UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2007 Commission File Number 000-50421
CONN'S, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 06-1672840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
One): Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer
[ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of August 28, 2007:
Class Outstanding
- ---------------------------------------- ----------------------
Common stock, $.01 par value per share 23,214,238
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements................................................1
- -------
Consolidated Balance Sheets as of January 31, 2007 and
July 31, 2007......................................................1
Consolidated Statements of Operations for the three and
six months ended July 31, 2006 and 2007...........................2
Consolidated Statement of Stockholders' Equity for the
six months ended July 31, 2007....................................3
Consolidated Statements of Cash Flows for the six months
ended July 31, 2006 and 2007......................................4
Notes to Consolidated Financial Statements..........................5
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- and Results of Operations........................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........29
- -------
Item 4. Controls and Procedures............................................29
- -------
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings..................................................30
- -------
Item 1A. Risk Factors.......................................................30
- --------
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds........30
- -------
Item 4. Submission of Matters to a Vote of Security Holders................31
- -------
Item 5. Other Information..................................................31
- -------
Item 6. Exhibits...........................................................31
- -------
SIGNATURE ....................................................................32
i
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets January 31, July 31,
2007 2007
-------------- --------------
(unaudited)
Current assets
Cash and cash equivalents............................. $ 56,570 $ 43,599
Accounts receivable, net.............................. 31,448 27,551
Interests in securitized assets....................... 136,848 166,130
Inventories........................................... 87,098 84,870
Deferred income taxes................................. 551 1,660
Prepaid expenses and other assets..................... 5,247 5,343
-------------- --------------
Total current assets................................ 317,762 329,153
Non-current deferred income tax asset................... 2,920 -
Property and equipment..................................
Land.................................................. 9,102 7,915
Buildings............................................. 13,896 11,749
Equipment and fixtures................................ 13,650 15,561
Transportation equipment.............................. 3,022 2,896
Leasehold improvements................................ 66,761 68,347
-------------- --------------
Subtotal............................................ 106,431 106,468
Less accumulated depreciation......................... (46,991) (51,843)
-------------- --------------
Total property and equipment, net................... 59,440 54,625
Goodwill, net........................................... 9,617 9,617
Debt issuance costs and other assets, net............... 208 181
-------------- --------------
Total assets........................................ $ 389,947 $ 393,576
============== ==============
Liabilities and Stockholders' Equity
Current liabilities
Current portion of long-term debt..................... $ 110 $ 118
Accounts payable...................................... 54,045 38,895
Accrued compensation and related expenses............. 9,234 8,704
Accrued expenses...................................... 20,424 22,229
Income taxes payable.................................. 3,693 113
Deferred revenues and allowances...................... 9,516 12,785
-------------- --------------
Total current liabilities........................... 97,022 82,844
Long-term debt.......................................... 88 58
Non-current deferred income tax liability............... - 499
Deferred gains on sales of property..................... 309 1,406
Stockholders' equity
Preferred stock ($0.01 par value, 1,000,000 shares
authorized; none issued or outstanding).............. - -
Common stock ($0.01 par value, 40,000,000 shares
authorized; 23,809,522 and 23,963,623 shares issued
at January 31, 2007 and July 31, 2007, respectively). 238 240
Additional paid-in capital............................ 93,365 96,382
Accumulated other comprehensive income................ 6,305 -
Retained earnings..................................... 196,417 224,651
Treasury stock, at cost, 168,000 and 499,085 shares,
respectively......................................... (3,797) (12,504)
-------------- --------------
Total stockholders' equity.......................... 292,528 308,769
-------------- --------------
Total liabilities and stockholders' equity........ $ 389,947 $ 393,576
============== ==============
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
Three Months Ended Six Months Ended
July 31, July 31,
--------------------------- ---------------------------
2006 2007 2006 2007
------------- ------------- ------------- -------------
Revenues
Product sales...................................... $ 150,647 $ 163,793 $ 309,156 $ 330,432
Service maintenance agreement commissions, net..... 7,063 9,071 15,030 18,352
Service revenues................................... 5,927 6,137 11,156 11,582
------------- ------------- ------------- -------------
Total net sales.................................. 163,637 179,001 335,342 360,366
Finance charges and other.......................... 18,567 24,526 39,050 48,471
------------- ------------- ------------- -------------
Total revenues................................... 182,204 203,527 374,392 408,837
Cost and expenses
Cost of goods sold, including warehousing
and occupancy costs............................... 119,756 132,677 245,485 264,648
Cost of parts sold, including warehousing
and occupancy costs............................... 1,389 2,123 2,954 3,989
Selling, general and administrative expense........ 48,425 54,733 95,089 106,369
Provision for bad debts............................ 390 348 433 908
------------- ------------- ------------- -------------
Total cost and expenses.......................... 169,960 189,881 343,961 375,914
------------- ------------- ------------- -------------
Operating income..................................... 12,244 13,646 30,431 32,923
Interest income, net................................. (187) (251) (371) (491)
Other income, net.................................... (721) (55) (754) (886)
------------- ------------- ------------- -------------
Income before income taxes........................... 13,152 13,952 31,556 34,300
Provision for income taxes........................... 4,608 4,295 11,063 11,697
------------- ------------- ------------- -------------
Net income........................................... $ 8,544 $ 9,657 $ 20,493 $ 22,603
============= ============= ============= =============
Earnings per share
Basic.............................................. $ 0.36 $ 0.41 $ 0.87 $ 0.96
Diluted............................................ $ 0.35 $ 0.40 $ 0.84 $ 0.94
Average common shares outstanding
Basic.............................................. 23,676 23,489 23,637 23,527
Diluted............................................ 24,344 24,058 24,355 24,089
See notes to consolidated financial statements.
2
Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six Months Ended July 31, 2007
(unaudited)
(in thousands, except descriptive shares)
Accum.
Other
Common Stock Compre- Additional
------------------------- hensive Paid-in Retained Treasury
Shares Amount Income Capital Earnings Stock Total
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance January 31, 2007............... 23,810 $ 238 $ 6,305 $ 93,365 $ 196,417 $ (3,797) $ 292,528
Cumulative effect of changes in
accounting principles................. (6,305) 5,631 (674)
Exercise of options to acquire
shares of common stock,
incl. tax benefit..................... 148 2 1,839 1,841
Issuance of shares of common
stock under Employee
Stock Purchase Plan................... 6 122 122
Stock-based compensation............... 1,056 1,056
Purchase of 331,085 shares
of treasury stock..................... (8,707) (8,707)
Net income............................. 22,603 22,603
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance July 31, 2007.................. 23,964 $ 240 $ - $ 96,382 $ 224,651 $ (12,504) $ 308,769
============ ============ ============ ============ ============ ============ ============
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
Six Months Ended
July 31,
------------------------------
2006 2007
-------------- --------------
Cash flows from operating activities
Net income............................................ $ 20,493 $ 22,603
Adjustments to reconcile net income to net cash used
in operating activities:
Depreciation........................................ 6,100 6,321
Amortization........................................ (214) (351)
Provision for bad debts............................. 433 908
Stock-based compensation............................ 802 1,056
Discounts on promotional credit..................... 159 725
Gains recognized on sales of receivables............ (10,269) (11,105)
Loss on mark-to-market of interests in securitized
assets............................................. - 878
Provision for deferred income taxes................. 730 579
Gains from sales of property and equipment.......... (754) (886)
Changes in operating assets and liabilities:
Accounts receivable................................. (1,903) (16,361)
Inventory........................................... (5,655) 2,228
Prepaid expenses and other assets................... 169 (95)
Accounts payable.................................... (3,450) (15,150)
Accrued expenses.................................... (10,756) 1,275
Income taxes payable................................ (10,603) (1,904)
Deferred revenue and allowances..................... 709 2,438
-------------- --------------
Net cash used in operating activities................... (14,009) (6,841)
-------------- --------------
Cash flows from investing activities
Purchase of property and equipment.................... (11,858) (8,203)
Proceeds from sales of property....................... 2,250 8,860
-------------- --------------
Net cash provided by (used in) investing activities..... (9,608) 657
-------------- --------------
Cash flows from financing activities
Proceeds from stock issued under employee benefit
plans................................................ 1,471 1,963
Purchase of treasury stock............................ - (8,707)
Excess tax benefits from stock-based compensation..... 135 2
Borrowings under lines of credit...................... 8,000 800
Payments on lines of credit........................... (8,000) (800)
Increase in debt issuance costs....................... (107) -
Payment of promissory notes........................... (136) (45)
-------------- --------------
Net cash provided by (used in) financing activities..... 1,363 (6,787)
-------------- --------------
Net change in cash...................................... (22,254) (12,971)
Cash and cash equivalents
Beginning of the year................................. 45,176 56,570
-------------- --------------
End of period......................................... $ 22,922 $ 43,599
============== ==============
See notes to consolidated financial statements.
4
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
July 31, 2007
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three and six month
periods ended July 31, 2007, are not necessarily indicative of the results that
may be expected for the year ending January 31, 2008. The financial statements
should be read in conjunction with the Company's (as defined below) audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K filed on March 29, 2007.
The Company's balance sheet at January 31, 2007, has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial presentation. Please see the
Company's Form 10-K for the fiscal year ended January 31, 2007, for a complete
presentation of the audited financial statements at that date, together with all
required footnotes, and for a complete presentation and explanation of the
components and presentations of the financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and all of its wholly-owned subsidiaries (the
Company). All material intercompany transactions and balances have been
eliminated in consolidation.
The Company enters into securitization transactions to sell its retail
installment and revolving customer receivables and retains servicing
responsibilities and subordinated interests. These securitization transactions
are accounted for as sales in accordance with Statement of Financial Accounting
Standards (SFAS) No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishment of Liabilities, as amended by SFAS No. 155, Accounting
for Certain Hybrid Financial Instruments, because the Company has relinquished
control of the receivables. Additionally, the Company has transferred the
receivables to a qualifying special purpose entity (QSPE). Accordingly, neither
the transferred receivables nor the accounts of the QSPE are included in the
consolidated financial statements of the Company. The Company's retained
interest in the transferred receivables is valued under the requirements of SFAS
No. 157, Fair Value Measurements.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
5
Earnings Per Share. In accordance with SFAS No. 128, Earnings per Share, the
Company calculates basic earnings per share by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
include the dilutive effects of any stock options granted, as calculated under
the treasury-stock method. The following table sets forth the shares outstanding
for the earnings per share calculations:
Three Months Ended
July 31,
-------------------------
2006 2007
------------ ------------
Common stock outstanding, net of treasury stock,
beginning of period................................... 23,665,335 23,504,760
Weighted average common stock issued in stock option
exercises............................................. 9,852 58,074
Weighted average common stock issued to employee stock
purchase plan......................................... 958 933
Less: Weighted average treasury shares purchased....... - (74,789)
------------ ------------
Shares used in computing basic earnings per share...... 23,676,145 23,488,978
Dilutive effect of stock options, net of assumed
repurchase of treasury stock.......................... 667,915 569,283
------------ ------------
Shares used in computing diluted earnings per share.... 24,344,060 24,058,261
============ ============
Six Months Ended
July 31,
-------------------------
2006 2007
------------ ------------
Common stock outstanding, net of treasury stock,
beginning of period................................... 23,571,564 23,641,522
Weighted average common stock issued in stock option
exercises............................................. 63,465 52,871
Weighted average common stock issued to employee stock
purchase plan......................................... 1,896 2,706
Less: Weighted average treasury shares purchased....... - (169,991)
------------ ------------
Shares used in computing basic earnings per share...... 23,636,925 23,527,108
Dilutive effect of stock options, net of assumed
repurchase of treasury stock.......................... 718,347 561,843
------------ ------------
Shares used in computing diluted earnings per share.... 24,355,272 24,088,951
============ ============
Application of APB 21 to Promotional Credit Programs that Exceed One Year in
Duration. The Company offers promotional credit payment plans, on certain
products, that extend beyond one year. In accordance with APB 21, Interest on
Receivables and Payables, such sales are discounted to their fair value
resulting in a reduction in sales and receivables, and the amortization of the
discount amount over the term of the deferred interest payment plan. The
difference between the gross sale and the discounted amount is reflected as a
reduction of Product sales in the consolidated statements of operations and the
amount of the discount being amortized in the current period is recorded in
Finance charges and other. For the three months ended July 31, 2006 and 2007,
Product sales were reduced by $0.7 million and $1.6 million, respectively, and
Finance charges and other was increased by $0.8 million and $1.5 million,
respectively, to effect the adjustment to fair value and to reflect the
appropriate amortization of the discount. For the six months ended July 31, 2006
and 2007, Product sales were reduced by $1.6 million and $3.5 million,
respectively, and Finance charges and other was increased by $1.5 million and
$2.8 million, respectively, to effect the adjustment to fair value and to
reflect the appropriate amortization of the discount.
Texas Tax Law Changes. On May 18, 2006, the Governor of Texas signed a tax
bill that modified the existing franchise tax, with the most significant change
being the replacement of the existing base with a tax based on margin. Taxable
margin is generally defined as total federal tax revenues minus the greater of
(a) cost of goods sold or (b) compensation. The tax rate to be paid by retailers
and wholesalers is 0.5% on taxable margin. This will result in an increase in
taxes paid by the Company, as franchise taxes paid have totaled less than
$50,000 per year for the last several years.
During June 2007, the Company completed a reorganization to simplify its
legal entity structure, by merging certain of its Texas limited partnerships
into their corporate partners. The reorganization also resulted in the one-time
elimination of the Texas margin tax owed by those partnerships, representing
virtually all of the margin tax owed by the Company. Accordingly, the Company
reversed approximately $0.9 million of accrued Texas margin tax as of June 2007,
net of federal income tax. The Company began accruing the margin tax for the
entities that acquired the operations through the mergers in July 2007.
6
Sale and Leaseback Transactions. During the six months ended July 31, 2007,
the Company completed transactions involving certain real estate assets that
qualify for sales-leaseback treatment. As a result, a portion of the gains
resulting from the transactions are being deferred and amortized as a reduction
of rent expense on a straight-line basis over the minimum lease term. The
deferred gains of $1.3 million recorded during the six months ended July 31,
2007, are included in Deferred gains on sales of property.
Sales Taxes. The Company records and reports all sales taxes collected on a
net basis in the financial statements.
Reclassifications. Certain reclassifications have been made in the prior
year's financial statements to conform to the current year's presentation.
2. Adoption of New Accounting Pronouncements
On February 1, 2007, the Company was required to adopt SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments. Among other things, this
statement establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding derivatives or that
are hybrid financial instruments that contain an embedded derivative requiring
bifurcation. Additionally, the Company had the option to choose to early adopt
the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. Essentially, the Company had to decide between
bifurcation of the embedded derivative and the fair value option in determining
how it would account for its Interests in securitized assets. The Company
elected to early adopt SFAS No. 159 because it believes it provides a more
easily understood presentation for financial statement users. Historically, the
Company had valued and reported its interests in securitized assets at fair
value, though most changes in the fair value were recorded in Other
comprehensive income. The fair value option simplifies the treatment of changes
in the fair value of the asset, by reflecting all changes in the fair value of
its Interests in securitized assets in current earnings, in Finance charges and
other, beginning February 1, 2007. For the three and six months ended July 31,
2007, Finance charges and other included losses of $0.4 million and $0.3
million, respectively, reflecting higher projected borrowing costs and a
slightly faster portfolio turnover rate, partially offset by the growth of the
portfolio, and mark-to-market adjustments for other changes in the fair value
assumptions (see discussion of SFAS No. 157 below). SFAS Nos. 155 and 159 do not
allow for retrospective application of these changes in accounting principle
and, as such, no adjustments have been made to the amounts disclosed in the
financial statements for periods ending prior to February 1, 2007. However, the
balance in Other comprehensive income, as of January 31, 2007, of $6.3 million,
which represented unrecognized gains on the fair value of the Interests in
securitized assets, was included in a cumulative-effect adjustment that was
recorded in Retained earnings, effective February 1, 2007.
Because of its adoption of SFAS No. 159, effective February 1, 2007, the
Company was required to adopt the provisions of SFAS No. 157, Fair Value
Measurements. This statement establishes a framework for measuring fair value
and defines fair value as "the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date." The Company estimates the fair value of
its Interests in securitized assets using a discounted cash flow model with most
of the inputs used being unobservable inputs. The primary unobservable inputs,
which are derived from the Company's historical experience, include the
portfolio yield, credit loss rate, discount rate, payment rate and delinquency
rate and reflect the Company's own assumptions about the assumptions market
participants would use in determining fair value. In determining the cost of
borrowings, the Company uses current actual borrowing rates, and adjusts them,
as appropriate, using interest rate futures data from market sources to project
interest rates over time. Changes in the assumptions over time, including
varying credit portfolio performance, market interest rate changes or a shift in
the mix of funding sources, could result in significant volatility in the fair
value of the Interest in securitized assets, and thus the earnings of the
Company.
7
The following is a reconciliation of the beginning and ending balances of
the Interests in securitized assets for the three and six months ended July 31,
2007 (in thousands):
Balance of Interests in securitized assets at April 30, 2007........ $ 150,552
Amounts recorded in Finance charges and other:
Fair value increase associated with portfolio growth........... 305
Fair value decrease due to changing portfolio yield............ (65)
Fair value increase due to lower interest rates................ 221
Fair value decrease due to higher expected borrowing cost...... (565)
Fair value decrease due to higher portfolio turnover rate...... (443)
Other changes.................................................. 99
-----------
Net Losses included in Finance charges and other............... (448)
Increase in principal balance of subordinated security due to
transfers of receivables........................................... 16,026
-----------
Balance of Interests in securitized assets at July 31, 2007......... $ 166,130
===========
Balance of Interests in securitized assets at January 31, 2007...... $ 136,848
Amounts recorded in Finance charges and other:
Fair value increase associated with portfolio growth........... 531
Fair value increase due to higher expected portfolio yield..... 204
Fair value increase due to lower interest rates................ 556
Fair value decrease due to higher expected borrowing cost...... (1,198)
Fair value decrease due to higher portfolio turnover rate...... (443)
Other changes.................................................. 3
-----------
Net Losses included in Finance charges and other............... (347)
Increase in principal balance of subordinated security due to
transfers of receivables........................................... 29,629
-----------
Balance of Interests in securitized assets at July 31, 2007......... $ 166,130
===========
Effective February 1, 2007, the Company was required to adopt the provisions
SFAS No. 156, Accounting for Servicing of Financial Assets, an Amendment of FASB
Statement No. 140. This statement requires companies to measure servicing assets
or servicing liabilities at fair value at each reporting date and report changes
in fair value in earnings in the period the changes occur, or amortize servicing
assets or servicing liabilities in proportion to and over the estimated net
servicing income or loss and assess servicing assets or servicing liabilities
for impairment or increased obligation based on the fair value at each reporting
date. The Company receives a servicing fee each month equal to 0.25% of the
average outstanding sold portfolio balance, plus late fees and other customer
fees collected. Servicing fees collected during the three months ended July 31,
2006 and 2007, totaled $5.1 million and $6.0 million, respectively, and are
reflected in Finance charges and other. Servicing fees collected during the six
months ended July 31, 2006 and 2007, totaled $10.1 million and $11.8 million,
respectively, and are reflected in Finance charges and other. In connection with
the adoption of SFAS No. 156 the Company elected to measure its servicing asset
or liability at fair value, and report changes in the fair value in earnings in
the period of change. As such, a $0.7 million cumulative-effect adjustment was
recorded to Retained earnings at February 1, 2007, net of related tax effects,
to recognize a $1.1 million servicing liability. The Company uses a discounted
cash flow model to estimate its servicing liability using the portfolio
performance and discount rate assumptions discussed above, and an estimate of
the servicing fee a market participant would require to service the portfolio.
In developing its estimate, based on the provisions of SFAS No. 157, the Company
reviewed available information regarding the servicing fees received by other
companies and estimated an expected risk premium a market participant would add
to the current fee structure to receive adequate compensation. During the three
and six months ended July 31, 2007, the Company recorded $23,000 and $59,000,
respectively, of expense related to the increase in the estimated fair value of
the servicing liability, in Finance charges and other. The increase in the
liability was largely driven by the increase in the balance of the sold
portfolio.
8
Effective February 1, 2007, the Company adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement
109 (FIN 48). This statement clarifies the criteria that an individual tax
position must satisfy for some or all of the benefits of that position to be
recognized in a company's financial statements. FIN 48 prescribes a recognition
threshold of more-likely-than-not, and a measurement attribute for all tax
positions taken or expected to be taken on a tax return, in order to be
recognized in the financial statements. No cumulative adjustment was required to
effect the adoption of FIN 48 and the Company currently has no liability accrued
or potential penalties or interest recorded for uncertain tax positions. To the
extent penalties and interest are incurred, the Company records these charges as
a component of its Provision for income taxes. The Company is subject to U.S.
federal income tax as well as income tax in multiple state jurisdictions. Tax
returns for the fiscal years subsequent to January 31, 2003, remain open for
examination by the Company's major taxing jurisdictions.
3. Supplemental Disclosure of Revenue and Comprehensive Income
The following is a summary of the classification of the amounts included as
Finance charges and other for the three and six months ended July 31, 2006 and
2007 (in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
---------------------- ----------------------
2006 2007 2006 2007
---------- ---------- ---------- ----------
Securitization income........................... $ 13,274 $ 18,378 $ 28,511 $ 36,338
Income from receivables not sold................ 323 251 658 516
Insurance commissions........................... 4,729 5,573 8,995 10,834
Other........................................... 241 324 886 783
---------- ---------- ---------- ----------
Finance charges and other....................... $ 18,567 $ 24,526 $ 39,050 $ 48,471
========== ========== ========== ==========
The components of total comprehensive income for the three and six months
ended July 31, 2006 and 2007, are presented in the table below (in thousands):
Three Months Ended Six Months Ended
July 31, July 31,
---------------------- ----------------------
2006 2007 2006 2007
---------- ---------- ---------- ----------
Net income...................................... $ 8,544 $ 9,657 $ 20,493 $ 22,603
Adjustment of fair value of securitized assets.. (789) - (16) -
Taxes on adjustment of fair value............... 145 - (119) -
---------- ---------- ---------- ----------
Total comprehensive income...................... $ 7,900 $ 9,657 $ 20,358 $ 22,603
========== ========== ========== ==========
9
4. Supplemental Disclosure Regarding Managed Receivables
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Total Principal Amount of Principal Amount 60 Days
Receivables or More Past Due (1)
-------------------------- --------------------------
January 31, July 31, January 31, July 31,
2007 2007 2007 2007
------------ ------------ ------------ ------------
Primary portfolio:
Installment........................... $ 382,482 $ 414,113 $ 24,853 $ 24,055
Revolving............................. 53,125 50,467 1,171 1,179
------------ ------------ ------------ ------------
Subtotal.................................... 435,607 464,580 26,024 25,234
Secondary portfolio:
Installment........................... 133,944 141,581 11,638 13,977
------------ ------------ ------------ ------------
Total receivables managed................... 569,551 606,161 37,662 39,211
Less receivables sold....................... 559,619 596,876 35,677 37,293
------------ ------------ ------------ ------------
Receivables not sold........................ 9,932 9,285 $ 1,985 $ 1,918
============ ============
Non-customer receivables.................... 21,516 18,266
------------ ------------
Total accounts receivable, net........ $ 31,448 $ 27,551
============ ============
(1) Amounts are based on end of period balances. The principal amount 60 days or
more past due relative to total receivables managed is not necessarily
indicative of relative balances expected at other times during the year due to
seasonal fluctuations in delinquency.
Average Balances Credit Charge-offs (1)
-------------------------- --------------------------
Three Months Ended Three Months Ended
July 31, July 31,
-------------------------- --------------------------
2006 2007 2006 2007
------------ ------------ ------------ ------------
Primary portfolio:
Installment........................... $ 368,939 $ 399,909
Revolving............................. 43,541 52,215
------------ ------------
Subtotal.................................... 412,480 452,124 $ 4,225 $ 2,569
Secondary portfolio:
Installment........................... 113,821 142,970 830 922
------------ ------------ ------------ ------------
Total receivables managed................... 526,301 595,094 5,055 3,491
Less receivables sold....................... 515,865 585,672 4,874 3,318
------------ ------------ ------------ ------------
Receivables not sold........................ $ 10,436 $ 9,422 $ 181 $ 173
============ ============ ============ ============
Average Balances Credit Charge-offs (1)
-------------------------- --------------------------
Six Months Ended Six Months Ended
July 31, July 31,
-------------------------- --------------------------
2006 2007 2006 2007
------------ ------------ ------------ ------------
Primary portfolio:
Installment........................... $ 371,493 $ 392,376
Revolving............................. 42,957 52,571
------------ ------------
Subtotal.................................... 414,450 444,947 $ 7,875 $ 5,493
Secondary portfolio:
Installment........................... 109,102 140,768 1,858 1,881
------------ ------------ ------------ ------------
Total receivables managed................... 523,552 585,715 9,733 7,374
Less receivables sold....................... 513,144 576,144 9,399 7,004
------------ ------------ ------------ ------------
Receivables not sold........................ $ 10,408 $ 9,571 $ 334 $ 370
============ ============ ============ ============
(1) Amounts represent total credit charge-offs, net of recoveries, on total
receivables. The increased level of credit losses for the three and six months
ended July 31, 2006, is primarily a result of the bankruptcy law change in
October 2005 and the impact on our credit operations of Hurricane Rita that hit
the Gulf Coast during September 2005.
10
5. Debt and Letters of Credit
At July 31, 2007, the Company had $49.1 million of its $50 million revolving
credit facility available for borrowings. The amounts utilized under the
revolving credit facility reflected $0.9 million related to letters of credit
issued under the facility.
There were no amounts outstanding under a short-term revolving bank
agreement that provides up to $8.0 million of availability on an unsecured
basis. This unsecured facility matures in June 2008.
The Company utilizes unsecured letters of credit to secure a portion of the
QSPE's asset-backed securitization program, deductibles under the Company's
property and casualty insurance programs and international product purchases. At
July 31, 2007, the Company had outstanding unsecured letters of credit of $22.3
million. These letters of credit were issued under the three following separate
facilities:
o The Company has a $5.0 million sub limit provided under its revolving
line of credit for stand-by and import letters of credit. At July 31,
2007, $0.9 million of letters of credit were outstanding and callable at
the option of the Company's property and casualty insurance carriers if
the Company does not honor its requirement to fund deductible amounts as
billed under its insurance programs.
o The Company has arranged for a $20.0 million stand-by letter of credit
to provide assurance to the trustee of the asset-backed securitization
program that funds collected by the Company, as the servicer, would be
remitted as required under the base indenture and other related
documents. The letter of credit has a term of one year and expires in
August 2008.
o The Company obtained a $10.0 million commitment for trade letters of
credit to secure product purchases under an international arrangement.
At July 31, 2007, there was $1.4 million outstanding under this
commitment. The letter of credit commitment expires in May 2008. No
letter of credit issued under this commitment can have an expiration
date more than 180 days after the commitment expiration date.
The maximum potential amount of future payments under these letter of credit
facilities is considered to be the aggregate face amount of each letter of
credit commitment, which total $35.0 million as of July 31, 2007.
6. Contingencies
Legal Proceedings. The Company is involved in routine litigation incidental
to its business from time to time. Currently, the Company does not expect the
outcome of any of this routine litigation to have a material affect on its
financial condition, results of operations or cash flows. However, the results
of these proceedings cannot be predicted with certainty, and changes in facts
and circumstances could impact the Company's estimate of reserves for
litigation.
Service Maintenance Agreement Obligations. The Company sells service
maintenance agreements that extend the period of covered warranty service on the
products the Company sells. For certain of the service maintenance agreements
sold, the Company is the obligor for payment of qualifying claims. The Company
is responsible for administering the program, including setting the pricing of
the agreements sold and paying the claims. The typical term for these agreements
is between 12 and 36 months. The pricing is set based on historical claims
experience and expectations about future claims. While the Company is unable to
estimate maximum potential claim exposure, it has a history of overall
profitability upon the ultimate resolution of agreements sold. The revenues
related to the agreements sold are deferred at the time of sale and recorded in
revenues in the statement of operations over the life of the agreements. The
revenues deferred related to these agreements totaled $3.6 million and $4.2
million, respectively, as of January 31, 2007 and July 31, 2007, and are
included on the face of the balance sheet in Deferred revenues and allowances.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This report contains forward-looking statements. We sometimes use words such
as "believe," "may," "will," "estimate," "continue," "anticipate," "intend,"
"expect," "project" and similar expressions, as they relate to us, our
management and our industry, to identify forward-looking statements.
Forward-looking statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends and other future
events. We have based our forward-looking statements largely on our current
expectations and projections about future events and financial trends affecting
our business. Actual results may differ materially. Some of the risks,
uncertainties and assumptions about us that may cause actual results to differ
from these forward-looking statements include, but are not limited to:
o the success of our growth strategy and plans regarding opening new
stores and entering adjacent and new markets, including our plans to
continue expanding in the Dallas/Fort Worth Metroplex, and South
Texas;
o our 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 effect of rising interest rates on sub-prime mortgage borrowers
that could impair our customers' ability to make payments on
outstanding credit accounts;
o inability to make customer financing programs available that allow
consumers to purchase products at levels that can support our
growth;
o the potential for deterioration in the delinquency status of the
sold or owned credit portfolios or higher than historical net
charge-offs in the portfolios could adversely impact earnings;
o the long-term effect of the change in bankruptcy laws could effect
net charge-offs in the credit portfolio which could adversely impact
earnings;
o technological and market developments, growth trends and projected
sales in the home appliance and consumer electronics industry,
including, with respect to digital products, DVD players, HDTV,
digital radio, home networking devices and other new products, and
our ability to capitalize on such growth;
o the potential for price erosion or lower unit sales that could
result in declines in revenues;
o higher oil and gas prices that could adversely affect our customers'
shopping decisions and patterns, as well as the cost of our delivery
and service operations and our cost of products, if vendors pass on
their additional fuel costs through increased pricing for products;
o the ability to attract and retain qualified personnel;
12
o both short-term and long-term impact of adverse weather conditions
(e.g. hurricanes) that could result in volatility in our revenues
and increased expenses and casualty losses;
o changes in laws and regulations and/or interest, premium and
commission rates allowed by regulators on our credit, credit
insurance and service maintenance agreements as allowed by those
laws and regulations;
o our relationships with key suppliers;
o the adequacy of our distribution and information systems and
management experience to support our expansion plans;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o the potential for market share erosion that could result in reduced
revenues;
o the accuracy of our expectations regarding the similarity or
dissimilarity of our existing markets as compared to new markets we
enter; and
o the outcome of litigation affecting our business.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under "Risk Factors" in our Form
10-K filed with the Securities Exchange Commission on March 29, 2007. In light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this report might not happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
All forward-looking statements attributable to us, or to persons acting on
our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
We intend for the following discussion and analysis to provide you with a
better understanding of our financial condition and performance in the indicated
periods, including an analysis of those key factors that contributed to our
financial condition and performance and that are, or are expected to be, the key
"drivers" of our business.
On February 1, 2007, we were required to adopt Statement of Financial
Accounting Standard (SFAS) No. 155, Accounting for Certain Hybrid Financial
Instruments. Among other things, this statement established a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation. Additionally, we had the
option to choose to early adopt the provisions of SFAS No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities. We elected to early adopt
SFAS No. 159 because we believe it provides a more easily understood
presentation for financial statement users. This election resulted in us
including all changes in the fair value of our Interests in securitized assets
in current earnings, in Finance charges and other, beginning February 1, 2007.
Previously, most changes in the fair value of our Interests in securitized
assets were recorded in Other comprehensive income, which was included in
Stockholders' equity. SFAS Nos. 155 and 159 do not allow for retrospective
application of these changes in accounting principle, as such, no adjustments
have been made to the amounts disclosed in the financial statements for periods
ending prior to February 1, 2007. Additionally, effective February 1, 2007, we
adopted SFAS No. 157, Fair Value Measurements, which established a framework for
measuring fair value, based on the assumptions we believe market participants
would use to value assets or liabilities to be exchanged. Changes in the
assumptions over time, including varying credit portfolio performance, market
interest rate changes or a shift in the mix of funding sources, could result in
significant volatility in the fair value of the Interest in securitized assets,
and thus our earnings. We were also required to adopt the provisions of SFAS No.
156, Accounting for Servicing of Financial Assets, effective on February 1,
2007. As a result of the adoption of this pronouncement, along with the
requirements of SFAS No. 157, we recorded a $1.1 million servicing liability on
the balance sheet in Deferred revenues and allowances. Any changes in the fair
value of the liability will be recorded in the period of change in the statement
of operations in Finance charges and other. As with the other changes discussed
above, no adjustments have been made to the financial statements for periods
ending prior to February 1, 2007. See the notes to the financial statements for
discussion of the impacts on the financial statements for the three and six
months ended July 31, 2007.
13
We are a specialty retailer that sells major home appliances, including
refrigerators, freezers, washers, dryers, dishwashers and ranges, a variety of
consumer electronics, including micro-display projection, plasma and LCD
flat-panel televisions, camcorders, digital cameras, DVD players 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 our sales associates to be knowledgeable of all of our products, but
to specialize in certain specific product categories.
We currently operate 63 retail locations in Texas and Louisiana, and have
several other stores under development.
Unlike many of our competitors, we provide flexible in-house credit options
for our customers. In the last three years, we financed, on average,
approximately 58% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and to issue asset-backed
and variable funding notes to third parties to finance its acquisition of the
receivables. We transfer receivables, consisting of retail installment and
revolving account receivables extended to our customers, to the issuer in
exchange for cash and subordinated securities.
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements, under
which we are the primary obligor, to protect the customers after the original
manufacturer's warranty or service maintenance agreement has expired.
Our business is moderately seasonal, with a slightly greater share of our
revenues, pretax and net income realized during the quarter ending January 31,
due primarily to the holiday selling season.
Executive Overview
This narrative is intended to provide an executive level overview of our
operations for the three and six months ended July 31, 2007. A detailed
explanation of the changes in our operations for these periods as compared to
the prior year is included under Results of Operations. As explained in that
section, our pretax income for the quarter and six months ended July 31, 2007,
increased approximately 6.1% and 8.7%, respectively, primarily as a result of
higher revenues and gross margin dollars. Some of the more specific items
impacting our operating and pretax income were:
o Same store sales for the quarter and six months increased by 5.0% and 2.1%,
respectively, as compared to 7.2% and 11.7%, respectively, in the prior
year. Prior year same store sales growth benefited significantly as a result
of Hurricanes Rita and Katrina.
o The addition of stores in our existing Houston, Dallas/Fort Worth and San
Antonio markets had a positive impact on our revenues. We achieved
approximately $10.6 million and $22.1 million of increases in product sales
and service maintenance agreement commissions for the three and six months
ended July 31, 2007, respectively, from the new stores that were opened in
these markets after February 1, 2006. Our plans provide for the opening of
additional stores in and around existing markets during fiscal 2008 as we
focus on leveraging our existing infrastructure.
14
o Deferred interest and "same as cash" plans continue to be an important part
of our sales promotion plans and are utilized to provide a wide variety of
financing to enable us to appeal to a broader customer base. For the three
and six months ended July 31, 2007, $44.0 million, or 26.9%, and $88.1
million, or 26.7%, respectively of our product sales were financed by
deferred interest and "same as cash" plans. This volume of promotional
credit as a percent of product sales is consistent with our use of this type
of credit product before the hurricanes in late 2005. For the comparable
periods in the prior year, gross product sales financed by deferred interest
and "same as cash" sales were $33.0 million, or 21.9% and $65.8 million, or
21.3%, respectively. Our promotional credit programs (same as cash and
deferred interest programs), which require monthly payments, are reserved
for our highest credit quality customers, thereby reducing the overall risk
in the portfolio, and is used primarily to finance sales of our highest
margin products. We expect to continue to offer extended term promotional
credit in the future.
o Our gross margin increased from 33.5% to 33.8% for the three months ended
July 31, 2007, and from 33.6% to 34.4% for the six months ended July 31,
2007, when compared to the same period in the prior year, primarily as a
result of a change in our revenue mix as higher margin Service maintenance
agreement commissions and Finance charges and other grew faster than Product
sales. The benefit to the gross margin due to the change in the mix was
partially offset by a decline in product gross margins from 20.5% to 19.0%
for the three months ended July 31, 2007, and from 20.6% to 19.9% for the
six months ended July 31, 2007, when compared to the same period in the
prior year. The product gross margin was negatively impacted by a highly
price-competitive retail market during the three months ended July 31, 2007.
o Finance charges and other increased 32.1% and 24.1% for the quarter and six
months ended July 31, 2007, respectively, as:
o securitization income increased by 38.5% and 27.5% for the three and
six months ended July 31, 2007, respectively. The improvement for
the three and six month periods ended July 31, 2007, was driven by
30.7% and 24.5%, respectively, decreases in net credit losses from
the prior year period. The decreases were a result of improved
staffing levels and case loads in our credit collection operations,
after the disruption to our operations in the prior year caused by
Hurricane Rita.
o insurance commissions grew 17.8% and 20.4% for the three and six
months ended July 31, 2007, respectively, primarily as a result of
increased sales and lower credit charge-offs, which resulted in
reduced insurance cancellations.
o During the three and six months ended July 31, 2007, Selling, general and
administrative (SG&A) expense increased as a percent of revenues to 26.9%
from 26.6%, and to 26.0% from 25.4%, respectively, when compared to the
prior year, primarily from increased compensation and employee related
expenses and occupancy cost, including property taxes, as a percent of
revenues.
o The provision for income taxes benefited from a $0.9 million reduction
attributable to the reversal of previously accrued Texas margin tax as a
result of the legal entity reorganization completed during the three months
ended July 31, 2007.
Operational Changes and Resulting Outlook
We have several locations in and around 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 2008.
On May 18, 2006, the Governor of Texas signed a tax bill that modified the
existing franchise tax, with the most significant change being the replacement
of the existing base with a tax based on margin. Taxable margin is generally
defined as total federal tax revenues minus the greater of (a) cost of goods
sold or (b) compensation. The tax rate to be paid by retailers and wholesalers
is 0.5% on taxable margin. During June 2007, we completed a reorganization to
simplify our legal entity structure, by merging certain of our Texas limited
partnerships into their corporate partners. The reorganization also resulted in
the one-time elimination of the Texas margin tax owed by those partnerships,
representing virtually all of the margin tax owed by us. Accordingly, we
reversed approximately $0.9 million of accrued Texas margin tax as of June 2007,
net of federal tax. The Company began accruing the margin tax for the entities
that acquired the operations through the mergers in July 2007 and expects its
effective tax rate to be between 36.0% and 37.0% in future quarters.
15
The consumer electronics industry depends on new products to drive same
store sales increases. Typically, these new products, such as high-definition
televisions, DVD players, digital cameras and MP3 players are introduced at
relatively high price points that are then gradually reduced as the product
becomes mainstream. To sustain positive same store sales growth, unit sales must
increase at a rate greater than the decline in product prices. The affordability
of the product helps drive the unit sales growth. However, as a result of
relatively short product life cycles in the consumer electronics industry, which
limit the amount of time available for sales volume to increase, combined with
rapid price erosion in the industry, retailers are challenged to maintain
overall gross margin levels and positive same store sales. This has historically
been our experience, and we continue to adjust our marketing strategies to
address this challenge through the introduction of new product categories and
new products within our existing categories.
Application of Critical Accounting Policies
In applying the accounting policies that we use to prepare our consolidated
financial statements, we necessarily make accounting estimates that affect our
reported amounts of assets, liabilities, revenues and expenses. Some of these
accounting estimates require us to make assumptions about matters that are
highly uncertain at the time we make the accounting estimates. We base these
assumptions and the resulting estimates on authoritative pronouncements,
historical information and other factors that we believe to be reasonable under
the circumstances, and we evaluate these assumptions and estimates on an ongoing
basis. We could reasonably use different accounting estimates, and changes in
our accounting estimates could occur from period to period, with the result in
each case being a material change in the financial statement presentation of our
financial condition or results of operations. We refer to accounting estimates
of this type as "critical accounting estimates." We believe that the critical
accounting estimates discussed below are among those most important to an
understanding of our consolidated financial statements as of July 31, 2007.
Transfers of Financial Assets. We transfer customer receivables to a QSPE
that issues asset-backed securities to third party lenders using these accounts
as collateral, and we continue to service these accounts after the transfer. We
recognize the sale of these accounts when we relinquish control of the
transferred financial asset in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,
as amended by SFAS No. 155, Accounting for Certain Hybrid Financial Instruments.
As we transfer the accounts we record an asset representing our interest in the
cash flows of the QSPE, which is the difference between the interest earned on
customer accounts and the cost associated with financing and servicing the
transferred accounts, including a provision for bad debts associated with the
transferred accounts, plus our retained interest in the transferred receivables,
discounted using a market rate of interest. We recognize the income from our
interest in these transferred accounts as gains on the transfer of the asset,
interest income and servicing fees. This income is recorded as Finance charges
and other in our consolidated statements of operations. Additionally, as a
result of our adoption of SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, effective February 1, 2007, we record all
changes in the fair value of our Interest in securitized assets in current
earnings, in Finance charges and other. Previously, most changes in the fair
value of our Interests in securitized assets were recorded in Other
comprehensive income. Effective February 1, 2007, we adopted SFAS No. 157, Fair
Value Measurements, which established a framework for measuring fair value,
based on the assumptions a company believes market participants would use to
value assets or liabilities to be exchanged. The gain or loss recognized on the
sales of the receivables is based on our best estimates of key assumptions,
including forecasted credit losses, payment rates, forward yield curves, costs
of servicing the accounts and appropriate discount rates, based on our
expectations of the assumptions that a market participant would use. We were
required to adopt the provisions of SFAS No. 156, Accounting for Servicing of
Financial Assets, effective on February 1, 2007. As a result of the adoption of
this pronouncement we recorded a servicing liability on the balance sheet in
Deferred revenues and allowances and any changes in the fair value of the
liability are recorded in the period of change in the statement of operations in
Finance charges and other. We estimate the fair value of our servicing liability
using the portfolio performance and discount rate assumptions discussed above,
and an estimate of the servicing fee a market participant would require to
service the portfolio. The use of different estimates or assumptions in the
valuation of our Interest in securitized assets or servicing liability could
produce different financial results. Additionally, changes in the assumptions
over time, including varying credit portfolio performance, market interest rate
changes or a shift in the mix of funding sources, could result in significant
volatility in the fair value of the Interest in securitized assets, and thus our
earnings. 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 and
Finance charges and other would have been reduced by $6.1 million as of July 31,
2007. If the assumption used for estimating credit losses was increased by 0.5%,
the impact to Finance charges and other would have been a reduction in revenues
and pretax income of $2.3 million.
16
Deferred Taxes. We have net deferred tax assets of approximately $1.2
million as of July 31, 2007. If we had assumed that the future tax rate at which
these deferred items would reverse was 50 basis points lower than currently
anticipated, we would have decreased the net deferred tax asset and decreased
net income by approximately $16,000.
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the product is delivered to the customer. Such revenues
are recognized net of any adjustments for sales incentive offers such as
discounts, coupons, rebates, or other free products or services and discounts of
promotional credit sales that will extend beyond one year. We sell service
maintenance agreements and credit insurance contracts on behalf of unrelated
third parties. For contracts where the third parties are the obligors on the
contract, commissions are recognized in revenues at the time of sale, and in the
case of retrospective commissions, at the time that they are earned. Where we
sell service maintenance renewal agreements in which we are deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
service maintenance agreements are renewal contracts that provide our customers
protection against product repair costs arising after the expiration of the
manufacturer's warranty and the third party obligor contracts. These agreements
typically range from 12 months to 36 months. These agreements are separate units
of accounting under Emerging Issues Task Force No. 00-21, Revenue Arrangements
with Multiple Deliverables. The amount of service maintenance agreement revenue
deferred at July 31, 2007 and January 31, 2007 was $4.2 million and $3.6
million, respectively, and is included in Deferred revenues and allowances in
the accompanying balance sheets.
Vendor Allowances. We receive funds from vendors for price protection,
product rebates, marketing and training and promotion programs which are
recorded on the accrual basis as a reduction to the related product cost or
advertising expense according to the nature of the program. We accrue rebates
based on the satisfaction of terms of the program and sales of qualifying
products even though funds may not be received until the end of a quarter or
year. If the programs are related to product purchases, the allowances, credits
or payments are recorded as a reduction of product cost; if the programs are
related to promotion or marketing of the product, the allowances, credits, or
payments are recorded as a reduction of advertising expense in the period in
which the expense is incurred.
Accounting for Share-Based Compensation. We adopted Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, effective February 1, 2006,
using the modified retrospective application transition. This statement
establishes standards for accounting for transactions in which an entity
exchanges its equity instruments for goods or services, focusing primarily on
accounting for transactions in which an entity obtains an employee's services.
The statement requires a public entity to measure the cost of employee services
received in exchange for an award of equity instruments, based on the grant-date
fair value of the award, and record that cost over the period during which the
employee is required to provide service in exchange for the award The fair value
assigned to awards of share-based compensation are based on assumptions about
the risk-free interest rate, average expected life of the award and expected
stock price volatility over the life of the award. The use of different
estimates or assumptions could produce different financial results.
17
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. For
transactions that qualify for treatment as a sale-leaseback, any gain or loss is
deferred and amortized as rent expense on a straight-line basis over the minimum
lease term. Any deferred gain would be included in Deferred revenues and
allowances and any deferred loss would be included in Other assets on the
consolidated balance sheets.
Results of Operations
The following table sets forth certain statement of operations information
as a percentage of total revenues for the periods indicated:
Three Months Ended Six Months Ended
July 31, July 31,
-------------------- --------------------
2006 2007 2006 2007
--------- --------- --------- ---------
Revenues:
Product sales............................................................ 82.6% 80.4% 82.6% 80.8%
Service maintenance agreement commissions (net).......................... 3.9 4.5 4.0 4.5
Service revenues......................................................... 3.3 3.0 3.0 2.8
--------- --------- --------- ---------
Total net sales........................................................ 89.8 87.9 89.6 88.1
Finance charges and other................................................ 10.2 12.1 10.4 11.9
--------- --------- --------- ---------
Total revenues....................................................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of goods sold, including warehousing and occupancy cost............. 65.7 65.2 65.6 64.7
Cost of parts sold, including warehousing and occupancy cost............. 0.8 1.0 0.8 1.0
Selling, general and administrative expense.............................. 26.6 26.9 25.4 26.0
Provision for bad debts.................................................. 0.2 0.2 0.1 0.2
--------- --------- --------- ---------
Total costs and expenses............................................. 93.3 93.3 91.9 91.9
--------- --------- --------- ---------
Operating income......................................................... 6.7 6.7 8.1 8.1
Interest income, net..................................................... (0.1) (0.1) (0.1) (0.1)
Other income, net........................................................ (0.4) (0.0) (0.2) (0.2)
--------- --------- --------- ---------
Income before income taxes............................................... 7.2 6.8 8.4 8.4
Provision for income taxes............................................... 2.5 2.1 2.9 2.9
--------- --------- --------- ---------
Net income............................................................... 4.7% 4.7% 5.5% 5.5%
========= ========= ========= =========
The table above identifies several changes in our operations for the current
quarter, including changes in revenue and expense categories expressed as a
percentage of revenues. These changes are discussed in the Executive Overview,
and in more detail in the discussion of operating results beginning in the
analysis below.
Same store sales growth is calculated by comparing the reported sales by
store for all stores that were open throughout a period to reported sales by
store for all stores that were open throughout the prior year period. Sales from
closed stores have been removed from each period. Sales from relocated stores
have been included in each period because each store was relocated within the
same general geographic market. Sales from expanded stores have been included in
each period.
18
The presentation of gross margins may not be comparable to other retailers
since we include the cost of our in-home delivery service as part of Selling,
general and administrative expense. Similarly, we include the cost related to
operating our purchasing function in Selling, general and administrative
expense. It is our understanding that other retailers may include such costs as
part of their cost of goods sold. Additionally, while we include a portion of
our advertising expense in cost of goods sold, we understand that other
retailers may include such costs as part of their Selling, general and
administrative expense.
Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006
Revenues. Total revenues increased by $21.3 million, or 11.7%, from $182.2
million for the three months ended July 31, 2006, to $203.5 million for the
three months ended July 31, 2007. The increase was attributable to increases in
net sales of $15.4 million, or 9.4%, and $5.9 million, or 32.1%, in finance
charges and other revenue.
The $15.4 million increase in net sales was made up of the following:
o a $7.9 million same store sales increase of 5.0%, driven by strength in
consumer electronics, furniture and lawn and garden sales;
o a $8.2 million increase generated by six retail locations that were not
open for three consecutive months in each period;
o a $0.9 million decrease resulted from an increase in discounts on
extended-term promotional credit sales (those with terms longer than 12
months); and
o a $0.2 million increase resulted from an increase in service revenues.
The components of the $15.4 million increase in net sales were a $13.2
million increase in Product sales and a $2.2 million increase in service
maintenance agreement commissions and service revenues. The $13.2 million
increase in product sales resulted from the following:
o approximately $6.9 million increase attributable to increases in unit
sales, due primarily to increased consumer electronics and furniture
sales, and
o approximately $6.3 million increase attributable to increases in unit
price points. The price point impact was driven by a shift to
higher-priced flat-panel televisions, high-efficiency laundry items and
higher priced tractors and zero turn radius mowers, partially offset by
a decline in the average price points on our furniture and mattresses
categories and the $0.9 million increase in discounts on extended-term
promotional credit sales.
The $2.2 million increase in service maintenance agreement sales and service
revenues was driven by increased sales of service maintenance agreements and
reduced service maintenance agreement cancellations, as credit charge-offs
decreased as compared to the prior year period.
19
The following table presents the makeup of net sales by product category in
each quarter, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Three Months Ended July 31,
--------------------------------------------------
2006 2007
------------------------ ------------------------ Percent
Category Amount Percent Amount Percent Increase
----------- ----------- ----------- ----------- -----------
Major home appliances............ $ 59,931 36.6% $ 60,737 33.9% 1.3% (1)
Consumer electronics............. 46,421 28.4 53,426 29.8 15.1 (2)
Track............................ 20,246 12.4 21,055 11.8 4.0 (3)
Delivery......................... 2,845 1.7 3,301 1.8 16.0 (4)
Lawn and garden.................. 6,576 4.0 8,555 4.8 30.1 (5)
Mattresses....................... 4,908 3.0 4,237 2.4 (13.7) (6)
Furniture........................ 8,243 5.1 11,047 6.2 34.0 (7)
Other............................ 1,477 0.9 1,435 0.8 (2.8)
----------- ----------- ----------- -----------
Total product sales.......... 150,647 92.1 163,793 91.5 8.7
Service maintenance agreement
commissions..................... 7,063 4.3 9,071 5.1 28.4 (8)
Service revenues................. 5,927 3.6 6,137 3.4 3.5 (9)
----------- ----------- ----------- -----------
Total net sales.............. $ 163,637 100.0% $ 179,001 100.0% 9.4%
=========== =========== =========== ===========
- ----------------------------------
(1) This increase was smaller than the overall increase in product sales
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 increase in track sales (consisting largely of computers, computer
peripherals, portable electronics and small appliances) is driven
primarily by increased laptop computer sales and was partially offset
by reduced sales of portable electronics, including camcorders, digital
cameras and portable CRT televisions.
(4) This increase was due to an increase in the delivery fee charged to our
customers and the overall increase in product sales.
(5) A higher than normal level of rainfall impacted this category in the
current year.
(6) This decrease is due to the impact of our change in strategy as we move
to a multi-vendor relationship.
(7) This increase is due to the increased emphasis on the sales of
furniture, primarily sofas, recliners and entertainment centers, and
new products added to this category.
(8) This increase is due to the increase in product sales, increased sales
penetration as we introduced SMA coverage on some of our furniture
products and decreased SMA cancellations as credit charge-offs declined
as compared to the prior year period.
(9) This increase is driven by increased units in operation as we continue
to grow product sales and an increase in the cost of parts used to
repair higher-priced technology (flat-panel and micro-display
televisions, etc.).
Revenues from Finance charges and other increased by approximately $5.9
million, or 32.1%, from $18.6 million for the three months ended July 31, 2006,
to $24.5 million for the three months ended July 31, 2007. It increased due
primarily to an increase in securitization income of $5.1 million, or 38.5% and
an increase in insurance commissions of $0.8 million. The securitization income
comparison was impacted by a $1.5 million impairment charge recorded in the
prior year for higher projected credit losses and a 30.7% decrease in net credit
losses for the quarter ended July 31, 2007, due to the impact in the prior year
of Hurricane Rita on our credit collection operations and increased bankruptcy
filings due to the new bankruptcy laws that took effect in October 2005. Our net
credit loss rate of 2.3% for the three months ended July 31, 2007, was slightly
below our expected long-term net loss rate of between 2.5% and 3.0%.
Additionally, securitization income, for the three months ended July 31, 2007,
was negatively impacted, in the amount of $0.4 million, as we recorded a
decrease in the fair value of our Interests in securitized assets in current
earnings, due to the mark-to-market adjustment now required under SFAS No. 159.
This decrease in fair value was driven primarily by higher projected borrowing
costs and a slightly faster portfolio turnover rate, partially offset by the
benefit of the growth of the portfolio (see the notes to the financial
statements for additional information). Insurance commissions increased
primarily due to increased sales and reduced insurance cancellations as credit
charge-offs declined from the prior year period.
20
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $12.9 million, or 10.8%, from $119.8 million for the three
months ended July 31, 2006, to $132.7 million for the three months ended July
31, 2007. This increase was due primarily to the 8.7% growth in product sales
during the three months ended July 31, 2007. Cost of products sold was 81.0% of
product sales in the quarter ended July 31, 2007, and 79.5% in the quarter ended
July 31, 2006, and was higher due to increased price competition, especially in
the consumer electronics and track categories.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $0.7 million, or 52.8%, for the three months ended
July 31, 2007, as compared to the three months ended July 31, 2006, primarily
due to a 20.8% increase in parts sales, valuation adjustments on our parts
inventory and realignment of staffing.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $6.3 million, or 13.3%, from $48.4 million
for the three months ended July 31, 2006, to $54.7 million for the three months
ended July 31, 2007. As a percentage of total revenues, it increased from 26.6%
to 26.9%. The increase in expense resulted primarily from higher compensation
and employee related expenses and occupancy cost, including property taxes, as a
percent of revenues. The occupancy cost increase is attributable primarily to
the additions of new stores.
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 decreased by $42,000, during the three months ended July
31, 2007, as compared to the three months ended July 31, 2006. See the notes to
the financial statements for information regarding the performance of the credit
portfolio.
Interest Income, net. Net interest income improved by $64,000, from net
interest income of $187,000 for the three months ended July 31, 2006 to net
interest income of $251,000 for the three months ended July 31, 2007. The net
improvement in interest income was primarily attributable to increased interest
income from invested funds, driven primarily by higher average invested
balances, with a smaller portion of the increase due to higher yields.
Other Income, net. Other income declined by $666,000, from $721,000 for the
three months ended July 31, 2006, to $55,000 for the three months ended July 31,
2007, primarily resulting from a $0.7 million gain recognized in the prior year
period 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 6.8%, from $4.6 million for the three months ended July 31, 2006, to
$4.3 million for the three months ended July 31, 2007. The decrease in the
Provision for income taxes is attributable to the reversal of previously accrued
Texas margin tax as a result of the legal entity reorganization completed during
the three months ended July 31, 2007. This decrease was partially offset by the
impact of the 6.1% increase in pretax income. In July 2007, we began accruing
margin tax for the entities that acquired the operations through the mergers
completed during the quarter.
21
Six Months Ended July 31, 2007 Compared to Six Months Ended July 31, 2006
Revenues. Total revenues increased by $34.4 million, or 9.2%, from $374.4
million for the six months ended July 31, 2006, to $408.8 million for the six
months ended July 31, 2007. The increase was attributable to increases in net
sales of $25.0 million, or 7.5%, and $9.4 million, or 24.1%, in finance charges
and other revenue.
The $25.0 million increase in net sales was made up of the following:
o a $6.9 million same store sales increase of 2.1%, driven by strength in
consumer electronics, furniture and lawn and garden sales, partially
offset by declines in appliance and track sales. The decline in
appliance same store sales was due to the positive impact in the prior
year period of Hurricanes Rita and Katrina on our sales in the
storm-impacted markets;
o a $19.6 million increase generated by six retail locations that were not
open for six consecutive months in each period;
o a $1.9 million decrease resulted from an increase in discounts on
extended-term promotional credit sales (those with terms longer than 12
months); and
o a $0.4 million increase resulted from an increase in service revenues.
The components of the $25.0 million increase in net sales were a $21.3
million increase in Product sales and a $3.7 million increase in service
maintenance agreement commissions and service revenues. The $21.3 million
increase in product sales resulted from the following:
o approximately $10.9 million increase attributable to increases in unit
sales, due primarily to increased consumer electronics and furniture
sales, and
o approximately $10.4 million increase attributable to increases in unit
price points. The price point impact was driven by a shift to
higher-priced flat-panel televisions, high-efficiency laundry items and
higher priced tractors and zero turn radius mowers, partially offset by
a decline in the average price points on our furniture and mattresses
categories and the $1.9 million increase in discounts on extended-term
promotional credit sales.
The $3.7 million increase in service maintenance agreement sales and service
revenues was driven by increased sales of service maintenance agreements and
reduced service maintenance agreement cancellations, as credit charge-offs
decreased as compared to the prior year period.
22
The following table presents the makeup of net sales by product category in
each period, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to ensure
comparability between the categories.
Six Months Ended July 31,
--------------------------------------------------
2006 2007
------------------------ ------------------------ Percent
Category Amount Percent Amount Percent Increase
----------- ----------- ----------- ----------- -----------
Major home appliances............ $ 121,581 36.3% $ 118,444 32.9% (2.6)% (1)
Consumer electronics............. 100,057 29.8 112,249 31.1 12.2 (2)
Track............................ 43,510 13.0 42,736 11.9 (1.8) (3)
Delivery......................... 5,717 1.7 6,365 1.8 11.3 (4)
Lawn and garden.................. 11,848 3.5 14,711 4.1 24.2 (5)
Mattresses....................... 10,003 3.0 8,641 2.4 (13.6) (6)
Furniture........................ 13,649 4.1 24,560 6.8 79.9 (7)
Other............................ 2,791 0.8 2,726 0.7 (2.3)
----------- ----------- ----------- -----------
Total product sales.......... 309,156 92.2 330,432 91.7 6.9
Service maintenance agreement
commissions..................... 15,030 4.5 18,352 5.1 22.1 (8)
Service revenues................. 11,156 3.3 11,582 3.2 3.8 (9)
----------- ----------- ----------- -----------
Total net sales.............. $ 335,342 100.0% $ 360,366 100.0% 7.5%
=========== =========== =========== ===========
- ----------------------------------
(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, especially during the first three months of the
period.
(2) This increase is due to increased unit volume in the area of flat-panel
and micro-display televisions, which also have higher price points than
traditional tube and projection televisions.
(3) The decrease in track sales (consisting largely of computers, computer
peripherals, portable electronics and small appliances) is due
primarily to reduced sales of portable electronics, including
camcorders, digital cameras and portable CRT televisions.
(4) This increase was due to an increase in the delivery fee charged to our
customers and the overall increase in product sales.
(5) A higher than normal level of rainfall impacted this category in the
current year.
(6) This decrease is due to the impact of our change in strategy as we move
to a multi-vendor relationship and a change in the price points offered
that negatively impacted our sales efforts.
(7) This increase is due to the increased emphasis on the sales of
furniture, primarily sofas, recliners and entertainment centers, and
new products added to this category.
(8) This increase is due to the increase in product sales, increased sales
penetration as we introduced SMA coverage on some of our furniture
products and decreased SMA cancellations as credit charge-offs declined
as compared to the prior year period.
(9) This increase is driven by increased units in operation as we continue
to grow product sales and an increase in the cost of parts used to
repair higher-priced technology (flat-panel and micro-display
televisions, etc.).
Revenues from Finance charges and other increased by approximately $9.4
million, or 24.1%, from $39.1 million for the six months ended July 31, 2006 to
$48.5 million for the six months ended July 31, 2007. It increased due primarily
to an increase in securitization income of $7.8 million, or 27.5% and an
increase in insurance commissions of $1.8 million, partially offset by a
decrease in income from receivables not sold and other items of $0.2 million.
The securitization income comparison was impacted by a $1.5 million impairment
charge recorded in the prior year for higher projected credit losses and a 24.5%
decrease in net credit losses for the six months ended July 31, 2007, due to the
impact in the prior year of Hurricane Rita on our credit collection operations
and increased bankruptcy filings due to the new bankruptcy laws that took effect
in October 2005. Our net credit loss rate of 2.5% for the six months ended July
31, 2007, was in-line with our expected long-term net loss rate of between 2.5%
and 3.0%. Additionally, securitization income, for the six months ended July 31,
2007, was negatively impacted, in the amount of $0.3 million, as we recorded a
decrease in the fair value of our Interests in securitized assets in current
earnings, due to the mark-to-market adjustment now required under SFAS No. 159.
This decrease in fair value was driven primarily by higher projected borrowing
costs, partially offset by the benefit of the growth of the portfolio (see the
notes to the financial statements for additional information). Insurance
commissions increased primarily due to increased sales and reduced insurance
cancellations as credit charge-offs declined from the prior year period.
23
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $19.1 million, or 7.8%, from $245.5 million for the six
months ended July 31, 2006, to $264.6 million for the six months ended July 31,
2007. This increase was due primarily to the 6.9% growth in product sales during
the six months ended July 31, 2007. Cost of products sold was 80.1% of product
sales in the six months ended July 31, 2007, and 79.4% in the six months ended
July 31, 2006, and was higher due to increased price competition, especially in
the consumer electronics and track categories.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $1.0 million, or 35.0%, for the six months ended
July 31, 2007, as compared to the six months ended July 31, 2006, due primarily
to a 22.4% increase in parts sales, valuation adjustments on our parts inventory
and realignment of staffing.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased by $11.3 million, or 11.9%, from $95.1 million
for the six months ended July 31, 2006, to $106.4 million for the six months
ended July 31, 2007. As a percentage of total revenues, it increased from 25.4%
to 26.0%. The increase in expense resulted primarily from higher net advertising
expenses, compensation and employee related expenses and occupancy cost,
including property taxes, as a percent of revenues. The occupancy cost increase
is attributable primarily to the additions of new stores.
Provision for Bad Debts. The provision for bad debts on non-credit portfolio
receivables and credit portfolio receivables retained by the Company and not
transferred to the QSPE increased by $0.5 million, during the six months ended
July 31, 2007, as compared to the six months ended July 31, 2006, primarily as a
result of provision adjustments due to increased credit losses. Additionally,
the provision for bad debts in the six months ended July 31, 2006, benefited
from a $0.1 million reserve adjustment related to the special reserves recorded
as a result of the hurricanes in 2005. See the notes to the financial statements
for information regarding the performance of the credit portfolio.
Interest Income, net. Net interest income improved by $120,000, from net
interest income of $371,000 for the six months ended July 31, 2006 to net
interest income of $491,000 for the six months ended July 31, 2007. The net
improvement in interest income was primarily attributable to increased interest
income from invested funds, driven by higher yields and higher average invested
balances.
Other Income, net. Other income increased by $132,000, from $754,000 for the
six months ended July 31, 2006, to $886,000 for the six months ended July 31,
2007. Both periods included gains recognized on the sales of company assets.
Additionally, during the six months ended July 31, 2007, there were gains
realized, but not recognized, on transactions qualifying for sale-leaseback
accounting that have been deferred and will be amortized as a reduction of rent
expense on a straight-line basis over the minimum lease terms.
Provision for Income Taxes. The provision for income taxes increased by $0.6
million, or 5.7%, from $11.1 million for the six months ended July 31, 2006, to
$11.7 million for the six months ended July 31, 2007. The effective tax rate
declined from 35.1% for the six months ended July 31, 2006, to 34.1% for the six
months ended July 31, 2007. The decrease in the effective tax rate is
attributable to the reversal of previously accrued Texas margin tax as a result
of the legal entity reorganization completed during the three months ended July
31, 2007. This decrease was partially offset by the impact of the 8.7% increase
in pretax income. In July 2007, we began accruing margin tax for the entities
that acquired the operations through the mergers completed during the quarter.
24
Liquidity and Capital Resources
Current Activities
Historically we have financed our operations through a combination of cash
flow generated from operations, and external borrowings, including primarily
bank debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables under our asset-backed securitization facilities.
As of July 31, 2007, we had approximately $37.9 million in excess cash, the
majority of which was generated through the operations of the Company, and was
invested in short-term, tax-free instruments. In addition to the excess cash, we
had $49.1 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, $24.9 million under extended
vendor terms for purchases of inventory and $107.5 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 July 31, 2007, we had spent $12.5 million under this
authorization to acquire 499,085 shares of our common stock.
A summary of the significant financial covenants that govern our bank credit
facility compared to our actual compliance status at July 31, 2007, is presented
below:
Required
Minimum/
Actual Maximum
----------------- -----------------
Debt service coverage ratio must exceed required minimum 4.53 to 1.00 2.00 to 1.00
Total adjusted leverage ratio must be lower than required maximum 1.62 to 1.00 3.00 to 1.00
Consolidated net worth must exceed required minimum $302.7 million $198.9 million
Charge-off ratio must be lower than required maximum 0.02 to 1.00 0.06 to 1.00
Extension ratio must be lower than required maximum 0.03 to 1.00 0.05 to 1.00
Thirty-day delinquency ratio must be lower than required maximum 0.08 to 1.00 0.13 to 1.00
Note: All terms in the above table are defined by the bank credit facility
and may or may not agree directly to the financial statement captions in
this document.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our bank
credit facility and unsecured credit line, extended vendor terms for purchases
of inventory, acquisition of inventory under consignment arrangements and access
to the unfunded portion of the variable funding portion of the QSPE's
asset-backed securitization program will be sufficient to fund our operations,
store expansion and updating activities, stock repurchases, if any, and capital
programs for at least 12 months. However, there are several factors that could
decrease cash provided by operating activities, including:
o reduced demand for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional activities;
25
o changes in inventory requirements based on longer delivery times of the
manufacturers or other requirements which would negatively impact our
delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under our
current QSPE's asset-backed securitization program as a result of
changes in performance or types of receivables transferred (promotional
versus non-promotional and primary versus secondary portfolio), or as a
result of a change in the mix of funding sources available to the QSPE,
requiring higher collateral levels;
o inability to expand our capacity for financing our receivables portfolio
under new or replacement QSPE asset-backed securitization programs or a
requirement that we retain a higher percentage of the credit portfolio
under such new programs;
o increases in program costs (interest and administrative fees relative to
our receivables portfolio associated with the funding of our
receivables); and
o increases in personnel costs.
During the six months ended July 31, 2007, net cash used in operating
activities improved $7.2 million from $14.0 million for the six months ended
July 31, 2006, to $6.8 million for the six months ended July 31, 2007. Operating
cash flows for both periods were negatively impacted by higher than normal
payments on accounts payable and accrued expenses, as discussed below. The cash
used in operations for the six months ended July 31, 2007, was driven primarily
by payments on accounts payable, which was driven by the timing of receipts of
inventory, and increased investment in accounts receivable. Our increased
investment in accounts receivable was due primarily to increased balances in the
sold portfolio and a lower funding rate as a percentage of the sold portfolio.
The lower funding rate is being impacted by the QSPE's pay down of its 2002
Series B bond issuance, the increase in the balance of the 2002 Series A
variable funding note, and other collateral requirements. The lower funding rate
results in a negative impact on operating cash flows of approximately $22.2
million in the current year period. The cash used in operations for the six
months ended July 31, 2006, resulted primarily from the timing of payments of
accounts payable and federal income and employment taxes, which had been
extended due to the impact of hurricanes in the prior fiscal year. Those
extended terms ended and deadlines were reached in the quarter ended April 30,
2006, and we were required to satisfy those obligations, negatively impacting
our operating cash flows by approximately $18.9 million.
As noted above, we offer promotional credit programs to certain customers
that provide for "same as cash" or deferred interest interest-free periods of
varying terms, generally three, six, 12, 18, 24 and 36 months, and require
monthly payments beginning in the month after the sale. The various "same as
cash" promotional accounts and deferred interest program accounts are eligible
for securitization up to the limits provided for in our securitization
agreements. This limit is currently 30.0% of eligible securitized receivables.
If we exceed this 30.0% limit, we would be required to use some of our other
capital resources to carry the unfunded balances of the receivables for the
promotional period. The percentage of eligible securitized receivables
represented by promotional receivables was 17.0% and 21.0%, as of July 31, 2006
and 2007, respectively. The weighted average promotional period was 11.5 months
and 14.5 months for promotional receivables outstanding as of July 31, 2006 and
2007, respectively. The weighted average remaining term on those same
promotional receivables was 7.2 months and 10.8 months as of both July 31, 2006
and 2007, respectively. While overall these promotional receivables have a much
shorter weighted average term than non-promotional receivables, we receive less
income on these receivables, resulting in a reduction of the net interest margin
used in the calculation of the gain on the sale of receivables.
Net cash from investing activities increased by $10.3 million, from $9.6
million used in the fiscal 2007 period to $0.7 million provided in the fiscal
2008 period. The increase in cash provided by investing activities resulted
primarily from the sales of property and equipment, partially offset by
purchases of property and equipment. We entered into leases for certain of the
properties sold. The cash expended for property and equipment was used primarily
for construction of new stores and the reformatting of existing stores to better
support our current product mix. Based on current plans, we expect to increase
expenditures for property and equipment in the remainder of fiscal 2008 as we
open additional stores.
26
Net cash from financing activities decreased by $8.2 million from $1.4
million provided during the six months ended July 31, 2006 to $6.8 million used
during the six months ended July 31, 2007. The increase in cash used by
financing activities resulted primarily from an increase in the cash used to
purchase treasury stock. During the six months ended July 31, 2007, we used $8.7
million to purchase 331,085 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.
At July 31, 2007, the issuer had issued three series of notes and bonds: the
2002 Series A variable funding note with a total availability of $300 million,
three classes of 2002 Series B bonds with an aggregate amount outstanding of
$100 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 2006
Series A bonds with an aggregate amount outstanding of $150 million, of which
$6.0 million was required to be placed in a restricted cash account for the
benefit of the bondholders. The 2002 Series A variable funding note is composed
of a $100 million 364-day tranche, and a $200 million tranche that matures in
2011. The 364-day commitment was recently renewed by the note holder until July
31, 2008. 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 July 31, 2007, the net portfolio yield was in
compliance with this requirement. Private institutional investors, primarily
insurance companies, purchased the 2002 Series B bonds at a weighted fixed rate
of 5.25% and 2006 Series A bonds at a weighted fixed rate of 5.75%.
The issuer is currently in the process of marketing an additional series of
fixed rate bonds, but no assurance can be given that a transaction can be
completed on terms favorable to it. It is currently anticipated that the
transaction will be completed in the third or fourth quarter of the current
fiscal year. The proceeds of the new issuance will provide the issuer additional
capacity for the purchase of our receivables. If the issuer is unable to
complete the new bond issuance or increase the total availability under the 2002
Series A variable funding note, then, after its current funding sources are
exhausted, we may have to fund growth in the receivables portfolio until the
issuer can obtain additional funding. At July 31, 2007, the issuer had $107.5
million of available capacity under the 2002 Series A variable funding note to
fund receivables purchases and the required $10 million principal payments on
the 2002 Series B bonds. Additionally, at July 31, 2007, we had $37.9 million of
excess cash and $57.1 million of availability under our revolving credit
facilities, among other liquidity sources, to provide funding, if needed, to
fund receivable portfolio growth.
We continue to service the transferred accounts for the QSPE, and we receive
a monthly servicing fee, so long as we act as servicer, in an amount equal to
..25% multiplied by the average aggregate principal amount of receivables
serviced, including the amount of average aggregate defaulted receivables. The
issuer records revenues equal to the interest charged to the customer on the
receivables less losses, the cost of funds, the program administration fees paid
in connection with either the 2002 Series A, 2002 Series B or 2006 Series A bond
holders, the servicing fee and additional earnings to the extent they are
available.
The 2002 Series A variable funding note permits the issuer to borrow funds
up to $300 million to purchase receivables from us or make principal payments on
other bonds, thereby functioning as a "basket" to accumulate receivables. As
issuer borrowings under the 2002 Series A variable funding note approach $300
million, the issuer is required to request an increase in the 2002 Series A
amount or issue a new series of bonds and use the proceeds to pay down the then
outstanding balance of the 2002 Series A variable funding note, so that the
basket will once again become available to accumulate new receivables or meet
other obligations required under the transaction documents. As of July 31, 2007,
borrowings under the 2002 Series A variable funding note were $192.5 million.
27
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the 2002 Series A
note, 2002 Series B bonds and 2006 Series A bonds due to its inability to
collect the transferred customer accounts, the issuer could not pay the
subordinated notes it has issued to us in partial payment for transferred
customer accounts, and the 2002 Series B and 2006 Series A bond holders could
claim the balance in its $14.0 million restricted cash account. We are also
contingently liable under a $20.0 million letter of credit that secures the
performance of our obligations or services under the servicing agreement as it
relates to the transferred assets that are part of the asset-backed
securitization facility.
The issuer is subject to certain affirmative and negative covenants
contained in the transaction documents governing the 2002 Series A variable
funding note, and the 2002 Series B and 2006 Series A bonds, including covenants
that restrict, subject to specified exceptions: the incurrence of non-permitted
indebtedness and other obligations and the granting of additional liens;
mergers, acquisitions, investments and disposition of assets; and the use of
proceeds of the program. The issuer also makes representations and warranties
relating to compliance with certain laws, payment of taxes, maintenance of its
separate legal entity, preservation of its existence, protection of collateral
and financial reporting. In addition, the program requires the issuer to
maintain a minimum net worth.
A summary of the significant financial covenants that govern the 2002 Series
A variable funding note compared to actual compliance status at July 31, 2007,
is presented below:
Required
Minimum/
As reported Maximum
----------------- -----------------
Issuer interest must exceed required minimum $66.9 million $63.4 million
Gross loss rate must be lower than required maximum 3.0% 10.0%
Net portfolio yield must exceed required minimum 9.0% 2.0%
Payment rate must exceed required minimum 6.7% 3.0%
Note: All terms in the above table are defined by the asset backed credit
facility and may or may not agree directly to the financial statement
captions in this document.
Events of default under the 2002 Series A variable funding note and the 2002
Series B and 2006 Series A bonds, subject to grace periods and notice provisions
in some circumstances, include, among others: failure of the issuer to pay
principal, interest or fees; violation by the issuer of any of its covenants or
agreements; inaccuracy of any representation or warranty made by the issuer;
certain servicer defaults; failure of the trustee to have a valid and perfected
first priority security interest in the collateral; default under or
acceleration of certain other indebtedness; bankruptcy and insolvency events;
failure to maintain certain loss ratios and portfolio yield; change of control
provisions and certain other events pertaining to us. The issuer's obligations
under the program are secured by the receivables and proceeds.
28
Securitization Facilities
We finance most of our customer receivables through asset-backed
securitization facilities
----------------------------
| |
| 2002 Series A Note |
---->| $300 million |
| | Credit Rating: P1/A1 |
| | Three Pillars Funding LLC |
| | |
Customer Receivables | ----------------------------
|
- -------------------------- -----------> -------------------------- | ----------------------------
| | | | | | 2002 Series B Bonds |
| | | Qualifying | | | $100 million |
| Retail | | Special Purpose |<---------->| Private Institutional |
| Sales | | Entity | | | Investors |
| Entity | | ("QSPE") | | | Class A: $60.0 mm (Aaa) |
| | | | | | Class B: $28.9 mm (A2) |
| | | | | | Class C: $11.1 mm (Baa2) |
- -------------------------- <----------- -------------------------- | ----------------------------
|
1. Cash Proceeds | ----------------------------
2. Subordinated Securities | | 2006 Series A Bonds |
3. Right to Receive Cash Flows | | $150 million |
Equal to Interest Spread |--->| Private Institutional |
| Investors |
| Class A: $90 mm (Aaa) |
| Class B: $43.3 mm (A2) |
| Class C: $16.7 mm (Baa2) |
----------------------------
Both the bank credit facility and the asset-backed securitization program
are significant factors relative to our ongoing liquidity and our ability to
meet the cash needs associated with the growth of our business. Our inability to
use either of these programs because of a failure to comply with their covenants
would adversely affect our continued growth. Funding of current and future
receivables under the QSPE's asset-backed securitization program can be
adversely affected if we exceed certain predetermined levels of re-aged
receivables, size of the secondary portfolio, the amount of promotional
receivables, write-offs, bankruptcies or other ineligible receivable amounts. If
the funding under the QSPE's asset-backed securitization program was reduced or
terminated, we would have to draw down our bank credit facility more quickly
than we have estimated.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates under our bank credit facility are variable and are
determined, at our option, as the base rate, which is the greater of prime rate
or federal funds rate plus 0.50% plus the base rate margin, which ranges from
0.00% to 0.50%, or LIBOR plus the LIBOR margin, which ranges from 0.75% to
1.75%. Accordingly, changes in the prime rate, the federal funds rate or LIBOR,
which are affected by changes in interest rates generally, will affect the
interest rate on, and therefore our costs under, our bank credit facility. We
are also exposed to interest rate risk associated with our interest only strip
and the subordinated securities we receive from our sales of receivables to the
QSPE.
There have been no material changes in our interest rate risks since January
31, 2007.
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, regarding the effectiveness of our disclosure controls and procedures
(as defined in 15d-15(e) of the Securities Exchange Act of 1934 (the Exchange
Act) as of the end of the period covered by this quarterly report. Based on that
evaluation, our management, including our Chief Executive Officer and our Chief
Financial Officer, concluded that our disclosure controls and procedures are
effective in timely alerting them to material information relating to our
Company (including its consolidated subsidiaries) required to be included in our
periodic filings with the Securities and Exchange Commission. There have been no
changes in our internal control over financial reporting that occurred during
the quarter ended July 31, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to our business from time
to time. Currently, we do not expect the outcome of any of this routine
litigation to have a material affect on our financial condition, results of
operations or cash flows. However, the results of these proceedings cannot be
predicted with certainty, and changes in facts and circumstances could impact
our estimate of reserves for litigation.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, "Item 1A. Risk Factors" in
our Annual Report on Form 10-K for the year ended January 31, 2007, which could
materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 25, 2006, we announced that our Board of Directors had authorized
a common stock repurchase program, permitting us to purchase, from time to time,
in the open market and in privately negotiated transactions, up to an aggregate
of $50.0 million of our common stock, dependent on market conditions and the
price of the stock.
During the quarter ended July 31, 2007, we made the following repurchases of
our common stock:
Total # of Shares Approximate
Purchased as Dollar Value of
Total # of Average Part of Publicly Shares That May
shares Price Paid Announced Yet Be Purchased
Period purchased per share Programs Under the Programs
------ ---------- ---------- ------------------- --------------------
May 1 - May 31, 2007 79,500 $ 26.10 79,500 $ 39,590,473
June 1 - June 30, 2007 - $ - - $ 39,590,473
July 1 - July 31, 2007 73,585 $ 28.23 73,585 $ 37,515,273
---------- -------------------
Total 153,085 153,085
========== ===================
30
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 30, 2007, the following
proposals were submitted to stockholders with the following results:
1. Election of nine directors
Number of Shares
---------------------------------
For Withheld
--------------- ---------------
Marvin D. Brailsford 22,525,912 178,542
Thomas J. Frank, Sr. 13,219,292 9,485,162
Jon E. M. Jacoby 22,395,449 309,005
Bob L. Martin 13,025,867 9,678,587
Douglas H. Martin 13,318,356 9,386,098
Dr. William C. Nylin, Jr. 13,341,932 9,362,522
Scott L. Thompson 22,528,072 176,382
William T. Trawick 22,401,630 302,824
Theodore M. Wright 22,528,072 176,382
2. Approval of the Audit Committee's appointment of Ernst & Young, LLP
as our independent public accountants for the fiscal year ending January 31,
2008.
Number of Shares
----------------------
For 22,692,618
Against 4,786
Abstain 7,050
Broker Nonvotes -
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.
31
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: August 30, 2007
32
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
33
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).
34
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).
35
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 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
36
10.18 Dealer Agreement between Conn Appliances, Inc. and Voyager Service
Programs, Inc. effective as of January 1, 1998 (incorporated herein
by reference to Exhibit 10.19 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.1 Amendment #1 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.1 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.2 Amendment #2 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.2 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.3 Amendment #3 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.3 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.4 Amendment #4 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of July 1, 2005 (incorporated herein by
reference to Exhibit 10.19.4 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.18.5 Amendment #5 to Dealer Agreement by and among Conn Appliances, Inc.,
CAI, L.P., Federal Warranty Service Corporation and Voyager Service
Programs, Inc. effective as of April 7, 2007 (filed herewith).
10.19 Service Expense Reimbursement Agreement between Affiliates Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager
Property and Casualty Insurance Company effective July 1, 1998
(incorporated herein by reference to Exhibit 10.20 to Conn's, Inc.
Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
10.19.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI, L.P., Affiliates Insurance Agency, Inc., American Bankers
Life Assurance Company of Florida, Voyager Property & Casualty
Insurance Company, American Bankers Life Assurance Company of
Florida, American Bankers Insurance Company of Florida and American
Bankers General Agency, Inc. effective July 1, 2005 (incorporated
herein by reference to Exhibit 10.20.1 to Conn's, Inc. Form 10-K for
the annual period ended January 31, 2006 (File No. 000-50421) as
filed with the Securities and Exchange Commission on March 30,
2006).
10.20 Service Expense Reimbursement Agreement between CAI Credit Insurance
Agency, Inc. and American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company Ranchers & Farmers County Mutual
Insurance Company, Voyager Life Insurance Company and Voyager
Property and Casualty Insurance Company effective July 1, 1998
(incorporated herein by reference to Exhibit 10.21 to Conn's, Inc.
Form 10-K for the annual period ended January 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
March 30, 2006).
37
10.20.1 First Amendment to Service Expense Reimbursement Agreement by and
among CAI Credit Insurance Agency, Inc., American Bankers Life
Assurance Company of Florida, Voyager Property & Casualty Insurance
Company, American Bankers Life Assurance Company of Florida,
American Bankers Insurance Company of Florida, American Reliable
Insurance Company, and American Bankers General Agency, Inc.
effective July 1, 2005 (incorporated herein by reference to Exhibit
10.21.1 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on March 30, 2006).
10.21 Consolidated Addendum and Amendment to Service Expense Reimbursement
Agreements by and among Certain Member Companies of Assurant
Solutions, CAI Credit Insurance Agency, Inc. and Affiliates
Insurance Agency, Inc. effective April 1, 2004 (incorporated herein
by reference to Exhibit 10.22 to Conn's, Inc. Form 10-K for the
annual period ended January 31, 2006 (File No. 000-50421) as filed
with the Securities and Exchange Commission on March 30, 2006).
10.22 Series 2006-A Supplement to Base Indenture, dated August 1, 2006, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank,
National Association, as Trustee (incorporated herein by reference
to Exhibit 10.23 to Conn's, Inc. Form 10-Q for the quarterly period
ended July 31, 2006 (File No. 000-50421) as filed with the
Securities and Exchange Commission on September 15, 2006).
10.23 Fourth Amended and Restated Subordination and Priority Agreement,
dated August 31, 2006, by and among Bank of America, N.A. and
JPMorgan Chase Bank, as Agent, and Conn Appliances, Inc. and/or its
subsidiary CAI, L.P (incorporated herein by reference to Exhibit
10.24 to Conn's, Inc. Form 10-Q for the quarterly period ended
October 31, 2006 (File No. 000-50421) as filed with the Securities
and Exchange Commission on November 30, 2006).
10.23.1 Fourth Amended and Restated Security Agreement, dated August 31,
2006, by and among Conn Appliances, Inc. and CAI, L.P. and Bank of
America, N.A. (incorporated herein by reference to Exhibit 10.24.1
to Conn's, Inc. Form 10-Q for the quarterly period ended October 31,
2006 (File No. 000-50421) as filed with the Securities and Exchange
Commission on November 30, 2006)..
10.24 Letter of Credit and Reimbursement Agreement, dated September 1,
2002, by and among CAI, L.P., Conn Funding II, L.P. and SunTrust
Bank (incorporated herein by reference to Exhibit 10.25 to Conn's,
Inc. Form 10-Q for the quarterly period ended October 31, 2006 (File
No. 000-50421) as filed with the Securities and Exchange Commission
on November 30, 2006).
10.24.1 Amendment to Standby Letter of Credit dated August 23, 2006, by and
among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(incorporated herein by reference to Exhibit 10.25.1 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
November 30, 2006).
10.24.2 Amendment to Standby Letter of Credit dated September 20, 2006, by
and among CAI, L.P., Conn Funding II, L.P. and SunTrust Bank
(incorporated herein by reference to Exhibit 10.25.2 to Conn's, Inc.
Form 10-Q for the quarterly period ended October 31, 2006 (File No.
000-50421) as filed with the Securities and Exchange Commission on
November 30, 2006).
11.1 Statement re: computation of earnings per share is included under
Note 1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (filed herewith).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
(filed herewith).
32.1 Section 1350 Certification (Chief Executive Officer and Chief
Financial Officer) (furnished herewith).
38
99.1 Subcertification by Executive Vice-Chairman of the Board in support
of Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
99.2 Subcertification by Chief Operating Officer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.3 Subcertification by Treasurer in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.4 Subcertification by Secretary in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.5 Subcertification of Executive Vice-Chairman of the Board, Chief
Operating Officer, Treasurer and Secretary in support of Section
1350 Certifications (Chief Executive Officer and Chief Financial
Officer) (furnished herewith).
t Management contract or compensatory plan or arrangement.
39
EXHIBIT 10.18.5
AMENDMENT #5 TO DEALER AGREEMENT
REPLACEMENT PROGRAM
THIS AMENDMENT #5 (herein "Amendment") to the Dealer Agreement
("Agreement") is made this 9th day of April, 2007 with an effective date of June
1, 2006 ("Effective Date") by and among Conn Appliances, Inc., a Texas
corporation ("Conn"), CAI, L.P., a Texas limited partnership ("CAILP") having
their principal places of business at 3295 College Street, Beaumont, Texas 77701
(except as otherwise noted, Conn and CAILP collectively herein referred to as
"Dealer"), and Federal Warranty Service Corporation, an Illinois corporation
having its principal place of business at 260 Interstate North Circle, SE,
Atlanta, GA 30339 (through prior Amendment #1 replaced Voyager Service Programs,
Inc.) ("Federal").
WHEREAS, Dealer and Voyager entered into a "Dealer Agreement" stated as
effective January 1, 1998 (the "Agreement") concerning the sale by Dealer of
Service Contracts covering certain specified merchandise sold by Dealer, under
which Service Contracts Voyager was the obligor, and which Service Contracts
were administered by Dealer; and
WHEREAS, "Amendment #1" to the Agreement substituted Federal in place of Voyager
and CAILP in place of Conn as parties to the Agreement, "Amendment #2" amended
the term and termination provisions of the Agreement, "Amendment #3" amended the
Agreement's pricing provisions and provided for the transfer and release of
specified reserves held by Voyager under the Agreement and "Amendment #4"
provided mutual commitment to the future addition of the Replacement Program (as
defined in Amendment #4) and provided for the assignment of a Sales Manager to
support Dealer's Service Contract program; and
WHEREAS, The parties now desire to amend the Agreement to provide for the
implementation and launch of the Replacement Program.
NOW THEREFORE, in consideration of the mutual covenants and promises set forth
herein and in the Agreement, the parties do hereby agree as follows:
1. The parties agree that the Replacement Program is hereby added to the
Agreement and shall be included in the term "Service Contract" as used
therein. A "Replacement Program" Service Contract is one which provides for
the replacement of Covered Merchandise in the event of specified types of
failure as set forth in the applicable Service Contract form. The initial
Replacement Program Service Contract form approved by Federal for use by
Dealer is attached hereto as Exhibit A.1. Dealer shall use only the
Replacement Program Service Contract forms approved by Federal. Replacement
Program Service Contracts may be sold to cover only specific categories of
Covered Merchandise, and at specific Contract Prices, as set forth in
Schedule A.1 attached hereto. Exhibit A.1 and Schedule A.1 are hereby
attached to and made part of the Agreement.
2. Paragraph 2.2 is hereby deleted in its entirety and replaced with the
following:
"Contract Prices. Dealer shall sell Non-Replacement Program Service
Contracts on such Covered Merchandise and at such prices as are contained
in Schedule A.1 and shall sell Replacement Program Service Contracts on
such Covered Merchandise and at such prices contained in Schedule A.1
attached hereto (such retail prices for both Replacement Program and
Non-Replacement Program Service Contracts shall herein be referred to as
"Contract Prices"). Dealer shall, from time to time, establish the Contract
Prices to be charged for the Service Contracts subject to Federal's
approval and shall advise Federal in writing of such Contract Prices.
Approval of the Contract Prices shall not be unreasonably withheld or
delayed by Federal. It is understood that in the event Federal has neither
disapproved a Dealer-proposed Contract Price nor requested additional time
to review same, in writing, within ten (10) business days after Federal's
receipt thereof, approval of such Contract Price shall be deemed to be
given. Dealer shall comply with all United States (federal), Texas and
Louisiana laws and regulations applicable to the pricing of the Service
Contracts.""
1
3. The definition of Federal Fees in the first sentence of 5.1 shall be
replaced with the following:
"Federal Fee" means
a) for the Non-Replacement Program Service Contracts: that amount
equal to thirty-four percent (34%) of the Contract Prices and
b) for the Replacement Program Service Contracts: that amount equal
to fifty-four percent (54%) of the Contract Prices for the first
$3,750,000 of such retail sales during any contract year, and
that amount equal to fifty percent (50%) of the Contract Prices
for retail sales in excess of $3,750,000 during any contract
year.
The Federal Fee applies to Contract Prices net of sales tax collected of
Service Contracts sold by or delivered by Dealer in connection with the
sale of covered Merchandise and any renewals thereof.
4. The reference to "paragraph 5.5" as found in paragraph 3.7 of the Agreement
is hereby amended to refer to "paragraph 5.4.
5. The attached Exhibit D, amended to reflect the differing Federal
(previously Voyager) retention rates for Replacement Program business, is
hereby attached to the Agreement and replaces in its entirety the previous
Exhibit D.
6. All other terms and conditions of the Agreement shall apply to the
Replacement Program and shall remain the same.
IN WITNESS HEREOF, the parties have signed this Amendment effective as of the
date first above written.
Conn Appliances, Inc.
By:
-------------------------------
Title:
----------------------------
Federal Warranty Service Corporation CAI, L.P. (by Conn Appliances, Inc.,
General Partner)
By: By:
-------------------------------- -------------------------------
Title: Title:
----------------------------- ----------------------------
2
EXHIBIT A.1
REPLACEMENT PROGRAM TERMS AND CONDITIONS
REPLACEMENT PLAN
SERVICE AGREEMENT
In consideration of the amount paid on the invoice for this Replacement Plan
Service Agreement ("Agreement"), and except as hereinafter provided, should Your
covered product require replacement, Federal Warranty Service Corporation will
make the necessary replacement of the product identified on this invoice at the
owner's address as identified on the invoice. Pre-existing conditions are
included in this Agreement. This Agreement is not a contract of Insurance.
"We", "Us" and "Our" mean the company obligated under this Agreement, Federal
Warranty Service Corporation [P.O. Box 105689, Atlanta, GA 30348-5689]. "You"
and "Your" indicates the purchaser of this Agreement. " Retailer" means the
store You purchased the products covered under this Agreement from. "Covered
Product" means the consumer item(s) which You purchased concurrently with and is
covered by this Agreement. "Administrator" means CAI, LP ("Conn's").
"Replacement" mean the exchange of a defective covered product with a new,
rebuilt, or refurbished product of equal or similar features and functionality
as the original covered product. We reserve the right to select the manufacturer
and model of the replacement product. This Agreement is not a contract of
insurance.
REPLACEMENT PLAN TERMS AND CONDITIONS
(1) For the Replacement Plan , the term of this Agreement begins on the date of
purchase and continues for a period of two (2) years or until a claim is
paid, whichever occurs first.
(2) We will replace the Covered Product, at Our discretion, when required
due to a mechanical or electrical breakdown during normal usage,
including those experienced during normal wear and tear. A mechanical
or electrical breakdown caused by a direct result of a power surge is
also covered.
(3) If Your covered product requires replacement, return it to the nearest
Administrator's retail store for determination that Your covered
product is defective and requires replacement.
(4) If you do not reside in an Administrators territory, contact the
Administrator at 1-877-472-5422, Monday - Friday 10:00am to 9:00pm,
Saturday 9:00am to 9:00pm, Sunday 11:00am to 7:00pm. You will be
instructed on where to ship Your Covered Product for determination
that Your covered product is defective and requires replacement.. If
appropriate, the Administrator will issue a return authorization
number (RA#). You are then responsible for shipping and handling
charges to the Administrator at the national return center. You must
write the RA# on the outside of the package. Covered Products shipped
without the RA# will be refused. Covered Products found to be
non-defective will be returned to You. You are responsible for all
costs involved when Covered Products are found to be non-defective.
(5) The limit of liability under the replacement plan is the value of the
Covered Product at the time of purchase. This Agreement shall expire
upon replacement of the Covered Product. Coverage provided under this
Contract shall not be transferable to any replaced product, unless
otherwise required by state law. All defective products will become
Our property, should We unilaterally elect to exercise Our rights to
the property.
3
(6) This Agreement excludes, (a) products not originally covered by a
manufacturer's warranty; product repairs that should be covered by the
manufacturer's warranty or are a result of a recall regardless of the
manufacturer's ability to pay for such repairs; (b) periodic checkups
and/or preventative maintenance as directed by the manufacturer except as
provided herein; any deficiencies noted on the sales receipt; (c) parts or
repairs due to normal wear and tear unless tied to a breakdown and items
normally designed to be periodically replaced by You during the life of the
covered product, including but not limited to batteries, light bulbs, etc;
(d) damage from accident, abuse, misuse, mishandling, introduction of
foreign objects into the Covered Products; (e) unauthorized modifications
or alterations to a Covered Product; (f) failure to follow the
manufacturer's instructions; (g) external causes including third party
actions, fire, theft, insects, animals, exposure to weather conditions,
earthquake, sand, dirt, hail, windstorm, flood, water, acts of god; (h)
consequential loss of any nature; (i) loss or damage caused by war,
invasion or act of foreign enemy, hostilities, rebellion, riot, civil war,
strike labor disturbance, lockout, or civil commotion; (j) incidental,
consequential or secondary damages or delay in rendering service under the
Agreement, or loss of use during the period that the Covered Product is at
an authorized service center or otherwise awaiting parts; (k) any product
used in a commercial setting or rental basis; (l) failures that occur
outside the 50 states of the United States of America; (m) nonfunctional or
aesthetic parts including but not limited to plastic parts, knobs, rollers,
baskets, scratches, peeling and dents; (n) unauthorized repairs and/or
parts; (o) cost of installations, set-up, diagnostic charges, removal of
reinstallation of the Covered Product, except as provided herein; (p)
accessories used in conjunction with a Covered Product; (q) any loss other
than a covered breakdown of the Covered Product; (r) service where no
problem can be found; (s) breakdown which are not reported within the term
of the Agreement; (t) failure as a result from rust or corrosion on any
covered product or part; (u) damage to clothing; (v) abnormal variation of
electricity or water supply; (w) water and gas lines beyond the Covered
Product; (x) damage incurred while moving the Covered Product to another
location; (y) reimbursement of food loss due to natural spoilage or caused
by misuse of the Covered Product; (z) products greater than 14 years old;
(aa) any storage media damaged by a malfunctioning part; (bb) improper
installation of components or peripherals; (cc) repair or replacement of
upgraded internal computer components when repair or replacement is
required due to incompatibility of parts or incorrect installation; (dd)
broken or cracked LCD screens in notebooks or portable computers and burned
in phosphor in CRT or any other type of display; (ee) application programs,
operating software or other software, loss of data or restorations of
programs that You were responsible for back up prior for commencement of
repair; (ff) corruption of any program, data or setup information resident
on any hard drives and internal or external removable storage devices, as a
result of the malfunctioning or damage of an operating part, or as a result
of any repairs or replacement under this Agreement; (gg) color fading of
picture for any television; (hh) plasma televisions in use at or above 6000
ft. above sea level; (ii) burned-in phosphor (including image ghosting),
pixel burnout not in accordance with the manufacturer's specifications.
(7) You have the right to cancel at any time by contacting the Administrator at
a retail store or by writing to the Administrator at 3295 College Street,
Beaumont, TX 77701. If You cancel Your Agreement within thirty (30) days of
receipt of Your Agreement, You can return to the Retailer for a full
refund. If You cancel after thirty (30) days of receipt of Your Agreement,
please contact the Administrator. You will receive a pro-rata refund based
on the time expired less a twenty-five dollar ($25) cancellation fee, or
ten percent (10%) of the purchase price (whichever is less), less the cost
of claims paid. We may not cancel this Agreement except for fraud, material
misrepresentation or non-payment by You; or if required to do so by a
regulatory authority. Notice of such cancellation will be in writing and
given at least thirty (30) days prior to cancellation. If We cancel, the
return premium is based upon one-hundred percent (100%) of the unearned
pro-rata premium.
(8) This Agreement is transferable by the original purchaser for the balance of
the original replacement plan service agreement protection period. The
Covered Product may be registered by mailing information to the
Administrator, including the agreement reference number, date of new
ownership, new owners name, complete address, and telephone number.
(9) The Agreement territory is limited to the United States of America,
including the District of Columbia. It does not include any Canadian
or U.S. Territories including Guam, Puerto Rico, or U.S. Virgin
Islands.
(10) If We pay for a loss, We may require You to assign Us Your rights of
recovery against others. We will not pay for a loss if You impair
these rights to recover. Your rights to recover from others may not be
waived.
(11) This Agreement is not renewable.
(12) The Administrator (Conn's) provides customer assistance at
www.conns.com, check the local telephone listings in your area for
your nearest Conn's store, visit any Conn's store location or by
calling 1-877-472-5422.
(13) Arbitration Provision - READ THE FOLLOWING ARBITRATION PROVISION
("PROVISION") CAREFULLY. IT LIMITS CERTAIN OF YOUR RIGHTS, INCLUDING YOUR
RIGHT TO OBTAIN RELIEF OR DAMAGES THROUGH COURT ACTION.
As used in this Provision, "You" and "Your" mean the person or persons
named in this Agreement, and all of his/her heirs, survivors, assigns and
representatives. And, "We" and "Us" shall mean the Obligor identified above
and shall be deemed to include all of its agents, affiliates, successors
and assigns, and any retailer or distributor of its products, and all of
the dealers, licensees, and employees of any of the foregoing entities
Any and all claims, disputes, or controversies of any nature whatsoever
(whether in contract, tort or otherwise, including statutory, common law,
fraud (whether by misrepresentation or by omission) or other intentional
tort, property, or equitable claims) arising out of, relating to, or in
connection with (1) this [Service Agreement] or any prior Agreement, and
the purchase thereof; and (2) the validity, scope, interpretation, or
enforceability of this Provision or of the entire Agreement ("Claim"),
shall be resolved by binding arbitration before a single arbitrator. All
arbitrations shall be administered by the American Arbitration Association
("AAA") in accordance with its Expedited Procedures of the Commercial
Arbitration Rules of the AAA in effect at the time the Claim is filed. The
terms of this Provision shall control any inconsistency between the AAA's
Rules and this Provision. You may obtain a copy of the AAA's Rules by
calling (800) 778-7879. Upon written request We will advance to You either
all or part of the fees of the AAA and of the arbitrator. The arbitrator
will decide whether You or We will be responsible for these fees. The
arbitrator shall apply relevant substantive law and applicable statute of
limitations and shall provide written, reasoned findings of fact and
conclusions of law. The arbitration shall be held at a location selected by
Us within the state in which You purchased this Agreement. This Provision
is part of a transaction involving interstate commerce and shall be
governed by the Federal Arbitration Act, 9 U.S.C. ss. 1 et seq. If any
portion of this Arbitration Provision is deemed invalid or unenforceable,
it shall not invalidate the remaining portions of the Arbitration
Provision. This Arbitration Provision shall inure to the benefit of and be
binding on You and Us and its Provision shall continue in full force and
effect subsequent to and notwithstanding the expiration of termination of
this Agreement.
You agree that any arbitration proceeding will only consider Your Claims.
Claims by, or on behalf of, other individuals will not be arbitrated in any
proceeding that is considering Your Claims.
You and We Understand and agree that because of this arbitration PROVISION
neither you nor us will have the right to go to court except as provided
above or to have a jury trial or to participate as any member of a class of
claimants pertaining to any claim.
THIS SERVICE AGREEMENT PROVIDES NO BENEFITS DURING THE TERM OF THE
MANUFACTURER'S WARRANTY. THE TERM OF THIS SERVICE AGREEMENT AND THE
COVERAGE DESCRIBED HEREIN COMMENCE IMMEDIATELY UPON EXPIRATION OF THE
MANUFACTURER'S WARRANTY.
(14) State Disclosures - These special state disclosures apply if Your Agreement
was delivered to You in one of the following states and supersedes any
other provision herein to the contrary.
Louisiana residents: The Arbitration Provision is deleted in its entirety.
4
Texas residents: A ten percent (10%) penalty per month shall be applied to
refunds not paid or credited within thirty (30) days of receipt of returned
service Agreement. The obligations under this Agreement are insured by a
policy of insurance issued by American Bankers Insurance Company of
Florida, 11222 Quail Roost Drive, Miami, FL 33157. In the event any covered
service is not paid within 60 days after proof of loss has been filed, or
is a refund or credit is not paid before the 46th day after the date which
the Agreement is returned, you may apply directly to American Bankers
Insurance Company of Florida. If yOU have complaints or questions regarding
this Agreement, yOU may contact the Texas Department of Licensing and
Regulation at the following address and telephone number: Texas Department
of Licensing and Regulation, Post Office Box 12157, Austin, Texas 78711;
512-463-6599 or 800-803-9202.
To learn more about how Federal Warranty Service Corporation, an
Assurant Solutions company, uses your information, please visit our website
at www.assurantsolutions.com.
EXHIBIT D
This Exhibit D is attached, as of the date of execution of Amendment #5, to that
certain Dealer Agreement by and between Voyager Service Programs, Inc. and Conn
Appliances, Inc., effective January 1, 1998, and replaces any previous version.
EXPERIENCE REFUND COMPUTATION
Step 1. In accordance with Paragraph 5.5, Federal shall calculate an Experience
Refund which shall be on a cumulative inception to date basis as follows:
a. From the net written Federal Fees, the unearned Federal Fees as of the
end of the applicable Calculation Period shall be subtracted. The
amount of the "unearned Federal Fees" shall be calculated using the
pro rata method, over the term of each individual Service Contract
beginning in the tenth month following the sale of such Service
Contract. The resulting number is the earned Federal Fees.
b. From the earned Federal Fees premium taxes and the Dealer
Administrative Compensation associated with the earned Federal Fees
shall be subtracted. Federal shall also subtract and retain: i)
Federal's retention of 4% of the Contract Price for Non-Replacement
Service Contracts, and ii) Federal's retention of 8% of the Contract
Price for Replacement Plan Service Programs for the first $3,750,000
of such retail sales during any contract year, and iii) Federal's
retention of 4% of the Contract Price for Replacement Plan Service
Programs for retail sales in excess of $3,750,000 during any contract
year, if any.
From the amount calculated in (b), the paid Service Contract Losses,
claims-related expenses and ending claims reserves shall be subtracted.
Step. 2. From the sum determined under Step 1, subtract any Experience Refunds
previously paid for prior Calculation Periods.
The positive or negative amount calculated in accordance with these steps is the
"Experience Refund" for the applicable Calculation Period to in Subparagraph
5.5.
5
EXHIBIT 21
SUBSIDIARIES OF CONN'S, INC.
Subsidiary Jurisdiction
---------- ------------
CAIAIR, Inc. Delaware
CAI Credit Insurance Agency, Inc. Louisiana
CAI Holding Co. Delaware
Conn Appliances, Inc. Texas
Conn Appliances, LLC Delaware
Conn Credit Corporation, Inc. Texas
Conn Funding II GP, LLC Texas
Conn Funding II, L.P. Texas
40
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: August 30, 2007
41
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: August 30, 2007
42
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company")
on Form 10-Q for the period ended July 31, 2007 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, Thomas J. Frank, Sr.,
Chairman of the Board and Chief Executive Officer of the Company and David L.
Rogers, Chief Financial Officer of the Company, hereby certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ Thomas J. Frank Sr.
----------------------------------
Thomas J. Frank, Sr.
Chairman of the Board and
Chief Executive Officer
/s/ David L. Rogers
----------------------------------
David L. Rogers
Chief Financial Officer
Dated: August 30, 2007
A signed original of this written statement required by Section 906 has been
provided to Conn's, Inc. and will be retained by Conn's, Inc. and furnished to
the Securities and Exchange Commission or its staff upon request. The foregoing
certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and
is not being filed as part of the Report or as a separate disclosure document.
43
EXHIBIT 99.1
SUBCERTIFICATION OF EXECUTIVE VICE-CHAIRMAN OF THE BOARD IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, William C. Nylin Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ William C. Nylin, Jr.
----------------------------------------
William C. Nylin, Jr.
Executive Vice-Chairman of the Board
Date: August 30, 2007
44
EXHIBIT 99.2
SUBCERTIFICATION OF CHIEF OPERATING OFFICER IN SUPPORT OF
RULE 13a-14(a)/15d-14(a) CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Timothy L. Frank, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Timothy L. Frank
----------------------------------------
Timothy L. Frank
President and Chief Operating Officer
Date: August 30, 2007
45
EXHIBIT 99.3
SUBCERTIFICATION OF TREASURER IN SUPPORT OF RULE 13a-14(a)/15d-14(a)
CERTIFICATION (CHIEF FINANCIAL OFFICER)
I, David R. Atnip, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ David R. Atnip
----------------------------------------
David R. Atnip
Senior Vice President and Treasurer
Date: August 30, 2007
46
EXHIBIT 99.4
SUBCERTIFICATION OF SECRETARY IN SUPPORT OF RULE 13a-14(a)/15d-14(a)
CERTIFICATION (CHIEF EXECUTIVE OFFICER)
I, Sydney K. Boone, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Conn's, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
/s/ Sydney K. Boone, Jr.
----------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Date: August 30, 2007
47
EXHIBIT 99.5
SUBCERTIFICATION OF EXECUTIVE VICE CHAIRMAN OF THE BOARD,
CHIEF OPERATING OFFICER, TREASURER AND SECRETARY IN SUPPORT OF
18 U.S.C. SECTION 1350 CERTIFICATION,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Conn's, Inc. (the "Company")
on Form 10-Q for the period ended July 31, 2007 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), we, William C. Nylin,
Jr., Executive Vice-Chairman of the Board, Timothy L. Frank, President and Chief
Operating Officer of the Company, David R. Atnip, Senior Vice President and
Treasurer of the Company, and Sydney K. Boone, Jr., Corporate General Counsel
and Secretary of the Company, hereby certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that, to the best of our knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
/s/ William C. Nylin, Jr.
----------------------------------------
William C. Nylin, Jr.
Executive Vice-Chairman of the Board
/s/ Timothy L. Frank
----------------------------------------
Timothy L. Frank
President and Chief Operating Officer
/s/ David R. Atnip
----------------------------------------
David R. Atnip
Senior Vice President and Treasurer
/s/ Sydney K. Boone, Jr.
----------------------------------------
Sydney K. Boone, Jr.
Corporate General Counsel and Secretary
Dated: August 30, 2007
A signed original of this written statement has been provided to Conn's, Inc.
and will be retained by Conn's, Inc. The foregoing certification is being
furnished solely to support certifications pursuant to 18 U.S.C. Section 1350
and is not being filed as part of the Report or as a separate disclosure
document.
48