shall bear
interest from the date of expenditure or payment at the maximum rate permitted
by applicable law until paid and, together with such interest, shall be payable
by Debtor to Secured Party upon demand and shall be part of the indebtedness
secured hereby.
(b) Collateral in Secured Party's Possession. If, while an Event of
Default exists, any Collateral comes into Secured Party's possession, Secured
Party may use such Collateral for the purpose of preserving it or its value
pursuant to the order of a court of appropriate jurisdiction or in accordance
with any other Rights held by Secured Party in respect of such Collateral.
Debtor covenants to promptly reimburse and pay to Secured Party, at Secured
Party's request, the amount of all expenses incurred by Secured Party in
connection with its custody and preservation of such Collateral, and all such
expenses, costs, taxes, and other charges shall bear interest at the maximum
rate permitted by applicable Law until repaid and, together with such interest,
shall be payable by Debtor to Secured Party upon demand and shall be part of the
indebtedness secured hereby. However, the risk of accidental loss or damage to,
or diminution in value of, Collateral is on Debtor. Provided that Secured Party
acts in accordance with all applicable Law, Secured Party shall have no
liability for failure to obtain or maintain insurance, nor to determine whether
any insurance ever in force is adequate as to amount or as to the risks insured.
With respect to Collateral that is in the possession of Secured Party, Secured
Party shall have no duty to fix or preserve Rights against prior parties to such
Collateral and shall never be liable for any failure to use diligence to collect
any amount payable in respect of such Collateral, but shall be liable only to
account to Debtor for what it may actually collect or receive thereon.
13. Miscellaneous.
(a) Term. Upon full and final payment of the indebtedness secured
hereby (other than as a result of Secured Party having exercised his rights
under this Agreement), this Agreement shall terminate, provided that no Obligor
on any of the Collateral shall be obligated to inquire as to the termination of
this Agreement, but shall be fully protected in making payment directly to
Secured Party, which payment shall be promptly paid over to Debtor after
termination of this Agreement.
8
(b) Actions Not Releases. The Security Interest and Debtor's obligation
and Secured Party's Rights under this Agreement shall not be released,
diminished, impaired, or adversely affected by the occurrence of any one or more
of the following events: (i) the taking or accepting of any other security or
assurance for any or all of the Obligations, (ii) any release, surrender,
exchange, subordination, or loss of any security or assurance at any time
existing in connection with any or all of the Obligations, (iii) the
modification of, amendment to, or waiver of compliance with any terms of any
application or agreement for the issuance of commercial letter of credit or
similar agreement executed and delivered in connection with the Import Letter of
Credit Line, (iv) the insolvency, bankruptcy, or lack of corporate or trust
power of any party at any time liable for the payment of any or all of the
Obligation, whether now existing or hereafter occurring, (v) any renewal,
increase, extension, or rearrangement of the payment of any or all of the
Obligations, either with or without notice to or consent of Debtor, or any
adjustment, indulgence, forbearance, or compromise that may be granted or given
by Secured Party to Debtor, (vi) any neglect, delay, omission, failure, or
refusal of Secured Party to take or prosecute any action in connection with any
other agreement, document, guaranty, or instrument evidencing, securing, or
assuring the payment of all or any of the Obligation, (vii) any failure of
Secured Party to notify Debtor of any renewal, extension, or assignment of the
Obligation or any part thereof, or the release of any security under any other
document or instrument, or of any other action taken or refrained from being
taken by Secured Party against Debtor or any new agreement between Secured Party
and Debtor, it being understood that Secured Party shall not be required to give
Debtor any notice of any kind under any circumstances whatsoever with respect to
or in connection with the Obligation, including, without limitation, notice of
acceptance of this Agreement or any Collateral ever delivered to or for the
account of Secured Party under this Agreement, (viii) the illegality,
invalidity, or unenforceability of all or any part of the Obligation against any
third party obligated with respect thereto by reason of the fact that the
Obligation, or the interest paid or payable with respect thereto, exceeds the
amount permitted by Law, the act of creating the Obligation, or any part
thereof, is ultra vires, or the officers, partners, or trustees creating same
acted in excess of their authority, or for any other reason, or (ix) if any
payment by any party obligated with respect thereto is held to constitute a
preference under applicable Laws or for any other reason Secured Party is
required to refund such payment or pay the amount thereof to someone else.
(c) Waivers. Except to the extent expressly otherwise provided in this
Agreement, Debtor waives (i) any Right to require Secured Party to proceed
against any other Person, to exhaust its Rights in the Collateral, or to pursue
any other Right which Secured Party may have, (ii) with respect to the
Obligation, presentment and demand for payment, protest, notice of protest and
nonpayment, notice of acceleration, and notice of the intention to accelerate,
and (iii) all Rights of marshalling in respect of any and all of the Collateral.
(d) Financing Statement. Secured Party shall be entitled at any time to
file this Agreement or a carbon, photographic, or other reproduction of this
Agreement, as a financing statement, but the failure of Secured Party to do so
shall not impair the validity or enforceability of this Agreement.
(e) Amendments. This Agreement may only be amended by a writing
executed by Debtor and Secured Party.
(f) Multiple Counterparts. This Agreement may be executed in any number
of counterparts with the same effect as if all signatories had signed the same
document. All counterparts must be construed together to constitute one and the
same Agreement.
(g) Parties Bound. This Agreement shall be binding on Debtor and its
successors and assigns and shall inure to the benefit of Secured Party and its
successors and assigns.
(h) Assignment. Debtor may not, without Secured Party's prior written
consent, assign any Rights, duties, or obligations under this Agreement. In the
event of an assignment of all or part of the Obligation, the Security Interest
and other Rights and benefits under this Agreement, to the extent applicable to
the part of the Obligations so assigned, may be transferred with the
Obligations.
9
(i) Notices. Any notice or communication required or permitted under
this Agreement must be given to the address specified under each party's
signature below. Any notice or demand given hereunder shall be deemed to have
been given and received (a) when actually received by the recipient, if
delivered in person, or (b) if mailed to the address below (whether ever
received or not), two business days after deposit in the U.S. Mail, postage
prepaid.
(j) Amendment and Restatement. This Agreement amends and restates in
its entirety the Existing Security Agreement and shall not be construed to be a
novation of the Existing Security Agreement.
(k) Governing Law. THIS AGREEMENT MUST BE CONSTRUED, AND ITS
PERFORMANCE ENFORCED, UNDER TEXAS LAW.
[Signatures appear on following page.]
10
EXECUTED as of the date set forth in the preamble.
DEBTOR:
CONN APPLIANCES, INC., a Texas
corporation
By: /s/ David R. Atnip
--------------------------------------
David R. Atnip, Secretary/Treasurer
Address:
P.O. Box 2358
Beaumont, TX 77704-2358
Facsimile No.: (409) 832-4967
Attention: Thomas J. Frank, CEO
CAI, L.P., a Texas limited partnership
By: Conn Appliances, Inc., its sole
general partner
By: /s/ David R. Atnip
--------------------------------------
David R. Atnip, Secretary/Treasurer
Address:
P.O. Box 2358
Beaumont, TX 77704-2358
Facsimile No.: (409) 832-4967
Attention: David R. Atnip
SECURED PARTY:
BANK OF AMERICA, N.A., a Texas
corporation
By: /s/ Gary L. Mingle
--------------------------------------
Gary L. Mingle, Senior Vice President
11
EXHIBIT 10.25
- --------------------------------------------------------------------------------
LETTER OF CREDIT REIMBURSEMENT AGREEMENT
Dated as of September 1, 2002
among
CAI, L.P.,
CONN FUNDING II, L.P.
and
SUNTRUST BANK,
as Letter of Credit Provider
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
ARTICLE I DEFINITIONS................................................................1
Section 1.1 Definitions........................................................1
ARTICLE II ISSUANCE OF LC; REIMBURSEMENT OBLIGATION...................................1
Section 2.1 Issuance of LC.....................................................1
Section 2.2 Disbursements......................................................2
Section 2.3 Reimbursement......................................................2
Section 2.4 Facility Fee.......................................................3
Section 2.5 No Liability of LC Provider........................................3
Section 2.6 Surrender of LC....................................................4
Section 2.7 Conditions Precedent to Issuance...................................4
Section 2.8 Increased Capital Costs............................................5
Section 2.9 Taxes..............................................................6
Section 2.10 Obligation Absolute................................................7
Section 2.11 Events of Default..................................................8
ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS..................................9
Section 3.1 Representations and Warranties of the Applicant....................9
Section 3.2 Covenants of the Applicant........................................10
ARTICLE IV MISCELLANEOUS.............................................................12
Section 4.1 Payments..........................................................12
Section 4.2 Expenses..........................................................12
Section 4.3 Indemnity.........................................................12
Section 4.4 Notices...........................................................13
Section 4.5 Governing Law; Waiver of Jury Trial...............................13
Section 4.6 Waivers...........................................................13
Section 4.7 Severability......................................................14
Section 4.8 Term..............................................................14
Section 4.9 Successors and Assigns............................................14
Section 4.10 Counterparts......................................................14
Section 4.11 Further Assurances................................................14
Section 4.12 Survival of Representations and Warranties........................14
i
TABLE OF CONTENTS
(continued)
Page
Section 4.13 Obligation........................................................14
Section 4.14 Headings..........................................................15
Section 4.15 No Bankruptcy Petition Against the Issuer.........................15
ii
LETTER OF CREDIT REIMBURSEMENT AGREEMENT
THIS LETTER OF CREDIT REIMBURSEMENT AGREEMENT, dated as of September 1,
2002 (as amended, supplemented or otherwise modified from time to time, this
"Agreement") is entered into by and among CAI, L.P. ("CAILP"), a Texas limited
partnership, CONN FUNDING II, L.P. (the "Issuer"), a Texas limited partnership
and SUNTRUST BANK, a Georgia banking corporation (the "LC Provider").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to the terms and conditions of the Base Indenture, dated
as of September 1, 2002 (as amended, amended and restated, supplemented or
otherwise modified from time to time, the "Base Indenture"), between the Issuer
and Wells Fargo Bank Minnesota, National Association (the "Trustee"), CAILP and
the Issuer are required to obtain a letter of credit to provide credit support
for the Servicer's obligations to deposit Collections pursuant to Article 5 of
the Base Indenture; and
WHEREAS, CAILP and the Issuer (collectively, the "Applicant") desire to
obtain, and, subject to and in accordance with the terms of this Agreement, the
LC Provider has agreed to provide, an irrevocable letter of credit, in
substantially the form of Exhibit A attached hereto (such letter of credit and
any successor letter of credit as provided in such letter of credit, herein, the
"LC"), to provide credit support for the Servicer's obligations to deposit
Collections pursuant to Article 5 of the Base Indenture;
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. As used in this Agreement and unless the context
requires a different meaning, capitalized terms not otherwise defined herein
shall have the meanings assigned to such terms in Section 1.1 of the Base
Indenture, as the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms of the Indenture.
ARTICLE II
ISSUANCE OF LC;
REIMBURSEMENT OBLIGATION
Section 2.1 Issuance of LC. (a) The LC Provider hereby agrees, on the terms
and subject to the conditions hereinafter set forth, to issue to the Trustee,
for the benefit of the Lender, the LC in an initial amount equal to $10,000,000
(the "LC Commitment") for a term expiring on the earlier of (i) August 31, 2003,
or (ii) the date on which there are no amounts outstanding under the Indenture
(the "LC Expiration Date").
(b) If a successor Trustee is appointed under the Indenture, promptly
following the appointment of such successor Trustee and upon receipt of an
Instruction to Transfer substantially in the form of Annex B to the LC, the LC
Provider shall deliver to such successor Trustee, in exchange for, and
contemporaneously with the surrender of, the outstanding LC held by the
predecessor Trustee, a substitute letter of credit substantially in the form of
Exhibit A hereto, having terms identical to the then outstanding LC but in favor
of such successor Trustee.
(c) If the Applicant wishes to extend the LC Expiration Date for purposes
of this Agreement and the LC, the Applicant shall give the LC Provider written
notice to such effect not later than the date 90 days prior to the LC Expiration
Date as then in effect. If the Applicant shall make such request, the LC
Provider shall notify the Applicant and the Trustee in writing of its decision
whether or not to so extend the LC Expiration Date, which decision shall be in
its sole and absolute discretion, not later than 30 days after the notice from
the Applicant referred to above, stating that the LC Provider has or has not
agreed to extend such LC Expiration Date for an additional period as specified
by the LC Provider and, if the LC Provider does so consent, the conditions of
such consent (including conditions relating to legal documentation). If the LC
Provider shall not so notify the Applicant and the Trustee, it shall be deemed
not to have consented to such request. If the LC Provider decides to extend the
LC Expiration Date, the LC Provider shall either (i) issue to the Trustee, in
exchange for, and upon receipt of, the then outstanding LC, a substitute letter
of credit having terms substantially the same as the then outstanding LC and
with a face amount equal to the LC Amount but expiring on the LC Expiration
Date, as so extended or (ii) deliver to the Trustee an amendment to the then
outstanding LC to reflect such extension of the LC Expiration Date.
Section 2.2 Disbursements. Upon presentation by the Trustee to the LC
Provider of a Certificate of Credit Demand (the "Credit Demand") in the form of
Annex A to the LC, and subject to the terms and conditions set forth herein and
in the LC, the LC Provider shall make a disbursement (such disbursement being
referred to herein as an "LOC Credit Disbursement") at the time, in the manner
and to the account specified in the Credit Demand, up to the lesser of (i) the
full amount of such Credit demand but in an aggregate amount not exceeding the
LC Amount (as defined in the LC) and (ii) the LC Available Amount (the "LC
Available Amount").
Section 2.3 Reimbursement. The Applicant, jointly and severally, shall pay
to the LC Provider on demand on and after each date on which the LC Provider
shall pay any LOC Credit Disbursement (i) an amount equal to such LOC Credit
Disbursement plus (ii) interest on any amount remaining unpaid by the Applicant
to the LC Provider under clause (i) of this Section 2.3, from the date of such
LOC Credit Disbursement until payment in full thereof, at a rate equal to the
Alternate Reference Rate plus 2.0%.
"Alternate Reference Rate" means, on any date, a fluctuating rate of interest
per annum equal to the higher of:
(i) the rate of interest most recently announced by LC Provider at its
principal office in Atlanta, Georgia as its prime rate (it being understood
that at any one time there shall exist only one such prime rate so
announced), which rate is not necessarily intended to be the lowest rate of
interest determined by LC Provider in connection with extensions of credit;
or
2
(ii) the Federal Funds Rate most recently determined by LC Provider
plus 0.50% per annum.
"Federal Funds Rate" means, for any period, the per annum rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the Federal Reserve Board (including any such
successor, "H.15(519)") for such day opposite the caption "Federal Funds
(Effective)." If on any relevant day such rate is not yet published in
H.15(519), the rate for such day will be the rate set forth in the daily
statistical release designated as the Composite 3:30 p.m. Quotations for U.S.
Government Securities, or any successor publications, published by the Federal
Reserve Bank of New York (including any such successor, the "Composite 3:30 p.m.
Quotations") for such day under the caption "Federal Funds Effective Rate." If
on any relevant day the appropriate rate for such previous day is not yet
published in either H.15(519) or the Composite 3:30 p.m. Quotations, the rate
for such day will be the arithmetic mean as determined by LC Provider of the
rates for the last transaction in overnight Federal funds arranged prior to 9:00
a.m. (New York time) on that day by each of three leading brokers of Federal
funds transactions in New York City selected by LC Provider.
Section 2.4 Facility Fee. CAILP shall pay to the LC Provider a letter of
credit fee (the "Facility Fee"), which Facility Fee shall be due and payable in
quarterly installments in arrears (or, if an LC Event of Default has occurred,
six months in advance) on the Payment Date following the end of each calendar
quarter, with each such installment being in an amount equal to 1.85% (plus, if
an LC Event of Default has occurred, 1.0%) per annum of the weighted average LC
Amount (as defined in the LC) during such calendar quarter (computed on the
basis of a 360-day year and the actual number of days during such calendar
quarter). In addition, CAILP shall pay to the LC Provider any amounts necessary
to reimburse the LC Provider for amendment, transfer or drawing costs and
miscellaneous expenses and documentary and processing charges in accordance with
the LC Provider's standard schedule of such charges in effect at the time of
amendment, transfer or drawing, as the case may be, of the LC.
Section 2.5 No Liability of LC Provider. The Applicant assumes all risks of
acts or omissions of the Trustee and any other beneficiary or transferee of the
LC with respect to its use of the LC. Neither the LC Provider nor any of its
respective employees, officers or directors shall be liable or responsible for:
(a) the use which may be made of the LC or any acts or omissions of the Trustee
and any transferee of the LC; (b) the validity or genuineness of documents, or
of any endorsement thereon, even if such documents should prove to be in any or
all respects invalid, fraudulent or forged; (c) payment by the LC Provider
against presentation of documents which do not comply with the terms of the LC,
including failure of any document to bear any reference or adequate reference to
the LC, provided the LC Provider has received a Credit Demand from the Trustee
which appears regular on its face; or (d) any other circumstances whatsoever in
making or failing to make payment under the LC; provided, however, that the LC
Provider shall be liable to the Applicant, to the extent of any direct, as
opposed to consequential, damages suffered by the Applicant which were caused by
(i) the LC Provider's willful misconduct, bad faith or gross negligence in
determining whether documents presented under the LC comply with the terms of
the LC or (ii) the LC Provider's bad faith or gross negligence in failing to
make or willful failure to make lawful payment under the LC after the
presentation to the LC Provider by the Trustee of a certificate strictly
complying with the terms and conditions of the LC (it being understood that if
the Applicant requests the LC Provider to take any action, or fail to take any
action, described in clause (i) or (ii) of this Section 2.5, the LC Provider
shall not be liable to the Applicant therefor). In furtherance and not in
limitation of the foregoing, the LC Provider may accept documents that appear on
their face, absent manifest error, to be in order, without responsibility for
further investigation.
3
Section 2.6 Surrender of LC. Provided that the LC Provider is not then in
default under the LC by reason of its having wrongfully failed to honor a demand
for payment previously made by the Trustee under the LC, the LC Provider or the
Applicant shall instruct the Trustee to surrender the LC to the LC Provider on
the earliest of (i) the LC Expiration Date, (ii) the date on which the LC
Provider honors a Credit Demand equal to the then available LC Amount, and (iii)
the date on which the LC Provider receives written notice from the Trustee that
an alternate letter of credit or other credit facility has been substituted for
the LC.
Section 2.7 Conditions Precedent to Issuance. The following constitute
conditions precedent to the effectiveness of this Agreement and the obligation
of the LC Provider to execute and to deliver to the Trustee the LC:
(a) On the date of execution and delivery of this Agreement and the
LC, all representations and warranties of the Applicant contained in this
Agreement shall be true and correct in all material respects.
(b) On the date of the execution and delivery of this Agreement and
the LC, and after giving effect to the transactions contemplated by this
Agreement and the Indenture, there shall not have occurred a Pay Out Event,
a Potential Payout Event, an Event of Default, a Default or a Servicer
Default.
(c) The LC Provider shall have received the favorable written opinions
of counsel to the Applicant covering such matters as the LC Provider may
reasonably request.
(d) The LC Provider shall have received (i) copies of each of the
organizational documents of the Applicant, each certified by the Secretary
of State of the State of the Applicant's jurisdiction, (ii) resolutions of
the Applicant's general partners' Board of Directors authorizing the
execution, delivery and performance of this Agreement and the other
Transaction Documents to which the Applicant is a party (and the
procurement of the LC), certified as of the Closing Date by an officer of
the Applicant, (iii) incumbency certificates of the Applicant's general
partners with respect to its officers, agents or other representatives
authorized to execute this Agreement and (iv) executed copies of the
Transaction Documents, together with evidence reasonably satisfactory to
the LC Provider that all conditions precedent to the obligations of the
parties thereunder have been satisfied.
4
(e) The LC Provider shall be satisfied with the final terms and
conditions of the transactions contemplated hereby and by the Transaction
Documents, including, without limitation, all legal aspects thereof; and
all documentation relating to the transactions shall be in form and
substance reasonably satisfactory to the LC Provider.
(f) The LC Provider shall be satisfied with the organizational
structure and capitalization of the Applicant.
(g) On the date of the execution and delivery of this Agreement and
the LC, there shall be no action, suit, investigation, litigation or
proceeding pending against or, to the knowledge of the Applicant,
threatened against or affecting the Applicant before any court or
arbitrator or any governmental authority that (A) would be reasonably
likely to have a Material Adverse Effect with respect to the Applicant, or
(B) which in any manner draws into question the legality, validity or
enforceability of this Agreement or any other Transaction Document, the
consummation of the transactions contemplated hereby or thereby, or the
ability of any Person to comply with any of the respective terms hereunder
or thereunder.
(h) All governmental and third party consents, actions, authorizations
and approvals necessary in connection with this Agreement, the LC, the
Transaction Documents or the transactions contemplated hereby or thereby
shall have been obtained (without the imposition of any conditions that are
not, in its reasonable judgment, acceptable to the LC Provider) and shall
remain in effect; all applicable waiting periods shall have expired without
any action being taken by any competent authority; and no law or regulation
shall be applicable that restrains, prevents or imposes materially adverse
conditions upon this Agreement or the LC or the transactions contemplated
hereby or thereby.
(i) The LC Provider shall have received such other documents
(including, without limitation, an executed copy (or duplicate thereof) of
each other Transaction Document) certificates, instruments, approvals or
opinions as the LC Provider may reasonably request.
(j) The Applicant shall have paid the first installment of the
Facility Fee.
Section 2.8 Increased Capital Costs. (a) In the event that the LC Provider
shall have determined that the adoption of any law, treaty, governmental (or
quasi-governmental) rule, regulation, guideline or order regarding capital
adequacy, or any change therein or in the interpretation or application thereof,
or compliance by the LC Provider with any request or directive regarding capital
adequacy (whether or not having the force of law and whether or not failure to
comply therewith would be unlawful) from any central bank or governmental agency
or body having jurisdiction, does or shall have the effect of increasing the
amount of capital required to be maintained by the LC Provider with respect to
the issuance or maintenance of the LC, then the Applicant, jointly and
severally, shall from time to time, within ten days of written notice and demand
from the LC Provider, pay to the LC Provider additional amounts sufficient to
compensate the LC Provider for the cost of such additional required capital.
5
(b) If by reason of (i) any change in applicable law, regulation, rule,
decree or regulatory requirement or any change in the interpretation or
application by any judicial or regulatory authority of any law, regulation,
rule, or (ii) compliance by the LC Provider with any direction, request or
requirement (whether or not having the force of law) of any Governmental
Authority or monetary authority including, without limitation, Regulation D of
the Federal Reserve Board as from time to time in effect and any successor to
all or a portion thereof establishing reserve requirements:
(A) the LC Provider shall be subject to any tax, levy, charge or
withholding of any nature or to any variation thereof or to any
penalty with respect to the maintenance or fulfillment of its
obligations under this Agreement, whether directly or by such being
imposed on or suffered by the LC Provider (except for changes in the
rate of tax on the overall net income of the LC Provider);
(B) any reserve, deposit or similar requirement is or shall be applicable,
imposed or modified in respect of the LC; or
(C) there shall be imposed on the LC Provider any other condition
regarding the LC;
and the result of the foregoing is to directly or indirectly increase the cost
to the LC Provider of issuing or maintaining the LC, or to reduce the amount
receivable in respect thereof by the LC Provider, then and in any such case the
LC Provider may, at any time within a reasonable period after the additional
cost is incurred or the amount received is reduced, notify the Applicant and the
Applicant shall, jointly and severally, pay, within ten Business Days of demand,
such amounts as the LC Provider may reasonably deem to be necessary to
compensate the LC Provider for such additional cost or reduced receipt, together
with interest on such amount from the date demanded until payment in full
thereof at a rate equal at all times to the Alternate Reference Rate.
(c) The determination by the LC Provider of any amount due pursuant to this
Section 2.8 shall be contained in a certificate setting forth the calculation
thereof in reasonable detail, which certificate shall be delivered by the LC
Provider to the Applicant and shall, in the absence of manifest error, be final
and conclusive and binding on all of the parties hereto.
Section 2.9 Taxes. (a) All payments by the Applicant of principal of, and
interest on, LOC Credit Disbursements and all other amounts payable hereunder by
the Applicant shall be made free and clear of and without deduction for any
present or future income, excise, stamp or franchise taxes and other taxes,
fees, duties, withholdings or other charges of any nature whatsoever imposed by
any taxing authority, but excluding franchise taxes and taxes imposed on or
measured by the LC Provider's net income or receipts (such non-excluded items
being called "Taxes"). In the event that any withholding or deduction from any
payment to be made by the Applicant hereunder is required in respect of any
Taxes pursuant to any applicable law, rule or regulation, then the Applicant
will:
(i) pay directly to the relevant authority the full amount
required to be so withheld or deducted;
6
(ii) promptly forward to the LC Provider an official receipt or
other documentation reasonably satisfactory to the LC Provider
evidencing such payment to such authority; and
(iii) pay to the LC Provider such additional amount or amounts as
is necessary to ensure that the net amount actually received by the LC
Provider will equal the full amount the LC Provider would have
received had no such withholding or deduction been required.
Moreover, if any Taxes are directly asserted against the LC Provider with
respect to any payment received by the LC Provider hereunder, the LC Provider
may pay such Taxes and the Applicant shall promptly pay such additional amounts
(including any interest or expenses) as is necessary in order that the net
amount received by the LC Provider after the payment of such Taxes (including
any Taxes on such additional amount) shall equal the amount the LC Provider
would have received had not such Taxes been asserted.
(b) If the Applicant fails to pay any Taxes of which the Applicant has
received notice when due to the appropriate taxing authority or fails to remit
to the LC Provider the required receipts or other required documentary evidence,
the Applicant shall, jointly and severally, indemnify the LC Provider for any
incremental Taxes, interest or penalties that may become payable by the LC
Provider as a result of any such failure.
Section 2.10 Obligation Absolute. The obligations of the Applicant under
this Agreement and any other agreement or instrument relating to the LC shall be
irrevocable, and shall be paid strictly in accordance with the terms of this
Agreement and the Indenture and such other agreement or instrument under all
circumstances, including, without limitation, the following circumstances:
(a) any lack of validity or enforceability of this Agreement, the LC
or any other Transaction Document;
(b) any change in the time, manner or place of payment of, or in any
other terms of, all or any of the obligations of the Applicant in respect
of the LC or of the Applicant under any other amendment or waiver of or any
consent to departure from all or any of the Transaction Documents;
(c) the existence of any claim, set-off, defense or other right which
the Applicant may have at any time against the Trustee or any other
beneficiary or any transferee of the LC (or any persons or entities for
whom the Trustee, any such beneficiary or any such transferee may be
acting), or any other person or entity, whether in connection with this
Agreement, the transactions contemplated hereby or by any other Transaction
Document or any unrelated transaction;
(d) any statement or any other document presented under the LC proven
to be forged, fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect;
7
(e) payment by the LC Provider under the LC against presentation of a
draft or certificate which does not comply with the terms of the LC,
provided that the LC Provider has received a Credit Demand from the Trustee
which appears regular on its face;
(f) any exchange, release or non-perfection of any collateral, or any
release or amendment or waiver of or consent to departure from any
guarantee, for all or any of the obligations of the Applicant in respect of
the LC; or
(g) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing, including, without limitation, any other
circumstance that might otherwise constitute a defense available to, or a
discharge of, the Applicant or a guarantor, but excluding in any event, the
bad faith, gross negligence or willful misconduct of the LC Provider and
the defense of payment by the Applicant.
Section 2.11 Events of Default. Upon the occurrence and continuance of any
of the following events (herein referred to as a "LC Event of Default"):
(a) the Applicant shall fail to pay to the LC Provider any unpaid
principal amount due and payable by the Applicant under this Agreement in
respect of any LOC Credit Disbursement within five Business Days of the
date when such amount is due;
(b) the Applicant shall fail to pay any unpaid interest, fees or other
amounts due and payable by the Applicant under this Agreement, within five
Business Days of the date when such interest, fees or other amounts are
due;
(c) the Applicant shall fail to observe or perform any of the
covenants contained in Section 3.2 and, in the case of covenants set forth
in Section 3.2(a), such failure shall continue unremedied for the grace
period, if any, set forth in the applicable Transaction Documents, and in
the case of any other covenant set forth in Section 3.2 such failure shall
continue unremedied for thirty (30) days;
(d) any representation, warranty or certification made by the
Applicant in this Agreement or any other Transaction Document or in any
certificate delivered pursuant to this Agreement or any other Transaction
Document shall prove to have been incorrect when made which continues
unremedied for a period of 30 days after the date on which the Applicant
has knowledge or notice thereof;
(e) a final judgment or judgments for the payment of money in excess
of $250,000 in the aggregate shall have been rendered against the Issuer,
the Applicant, any Originator or Parent and the same shall have remained
unsatisfied and in effect, without stay of execution, for a period of 30
consecutive days after the period for appellate review shall have elapsed;
(f) any event of default (not cured or waived within ten (10) Business
Days) under (A) the Retailer Credit Agreement, (B) any inventory financing
agreement between any lender and the Applicant, the Parent or any Seller,
or (C) any indenture, credit or loan agreement or other agreement or
instrument of any kind pursuant to which Indebtedness of the Applicant, the
Parent or Seller in an aggregate principal amount in excess of $1,000,000
is outstanding or by which the same is evidenced, shall have occurred and
be continuing;
8
(g) a Pay Out Event, Servicer Default or Event of Default under the
Transaction Documents shall have occurred and be continuing;
then, the LC Provider, may (a) to the extent demand is not otherwise made, by
notice to the Applicant and the Trustee declare the principal amounts of all
outstanding LOC Credit Disbursements to be due and payable, together with
accrued interest thereon and all other sums, payable by the Applicant hereunder
whereupon the same shall become due and payable without presentment, demand,
protest, or further notice of any kind, all of which are hereby expressly waived
by the Applicant and (b) take any other action permitted to be taken by it
hereunder, under any other Transaction Document or under applicable law or
otherwise.
ARTICLE III
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 3.1 Representations and Warranties of the Applicant. In order to
induce LC Provider to enter into this Agreement and to issue the LC, the
Applicant hereby represents and warrants to the LC Provider as follows:
(a) Organization and Good Standing, etc. The Applicant has been duly
organized and is existing as a limited partnership in good standing under the
laws of the State of Texas, with power and authority to own its properties and
to conduct its business as such properties are presently owned and such business
is presently conducted. The Applicant is duly licensed or qualified to do
business as a foreign limited partnership and the Applicant is in good standing
in the jurisdiction where its principal place of business and chief executive
office are located and in each other jurisdiction in which the failure to be so
licensed or qualified would be reasonably likely to have a Material Adverse
Effect.
(b) Power and Authority; Due Authorization. The Applicant has (a) all
necessary power, authority and legal right to (i) execute, deliver and perform
its obligations under this Agreement, and (ii) to borrow on the terms and
subject to the conditions herein provided, and (b) duly authorized, by all
necessary corporate or partnership action (as applicable), the execution,
delivery and performance of this Agreement.
(c) No Violation. The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not (a) conflict with,
result in any breach of any of the terms and provisions of, or constitute (with
or without notice or lapse of time or both) a default under, (i) the certificate
of limited partnership or partnership agreement of the Applicant or the
certificate or articles of incorporation or organization or by-laws of the
Applicant's general partner, or (ii) any indenture, loan agreement, pooling and
servicing agreement, receivables purchase agreement, mortgage, deed of trust, or
other agreement or instrument to which the Applicant is a party or by which it
or any of its properties is bound, (b) result in or require the creation or
imposition of any Adverse Claim upon any of its properties pursuant to the terms
of any such indenture, loan agreement, pooling and servicing agreement,
receivables purchase agreement, mortgage, deed of trust, or other agreement or
instrument, or (c) violate any law or any order, rule, or regulation applicable
to the Applicant or of any court or of any federal, state or foreign regulatory
body, administrative agency, or other governmental instrumentality having
jurisdiction over the Applicant or any of its properties.
9
(d) Validity and Binding Nature. This Agreement is the legal, valid and
binding obligation of the Applicant enforceable against the Applicant in
accordance with its respective terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar law
affecting creditors' rights generally and by general principles of equity.
(e) Government Approvals. No authorization or approval or other action by,
and no notice to or filing with, any governmental authority or regulatory body
required for the due execution, delivery or performance by the Applicant of this
Agreement remains unobtained or unfiled.
(f) Financial Condition. Since January 31, 2002, no event has occurred that
has had, or is reasonably likely to have, a Material Adverse Effect.
(g) Accuracy of Information. All factual written information heretofore or
contemporaneously furnished by the Applicant to LC Provider for purposes of or
in connection with this Agreement is, and all other such factual, written
information hereafter furnished by the Applicant to LC Provider pursuant to or
in connection with this Agreement will be, true and accurate in every material
respect on the date as of which such information is dated or certified. No
information contained in any report or certificate delivered pursuant to this
Agreement shall be incomplete by omitting to state a material fact or any fact
necessary to make the statements contained therein not misleading on the date as
of which such information is dated or certified.
(h) No Actions, Suits. There are no actions, suits or other proceedings
(including matters relating to environmental liability) pending or, to its
knowledge, threatened against or affecting the Applicant or any of its
respective properties, by or before any governmental authority which, if
adversely determined (individually or in the aggregate), may have a material
adverse effect on the financial condition of the Applicant.
Section 3.2 Covenants of the Applicant. So long as the LC has not expired
or any amount is owing to the LC Provider hereunder, the Applicant agrees that,
unless at any time the LC Provider shall otherwise expressly consent in writing,
it will:
(a) Transaction Documents. Comply with all covenants of the Applicant
set forth in the other Transaction Documents to which it is a party.
10
(b) Reporting Requirements. Furnish, or cause to be furnished, to the
LC Provider:
(i) Audit Report. As soon as available and in any event within
ninety (90) days after the end of each Fiscal Year of Parent, a
balance sheet of Parent as of the end of such year and statements of
income and retained earnings and of source and application of funds of
Parent, along with consolidating statements, for the period commencing
at the end of the previous Fiscal Year and ending with the end of such
year, in each case setting forth comparative figures for the previous
Fiscal Year, certified without material qualification in a manner
satisfactory to the Trustee by Ernst & Young or other nationally
recognized independent public accountants acceptable to the Trustee,
together with a certificate of such accounting firm stating that in
the course of the regular audit of the business of Parent, which audit
was conducted in accordance with GAAP, such accounting firm has
obtained no knowledge that an Event of Default, Default, Pay Out Event
or Potential Pay Out Event has occurred and is continuing, or if, in
the opinion of such accounting firm, such an Event of Default,
Default, Pay Out Event or Potential Pay Out Event has occurred and is
continuing, a statement as to the nature thereof;
(ii) Quarterly Statements. As soon as available and in any event
within forty five (45) days after the end of each fiscal quarter,
quarterly balance sheets and quarterly statements of source and
application of funds and quarterly statements of income and retained
earnings of Parent, certified by the Responsible Officer of Parent
(which certification shall state that such balance sheets and
statements fairly present the financial condition and results of
operations for such fiscal quarter, subject to year-end audit
adjustments), delivery of which balance sheets and statements shall be
accompanied by a Conn Officer's Certificate to the effect that no
Event of Default, Default, Pay Out Event or Potential Pay Out Event
has occurred and is continuing
(iii) Notice of Default. Immediately, and in any event within one
(1) Business Day after the Applicant obtains knowledge of any Pay Out
Event, Potential Pay Out Event, Servicer Default, Event of Default,
Default or LC Event of Default, the Applicant shall give the LC
Provider notice thereof, together with a written statement of the
principal financial officer of the Applicant setting forth the details
thereof and any action with respect thereto taken or contemplated to
be taken by the Applicant; and
(iv) Other. Promptly, from time to time, such other information,
documents, or reports respecting the condition or operations,
financial or otherwise, of the Applicant as the LC Provider may from
time to time reasonably request in order to protect the interests of
the LC Provider or the Trustee under or as contemplated by this
Agreement or any other Transaction Document.
11
(c) Financial Covenants. Parent shall maintain a consolidated net
worth of at least $30,000,000.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Payments. (a) Unless otherwise specified herein, all payments
to the LC Provider hereunder shall be made in lawful currency of the United
States and in immediately available funds prior to 1:00 p.m. (Atlanta, Georgia
time) on the date such payment is due by wire transfer to SunTrust Capital
Markets, Inc. (on behalf of the LC Provider), ABA No. 061000104, Account No.
8801898605, Reference: Conn Funding II, L.P., Attn.: STCM Accounting Department,
or to such other office or account maintained by the LC Provider as the LC
Provider may direct.
(b) Whenever any payment under this Agreement shall be stated to be due on
a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall in such case be
included in computing interest, commissions or fees, if any, in connection with
such payment.
Section 4.2 Expenses. The Applicant agrees to pay all costs and expenses
incurred by the LC Provider (including, without limitation, reasonable
attorneys' fees and expenses), if any, in connection with the preparation,
execution and delivery, enforcement, amendment or waiver of the obligations of
the Applicant under this Agreement or any other Transaction Document or any
other agreement furnished pursuant hereto or in connection herewith or in
connection with any negotiations arising out of any LC Event of Default or any
events or circumstances that may give rise to an LC Event of Default and with
respect to presenting claims in or otherwise participating in any bankruptcy,
insolvency or other similar proceeding involving creditors' rights generally and
any ancillary proceedings. In addition, the Applicant shall pay any and all
stamp and other taxes and fees payable or determined to be payable in connection
with the execution, delivery, filing and recording of this Agreement or the LC
and any such other documents, and agrees to hold the LC Provider harmless from
and against any and all liabilities with respect to or resulting from any delay
in paying or omission to pay such taxes and fees.
Section 4.3 Indemnity. The Applicant agrees to indemnify and hold harmless
the LC Provider and, in their capacities as such, officers, directors,
shareholders, affiliates, controlling persons, employees, agents and servants of
the LC Provider, from and against any and all claims, damages, losses,
liabilities, costs or expenses whatsoever which the LC Provider may incur or
which may be claimed against the LC Provider by any person whatsoever (including
fees and expenses of counsel) in each case arising out of or by reason of or in
connection with, or in connection with the preparation of a defense of, any
investigation, litigation or proceeding arising out of, relating to or in
connection with the execution and delivery of, or payment of any amount payable
by the Applicant under, the LC or this Agreement or any other Transaction
Document or any acts or omissions of the Applicant in connection herewith or
therewith, or any transactions contemplated hereby or thereby (whether or not
consummated), or any inaccuracies or alleged inaccuracies in any material
respect or any untrue statement or alleged untrue statement of the Applicant
contained or incorporated by reference in each Transaction Document, except to
the extent that such claim, damage, loss, liability, cost or expense is caused
by the willful misconduct, bad faith or gross negligence of the LC Provider.
12
Section 4.4 Notices. All notices, requests and other communications to any
party hereunder shall be in writing (including bank wire, facsimile transmission
or similar writing) and addressed, delivered or transmitted to such party at its
address or facsimile number set forth on the signature page hereof, or at such
other address or facsimile number, as the case may be, as such party may
hereafter specify for the purpose by notice to the other party. Any notice, if
mailed and properly addressed with postage prepaid or if properly addressed and
sent by prepaid courier service shall be deemed given when received; any notice,
if transmitted by telecopier, shall be deemed given when transmitted upon
receipt of electronic confirmation of transmission. Each such notice, request or
communication shall be effective when received at the address or facsimile
number specified on the signature page hereof (or such other address or
facsimile number specified pursuant to this Section 4.4).
Section 4.5 Governing Law; Waiver of Jury Trial. THIS AGREEMENT AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER MAY NOT BE CHANGED ORALLY BUT
ONLY BY AN INSTRUMENT IN WRITING SIGNED BY EACH PARTY HERETO AND SHALL BE
CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
WITHOUT REGARDS TO THE CONFLICT OF LAWS PRINCIPLES THEREOF (OTHER THAN SECTION
5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW).
EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY, ABSOLUTELY AND
INTENTIONALLY WAIVES ANY RIGHTS IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS
AGREEMENT OR ANY OTHER TRANSACTION DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF
DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE LC PROVIDER OR
THE APPLICANT IN CONNECTION HEREWITH OR THEREWITH. THE APPLICANT ACKNOWLEDGES
AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS
PROVISION (AND EACH OTHER PROVISION OF EACH OTHER TRANSACTION DOCUMENT TO WHICH
IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE LC
PROVIDER ENTERING INTO THIS AGREEMENT AND EACH SUCH TRANSACTION DOCUMENT TO
WHICH IT IS A PARTY.
Section 4.6 Waivers. Neither any failure nor any delay on the part of the
LC Provider in exercising any right, power or privilege hereunder or under the
LC or any other Transaction Document shall operate as a waiver thereof, nor
shall a single or partial exercise thereof preclude any other or further
exercise or the exercise of any other right, power or privilege. No provision of
this Agreement shall be waived, amended or supplemented except by a written
instrument executed by the parties hereto. The remedies herein provided are
cumulative and not exclusive of any remedies provided by law.
13
Section 4.7 Severability. Any provisions of this Agreement which are
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
Section 4.8 Term. This Agreement shall remain in full force and effect
until the reimbursement of all LOC Credit Disbursements by the Applicant and the
payment by the Applicant of all other amounts payable hereunder, notwithstanding
the earlier termination of the LC.
Section 4.9 Successors and Assigns. This Agreement shall be binding upon
the LC Provider and its successors and assigns and the Applicant and its
successors and assigns; provided, however, that the Applicant may not transfer
or assign any of its obligations, rights, or interests hereunder without the
prior written consent of the LC Provider; provided, further, that the LC
Provider may at any time grant participations to any other Person, in all or
part of its obligations under the LC and its rights under this Agreement. The LC
Provider hereby acknowledges and agrees that any such disposition will not alter
or affect the LC Provider's direct obligations to the Trustee, and that the
Applicant shall not have any obligations to have any communication or
relationship with any participant in order to enforce such obligations of the LC
Provider hereunder and under the LC.
Section 4.10 Counterparts. This Agreement may be executed in any number of
counterparts, and by the different parties hereto on the same or separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute one and the same agreement.
Section 4.11 Further Assurances. The Applicant agrees to do such further
acts and things and to execute and deliver to the LC Provider such additional
assignments, agreements, powers and instruments as are reasonably required by
the LC Provider to carry into effect the purposes of this Agreement or to better
assure and confirm unto the LC Provider its rights, powers and remedies
hereunder.
Section 4.12 Survival of Representations and Warranties. All
representations and warranties contained herein or made in writing by the
Applicant in connection herewith shall survive the execution and delivery of
this Agreement, regardless of any investigation made by the LC Provider or on
its behalf and shall continue so long as and until such time as all obligations
hereunder and under the other Transaction Documents shall have been paid in
full. The obligations of the Applicant under Sections 4.1, 4.2 and 4.3 shall in
each case survive any termination of this Agreement, the payment in full of all
obligations hereunder or under any other Transaction Document and the
termination of the LC.
Section 4.13 Obligation. The LC Provider and the Applicant each understands
and agrees that the LC is irrevocable and the obligations of the LC Provider as
issuer thereof shall be unaffected by any default hereunder, including, without
limitation any failure to pay the Facility Fee. Neither the failure of the
Applicant (or any person or organization acting on its behalf) or the Trustee to
take any action (whether required hereunder or otherwise), nor any action taken
by the Applicant shall be asserted by the LC Provider as a defense to payment
under the LC (except for the failure of any documents presented thereunder to
comply with the terms of the LC) or as the basis of a right of setoff by the LC
Provider against its obligations to make any such payment.
14
Section 4.14 Headings. Section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
Section 4.15 No Bankruptcy Petition Against the Issuer. The LC Provider by
entering into this Agreement hereby covenants and agrees that, prior to the date
which is one year and one day after the payment in full of the latest maturing
Note and the termination of the Indenture, it will not institute against, or
join with any other Person in instituting against, the Issuer any bankruptcy,
reorganization, arrangement, insolvency or liquidation proceedings, or other
proceedings, under any United States Federal or state bankruptcy or similar law
in connection with any obligation relating to the Notes, the Indenture or any of
the Transaction Documents. In the event that the LC Provider takes action in
violation of this Section 4.15, the Issuer shall file an answer with the
bankruptcy court contesting the filing of such a petition by the LC Provider
against the Issuer or the commencement of such action and raising the defense
that the LC Provider has agreed in writing not to take such action and should be
estopped and precluded therefrom and such other defenses, if any, as its counsel
advises that it may assert. The provisions of this Section 4.15 shall survive
the termination of this Agreement. Nothing contained herein shall preclude
participation by the LC Provider in the assertion or defense of its claims in
any such proceeding involving the Issuer.
15
IN WITNESS WHEREOF, the Applicant and the LC Provider have caused this
Agreement to be duly executed by their duly authorized officers, as of the day
and year first above written.
CAI, L.P.
By: Conn Appliances, Inc., its general
partner
By: /s/ Thomas J. Frank
--------------------------------------
Name: Thomas J. Frank
-------------------------------
Title: CEO and Chairman of the Board
-------------------------------
CAI, L.P.
3295 College Street
Beaumont, Texas 77701
Attention: David Atnip
Facsimile: (409) 839-4609
CONN FUNDING II, L.P.
By: Conn Funding II GP, L.L.C., its
general partner
By: /s/ David R. Atnip
--------------------------------------
Name: David R. Atnip
-------------------------------
Title: Secretary / Treasurer
-------------------------------
Conn Funding II, L.P.
3295 College Street
Beaumont, Texas 77701
Attention: David Atnip
Facsimile: (409) 839-4609
Annex C-1
SUNTRUST BANK
By: /s/ R. Lee McCrary, Jr.
--------------------------------------
Name: R. Lee McCrary, Jr.
-------------------------------
Title: Vice-President
-------------------------------
SunTrust Bank
25 Park Place
Atlanta, GA 30303-3706
Attention: Lee McCrary
Facsimile: (404) 588-8129
2
EXHIBIT 10.25.1
LETTER OF CREDIT NUMBER F842227
AMENDMENT DATE: AUGUST 23, 2006
APPLICANT:
CAI, L.P.
3295 COLLEGE STREET
BEAUMONT, TX 77701
CONN FUNDING II, LP
3295 COLLEGE STREET
BEAUMONT, TX 77701
BENEFICIARY:
WELLS FARGO BANK MINNESOTA,
NATIONAL ASSOCIATION, AS TRUSTEE
MAC N9311-161, SIXTH STREET AND
MARQUETTE AVENUE
MINNEAPOLIS, MN 55479
THIS AMENDMENT IS TO BE CONSIDERED AS PART OF THE ABOVE MENTIONED CREDIT AND
MUST BE ATTACHED THERETO.
AMENDMENT NO. 005
EXPIRATION DATE NOW READS AUGUST 31, 2007.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
PLEASE DIRECT ALL INQUIRIES TO:
SUNTRUST BANK
ATTN: STANDBY LETTER OF CREDIT DEPARTMENT
25 PARK PLACE, 16TH FLOOR, MC 3706
ATLANTA, GEORGIA 30303
PHONE: 800-951-7847 OPTION 3.
SINCERELY,
SUNTRUST BANK
\
EXHIBIT 10.25.2
LETTER OF CREDIT NUMBER F842227
AMENDMENT DATE: SEPTEMBER 20, 2006
APPLICANT:
CAI, L.P.
3295 COLLEGE STREET
BEAUMONT, TX 77701
CONN FUNDING II, LP
3295 COLLEGE STREET
BEAUMONT, TX 77701
BENEFICIARY:
WELLS FARGO BANK MINNESOTA,
NATIONAL ASSOCIATION, AS TRUSTEE
MAC N9311-161, SIXTH STREET AND
MARQUETTE AVENUE
MINNEAPOLIS, MN 55479
THIS AMENDMENT IS TO BE CONSIDERED AS PART OF THE ABOVE MENTIONED CREDIT AND
MUST BE ATTACHED THERETO.
AMENDMENT NO. 006
THERE IS AN INCREASE IN LETTER OF CREDIT AMOUNT OF 10,000,000.00 U.S. DOLLARS
FOR A NEW TOTAL OF 20,000,000.00 U.S. DOLLARS.
ALL OTHER TERMS AND CONDITIONS REMAIN UNCHANGED.
PLEASE DIRECT ALL INQUIRIES TO:
SUNTRUST BANK
ATTN: STANDBY LETTER OF CREDIT DEPARTMENT
25 PARK PLACE, 16TH FLOOR, MC 3706
ATLANTA, GEORGIA 30303
PHONE: 800-951-7847 OPTION 3.
SINCERELY,
SUNTRUST BANK
\
EXHIBIT 31.1
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF EXECUTIVE OFFICER)
I, Thomas J. Frank, Sr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Thomas J. Frank, Sr.
---------------------------
Thomas J. Frank, Sr.
Chairman of the Board
and Chief Executive Officer
Date: November 30, 2006
45
EXHIBIT 31.2
RULE 13a-14(a)/15d-14(a) CERTIFICATION
(CHIEF FINANCIAL OFFICER)
I, David L. Rogers, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ David L. Rogers
---------------------------
David L. Rogers
Chief Financial Officer
Date: November 30, 2006
46
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company")
on Form 10-Q for the period ended October 31, 2006 as filed with the Securities
and Exchange Commission on the date hereof (the "Report"), we, Thomas J. Frank,
Sr., Chairman of the Board and Chief Executive Officer of the Company and David
L. Rogers, Chief Financial Officer of the Company, hereby certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Thomas J. Frank Sr.
-------------------------------------
Thomas J. Frank, Sr.
Chairman of the Board and
Chief Executive Officer
/s/ David L. Rogers
-------------------------------------
David L. Rogers
Chief Financial Officer
Dated: November 30, 2006
A signed original of this written statement required by Section 906 has been
provided to Conn's, Inc. and will be retained by Conn's, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request. The foregoing
certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and
is not being filed as part of the Report or as a separate disclosure document.
47
EXHIBIT 99.1
SUBCERTIFICATION OF CHIEF OPERATING OFFICER IN SUPPORT OF RULE
13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, William C. Nylin Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ William C. Nylin, Jr.
-------------------------------------------
William C. Nylin, Jr.
Executive Vice-Chairman of the Board and
Chief Operating Officer
Date: November 30, 2006
48
EXHIBIT 99.2
SUBCERTIFICATION OF TREASURER IN SUPPORT OF RULE 13a-14(a)/15d-14(a)
CERTIFICATION (CHIEF FINANCIAL OFFICER)
I, David R. Atnip, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ David R. Atnip
---------------------------------------------
David R. Atnip
Senior Vice President and Treasurer
Date: November 30, 2006
49
EXHIBIT 99.3
SUBCERTIFICATION OF SECRETARY IN SUPPORT OF RULE 13a-14(a)/15d-14(a)
CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Sydney K. Boone, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Sydney K. Boone, Jr.
----------------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Date: November 30, 2006
50
EXHIBIT 99.4
SUBCERTIFICATION OF CHIEF OPERATING OFFICER,
TREASURER AND SECRETARY IN SUPPORT OF
18 U.S.C. SECTION 1350 CERTIFICATION,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company") on
Form 10-Q for the period ended October 31, 2006 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, William C. Nylin,
Jr., President and Chief Operating Officer of the Company, David R. Atnip,
Senior Vice President and Treasurer of the Company, and Sydney K. Boone, Jr.,
Corporate General Counsel and Secretary of the Company, hereby certify, pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ William C. Nylin, Jr.
----------------------------------------------
William C. Nylin, Jr.
Executive Vice-Chairman of the Board and
Chief Operating Officer
/s/ David R. Atnip
----------------------------------------------
David R. Atnip
Senior Vice President and Treasurer
/s/ Sydney K. Boone, Jr.
----------------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Dated: November 30, 2006
A signed original of this written statement has been provided to Conn's, Inc.
and will be retained by Conn's, Inc. The foregoing certification is being
furnished solely to support certifications pursuant to 18 U.S.C. Section 1350
and is not being filed as part of the Report or as a separate disclosure
document.
51
