Our integrated management information system also includes extensive functionality for management of the complete credit portfolio life cycle as well as functionality for the management of product service. The credit system provides in-house credit underwriting, new account set up and tracking, credit portfolio reporting, collections, credit employee productivity metrics, skip-tracing, and bankruptcy, fraud and legal account management. The service system provides for service order processing, warranty claims processing, parts inventory management, technician scheduling and dispatch, technician performance metrics and customer satisfaction measurement. The sales, credit and service systems share a common customer and product sold database.

 

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Our invoicing system uses an IBM Series i5 hardware system that runs on the i5OS operating system. This system enables us to use a variety of readily available applications in conjunction with software that supports the system. All of our current business application software, except our website, accounting, human resources and credit legal systems, has been developed in-house by our management information system employees. We believe our management information systems efficiently support our current operations and provide a foundation for future growth.

We employ Nortel telephone switches and state of the art Avaya predictive dialers, as well as a redundant data network and cable plant, to improve the efficiency of our collection and overall corporate communication efforts.

As part of our ongoing system availability protection and disaster recovery planning, we have implemented a secondary IBM Series i5 system. We installed and implemented the back-up IBM Series i5 system in our corporate offices to provide the ability to switch production processing from the primary system to the secondary system within thirty minutes should the primary system become disabled or unreachable. The two machines are kept synchronized utilizing third party software. This backup system provides “high availability” of the production processing environment. The primary IBM Series i5 system is geographically removed from our corporate office for purposes of disaster recovery and security. Our disaster recovery plan worked as designed during our evacuation from our corporate headquarters in Beaumont, Texas, due to Hur ricane Rita in September 2005, and Hurricanes Gustav and Ike in September 2008. While we were displaced, our store, distribution and service operations that were not impacted by the hurricane continued to have normal system availability and functionality.

Competition

As measured by Twice, the top 100 consumer electronics retailers in the United States reported equipment and software sales of $126.2 billion in 2008, a 1.0% increase from the $124.9 billion reported in 2007. The consumer electronics market is highly fragmented with sales coming from large appliance and electronics superstores, national chains, small regional chains, single-store operators, and consumer electronics departments of selected department and discount stores. We estimate, based on data provided in Twice, that Best Buy and Circuit City, the two largest consumer electronics superstore chains, together accounted for approximately 38% of the total electronics sales attributable to the 100 largest retailers in 2008. Based on revenue in 2008, we were the 33rd largest retailer of consumer electronics in the United States.

Based on data published in Twice the top 100 major appliance retailers reported sales of approximately $22.8 billion in 2008, down approximately 1.0% from reported sales in 2007 of approximately $23.8 billion. The retail appliance market is large and concentrated among a few major dealers, with sales coming primarily from large appliance and electronics superstores, national chains, small regional chains and home improvement centers. Sears has been the leader in the retail appliance market, with a market share of the top 100 retailers of approximately 34% in 2008 and 35% in 2007. Lowe’s and Home Depot held the second and third place positions, respectively, in national market share in 2008.  Based on revenue in 2008, we were the 9th largest retailer of home appliances in the United States.

According to the U.S. Department of Commerce – Bureau of Economic Analysis, personal consumption expenditures for household furniture and mattresses were estimated to be approximately $85.8 billion in 2009, down from $92.8 billion in the prior year. Industry projections estimate that retail household furniture and mattress sales will grow approximately 3% to 5% annually from 2008 through 2013. The household furniture and mattress market is highly fragmented with sales coming from manufacturer-owned stores, independent dealers, furniture centers, specialty sleep product stores, national and local chains, mass market retailers, department stores and, to a lesser extent, home improvement centers, decorator showrooms, wholesale clubs, catalog retailers, and the Internet.

Based on data from the Federal Reserve System, estimated total consumer credit outstanding, which excludes primarily loans secured by real estate, was $2.45 trillion as of December 31, 2009, down 4.3% from $2.56 trillion at December 31, 2008. As a result of the recession that began in late 2007, consumers have increased their rate of savings and reduced their level of borrowing to fund purchases. Consumers obtain credit from banks, credit unions, finance companies and non-financial businesses that offer credit, including retailers. The credit obtained takes many forms, including revolving (e.g. credit cards) or fixed-term (automobile loans) credit, and at times is secured by the products being purchased.

 

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We compete primarily based on enhanced customer service and customer shopping experience through our unique sales force training and product knowledge, next day delivery capabilities, proprietary in-house credit program, guaranteed low prices and product repair service.

Regulation

The extension of credit to consumers is a highly regulated area of our business. Numerous federal and state laws impose disclosure and other requirements on the origination, servicing and enforcement of credit accounts. These laws include, but are not limited to, the Federal Truth in Lending Act, Equal Credit Opportunity Act and Federal Trade Commission Act. State laws impose limitations on the maximum amount of finance charges that we can charge and also impose other restrictions on consumer creditors, such as us, including restrictions on collection and enforcement. We routinely review our contracts and procedures to ensure compliance with applicable consumer credit laws. Failure on our part to comply with applicable laws could expose us to substantial penalties and claims for damages and, in certain circumstances, may require us to refund finance charges already paid and to forego finance charges not yet paid under non-complying contracts. We believe that we are in substantial compliance with all applicable federal and state consumer credit and collection laws.

Our sale of credit life, credit disability, credit involuntary unemployment and credit property insurance products is also highly regulated. State laws currently impose disclosure obligations with respect to our sales of credit and other insurance products similar to those required by the Federal Truth in Lending Act, impose restrictions on the amount of premiums that we may charge and require licensing of certain of our employees and operating entities. We believe we are in substantial compliance with all applicable laws and regulations relating to our credit insurance business.

Employees

As of January 31, 2010, we had approximately 2,800 full-time employees and 350 part-time employees, of which approximately 1,300 were sales personnel. We offer a comprehensive benefits package including health, life, short and long term disability, and dental insurance coverage as well as a 401(k) plan, employee stock purchase plan, paid vacation and holiday pay, for eligible employees. None of our employees are covered by collective bargaining agreements and we believe our employee relations are good. Conn’s has a formal dispute resolution plan that requires mandatory arbitration for employment related issues.

Tradenames and Trademarks

 

We have registered the trademarks "Conn's" and our logos.

Available Information

We are subject to reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, and its rules and regulations.  The Exchange Act requires us to file reports, proxy and other information statements and other information with the Securities and Exchange Commission (SEC). Copies of these reports, proxy statements and other information can be inspected and copied at the SEC Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  You may also obtain these materials electronically by accessing the SEC’s home page on the Internet at www.sec.gov.

 

Our board has adopted a code of business conduct and ethics for our employees, a code of ethics for our chief executive officer and senior financial professionals and a code of business conduct and ethics for our board of directors. A copy of these codes are published on our website at www.conns.com under “Investor Relations – Corporate Governance.” We intend to make all required disclosures concerning any amendments to, or waivers from, these codes on our website. In addition, we make available, free of charge on our Internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC.  You may review these documents, under the heading “Investor Relations – Corporate Governance,” by accessing our website at www.conns.com.

 

 

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ITEM 1A. RISK FACTORS.

 

An investment in our common stock involves risks and uncertainties.  You should consider carefully the following information about these risks and uncertainties before buying shares of our common stock.  The occurrence of any of the risks described below could adversely affect our business prospects, financial condition or results of operations.  In that case, the trading price of our stock could decline, and you could lose all or part of the value of your investment.

 

The inability to obtain funding for our credit operations may adversely affect our business and expansion plans.

 

We finance our customer receivables through asset-backed securitization facilities and an asset based loan facility that together provide $560 million in financing commitments as of January 31, 2010. The securitization facilities provide two separate series of asset-backed notes that allowed us, as of January 31, 2010, to borrow up to $350 million to finance customer receivables. Under each note series, we transfer customer receivables to a qualifying special purpose entity we formed for this purpose, in exchange for cash and subordinated securities. The qualifying special purpose entity, in turn, issues notes collateralized by these receivables that entitle the holders of the notes to participate in certain cash flows from these receivables.  The 2002 Series A program is a $200 million variable funding note, of which $196.4 million was drawn as of January 31, 2010, and is annually renewable, at our option, until August 2011. Additionally, in connection with recent amendments to the variable funding note facility, the commitment will be reduced from its current $200 million level, to $170 million in April 2010, and then to $130 million in April 2011. Further, we agreed to use the proceeds from any capital raising activity to further reduce the commitments and debt outstanding under the QSPE’s debt facilities, The 2006 Series A program consists of $150 million in private bond placements that will require scheduled principal payments beginning in September 2010. These bonds have been downgraded by the rating agency that originally rated the bonds, which may make it more difficult for us to issue medium-term bonds in the future if the ratings are not subsequently raised. The asset based loan facility is a syndicated revolving bank facility that provides a $210 mill ion of borrowing capacity, of which $129.2 million was drawn, including outstanding letters of credit, as of January 31, 2010, and matures in August 2011.

 

Our ability to raise additional capital through further securitization transactions or other debt or equity transactions, and to do so on economically favorable terms, depends in large part on factors that are beyond our control.

 

These factors include:

 

·	conditions in the securities and finance markets generally;

 

·	our credit rating or the credit rating of any securities we may issue;

 

·	economic conditions;

 

·	conditions in the markets for securitized instruments, or other debt or equity instruments;

 

·	the credit quality and performance of our customer receivables;

 

·	our overall sales performance and profitability;

 

·	our ability to obtain financial support for required credit enhancement;

 

·	our ability to adequately service our financial instruments;

 

·	the absence of any material downgrading or withdrawal of ratings given to our securities previously issued in securitizations;

 

·	our ability to meet debt covenant requirements; and

 

·	prevailing interest rates.

 

 

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Our ability to finance customer receivables under our current financing facilities depends on our continued compliance with covenants relating to our business and our customer receivables. In February and March 2010, we completed amendments to our financing facilities in order to obtain relief from potential covenant violations as of January 31, 2010 and revise certain future covenant requirements. If we had been unable to complete these amendments, or if we are unable to complete amendments, if required, in the future, and we are unable to arrange substitute financing facilities or other sources of capital, we may have to limit or cease offering credit through our finance programs. If our financing programs reach their capacity or if availability under the borrowing base calculations is reduced, or otherwise becomes unavailable, and we are unable to arrange substitute financing facilities or other sources of capital, we may have to limit the amount of credit that we make available through our customer finance programs.  A reduction in our ability to offer customer credit may adversely affect revenues and results of operations.  Further, our inability to obtain funding through securitization facilities or other sources may adversely affect the profitability of outstanding accounts under our credit programs if existing customers fail to repay outstanding credit due to our refusal to grant additional credit.

 

Additionally, the inability of any of the financial institutions providing our financing facilities to fund their commitment would adversely affect our ability to fund our credit programs, capital expenditures and other general corporate needs.

 

An increase in interest rates may have a negative impact on our results of operations.

 

The interest rates on our bank credit facility and the 2002 Series A program under our asset-backed securitization facility fluctuate up or down based upon the LIBOR rate, the prime rate of our administrative agent or the federal funds rate in the case of the bank credit facility and the commercial paper rate in the case of the 2002 Series A program. The level of interest rates in the market in general will impact the interest rate on medium-term notes issued under our asset-backed securitization facility or other debt instruments issued, if any. Additionally, we may issue debt securities or enter into credit facilities under which we pay interest at a higher rate than we have historically paid, which would reduce our margins and negatively impact our results of operations.

 

We have significant future capital needs which we may be unable to fund, and we may need additional funding sooner than currently anticipated.

 

We will need substantial capital to finance our operations and any future expansion plans, including funds for capital expenditures, pre-opening costs and initial operating losses related to any new store openings, and growth in the accounts receivable portfolio. We may not be able to obtain additional capital or financing on acceptable terms.  If adequate capital and funds are not available, we will have to curtail future growth, which could materially adversely affect our business, financial condition, operating results or cash flows.

 

Based on our current plans, we estimate that capital expenditures during fiscal 2011 will be approximately $5 million to $10 million and that capital expenditures during future years may exceed this amount, dependent on the availability of capital to fund growth in the future. Our capital expenditure plan for 2011 could increase, depending on the availability of capital to fund new store openings and accounts receivable portfolio growth. We expect that cash provided by operating activities and available borrowings under our credit facilities will be sufficient to fund our operations and capital expenditure programs for at least 12 months.  However, this may not be the case.  We may be required to seek additional capital earlier than anticipated if future cash flows from operations fail to meet our expectations and costs or capital expenditures exceed anticipated amounts.

 

Our ability to open and operate profitably new stores in existing, adjacent and new geographic markets.

 

While we currently have no plans to open any new stores, we expect to continue our expansion in the future. New stores that we open may not be profitable or meet our goals.  Any of these circumstances could have a material adverse effect on our financial results. There are a number of factors that could affect our ability to open and operate new stores consistent with our business plan, including:

 

·	the availability of additional financial resources;

 

 

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·	competition in existing, adjacent and new markets;

 

·	competitive conditions, consumer tastes and discretionary spending patterns in adjacent and new markets that are different from those in our existing markets;

 

·	a lack of consumer demand for our products or financing programs at levels that can support new store growth;

 

·	inability to make customer financing programs available that allow consumer to purchase products at levels that can support new store growth;

 

·	limitations created by covenants and conditions under our credit facilities and our asset-backed securitization program;

 

·	the substantial outlay of financial resources required to open new stores and the possibility that we may recognize little or no related benefit;

 

·	an inability or unwillingness of vendors to supply product on a timely basis at competitive prices;

 

·	the failure to open enough stores in new markets to achieve a sufficient market presence;

 

·	the inability to identify suitable sites and to negotiate acceptable leases for these sites;

 

·	unfamiliarity with local real estate markets and demographics in adjacent and new markets;

 

·	problems in adapting our distribution and other operational and management systems to an expanded network of stores;

 

·	difficulties associated with the hiring, training and retention of additional skilled personnel, including store managers; and

 

·	higher costs for print, radio and television advertising.

 

These factors may also affect the ability of any newly opened stores to achieve sales and profitability levels comparable with our existing stores or to become profitable at all.

 

If we are unable to manage our growing business, our revenues may not increase as anticipated, our cost of operations may rise and our results of operations may decline.

 

We face many business risks associated with growing companies, including the risk that our management, financial controls and information systems will be inadequate to support our expansion in the future. Our growth will require management to expend significant time and effort and additional resources to ensure the continuing adequacy of our financial controls, operating procedures, information systems, product purchasing, warehousing and distribution systems and employee training programs. We cannot predict whether we will be able to manage effectively these increased demands or respond on a timely basis to the changing demands that our expansion will impose on our management, financial controls and information systems. If we fail to manage successfully the challenges of growth, do not continue to improve these systems and controls o r encounter unexpected difficulties during expansion, our business, financial condition, operating results or cash flows could be materially adversely affected.

 

A decrease in our credit sales or a decline in credit quality could lead to a decrease in our product sales and profitability.

 

In the last three fiscal years, we financed, on average, approximately 61% of our retail sales through our internal credit programs.  Our ability to provide credit as a financing alternative for our customers depends on many factors, including the quality of our accounts receivable portfolio.  Payments on some of our credit accounts become delinquent from time to time, and some accounts end up in default, due to several factors, such as general and local economic conditions, including the impact of rising interest rates and unemployment rates.  As we expand into new markets, we will obtain new credit accounts that may present a higher risk than our existing credit accounts since new credit customers do not have an established credit history with us.  A general decline in the quality of our accou nts receivable portfolio could lead to a reduction in the advance rates used or eligible receivable balances included in the borrowing base calculations and thus a reduction of available credit to fund our finance operations.  As a result, if we are required to reduce the amount of credit we grant to our customers, we might sell fewer products, which could adversely affect our earnings.  Further, because approximately 60% of our credit customers have historically made their credit account payments in our stores, any decrease in credit sales could reduce traffic in our stores and lower our revenues.  A decline in the credit quality of our credit accounts could also cause an increase in our credit losses, which would result in an adverse effect on our earnings. A decline in credit quality could also lead to stricter underwriting criteria which might have a negative impact on net sales.

 

 

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A downturn in the economy may affect consumer purchases of discretionary items, which could reduce our net sales or gross margins.

 

A portion of our net sales represent discretionary spending by our customers.  Many factors affect spending, including regional or world events, war, conditions in financial markets, general business conditions, interest rates, inflation, energy and gasoline prices, consumer debt levels, the availability of consumer credit, taxation, unemployment trends and other matters that influence consumer confidence and spending.  Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions.  If this occurs, our net sales and results of operations could decline.

 

We face significant competition from national, regional, local and Internet retailers of home appliances, consumer electronics and furniture.

 

The retail market for consumer electronics is highly fragmented and intensely competitive and the market for home appliances is concentrated among a few major dealers.  We currently compete against a diverse group of retailers, including national mass merchants such as Sears, Wal-Mart, Target, Sam’s Club and Costco, specialized national retailers such as Best Buy and Rooms To Go, home improvement stores such as Lowe’s and Home Depot, and locally-owned regional or independent retail specialty stores that sell home appliances, consumer electronics and furniture similar, and often identical, to those items we sell.  We also compete with retailers that market products through store catalogs and the Internet. In addition, there are few barriers to entry into our current and contemplated markets, and new comp etitors may enter our current or future markets at any time.

 

We may not be able to compete successfully against existing and future competitors. Some of our competitors have financial resources that are substantially greater than ours and may be able to purchase inventory at lower costs and better sustain economic downturns. As a result, our sales may decline if we cannot offer competitive prices to our customers or we may be required to accept lower profit margins. Our competitors may respond more quickly to new or emerging technologies and may have greater resources to devote to promotion and sale of products and services.  If two or more competitors consolidate their businesses or enter into strategic partnerships, they may be able to compete more effectively against us.

 

Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including:

 

·	expansion by our existing competitors or entry by new competitors into markets where we currently operate;

 

·	entering the television market as the decreased size of flat-panel televisions allows new entrants to display and sell the product more easily;

 

·	lower pricing;

 

·	aggressive advertising and marketing;

 

·	extension of credit to customers on terms more favorable than we offer;

 

·	larger store size, which may result in greater operational efficiencies, or innovative store formats; and

 

·	adoption of improved retail sales methods.

 

 

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Competition from any of these sources could cause us to lose market share, sales and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.

 

If new products are not introduced or consumers do not accept new products, our sales may decline.

 

Our ability to maintain and increase sales depends to a large extent on the periodic introduction and availability of new products and technologies.  We believe that the introduction and continued growth in consumer acceptance of new or enhanced products, such as digital Blu-ray players and digital, high-definition televisions, will have a significant impact on our ability to increase sales. These products are subject to significant technological changes and pricing limitations and are subject to the actions and cooperation of third parties, such as movie distributors and television and radio broadcasters, all of which could affect the success of these and other new consumer electronics technologies.  It is possible that new products will never achieve widespread consumer acceptance or will be supplanted by al ternative products and technologies that do not offer us a similar sales opportunity or are sold at lower price points or margins.

 

If we fail to anticipate changes in consumer preferences, our sales will decline.