UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
OCTOBER 31, 2005 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 (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES __X__ NO___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of November 28, 2005:
CLASS OUTSTANDING
- ---------------------------------------- --------------------------
Common stock, $.01 par value per share 23,501,422
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
ITEM 1. Financial Statements...........................................................................1
- -------
Consolidated Balance Sheets as of January 31, 2005 and October 31, 2005........................1
Consolidated Statements of Operations for the three and nine months ended
October 31, 2004 and 2005..................................................................2
Consolidated Statement of Stockholders' Equity for the nine months ended
October 31, 2005...........................................................................3
Consolidated Statements of Cash Flows for the nine months ended
October 31, 2004 and 2005..................................................................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....................................28
- -------
ITEM 4. Controls and Procedures.......................................................................28
- -------
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings.............................................................................29
- -------
ITEM 5. Other Information.............................................................................29
- -------
ITEM 6. Exhibits......................................................................................29
- -------
SIGNATURE ..............................................................................................30
i
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
January 31, October 31,
2005 2005
--------- ---------
ASSETS (unaudited)
CURRENT ASSETS
Cash and cash equivalents .................................... $ 7,027 $ 36,165
Accounts receivable, net ..................................... 26,135 23,351
Interests in securitized assets .............................. 105,159 118,835
Inventories .................................................. 62,346 71,636
Deferred income taxes ........................................ 4,901 6,941
Prepaid expenses and other assets ............................ 3,356 3,838
--------- ---------
TOTAL CURRENT ASSETS ...................................... 208,924 260,766
NON-CURRENT DEFERRED INCOME TAX ASSET ........................... 1,523 2,755
PROPERTY AND EQUIPMENT
Land ......................................................... 2,919 6,671
Buildings .................................................... 8,068 6,045
Equipment and fixtures ....................................... 10,036 13,030
Transportation equipment ..................................... 4,419 2,973
Leasehold improvements ....................................... 56,926 66,123
--------- ---------
SUBTOTAL .................................................. 82,368 94,842
Less accumulated depreciation ................................... (34,658) (41,411)
--------- ---------
TOTAL PROPERTY AND EQUIPMENT, NET ......................... 47,710 53,431
GOODWILL, NET ................................................... 9,617 9,617
DEBT ISSUANCE COSTS AND OTHER ASSETS, NET ....................... 229 274
--------- ---------
TOTAL ASSETS ............................................. $ 268,003 $ 326,843
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable ................................................ $ 5,500 $ --
Current portion of long-term debt ............................ 29 11
Accounts payable ............................................. 26,912 52,931
Accrued compensation and related expenses .................... 6,221 10,970
Accrued expenses ............................................. 13,662 17,006
Income taxes payable ......................................... -- 4,493
Deferred income taxes ........................................ 966 643
Deferred revenues and allowances ............................. 7,383 8,099
Fair value of derivatives .................................... 177 --
--------- ---------
TOTAL CURRENT LIABILITIES ................................. 60,850 94,153
LONG-TERM DEBT .................................................. 5,003 --
NON-CURRENT DEFERRED INCOME TAX LIABILITY ....................... 704 877
DEFERRED GAIN ON SALE OF PROPERTY ............................... 644 518
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;
23,267,596 and 23,501,422 shares issued and outstanding
at January 31, 2005 and October 31, 2005, respectively) .... 233 235
Additional paid-in capital ................................... 84,257 86,277
Accumulated other comprehensive income ....................... 7,516 7,730
Retained earnings ............................................ 108,796 137,053
--------- ---------
Total stockholders' equity ................................ 200,802 231,295
--------- ---------
Total liabilities and stockholders' equity ............. $ 268,003 $ 326,843
========= =========
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
Three Months Ended Nine Months Ended
October 31, October 31,
---------------------- ----------------------
2004 2005 2004 2005
--------- --------- -------- ---------
REVENUES
Product sales ................................ $ 104,869 $ 140,405 $ 321,677 $ 398,547
Service maintenance agreement commissions, net 5,399 7,506 16,835 22,238
Service revenues ............................. 4,853 5,157 14,002 15,066
--------- --------- --------- ---------
Total net sales ........................... 115,121 153,068 352,514 435,851
Finance charges and other .................... 17,789 20,237 51,874 59,992
--------- --------- --------- ---------
TOTAL REVENUES ............................ 132,910 173,305 404,388 495,843
COST AND EXPENSES
Cost of goods sold, including warehousing
and occupancy costs ........................... 82,523 110,024 253,002 314,520
Cost of parts sold, including warehousing
and occupancy costs ........................... 1,159 1,334 3,354 3,795
Selling, general and administrative expense .. 37,738 46,881 110,121 131,063
Provision for bad debts ...................... 1,373 929 4,022 2,524
--------- --------- --------- ---------
TOTAL COST AND EXPENSES ................... 122,793 159,168 370,499 451,902
--------- --------- --------- ---------
OPERATING INCOME ................................ 10,117 14,137 33,889 43,941
Interest expense, net ........................... 615 74 1,764 488
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST AND INCOME TAXES 9,502 14,063 32,125 43,453
Minority interest in limited partnership ........ 113 -- 359 --
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES ...................... 9,389 14,063 31,766 43,453
Provision for income taxes
Current ...................................... 3,637 5,623 12,672 18,730
Deferred ..................................... (563) (691) (1,784) (3,534)
--------- --------- --------- ---------
TOTAL PROVISION FOR INCOME TAXES .......... 3,074 4,932 10,888 15,196
--------- --------- --------- ---------
NET INCOME ...................................... $ 6,315 $ 9,131 $ 20,878 $ 28,257
========= ========= ========= =========
EARNINGS PER SHARE
Basic ........................................ $ 0.27 $ 0.39 $ 0.90 $ 1.21
Diluted ...................................... $ 0.27 $ 0.38 $ 0.88 $ 1.17
AVERAGE COMMON SHARES OUTSTANDING
Basic ........................................ 23,206 23,458 23,175 23,378
Diluted ...................................... 23,681 24,286 23,716 24,088
See notes to consolidated financial statements.
2
Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine Months Ended October 31, 2005
(unaudited)
(in thousands except descriptive shares)
Accum.
Common Stock Other Additional
--------------------- Comprehensive Paid-in Retained
Shares Amount Income Capital Earnings Total
---------- ---------- ----------- ------------- ------------- ------------
Balance January 31, 2005 .................... 23,268 $ 233 $7,516 $ 84,257 $ 108,796 $ 200,802
Exercise of options to acquire
225,520 shares of common stock ........... 225 2 - 1,881 - 1,883
Issuance of 8,306 shares of
common stock under
Employee Stock Purchase Plan ............. 8 - - 139 - 139
Net income .................................. - - - - 28,257 28,257
Reclassification adjustments on
derivative instruments
(net of tax of $86) ...................... - - 160 - - 160
Adjustment of fair value of securitized
assets (net of tax of $26), net of
reclassification adjustments of
$6,923 (net of tax of $3,744) ............ - - 54 - - 54
------------
Total comprehensive income 28,471
---------- ---------- ----------- ------------- ------------- ------------
Balance October 31, 2005 .................... 23,501 $ 235 $7,730 $ 86,277 $ 137,053 $ 231,295
========== ========== =========== ============= ============= ============
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Nine Months Ended
October 31,
--------------------
2004 2005
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................. $ 20,878 $ 28,257
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ........................................ 6,236 8,356
Amortization ........................................ 104 (210)
Provision for bad debts ............................. 4,022 2,524
Discounts on promotional credit ..................... 1,307 611
Accretion from interests in securitized assets ...... (11,103) (10,667)
Provision for deferred income taxes ................. (1,784) (3,534)
Loss (Gain) from sale of property and equipment ..... 111 8
Loss (Gain) from derivatives ........................ (48) 69
Changes in operating assets and liabilities:
Accounts receivable ................................. (16,082) (3,246)
Inventory ........................................... (7,164) (9,290)
Prepaid expenses and other assets ................... (484) (482)
Accounts payable .................................... 3,524 26,019
Accrued expenses .................................... 3,512 8,093
Income taxes payable ................................ (2,556) 4,493
Deferred revenue and allowances ..................... 124 851
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............. 597 51,852
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment ..................... (14,957) (14,107)
Proceeds from sale of property ......................... 1,072 22
-------- --------
NET CASH USED IN INVESTING ACTIVITIES .................. (13,885) (14,085)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issued under employee benefit plans,
including tax benefit .................................. 925 2,022
Net borrowings (payments) under lines of credit ........ 9,638 (10,500)
Increase in debt issuance costs ........................ (75) (130)
Payment of promissory notes ............................ (52) (21)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .... 10,436 (8,629)
-------- --------
IMPACT ON CASH OF CONSOLIDATION OF SRDS ................ 284 --
-------- --------
NET CHANGE IN CASH ..................................... (2,568) 29,138
CASH AND CASH EQUIVALENTS
Beginning of the year .................................. 12,942 7,027
-------- --------
END OF PERIOD .......................................... $ 10,374 $ 36,165
======== ========
See notes to consolidated financial statements.
4
CONN'S , INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
OCTOBER 31, 2005
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying unaudited, condensed consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three and nine month
periods ended October 31, 2005 are not necessarily indicative of the results
that may be expected for the year ending January 31, 2006. 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 April 5, 2005.
The Company's balance sheet at January 31, 2005 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, 2005 for a complete
presentation of the audited financial statements at that date, together with all
required footnotes, and for a complete presentation and explanation of the
components and presentations of the financial statements.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Conn's, Inc. and its subsidiaries, limited liability companies
and limited partnerships, all of which are wholly-owned (the "Company"). All
material intercompany transactions and balances have been eliminated in
consolidation
The Company enters into securitization transactions to sell its retail
installment and revolving customer receivables to a qualifying special purpose
entity ("QSPE"). These securitization transactions are accounted for as sales in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 140,
ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF
LIABILITIES, because the Company has relinquished control of the receivables.
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 are valued on a
revolving pool basis.
APPLICATION OF FIN 46. In January 2003, the Financial Accounting Standards
Board issued Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES,
AN INTERPRETATION OF ACCOUNTING RESEARCH BULLETIN NO. 51, or FIN 46. FIN 46
requires entities, generally, to be consolidated by a company when it has a
controlling financial interest through ownership, direct or indirect, of a
majority voting interest in an entity with which it conducts business. The
Company evaluated the effects of the issuance of FIN 46 on the accounting for
its leases with Specialized Realty Development Services, LP ("SRDS") and
determined that it was appropriate to consolidate the balance sheet of SRDS with
the Company as of January 31, 2004. As of January 31, 2005, the Company no
longer leased any of its facilities from SRDS and therefore FIN 46 no longer
applies and the Company no longer consolidates SRDS's balance sheet or statement
of operations. However, the operations of SRDS are consolidated with those of
the Company commencing on February 1, 2004 through the last effective date of
the Company's leases with SRDS as of January 30, 2005. The effect of such
consolidation on the Company's Statement of Operations for the three months
ended October 31, 2004 was to reduce "Selling, general and administrative
expense" by $0.4 million, to increase "Interest expense" by $0.2 million and to
reduce "Income before income taxes" by $0.1 million for "Minority interest in
limited partnership". The effect of such consolidation on the Company's
Statement of Operations for the nine months ended October 31, 2004 was to reduce
"Selling, general and administrative expense" by $1.0 million, to increase
"Interest expense" by $0.6 million and to reduce "Income before income taxes" by
$0.3 million for "Minority interest in limited partnership". The Company had no
exposure to losses incurred by SRDS.
5
CONN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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.
EARNINGS PER SHARE. In accordance with SFAS No. 128, EARNINGS PER SHARE,
the Company calculates basic earnings per share by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
include the dilutive effects of any stock options granted calculated under the
treasury method. The following table sets forth the shares outstanding for the
earnings per share calculations:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------------ -----------------------------
2004 2005 2004 2005
--------------- -------------- ------------- ---------------
Common stock outstanding, beginning of period ............ 23,187,688 23,388,235 23,101,772 23,267,596
Weighted average common stock issued in stock
option exercises ....................................... 19,227 68,646 73,620 106,292
Weighted average common stock issued to employee
stock purchase plan .................................... 1,099 866 841 3,879
Weighted average number of restricted shares forfeited ... (1,727) - (1,295) -
--------------- --------------- --------------- ---------------
Shares used in computing basic earnings per share ........ 23,206,287 23,457,747 23,174,938 23,377,767
Dilutive effect of stock options, net of assumed
repurchase of treasury stock ........................... 474,313 828,448 540,605 709,924
--------------- --------------- --------------- ---------------
Shares used in computing diluted earnings per share ...... 23,680,600 24,286,195 23,715,543 24,087,691
=============== =============== =============== ===============
GOODWILL. Goodwill represents the excess of purchase price over the fair
market value of net assets acquired. The Company assesses the potential future
impairment of goodwill on an annual basis, or at any other time when impairment
indicators exist. The Company concluded at January 31, 2005 and October 31, 2005
that no impairment of goodwill existed.
STOCK-BASED COMPENSATION. As permitted by SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, the Company follows the intrinsic value method of
accounting for stock-based compensation issued to employees, as prescribed by
Accounting Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES, and related interpretations. Since all options outstanding at
October 31, 2005 were granted at or above fair value at the date of grant, no
compensation expense has been recognized under the Company's stock option plan
for any of the financial statements presented. Additionally, as the employee
stock purchase plan is a qualified plan, no compensation expense has been
recognized in the financial statements presented.
6
CONN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
If compensation expense for the Company's stock option and employee stock
purchase plans had been recognized using the fair value method of accounting
under SFAS No. 123, net income available for common stockholders for the three
months ended October 31, 2004 and 2005 would have decreased by 4.0% and 3.0%,
respectively; net income available for common stockholders for the nine months
ended October 31, 2004 and 2005 would have decreased by 3.5% and 3.3%
respectively. For post-IPO stock option grants, the Company has used the
Black-Scholes model to determine fair value. Prior to the IPO, the fair value of
the options issued was estimated using the minimum valuation option-pricing
model. Fair value compensation expense for the employee stock purchase plan was
computed as the 15% discount from fair market value the employee receives when
purchasing the shares. The following table presents the impact to earnings per
share as if the Company had adopted the fair value recognition provisions of
SFAS No. 123 (dollars in thousands except per share data):
Three Months Ended Nine Months Endedd
October 31, October 31,
---------------------- ------------------------
2004 2005 2004 2005
---------- ---------- ----------- ----------
Net income available for common stockholders as reported ..... $ 6,315 $ 9,131 $20,878 $28,257
Stock-based compensation, net of tax, that would have
been reported under SFAS 123 ............................... (256) (271) (729) (925)
---------- ---------- ----------- -----------
Pro forma net income ......................................... $ 6,059 $ 8,860 $20,149 $27,332
========== ========== =========== ===========
Earnings per share-as reported:
Basic ...................................................... $ 0.27 $ 0.39 $ 0.90 $ 1.21
Diluted .................................................... $ 0.27 $ 0.38 $ 0.88 $ 1.17
Pro forma earnings per share:
Basic ...................................................... $ 0.26 $ 0.38 $ 0.87 $ 1.17
Diluted .................................................... $ 0.26 $ 0.36 $ 0.85 $ 1.13
APPLICATION OF APB 21 TO PROMOTIONAL CREDIT PROGRAMS THAT EXCEED ONE YEAR
IN DURATION: The Company offers promotional credit payment plans, on certain
products, that extend beyond one year. In accordance with APB 21, INTEREST ON
RECEIVABLES AND PAYABLES, such sales are discounted to their fair value
resulting in a reduction in sales and receivables and the amortization of the
discount amount over the term of the deferred interest payment plan. The
difference between the gross sale and the discounted amount is reflected as a
reduction of Product sales in the consolidated statements of operations and the
amount of the discount being amortized in the current period is recorded in
Finance charges and other. For the three months ended October 31, 2004 and 2005,
Product sales were reduced by $829,000 and $730,000, respectively, and Finance
charges and other was increased by $280,000 and $654,000, respectively, to
effect the adjustment to fair value and to reflect the appropriate amortization
of the discount. For the nine months ended October 31, 2004 and 2005, Product
sales were reduced by $1.8 million and $2.3 million, respectively, and Finance
charges and other was increased by $452,000 and $1.7 million, respectively, to
effect the adjustment to fair value and to reflect the appropriate amortization
of the discount
RECENT ACCOUNTING PRONOUNCEMENTS. In December 2004, SFAS No. 123R,
SHARE-BASED PAYMENT, was issued. The statement is a revision of SFAS No. 123 and
supersedes APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. This
statement establishes standards for accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. The statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions, and does not change the
previous accounting guidance for share-based payment transactions with parties
other than employees. This 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. Additionally, employee services received in exchange for
liability awards will be measured at fair value and re-measured at each
reporting date, with changes in the fair value recorded as compensation cost
over that period.
7
CONN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
This statement applies to all awards granted after the required effective
date and to awards modified, repurchased or cancelled after that date. The
cumulative effect of initially applying this statement, if any, is recognized as
of the required effective date. As of the required effective date, all public
entities will apply this statement using a modified version of prospective
application, which requires recognition of compensation cost on or after the
required effective date for the portion of outstanding awards for which the
requisite service has not yet been rendered. For periods before the required
effective date, entities may elect to apply a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods by
Statement No. 123. The Company is required to adopt SFAS No. 123R on February 1,
2006. The Company is currently analyzing the impact this statement will have on
its consolidated results of operations and its financial position.
RECLASSIFICATIONS. Certain reclassifications have been made in the prior
year's financial statements to conform to current year's presentation.
2. SUPPLEMENTAL DISCLOSURE OF REVENUE AND COMPREHENSIVE INCOME
The following is a summary of the classification of the amounts included as
Finance charges and other for the three and nine months ended October 31, 2004
and 2005 (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------ ------------------------
2004 2005 2004 2005
--------- --------- --------- ---------
Securitization income ................................. $ 11,932 $ 15,300 $ 34,677 $ 43,082
Income from receivables not sold ...................... 305 319 900 903
Insurance commissions ................................. 4,355 4,205 13,116 13,163
Other ................................................. 1,197 413 3,181 2,844
--------- --------- --------- ---------
Finance charges and other ............................. $ 17,789 $ 20,237 $ 51,874 $ 59,992
========= ========= ========= =========
The components of total comprehensive income for the three and nine months
ended October 31, 2004 and 2005 are presented in the table below (in thousands):
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------ ------------------------
2004 2005 2004 2005
--------- --------- --------- ---------
Net income ............................................ $ 6,315 $ 9,131 $ 20,878 $ 28,257
Unrealized gain on derivative instruments ............. 280 - 836 246
Taxes on unrealized gain on derivatives ............... (99) - (295) (86)
Adjustment of fair value of securitized assets ........ 421 150 1,744 80
Taxes on adjustment of fair value ..................... (148) (53) (615) (26)
--------- --------- --------- ---------
Total comprehensive income ............................ $ 6,769 $ 9,228 $ 22,548 $ 28,471
========= ========= ========= =========
During the three months ended October 31, 2005, Securitization income was
reduced by $895,000 to reflect expected losses related to the increased number
of bankruptcy filings received during the period as consumers filed for
bankruptcy protection before the new bankruptcy law went into effect on October
17, 2005 and expected additional loan losses due to the impact of Hurricane
Rita.
During the three months ended July 31, 2005, the Company revised its
assumption for credit losses to 3.0%, from 3.4%, to more closely reflect its
expectation of future losses based on its historical loss experience over the
past twelve months. This change had the impact of increasing the fair value of
the Interests in securitized assets and had no impact on Income before income
taxes. The Company's credit losses are computed net of all recoveries. Credit
losses in the future will be impacted by the average age of the loans in the
revolving loan pool, the economic environment in the regions we serve and the
effectiveness of our loan underwriting and collection efforts. If the average
age of the loans in the revolving loan pool increases, economic conditions in
our markets decline or our underwriting or collection efforts become less
effective, we would expect our estimate for credit losses to increase.
8
CONN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
3. SUPPLEMENTAL DISCLOSURE REGARDING MANAGED RECEIVABLES
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Total Principal Amount of Principal Amount 60 Days
Receivables or More Past Due (1)
----------------------------- --------------------------
January 31, October 31, January 31, October 31,
2005 2005 2005 2005
---------- ------------- ----------- ----------
Primary portfolio:
Installment .................. $328,042 $364,691 $ 16,636 $ 22,816
Revolving .................... 30,210 38,294 867 1,242
--------- ------------- ----------- ----------
Subtotal ............................ 358,252 402,985 17,503 24,058
Secondary portfolio:
Installment .................. 70,448 87,612 5,640 9,341
--------- ------------- ----------- ----------
Total receivables managed ........... 428,700 490,597 23,143 33,399
Less receivables sold ............... 419,172 480,580 21,540 31,285
--------- ------------- ----------- ----------
Receivables not sold ................ 9,528 10,017 $ 1,603 $ 2,114
Non-customer receivables ............ 16,607 13,334 =========== ==========
--------- -------------
Total accounts receivable, net $ 26,135 $ 23,351
========= =============
The increased level of principal amounts 60 days or more past due is
primarily a result of the Hurricanes that hit the Gulf Coast during August and
September 2005 and is expected to be temporary in nature.
Average Balances Net Credit Losses(2)
------------------------ ------------------------
Three Months Ended Three Months Ended
October 31, October 31,
------------------------ ------------------------
2004 2005 2004 2005
-------- -------- -------- --------
Primary portfolio:
Installment ....... $301,182 $357,015
Revolving ......... 26,155 37,521
-------- --------
Subtotal ................ 327,337 394,536 $ 2,572 $ 2,609
Secondary portfolio:
Installment ....... 64,997 84,994 616 632
-------- -------- -------- --------
Total receivables managed 392,334 479,530 3,188 3,241
Less receivables sold ... 382,875 469,586 2,859 3,074
-------- -------- -------- --------
Receivables not sold .... $ 9,459 $ 9,944 $ 329 $ 167
======== ======== ======== ========
Average Balances Net Credit Losses(2)
------------------------ ------------------------
Nine Months Ended Nine Months Ended
October 31, October 31,
------------------------ ------------------------
2004 2005 2004 2005
-------- -------- -------- --------
Primary portfolio:
Primary portfolio:
Installment ....... $286,752 $344,348
Revolving ......... 24,752 33,748
-------- --------
Subtotal ................ 311,504 378,096 $ 7,562 $ 8,348
Secondary portfolio:
Installment ....... 62,254 80,060 1,944 1,671
-------- -------- -------- --------
Total receivables managed 373,758 458,156 9,506 10,019
Less receivables sold ... 364,336 448,513 8,508 9,610
-------- -------- -------- --------
Receivables not sold .... $ 9,422 $ 9,643 $ 998 $ 409
======== ======== ======== ========
(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,
(2) Amounts represent total loan loss provision, net of recoveries, on total
receivables.
9
CONN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
4. FAIR VALUE OF DERIVATIVES
The Company held interest rate swaps and collars with notional amounts
totaling $20.0 million as of October 31, 2004, which expired on April 15, 2005,
and were held for the purpose of hedging against variable interest rate risk,
primarily related to cash flows from the Company's interest-only strip as well
as variable rate debt.
In fiscal 2004, hedge accounting was discontinued for the $20.0 million of
swaps. In accordance with SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES, at the time hedge accounting was discontinued, the
Company began to recognize changes in fair value of the swaps as a reduction to
interest expense and to amortize the amount of accumulated other comprehensive
loss related to those derivatives as interest expense over the period that the
forecasted transactions affected the consolidated statements of operations.
During the three months ended October 31, 2004 and 2005, the Company
reclassified $280,000 and $0, respectively, of losses previously recorded in
accumulated other comprehensive income into the consolidated statements of
operations and recorded $(263,000) and $0, respectively, of interest reductions
in the consolidated statements of operations because of the change in fair value
of the swaps. During the nine months ended October 31, 2004 and 2005, the
Company reclassified $836,000 and $246,000, respectively, of losses previously
recorded in accumulated other comprehensive income into the consolidated
statements of operations and recorded $(884,000) and $(177,000), respectively,
of interest reductions in the consolidated statements of operations because of
the change in fair value of the swaps.
5. DEBT AND LETTERS OF CREDIT
On October 31, 2005, the Company entered into a new, expanded bank credit
facility with the same group of banks that had provided the previous credit
arrangement. The new agreement expands the line of credit to $50 million, from
$35 million, provides an accordion feature to allow further expansion of the
facility to $90 million, under certain conditions, and extends the maturity date
to November 1, 2010. Additionally, the facility provides sublimits of $8 million
for a swingline line of credit, and $5 million for standby letters of credit.
The new agreement also lowers the interest rate pricing on borrowings and
provides less restrictive covenants, including the elimination of the borrowing
base calculation.
The Company utilizes unsecured letters of credit to secure a portion of the
QSPE's asset-backed securitization program, deductibles under the Company's
insurance programs and international product purchases. At January 31, 2005 and
October 31, 2005, the Company had outstanding unsecured letters of credit of
$12.1 million and $13.0 million, respectively. These letters of credit were
issued under the three following facilities:
o The Company has a $5.0 million sublimit provided under its revolving
line of credit for stand-by and import letters of credit. At October
31, 2005, $3.0 million of letters of credit were outstanding and
callable at the option of the Company's insurance carrier if the
Company does not honor its requirement to fund deductible amounts as
billed under its insurance program.
o The Company has arranged for a $10.0 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 2006.
o The Company obtained a $1.5 million commitment for trade letters of
credit to secure product purchases under an international arrangement.
At October 31, 2005, there were no letters of credit outstanding under
this commitment. The letter of credit commitment has a term of one
year and expires in May 2006.
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 $16.5 million as of October 31, 2005.
10
CONN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
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 effect on its
financial condition or results of operations. However, the results of these
proceedings cannot be predicted with certainty, and changes in facts and
circumstances could impact the Company's estimate of reserves for litigation.
SERVICE MAINTENANCE AGREEMENT OBLIGATIONS. The Company sells service
maintenance agreements under which it is the obligor for payment of qualifying
claims. The Company is responsible for administering the program, including
setting the pricing of the agreements sold and paying the claims. The typical
term for these agreements is between 12 and 36 months. The pricing is set based
on historical claims experience and expectations about future claims. While the
Company is unable to estimate maximum potential claim exposure, it has a history
of overall profitability upon the ultimate resolution of agreements sold. The
revenues related to the agreements sold are deferred at the time of sale and
recorded in revenues in the statement of operations over the life of the
agreements. The revenues deferred related to these agreements totaled $3.9
million and $3.7 million, respectively, as of January 31, 2005 and October 31,
2005, 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 into the Dallas/Fort Worth Metroplex,
and the South Texas Rio Grande Valley;
o our ability 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 rising interest rates may increase our cost of borrowing or
reduce securitization income;
o technological and market developments, growth trends and
projected sales in the home appliance and consumer electronics
industry, including digital products like HDTV, and other new
products, and our ability to capitalize on such growth;
o the potential for price erosion or lower unit sales points that
could result in declines in revenues;
o increasing oil and gas prices could adversely affect our
customers' shopping decisions and patterns;
o weather conditions in our markets;
o both the short-term and long-term economic impacts of Hurricanes
Katrina and Rita;
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.
12
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 April 5, 2005. 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
The following discussion and analysis is intended to provide you with a
more meaningful 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.
We are a specialty retailer that sells major home appliances, including
refrigerators, freezers, washers, dryers and ranges, a variety of consumer
electronics, including projection, plasma, DLP and LCD televisions, camcorders,
VCRs, DVD players, portable audio and home theater products, lawn and garden
products, mattresses and furniture. We also sell home office equipment,
including computers and computer accessories and continue to introduce
additional product categories for the consumer and home to help increase same
store sales and to respond to our customers' product needs. We require all our
sales associates to be knowledgeable of all of our products, but to specialize
in certain specific product categories.
We currently operate 56 retail locations in Texas and Louisiana, and have
several other stores under development. We opened a 150,000 square-foot
distribution center in the Dallas/Fort Worth market this quarter, which will
help us serve that immediate market and will permit us to explore markets within
a 200+ mile radius of Dallas/Fort Worth. We also converted our previous
distribution center to a full-time service center, containing approximately
36,000 square feet.
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 56% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and to issue asset-backed
and variable funding notes to third parties. We transfer receivables, consisting
of retail installment and revolving account receivables, extended to our
customers, to the issuer in exchange for cash and subordinated securities. To
finance its acquisition of these receivables, the issuer has issued notes to
third parties.
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements, under
which we are the primary obligor, to protect the customers after the original
manufacturer's warranty or service maintenance agreement has expired.
Our business is somewhat seasonal, with a greater portion of our revenues
realized during the quarter ending January 31, due to the holiday selling
season, the major collegiate bowl season and the National Football League
playoffs and Super Bowl. Additionally, we generally realize a greater portion of
our pretax and net income during the quarters ended January 31 and April 30, due
to the factors discussed above and the impact of our promotional efforts during
these periods.
13
EXECUTIVE OVERVIEW
This narrative is intended to provide an executive level overview of our
operations for the three and nine months ended October 31, 2005. A detailed
explanation of the changes in our operations for these periods as compared to
the prior year is included beginning on page 18. As explained in that section,
our pretax income for the quarter and the nine months ended October 31, 2005
increased approximately 49.8% and 36.8% respectively, primarily as a result of
higher revenues and gross margin dollars, lower selling, general and
administrative expenses as a percentage of revenues and lower interest expense.
Some of the more specific issues that impacted our operating and pretax income
are:
o During the three months ended October 31, 2005, two hurricanes, Katrina and
Rita, hit the Gulf Coast. These storms significantly impacted our
operations during the period by:
o resulting in the temporary closing of our Louisiana, South East
Texas, Corpus Christi and Houston stores and related distribution
operations for limited periods of time,
o positively impacting Net sales as customers in the affected areas
replaced appliances and other household products damaged as a
result of the storms,
o disrupting credit collection efforts while we were displaced from
our corporate headquarters as a result of Hurricane Rita, which
caused what we believe is a short-term increase in the credit
portfolio's delinquency statistics and resulted in a reduction of
Finance charges and other and increase in Bad debt expense, and
o causing us to incur expenses related to the relocation of our
corporate office functions and losses related to damaged
merchandise and facilities, net of insurance proceeds.
o Same store sales for the quarter grew 23.3% and for the nine months same
store sales grew 14.4% over the same periods for the prior year. Same store
sales benefited significantly from the effects of the hurricanes. Appliance
sales accounted for the majority of the increase in total same stores
sales, driven primarily by improved execution and effective sales
promotions and partially by our customers' need to replace items damaged by
the storms. We also achieved solid increases in electronics, furniture and
lawn equipment during the quarter. We believe same store sales, adjusted
for our estimate of the impact of the hurricanes, grew approximately 16%
for the three months ended October 31, 2005.
o Our entry into the Dallas/Fort Worth and the South Texas markets had a
positive impact on our revenues. Approximately $20.3 million and $50.2
million of our product sales increase for the quarter and nine months ended
October 31, 2005, respectively, resulted from the opening of eleven new
stores in these markets, since February 2004. Our plans provide for the
opening of additional stores in existing markets during the balance of
fiscal 2006 as we focus on opportunities in markets in which we have
existing infrastructure.
o While deferred interest and "same as cash" plans continue to be an
important part of our sales promotion plans, our improved execution and
effective use of a variety of sales promotions, enabled us to reduce the
level of deferred interest and "same as cash" plans that extend beyond one
year, relative to gross product sales volume. For the three months and nine
months ended October 31, 2005, $7.4 million and $25.3 million,
respectively, in gross product sales were financed by extended deferred
interest and "same as cash" plans. For the comparable periods in the prior
year gross product sales financed by extended deferred interest and "same
as cash" sales were $9.8 million and $21.5 million, respectively. These
extended term promotional programs were not offered broadly until April,
2004. We expect to continue to offer this type of extended term promotional
credit in the future.
o During the three month period ended October 31, 2005, pretax income was
reduced by $1.0 million to reflect our estimate of expected losses due to
increased delinquencies from Hurricane Rita and a temporary increase in
bankruptcy filings. The increase in bankruptcy filings is as a result of
the new bankruptcy law that took effect October 17, 2005, prompting
consumers to file for bankruptcy protection before the new law went into
effect. The $1.0 million charge to earnings reduced Finance charges and
other by $895,000 and increased Bad debt expense by $105,000.
14
o Our gross margin for the quarter decreased from 37.0% to 35.7% for the
three months ended October 31, 2005 when compared to the same period in the
prior year, primarily as a result of a change in our revenue mix as Product
sales grew faster than Service revenues and Finance charges and other.
Also, reduced insurance sales penetration negatively impacted our gross
margin. Our gross margin for the nine months decreased from 36.6% to 35.8%
for the nine months ended October 31, 2005 when compared to the same period
in the prior year, primarily due to reduced insurance commissions during
the second and third quarters of fiscal year 2006 and a change in our
revenue mix as Product sales grew faster than Service revenues and Finance
charges and other.
o Operating margin, on the other hand, increased from 7.6% to 8.2% for the
three months ended October 31, 2005 when compared to the same period in the
prior year due in part to our ability to reduce Selling, general and
administrative (SG&A) expenses as a percent of revenues. The reduced SG&A
expenses as a percent of revenues also benefited the operating margin for
the nine months ended October 31, 2005 which increased to 8.9% from 8.4%
during the same period in the prior year. During the three months ended
October 31, 2005, we decreased SG&A expense as a percent of revenues to
27.0% from 28.4% when compared to the prior year, primarily from decreases
in payroll and payroll related expenses and net advertising expense as a
percent of revenues. Partially offsetting these reductions were expenses
incurred due to Hurricane Rita of approximately $822,000, net of estimated
insurance proceeds, including expenses related to the temporary relocation
of corporate office functions and losses related to damaged merchandise and
facility damage. Additionally, our operating margin benefited from a
decrease in the Provision for bad debts as a percent of revenues from 1.0%
to 0.5%. The trends for the nine months ended October 31, 2005 are
consistent with those discussed for the three months ended October 31,
2005.
OPERATIONAL CHANGES AND RESULTING OUTLOOK
During the quarter, we opened two new stores in the Dallas/Fort Worth
market and one in Harlingen, Texas. Additionally, we opened a new store in San
Antonio, Texas during November 2005. We continue to be satisfied with the
results in the Dallas/Fort Worth market and continue to expand the number of
stores in that market. We added additional distribution capability during the
quarter by opening our 150,000 square foot distribution center in Dallas, and
increased our service center in Dallas by converting our previous distribution
center to a full time service center. Our new Harlingen store now joins a store
in McAllen, Texas, opened in early September 2004, forming our South Texas
market, We believe that this market is substantially underserved and provides
great growth potential for our company. We have several other locations in Texas
and Louisiana that we believe are promising and are in various stages of
development for opening either later this year or the next. We also continue to
look at other markets, including neighboring states for opportunities.
The consumer electronics industry depends on new products to drive
increased consumer interest. Typically, these new products, such as digital
televisions (E.G., plasma, LCD, and DLP) and DVD players, are introduced at
relatively high price points that are then gradually reduced as the product
becomes more mainstream. To sustain positive same store sales growth, unit sales
must increase at a rate greater than the decline in product prices. The
affordability of the product helps 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 volumes 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 October 31, 2005.
15
TRANSFERS OF FINANCIAL ASSETS. We transfer customer receivables to the QSPE
that issues asset-backed securities to third party lenders using these accounts
as collateral, and we continue to service these accounts after the transfer. We
recognize the sale of these accounts when we relinquish control of the
transferred financial asset in accordance with SFAS No. 140, ACCOUNTING FOR
TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT OF LIABILITIES.
As we transfer the accounts, we record an asset representing the interest only
strip which is the difference between the interest earned on customer accounts
and the cost associated with financing and servicing the transferred accounts,
including a provision for bad debts associated with the transferred accounts (on
a revolving pool basis) discounted to a market rate of interest. The gain or
loss recognized on these transactions is based on our best estimates of key
assumptions, including forecasted credit losses based on actual portfolio
experience over the past twelve months, payment rates, forward yield curves,
costs of servicing the accounts and appropriate discount rates. The use of
different estimates or assumptions could produce different financial results.
For example, if we had assumed a 10.0% reduction in net interest spread (which
might be caused by rising interest rates or reductions in rates charged on the
accounts transferred), our interest in securitized assets would have been
reduced by $4.5 million as of October 31, 2005, which may have an adverse effect
on earnings. We recognize income from our interest in these transferred accounts
as gains on the transfer of the asset, interest income and servicing fees. This
income is recorded as Finance charges and other in our consolidated statements
of operations. If the assumption used for estimating credit losses were changed
by 0.5% from 3.0% to 3.5%, the impact to recorded Finance charges and other
would have been a reduction in revenues and pretax income of $1.9 million.
DEFERRED TAX ASSETS. We have significant net deferred tax assets
(approximately $8.2 million as of October 31, 2005), which are subject to
periodic recoverability assessments. Realization of our net deferred tax assets
may be dependent upon our ability to offset reversals against prior taxable
income, changes in tax rates or our future taxable income. Changes in these
assumptions, if any, may require material adjustments to these deferred tax
asset balances. For example, if we had assumed that the future tax rate at which
these deferred items would reverse was 34.5% rather than 35.1%, we would have
reduced the net deferred tax asset account and net income by approximately
$140,000.
INTANGIBLE ASSETS. We have significant intangible assets related primarily
to goodwill and the costs of obtaining various loans and funding sources. The
determination of related estimated useful lives and whether or not these assets
are impaired involves significant judgments. We test for potential impairment of
goodwill annually based on judgments regarding ongoing profitability and cash
flow of the underlying assets. Our testing includes using judgments to estimate
the separate operations of our insurance agency and secondary credit portfolio,
including allocations for interest, overhead and taxes. Once these separate
operations have been estimated, we apply a multiple of earnings based on
existing market conditions and estimated operating cash flow and compare the
resulting estimated entity values to the recorded goodwill. Changes in strategy
or market conditions could significantly impact these judgments and require
adjustments to recorded asset balances. For example, if we had reason to believe
that our recorded goodwill had become impaired due to decreases in the fair
market value of the underlying business, we would have to take a charge to
income for that portion of goodwill that we believe is impaired. Our goodwill
balance at October 31, 2005 was $9.6 million.
PROPERTY AND EQUIPMENT. Our accounting policies regarding land, buildings,
equipment and leasehold improvements include judgments regarding the estimated
useful lives of such assets, the estimated residual values to which the assets
are depreciated, and the determination as to what constitutes increasing the
life of existing assets. These judgments and estimates may produce materially
different amounts of depreciation and amortization expense that would be
reported if different assumptions were used. These judgments may also impact the
need to recognize an impairment charge on the carrying amount of these assets as
the cash flows associated with the assets are realized. In addition, the actual
life of the asset and residual value may be different from the estimates used to
prepare financial statements in prior periods.
16
REVENUE RECOGNITION. Revenues from the sale of retail products are
recognized at the time the product is delivered to the customer. Such revenues
are recognized net of any adjustments for sales incentive offers such as
discounts, coupons, rebates, or other free products or services and discounts of
promotional credit sales that will extend beyond one year. We sell service
maintenance agreements and credit insurance contracts on behalf of unrelated
third parties. For contracts where the third parties are the obligors on the
contract, commissions are recognized in revenues at the time of sale, and in the
case of retrospective commissions, at the time that they are earned. Where we
sell service maintenance renewal agreements in which we are deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
service maintenance agreements are renewal contracts that provide our customers
protection against product repair costs arising after the expiration of the
manufacturer's warranty and the third party obligor contracts. These agreements
typically range from 12 months to 36 months. These agreements are separate units
of accounting under Emerging Issues Task Force No. 00-21, REVENUE ARRANGEMENTS
WITH MULTIPLE DELIVERABLES. The amount of service maintenance agreement revenue
deferred at October 31, 2005 and January 31, 2005 was $3.7 million and $3.9
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.
RECENT ACCOUNTING PRONOUNCEMENTS. In December 2004, Statement of Financial
Accounting Standards No. 123R, SHARE-BASED Payment, was issued. 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. Additionally,
the statement provides multiple options for adopting the requirements of the
standard. We are currently analyzing the impact this statement will have on our
consolidated results of operations and our financial position. We are required
under existing accounting standards to provide supplemental disclosure in the
footnotes to our financial statements as if our financial statements had been
prepared using the fair value method of accounting for stock based compensation.
See Note 1 to our financial statements for additional information.
17
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations information
as a percentage of total revenues for the periods indicated:
Three Months Ended Nine Months Ended
October 31, October 31,
------------------------- -----------------------
2004 2005 2004 2005
------------- ----------- ------------ ---------
Revenues:
Product sales .................................. 78.9% 81.0% 79.5% 80.4%
Service maintenance agreement commissions (net) 4.1 4.3 4.2 4.5
Service revenues ............................... 3.6 3.0 3.5 3.0
----- ----- ----- -----
Total net sales .............................. 86.6 88.3 87.2 87.9
Finance charges and other ...................... 13.4 11.7 12.8 12.1
----- ----- ----- -----
Total revenues .......................... 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of goods sold, including warehousing
and occupancy cost ............................. 62.1 63.5 62.6 63.4
Cost of parts sold, including warehousing
and occupancy cost ............................. 0.9 0.8 0.8 0.8
Selling, general and administrative expense .... 28.4 27.0 27.2 26.4
Provision for bad debts ........................ 1.0 0.5 1.0 0.5
----- ----- ----- -----
Total costs and expenses ................ 92.4 91.8 91.6 91.1
----- ----- ----- -----
Operating income ............................... 7.6 8.2 8.4 8.9
Interest expense, net .......................... 0.4 0.1 0.4 0.1
----- ----- ----- -----
Income before minority interest and income taxes 7.2 8.1 8.0 8.8
Minority interest in limited partnership ....... 0.1 0.0 0.1 0.0
----- ----- ----- -----
Income before income taxes ..................... 7.1 8.1 7.9 8.8
Provision for income taxes ..................... 2.3 2.8 2.7 3.1
----- ----- ----- -----
Net income ..................................... 4.8% 5.3% 5.2% 5.7%
===== ===== ===== =====
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 section on page 14 and in more detail in the discussion of operating
results beginning in the analysis below.
Same store sales growth is calculated by comparing the reported sales by
store for all stores that were open throughout a period to reported sales by
store for all stores that were open throughout the prior year period. Sales from
closed stores have been removed from each period. Sales from relocated stores
have been included in each period because each store was relocated within the
same general geographic market. Sales from expanded stores have been included in
each period.
The presentation of gross margins may not be comparable to other retailers
since we include the cost of our in-home delivery service as part of Selling,
general and administrative expense. Similarly, we include the cost related to
operating our purchasing function in Selling, general and administrative
expense. It is our understanding that other retailers may include such costs as
part of their cost of goods sold.
18
THREE MONTHS ENDED OCTOBER 31, 2005 COMPARED TO THREE MONTHS
ENDED OCTOBER 31, 2004
REVENUES. Total revenues increased by $40.4 million, or 30.4%, from $132.9
million for the three months ended October 31, 2004 to $173.3 million for the
three months ended October 31, 2005. The increase was attributable to increases
in net sales of $37.9 million, or 33.0%, and $2.5 million, or 13.8%, in finance
charges and other revenue.
The $37.9 million increase in net sales was made up of the following:
o a $24.9 million same store sales increase of 23.3%. Appliance sales
accounted for the majority of the increase and were driven in large part by
our customers' need to replace items damaged as a result of Hurricanes
Katrina and Rita. After adjusting for our estimate of the impact of the
storms, we believe same store sales increased approximately 16%, with
appliance, electronics, furniture and lawn and garden sales being the
biggest contributors. As a result of changes in the commission structure on
our third-party service maintenance agreement (SMA) contracts, during the
three months ended October 31, 2005, we began realizing the benefit of
increased front-end commissions on SMA sales, which increased net sales
$777,000, (offsetting this increase is a decrease in retrospective
commissions which is reflected in Finance charges and other);
o an $12.6 million increase generated by nine retail locations that were not
open for three consecutive months in each period, net of reductions related
to the closing of one location;
o a $99,000 increase resulted from a decrease in discounts on promotional
credit sales; and
o a $304,000 increase resulted from an increase in service revenues.
The components of the $37.9 million increase in net sales, were a $35.5
million increase in product sales and a $2.4 million net increase in service
maintenance agreement commissions and service revenues. The $35.5 million
increase in product sales resulted from the following:
o approximately $30.3 million was attributable to increases in unit sales,
due to increased appliances, consumer electronics, furniture and track
sales, and
o approximately $5.2 million was attributable to increases in unit price
points. The price point impact was driven by consumers selecting higher
priced appliance products, including high-efficiency washers and dryers and
stainless kitchen appliances, and higher prices on appliances in general.
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 October 31,
-----------------------------------------------------
2004 2005
----------------------- ----------------------- Percent
Category Amount Percent Amount Percent Increase
---------- --------- ---------- --------- ---------
Major home appliances ................... $ 40,233 35.0 % $ 62,073 40.5 % 54.3 % (1)
Consumer electronics .................... 35,814 31.1 41,629 27.2 16.2 (2)
Track ................................... 18,928 16.4 21,514 14.0 13.7 (2)
Delivery ................................ 1,777 1.6 2,561 1.7 44.1 (3)
Lawn and garden ......................... 2,632 2.3 4,702 3.1 78.6 (4)
Bedding ................................. 2,872 2.5 3,305 2.2 15.1 (2)
Furniture ............................... 1,878 1.6 3,731 2.4 98.7 (5)
Other ................................... 735 0.6 890 0.6 21.1 (2)
---------- --------- ---------- ---------
Total product sales ................ 104,869 91.1 140,405 91.7 33.9
Service maintenance agreement
commissions ........................... 5,399 4.7 7,506 4.9 39.0
Service revenues ........................ 4,853 4.2 5,157 3.4 6.3
---------- --------- ---------- ---------
Total net sales .................... $ 115,121 100.0 % $ 153,068 100.0 % 33.0 %
========== ========= ========== =========
(1) In addition to strong overall sales growth, appliance sales benefited from
our customers' needs after the hurricanes.
(2) These increases are consistent with overall increase in product sales and
improved unit prices.
(3) This increase is due primarily to the increase in total product sales.
(4) A delayed selling season due to extremely dry weather during the prior
quarter contributed to this increase.
(5) This increase is due to the increased emphasis on the sales of furniture,
primarily sofas, recliners and entertainment centers, and new product lines
added to this category.
Revenue from Finance charges and other increased by approximately $2.5
million, or 13.8%, from $17.8 million for the three months ended October 31,
2004 to $20.3 million for the three months ended October 31, 2005. This increase
in revenue resulted primarily from increases in securitization income of $3.4
million, net of a $0.7 million decrease in service maintenance agreement
retrospective commissions. The securitization income increases are attributable
to higher product sales and increases in our retained interest in assets
transferred to the QSPE, due primarily to increases in the transferred balances.
Partially offsetting the securitization income increases was a reduction of
$895,000 for estimated losses resulting from increased bankruptcy filings by our
customers prior to October 17, 2005, the effective date of the new bankruptcy
law and our estimate of expected additional loan losses due to the impact of
Hurricane Rita. During the quarter ended July 31, 2005, we changed our process
related to selling credit insurance on promotional credit programs resulting in
a decline in insurance sales penetration in the current quarter. We believe this
reduced penetration level to be short term and ultimately expect this change to
result in increased insurance commission revenues.
COST OF GOODS SOLD. Cost of goods sold, including warehousing and occupancy
cost, increased by $27.5 million, or 33.3%, from $82.5 million for the three
months ended October 31, 2004 to $110.0 million for the three months ended
October 31, 2005. This increase was generally consistent with the 33.9% increase
in net product sales during the three months ended October 31, 2005. Cost of
products sold was 78.7% of net product sales in the quarter ended October 31,
2004 and 78.4% in the quarter ended October 31, 2005.
COST OF PARTS SOLD. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $176,000, or 15.2%, for the three months ended
October 31, 2005 as compared to the three months ended October 31, 2004, due to
increases in parts sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. While Selling, general and
administrative expense increased by $9.2 million, or 24.2%, from $37.7 million
for the three months ended October 31, 2004 to $46.9 million for the three
months ended October 31, 2005, it decreased as a percentage of total revenue
from 28.4% to 27.0%. The decrease in expense as a percentage of total revenues
resulted primarily from decreased payroll and payroll related expenses and net
advertising expense, as a percent of revenues, that were partially offset by
higher expenses incurred due to Hurricane Rita of approximately $822,000, net of
estimated insurance proceeds, including expenses related to the temporary
relocation of the corporate office functions and losses related to damaged
merchandise and facility damage.
20
PROVISION FOR BAD DEBTS. The provision for bad debts on receivables
retained by the Company and not transferred to the QSPE and other non-credit
portfolio receivables decreased by $444,000, or 32.3%, during the three months
ended October 31, 2005 as compared to the three months ended October 31, 2004,
primarily as a result of changes in the loss history and provision adjustments,
based on favorable loss experience during the last twelve months, and revised
loss allocations between receivables retained by us and those transferred to the
QSPE, which were offset in Finance charges and other. Partially offsetting the
bad debt expense decrease on receivables retained by the Company and not
transferred to the QSPE and other non-credit portfolio receivables was a charge
of $105,000 for estimated losses resulting from increased bankruptcy filings by
our customers prior to October 17, 2005, the effective date of the new
bankruptcy law and expected additional loan losses due to the impact of
Hurricane Rita on our customers. See Note 3 to the financial statements for
information regarding the performance of the credit portfolio.
INTEREST EXPENSE, NET. Net interest expense decreased by $541,000, or
88.0%, from $615,000 for the three months ended October 31, 2004 to $74,000 for
the three months ended October 31, 2005. The net decrease in interest expense
was attributable to the following factors:
o expiration of $20.0 million in our interest rate hedges and the
discontinuation of hedge accounting for derivatives resulted in a net
decrease in interest expense of approximately $291,000; and
o the deconsolidation of SRDS (previously consolidated as a VIE according to
FIN 46) resulted in a decrease of interest expense of $215,000,
The remaining decrease in interest expense of $35,000 resulted from lower
average outstanding debt balances and higher interest income from invested
funds.
MINORITY INTEREST. As a result of FIN 46, for the quarter ended October 31,
2004, we eliminated the pretax operating profit contributed from the
consolidation of SRDS through the minority interest line item in our
consolidated statement of operations (see Note 1 of Notes to the Financial
Statements).
PROVISION FOR INCOME TAXES. The provision for income taxes increased by
$1.8 million, or 60.4%, from $3.1 million for the three months ended October 31,
2004 to $4.9 million for the three months ended October 31, 2005, which is
higher than the increase in pretax income of 49.8%. The effective tax rate rose
to 35.1% in the current quarter from 32.7% in the prior year due to adjustments
of previous tax provisions and refunds received in the prior year.
NET INCOME. As a result of the above factors, Net income increased $2.8
million, or 44.6%, from $6.3 million for the three months ended October 31, 2004
to $9.1 million for the three months ended October 31, 2005.
NINE MONTHS ENDED OCTOBER 31, 2005 COMPARED TO NINE MONTHS ENDED OCTOBER 31,
2004
REVENUES. Total revenues increased by $91.4 million, or 22.6%, from $404.4
million for the nine months ended October 31, 2004 to $495.8 million for the
nine months ended October 31, 2005. The increase was attributable to increases
in net sales of $83.3 million, or 23.6%, and $8.1 million, or 15.6%, in finance
charges and other revenue.
The $83.3 million increase in net sales was made up of the following:
o a $46.6 million increase resulted from a same store sales increase of
14.4%. Appliance sales accounted for the majority of the increase and were
significantly impacted by our customers' need to replace items damaged as a
result of Hurricanes Katrina and Rita. After adjusting for our estimate of
the impact of the storms, we believe same store sales increased
approximately 12%, with appliance, electronics, track and furniture sales
being the biggest contributors,
21
o a $36.2 million increase generated by eleven retail locations that were not
open for nine consecutive months in each period, net of reductions related
to the closing of one location,
o a $568,000 decrease resulted from an increase in discounts on promotional
credit sales, and
o a $1.1 million increase resulted from an increase in service revenues.
The components of the $83.3 million increase in net sales were a $76.9
million increase in product sales and a $6.4 million net increase in service
maintenance agreement commissions and service revenues. The $76.9 million
increase in product sales resulted from the following:
o approximately $54.7 million was attributable to increases in unit sales,
due to increased appliances, track, furniture, and consumer electronics
sales, and
o approximately $22.2 million was attributable to increases in unit price
points. The price point impact was driven primarily by:
o consumers selecting higher priced consumer electronics
products, as the new technology becomes more affordable;
o consumers selecting higher priced appliance products,
including high-efficiency washers and dryers and stainless
kitchen appliances, and
o higher prices on appliances in general.
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.
Nine Months Ended October 31,
----------------------------------------------------------
2004 2005
---------------------------- -----------------------------
Percent
Category Amount Percent Amount Percent Increase
-------------- ------------ -------------- ------------- ------------
Major home appliances ................... $127,041 36.1% $162,195 37.2% 27.7% (1)
Consumer electronics .................... 106,128 30.1 125,011 28.7 17.8 (2)
Track ................................... 55,612 15.8 66,168 15.2 19.0 (2)
Delivery ................................ 5,562 1.5 6,899 1.6 24.0 (2)
Lawn and garden ......................... 12,684 3.6 15,764 3.6 24.3 (2)
Bedding ................................. 7,737 2.2 9,308 2.1 20.3 (2)
Furniture ............................... 4,678 1.3 10,498 2.4 124.4 (3)
Other ................................... 2,235 0.6 2,704 0.6 21.0 (2)
-------------- ------------ -------------- -------------
Total product sales ................ 321,677 91.2 398,547 91.4 23.9
Service maintenance agreement
commissions ........................... 16,835 4.8 22,238 5.1 32.1
Service revenues ........................ 14,002 4.0 15,066 3.5 7.6
-------------- ------------ -------------- -------------
Total net sales .................... $352,514 100.0% $435,851 100.0% 23.6%
============== ============ ============== =============
(1) In addition to strong overall sales growth, appliance sales benefited from
our customers' needs after the hurricanes.
(2) These increases are consistent with overall increase in product sales and
improved unit prices.
(3) This increase is due to the increased emphasis on the sales of furniture,
primarily sofas, recliners and entertainment centers, and new product lines
added to this category.
Revenue from Finance charges and other increased by approximately $8.1
million, or 15.6%, from $51.9 million for the nine months ended October 31, 2004
to $60.0 million for the nine months ended October 31, 2005. This increase in
revenue resulted primarily from increases in securitization income of $8.4
million, net of decreases in insurance commissions and other revenues of
$287,000. The increase in securitization income is attributable to higher
product sales and increases in our retained interest in assets transferred to
the QSPE, due primarily to increases in the transferred balances. Partially
offsetting the securitization income increases was a reduction of $895,000 for
estimated losses resulting from increased bankruptcy filings by our customers
prior to October 17, 2005, the effective date of the new bankruptcy law and our
estimate of expected additional loan losses due to the impact of Hurricane Rita.
22
COST OF GOODS SOLD. Cost of goods sold, including warehousing and occupancy
cost, increased by $61.5 million, or 24.3%, from $253.0 million for the nine
months ended October 31, 2004 to $314.5 million for the nine months ended
October 31, 2005. This increase was generally consistent with the 23.9% increase
in net product sales during the nine months ended October 31, 2005. Cost of
products sold was 78.7% of net product sales in the nine months ended October
31, 2004 and 78.9% in the nine months ended October 31, 2005.
COST OF PARTS SOLD. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $442,000, or 13.2%, for the nine months ended
October 31, 2005 as compared to the nine months ended October 31, 2004, due to
increases in parts sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. While Selling, general and
administrative expense increased by $21.0 million, or 19.0%, from $110.1 million
for the nine months ended October 31, 2004 to $131.1 million for the nine months
ended October 31, 2005, it decreased as a percentage of total revenue from 27.2%
to 26.4%. The decrease in expense as a percentage of total revenues resulted
primarily from decreased payroll and payroll related expenses and net
advertising expense, as a percent of revenues, that were partially offset by
higher expenses incurred due to Hurricane Rita of approximately $822,000, net of
estimated insurance proceeds, including expenses related to relocation of the
corporate office functions and losses related to damaged merchandise and
facility damage.
PROVISION FOR BAD DEBTS. The provision for bad debts on receivables
retained by the Company and not transferred to the QSPE and other non-credit
portfolio receivables decreased by $1.5 million, or 37.2%, during the nine
months ended October 31, 2005 as compared to the nine months ended October 31,
2004, primarily as a result of changes in the loss history and provision
adjustments based on favorable loss experience during the last twelve months,
and revised loss allocations between receivables retained by us and those
transferred to the QSPE, which were offset in Finance charges and other.
Partially offsetting the bad debt expense decrease was a charge of $105,000 for
estimated losses resulting from increased bankruptcy filings by our customers
prior to October 17, 2005, the effective date of the new bankruptcy law and
expected additional loan losses due to the impact of Hurricane Rita on our
customers. See Note 3 to the financial statements for information regarding the
performance of the credit portfolio.
INTEREST EXPENSE, NET. Net interest expense decreased by $1.3 million, or
72.4%, from $1.8 million for the nine months ended October 31, 2004 to $488,000
for the nine months ended October 31, 2005. The net decrease in interest expense
was attributable to the following factors:
o expiration of $20.0 million in our interest rate hedges and the
discontinuation of hedge accounting for derivatives resulted in a net
decrease in interest expense of approximately $576,000; and
o the deconsolidation of SRDS (previously consolidated as a VIE according to
FIN 46) resulted in a decrease of interest expense of $645,000,
The remaining decrease in interest expense of $48,000 resulted from lower
average outstanding debt balances and higher interest income from invested
funds.
MINORITY INTEREST. As a result of FIN 46, for the quarter ended October 31,
2004, we eliminated the pretax operating profit contributed from the
consolidation of SRDS through the minority interest line item in our
consolidated statement of operations (see Note 1 of Notes to the Financial
Statements).
23
PROVISION FOR INCOME TAXES. The provision for income taxes increased by
$4.3 million, or 39.6%, from $10.9 million for the nine months ended October 31,
2004 to $15.2 million for the nine months ended October 31, 2005, consistent
with the increase in pretax income of 36.8%.
NET INCOME. As a result of the above factors, Net income increased $7.4
million, or 35.3%, from $20.9 million for the nine months ended October 31, 2004
to $28.3 million for the nine months ended October 31, 2005.
LIQUIDITY AND CAPITAL RESOURCES
CURRENT ACTIVITIES
Historically we have financed our operations through a combination of cash
flow generated from operations, and external borrowings, including primarily
bank debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables to our asset-backed securitization facilities.
As of October 31, 2005, we had approximately $28.8 million in excess cash,
the majority of which was made available due to the deferral of accounts payable
and federal income and employment taxes due to Hurricane Rita. These deferred
payables are expected to be paid in the next four months. In addition to the
excess cash we had $47.0 million under the 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, $10.6 million under
extended vendor terms for purchases of inventory and $90.0 million in
commitments available for the transfer of receivables to our QSPE.
On October 31, 2005, we entered into a new, expanded bank credit facility
with the same group of banks that had provided the previous credit arrangement.
The new agreement expands the line of credit to $50 million, from $35 million,
provides an accordion feature to allow further expansion of the facility to $90
million, under certain conditions, and extends the maturity date to November 1,
2010. Additionally, the facility provides sublimits of $8 million for a
swingline line of credit for faster advances on borrowing requests, and $5
million for standby letters of credit. The new agreement also lowers the
interest rate pricing on borrowings and provides less restrictive covenants,
including the elimination of the borrowing base calculation.
A summary of the significant financial covenants that govern our bank credit
facility compared to our actual compliance status at October 31, 2005, is
presented below:
Required
Minimum/
Actual Maximum
------------------ -------------------
Debt service coverage ratio must exceed required minimum 4.11 to 1.00 2.00 to 1.00
Total adjusted leverage ratio must be lower than required maximum 1.67 to 1.00 3.00 to 1.00
Consolidated net worth must exceed required minimum $223.6 million $132.8 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 0.09 to 1.00 0.13 to 1.00
Note: All terms in the above table are defined by the bank credit facility and
may or may not agree directly to the financial statement captions in this
document.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our bank
credit facility and unsecured credit line, extended vendor terms for purchases
of inventory, acquisition of inventory under consignment arrangements and access
to the unfunded portion of the variable funding portion of the QSPE's
asset-backed securitization program will be sufficient to fund our operations,
store expansion and updating activities and capital programs through at least
January 31, 2007. However, there are several factors that could decrease cash
provided by operating activities, including:
24
o reduced demand for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional
activities;
o changes in inventory requirements based on longer delivery times of
the manufacturers or other requirements which would negatively impact
our delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under
our current QSPE's asset-backed securitization program as a result of
changes in performance or types of receivables transferred
(promotional versus non-promotional);
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 required for us to stay competitive in
our markets.
During the nine months ended October 31, 2005, net cash provided by
operating activities increased $51.3 million from $597,000 million provided in
the 2004 period to $51.9 million provided in the 2005 period. The net increase
in cash provided from operations resulted primarily from increased net income, a
smaller increase in the retained interest in the asset backed securitization
program, the timing of payments of accounts payable and federal income and
employment tax payments. The increase in operating cash flows due to changes in
accounts payable was driven by increased purchases during October in
anticipation of the holiday selling season and, due to Hurricane Rita, we were
able to obtain extended payment terms from several of our vendors. Operating
cash flows have been positively impacted by federal income and employment tax
payment deadlines after Hurricane Rita being deferred until February 28, 2006.
We believe that the available balances under our bank credit facility and
asset-backed securitization program are sufficient to fund the increase in
receivables or any increase in credit enhancement that we expect through the end
of fiscal 2007.
As noted above, we offer promotional credit programs to certain customers
that provide for "same as cash" interest free periods of varying terms,
generally three, six, or 12 months; in fiscal year 2005 we increased these terms
to include 18 or 24 months that are eligible to be partially funded through our
asset-backed securitization program. In the second quarter of fiscal 2005, we
began offering deferred interest programs with 36-month terms. In the second
quarter of fiscal 2006, we began offering deferred interest programs with
24-month terms. The three, six, 12, 18, 24 and 36 month "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 20.8% as of October 31, 2005. At October 31, 2004,
this percentage, computed on a consistent basis with the October 31, 2005
calculation, would have been 20.9%. The weighted average promotional period was
12.9 months and 12.4 months for promotional receivables outstanding as of
October 31, 2004 and 2005, respectively. The weighted average remaining term on
those same promotional receivables was 9.0 months and 7.7 months, respectively.
While overall these promotional receivables have a much shorter weighted average
term than non-promotional receivables, we receive less income as a result of a
reduced net interest margin used in the calculation of the gain on the sale of
receivables. As a result, the existence of the interest free extended payment
terms negatively impacts the gains as compared to other receivables.
25
Net cash used by investing activities increased by $200,000, from $13.9
million for the nine months ended October 31, 2004 to $14.1 million for the nine
months ended October 31, 2005. The increase in cash used in investing activities
resulted primarily from a decrease in the proceeds from sales of property and
equipment of $1.0 million, net of a decrease of $850,000 for purchases of
property and equipment. The cash expended for property and equipment was used
primarily for construction of new stores and the reformatting of existing stores
to better support our current product mix. Based on current plans, we expect to
increase expenditures for property and equipment in the balance of fiscal 2006
as we open additional stores.
Net cash from financing activities decreased by $19.0 million from $10.4
million for the nine months ended October 31, 2004 to ($8.6) million for the
nine months ended October 31, 2005. The increase in cash used by financing
activities resulted primarily from increases in payments on various debt
instruments of $10.6 million, as opposed to borrowings in the prior year of $9.6
million. Partially offsetting the use of cash was increased proceeds from stock
issued under employee benefit plans.
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 unsecured
promissory notes. To finance its acquisition of these receivables, the issuer
has issued the notes and bonds described below to third parties. The unsecured
promissory notes issued to us are subordinate to these third party notes and
bonds.
At October 31, 2005, the issuer had issued two series of notes and bonds: a
Series A variable funding note in the amount of $250 million purchased by Three
Pillars Funding LLC and three classes of Series B bonds in the aggregate amount
of $200 million, of which $8.0 million was required to be placed in a restricted
cash account for the benefit of the bondholders. If the net portfolio yield, as
defined by the Series B agreements, falls below 5.0%, then the issuer may be
required to fund a cash reserve in addition to the $8.0 million restricted cash
account. At October 31, 2005, the net portfolio yield for purposes of this
requirement was 10.3%. Private institutional investors, primarily insurance
companies, purchased the Series B bonds at a weighted fixed rate of 5.1%.
We continue to service the transferred accounts for the QSPE, and we
receive a monthly servicing fee, so long as we act as servicer, in an amount
equal to .0025% multiplied by the average aggregate principal amount of
receivables serviced plus the amount of average aggregate defaulted receivables.
The issuer records revenues equal to the interest charged to the customer on the
receivables less losses, the cost of funds, the program administration fees paid
in connection with either Three Pillars Funding LLC or the Series B bond
holders, the servicing fee and additional earnings to the extent they are
available.
The Series A variable funding note permits the issuer to borrow funds up to
$250 million to purchase receivables from us, thereby functioning as a "basket"
to accumulate receivables. When issuer borrowings under the Series A variable
funding note approach $250 million, the issuer intends to request an increase in
the Series A amount or issue a new series of bonds and use the proceeds to pay
down the then outstanding balance of the Series A variable funding note, so that
the basket will once again become available to accumulate new receivables. As of
October 31, 2005, borrowings under the Series A variable funding note were
$160.0 million.
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the Series A note and
Series B 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 Series B bond holders
could claim the balance in its $8.0 million restricted cash account. We are also
contingently liable under a $10.0 million letter of credit that secures our
performance of our obligations or services under the servicing agreement as it
relates to the transferred assets that are part of the asset-backed
securitization facility.
26
The issuer is subject to certain affirmative and negative covenants
contained in the transaction documents governing the Series A variable funding
note and the Series B 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 Series A
variable funding note compared to actual compliance status at October 31, 2005,
is presented below:
Required
Minimum/
Actual Maximum
----------------- -------------------
Issuer interest must exceed required minimum $47.6 million $44.4 million
Gross loss rate must be lower than required maximum 2.7% 10.0%
Net portfolio yield must exceed required minimum 10.3% 2.0%
Payment rate must exceed required minimum 6.9% 3.0%
Note: All terms in the above table are defined by the asset backed credit
facility and may or may not agree directly to the financial statement captions
in this document.
Events of default under the Series A variable funding note and the Series B
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. Due to delays as a result of our temporary
displacement from our corporate headquarters as a result of Hurricane Rita, the
Company and the Noteholders executed an amendment to the Servicing Agreement
changing the filing date of the required Accountant's Report on Agreed Upon
Procedures to December 15, 2005.
27
[GRAPHIC OMITTED]
[SEE SUPPLEMENTAL PDF OF SECURITIZATION FACILITIES CHART]
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 (as executed October 31,
2005) are variable and are determined, at our option, as the base rate, which is
the greater of prime rate or federal funds rate plus 0.50% plus the base rate
margin, which ranges from 0.00% to 0.50%, or LIBOR plus the LIBOR margin, which
ranges from 0.75% to 1.75%. Accordingly, changes in the prime rate, the federal
funds rate or LIBOR, which are affected by changes in interest rates generally,
will affect the interest rate on, and therefore our costs under, our bank credit
facility. We are also exposed to interest rate risk associated with our interest
only strip and the subordinated securities we receive from our sales of
receivables to the QSPE.
We held interest rate swaps and collars with notional amounts totaling
$20.0 million as of January 31, 2005, which expired on April, 15 2005. The swaps
and collars were held for the purpose of hedging against variable interest rate
risk, primarily related to cash flows from our interest-only strip as well as
our variable rate debt. There have been no material changes in our interest rate
risks since January 31, 2005.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of our disclosure controls and
procedures (as defined in 15d-15(e) of the Securities Exchange Act of 1934 (the
"Exchange Act") as of the end of the period covered by this quarterly report.
Based on that evaluation, our management, including our Chief Executive Officer
and our Chief Financial Officer, concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to our Company (including its consolidated subsidiaries) required to be
included in our periodic filings with the Securities and Exchange Commission.
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended October 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
28
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 effect on our financial condition or results of
operation. However, the results of these proceedings cannot be predicted with
certainty, and changes in facts and circumstances could impact our estimate of
reserves for litigation.
ITEM 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.
29
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: December 1, 2005
30
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 July 31,
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 July 31, 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 July 31, 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
31
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.
10.9.1 Letter of Credit Agreement dated November 12, 2004 by and between Conn
Appliances, Inc. and CAI Credit 10.9.1 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).
32
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).
10.11 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).
10.12 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).
10.13 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).
33
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.
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 2006 Bonus Program (incorporated herein by reference to Form 8-K (file
no. 000-50421) filed with the Securities and Exchange Commission on
April 4, 2005).t
10.18 Description of Compensation Payable to Non-Employee Directors
(incorporated herein by reference to Form 8-K (file no. 000-50421)
filed with the Securities and Exchange Commission on June 2, 2005).t
11.1 Statement re: computation of earnings per share is included under Note
1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (incorporated herein by reference to
Exhibit 21 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer) (filed
herewith).
32.1 Section 1350 Certification (Chief Executive Officer and Chief Financial
Officer) (furnished herewith).
99.1 Subcertification by Chief Operating Officer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer) (filed
herewith).
99.2 Subcertification by Treasurer in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Financial Officer) (filed herewith).
99.3 Subcertification by Secretary in support of Rule 13a-14(a)/15d-14(a)
Certification (Chief Executive Officer) (filed herewith).
99.4 Subcertification of Chief Operating Officer, Treasurer and Secretary in
support of Section 1350 Certifications (Chief Executive Officer and
Chief Financial Officer) (furnished herewith).
t Management contract or compensatory plan or arrangement.
34