Attached files
file | filename |
---|---|
8-K - FORM 8-K - CONNS INC | h74249e8vk.htm |
EX-99.2 - EX-99.2 - CONNS INC | h74249exv99w2.htm |
EX-99.1 - EX-99.1 - CONNS INC | h74249exv99w1.htm |
EX-99.3 - EX-99.3 - CONNS INC | h74249exv99w3.htm |
EX-23.1 - EX-23.1 - CONNS INC | h74249exv23w1.htm |
EX-12.1 - EX-12.1 - CONNS INC | h74249exv12w1.htm |
EXHIBIT 99.4
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report Of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Conns, Inc.
We have audited the accompanying consolidated balance sheets of Conns, Inc. as of January 31, 2010
and 2009, and the related consolidated statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended January 31, 2010. Our audits also included
the financial statement schedule listed in the Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Conns, Inc. at January 31, 2010 and 2009, and the
consolidated results of its operations and its cash flows for each of the three years in the period
ended January 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set
forth therein.
As discussed in Note 2 to the consolidated financial statements, effective February 1, 2010, the
Company retrospectively changed its method of accounting for its investment in its variable
interest entity.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Conns, Inc.s internal control over financial reporting as of January 31,
2010, based on criteria established in Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 25,
2010, expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Houston, Texas
March 25, 2010, except for Notes 2 and 14 as to which
the date is July 7, 2010
March 25, 2010, except for Notes 2 and 14 as to which
the date is July 7, 2010
Conns, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
January 31, | ||||||||
2009 | 2010 | |||||||
Assets |
||||||||
Current Assets |
||||||||
Cash and cash equivalents (includes balances of VIE of $111 and $104, respectively) |
$ | 11,909 | $ | 12,247 | ||||
Other accounts receivable, net of allowance of $60
and $50, respectively |
32,505 | 23,254 | ||||||
Customer accounts receivable, net of allowance of $13,735
and $19,204, respectively (includes balances of VIE of $310,888 and $279,948, respectively) |
321,907 | 368,304 | ||||||
Inventories |
95,971 | 63,499 | ||||||
Deferred income taxes |
14,203 | 15,237 | ||||||
Federal income taxes recoverable |
| 8,148 | ||||||
Prepaid expenses and other assets |
5,933 | 8,050 | ||||||
Total current assets |
482,428 | 498,739 | ||||||
Long-term portion of customer accounts receivable, net of
allowance of $13,186 and $16,598, respectively (includes balances of VIE of $298,470 and $241,971, respectively) |
389,748 | 318,341 | ||||||
Property and equipment |
||||||||
Land |
7,682 | 7,682 | ||||||
Buildings |
12,011 | 10,480 | ||||||
Equipment and fixtures |
21,670 | 23,797 | ||||||
Transportation equipment |
2,646 | 1,795 | ||||||
Leasehold improvements |
83,361 | 91,299 | ||||||
Subtotal |
127,370 | 135,053 | ||||||
Less accumulated depreciation |
(64,819 | ) | (75,350 | ) | ||||
Total property and equipment, net |
62,551 | 59,703 | ||||||
Goodwill, net |
9,617 | | ||||||
Non-current deferred income tax asset |
2,025 | 5,485 | ||||||
Other assets, net (includes balances of VIE of $7,545 and $7,106, respectively) |
11,197 | 10,198 | ||||||
Total assets |
$ | 957,566 | $ | 892,466 | ||||
Liabilities and Stockholders Equity |
||||||||
Current Liabilities |
||||||||
Current portion of long-term debt (includes balances of VIE of $92,500 and $63,900, respectively) |
$ | 92,505 | $ | 64,055 | ||||
Accounts payable |
57,809 | 39,944 | ||||||
Accrued compensation and related expenses |
11,473 | 5,697 | ||||||
Accrued expenses |
24,843 | 31,685 | ||||||
Income taxes payable |
4,155 | 2,640 | ||||||
Deferred revenues and allowances |
14,347 | 14,596 | ||||||
Total current liabilities |
205,132 | 158,617 | ||||||
Long-term debt (includes balances of VIE of $350,000 and $282,500, respectively) |
412,912 | 388,249 | ||||||
Other long-term liabilities |
5,702 | 5,195 | ||||||
Fair value of interest rate swaps |
| 337 | ||||||
Deferred gain on sale of property |
1,036 | 905 | ||||||
Stockholders equity |
||||||||
Preferred stock ($0.01 par value, 1,000,000 shares authorized;
none issued or outstanding) |
| | ||||||
Common stock ($0.01 par value, 40,000,000 shares authorized;
24,167,445 and 24,194,555 shares issued at January 31, 2009 and
2010, respectively) |
242 | 242 | ||||||
Additional paid in capital |
103,553 | 106,226 | ||||||
Accumulated other comprehensive loss |
| (218 | ) | |||||
Retained earnings |
266,060 | 269,984 | ||||||
Treasury stock, at cost, 1,723,205 shares |
(37,071 | ) | (37,071 | ) | ||||
Total stockholders equity |
332,784 | 339,163 | ||||||
Total liabilities and stockholders equity |
$ | 957,566 | $ | 892,466 | ||||
See notes to consolidated financial statements.
- 2 -
Conns, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share)
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Revenues |
||||||||||||
Product sales |
$ | 671,571 | $ | 743,729 | $ | 667,401 | ||||||
Repair service agreement commissions (net) |
36,424 | 40,199 | 33,272 | |||||||||
Service revenues |
22,997 | 21,121 | 22,115 | |||||||||
Total net sales |
730,992 | 805,049 | 722,788 | |||||||||
Finance charges and other |
139,538 | 154,492 | 152,797 | |||||||||
Total revenues |
870,530 | 959,541 | 875,585 | |||||||||
Cost and expenses |
||||||||||||
Cost of goods sold, including warehousing and
occupancy costs |
508,787 | 580,423 | 534,299 | |||||||||
Cost of service parts sold, including warehousing
and occupancy cost |
8,379 | 9,638 | 10,401 | |||||||||
Selling, general and administrative expense |
245,761 | 254,172 | 255,942 | |||||||||
Goodwill impairment |
| | 9,617 | |||||||||
Provision for bad debts |
19,465 | 27,952 | 36,843 | |||||||||
Total cost and expenses |
782,392 | 872,185 | 847,102 | |||||||||
Operating income |
88,138 | 87,356 | 28,483 | |||||||||
Interest expense, net |
24,839 | 23,597 | 20,571 | |||||||||
Other (income) expense, net |
(943 | ) | 117 | (123 | ) | |||||||
Income before income taxes |
64,242 | 63,642 | 8,035 | |||||||||
Provision for income taxes |
22,575 | 23,624 | 4,111 | |||||||||
Net Income |
$ | 41,667 | $ | 40,018 | $ | 3,924 | ||||||
Earnings per share |
||||||||||||
Basic |
$ | 1.80 | $ | 1.79 | $ | 0.17 | ||||||
Diluted |
$ | 1.76 | $ | 1.77 | $ | 0.17 | ||||||
Average common shares outstanding |
||||||||||||
Basic |
23,193 | 22,413 | 22,456 | |||||||||
Diluted |
23,673 | 22,577 | 22,610 |
See notes to consolidated financial statements.
- 3 -
Conns, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
Accum. | ||||||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||||||
Compre- | ||||||||||||||||||||||||||||||||
hensive | ||||||||||||||||||||||||||||||||
Common Stock | Income | Paid in | Retained | Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | (Loss) | Capital | Earnings | Shares | Amount | Total | |||||||||||||||||||||||||
Balance January 31, 2007 |
23,810 | $ | 238 | $ | 6,305 | $ | 93,365 | $ | 196,417 | (168 | ) | $ | (3,797 | ) | $ | 292,528 | ||||||||||||||||
Cumulative effect of changes
in accounting principles |
(6,305 | ) | (12,042 | ) | (18,347 | ) | ||||||||||||||||||||||||||
Exercise of options, including
tax benefit |
279 | 2 | 3,241 | 3,243 | ||||||||||||||||||||||||||||
Issuance of common stock
under Employee Stock Purchase
Plan |
13 | 1 | 247 | 248 | ||||||||||||||||||||||||||||
Stock-based compensation |
2,661 | 2,661 | ||||||||||||||||||||||||||||||
Purchase of treasury stock |
(1,555 | ) | (33,274 | ) | (33,274 | ) | ||||||||||||||||||||||||||
Return of shares |
(4 | ) | ||||||||||||||||||||||||||||||
Net income |
41,667 | 41,667 | ||||||||||||||||||||||||||||||
Balance January 31, 2008 |
24,098 | 241 | | 99,514 | 226,042 | (1,723 | ) | (37,071 | ) | 288,726 | ||||||||||||||||||||||
Exercise of options,
including tax benefit |
47 | 1 | 614 | 615 | ||||||||||||||||||||||||||||
Issuance of common stock
under Employee Stock Purchase
Plan |
22 | 237 | 237 | |||||||||||||||||||||||||||||
Stock-based compensation |
3,188 | 3,188 | ||||||||||||||||||||||||||||||
Net income |
40,018 | 40,018 | ||||||||||||||||||||||||||||||
Balance January 31, 2009 |
24,167 | 242 | | 103,553 | 266,060 | (1,723 | ) | (37,071 | ) | 332,784 | ||||||||||||||||||||||
Issuance of common stock
under Employee stock Purchase
Plan |
27 | 228 | 228 | |||||||||||||||||||||||||||||
Stock-based compensation |
2,445 | 2,445 | ||||||||||||||||||||||||||||||
Net income |
3,924 | 3,924 | ||||||||||||||||||||||||||||||
Other comprehensive income
(loss): |
||||||||||||||||||||||||||||||||
Adjustment of fair value of
interest rate swaps, net of
tax benefit of $118 |
(218 | ) | (218 | ) | ||||||||||||||||||||||||||||
Other comprehensive income
(loss) |
(218 | ) | (218 | ) | ||||||||||||||||||||||||||||
Total comprehensive income |
3,706 | |||||||||||||||||||||||||||||||
Balance January 31, 2010 |
24,194 | $ | 242 | $ | (218 | ) | $ | 106,226 | $ | 269,984 | (1,723 | ) | $ | (37,071 | ) | $ | 339,163 | |||||||||||||||
See notes to consolidated financial statements.
- 4 -
Conns, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Cash flows from operating activities |
||||||||||||
Net income |
$ | 41,667 | $ | 40,018 | $ | 3,924 | ||||||
Adjustments to reconcile net income to net cash provided by
(used in) operating activities: |
||||||||||||
Depreciation |
12,441 | 12,672 | 13,516 | |||||||||
Amortization / (Accretion), net |
(313 | ) | (131 | ) | 496 | |||||||
Provision for bad debts |
19,465 | 27,952 | 36,843 | |||||||||
Stock-based compensation |
2,661 | 3,188 | 2,445 | |||||||||
Goodwill impairment |
| | 9,617 | |||||||||
Provision for deferred income taxes |
331 | (4,051 | ) | (3,499 | ) | |||||||
Loss (gain) from sale of property and equipment |
(943 | ) | 117 | (123 | ) | |||||||
Discounts and accretion on promotional credit |
1,208 | (1,115 | ) | (639 | ) | |||||||
Change in operating assets and liabilities: |
||||||||||||
Customer accounts receivable |
(98,658 | ) | (119,320 | ) | (11,139 | ) | ||||||
Other accounts receivable |
(5,390 | ) | (4,783 | ) | 9,251 | |||||||
Inventory |
5,603 | (14,476 | ) | 32,472 | ||||||||
Prepaid expenses and other assets |
507 | (1,481 | ) | (2,087 | ) | |||||||
Accounts payable |
(22,849 | ) | 29,631 | (17,866 | ) | |||||||
Accrued expenses |
2,208 | 3,540 | 1,066 | |||||||||
Income taxes payable |
(996 | ) | 2,686 | (10,568 | ) | |||||||
Deferred revenues and allowances |
3,687 | 5,085 | 530 | |||||||||
Net cash provided by (used in) operating activities |
(39,371 | ) | (20,468 | ) | 64,239 | |||||||
Cash flows from investing activities |
||||||||||||
Purchase of property and equipment |
(18,955 | ) | (17,597 | ) | (10,255 | ) | ||||||
Proceeds from sales of property |
8,921 | 224 | 152 | |||||||||
Changes in restricted cash balances |
4,025 | 4,029 | | |||||||||
Net cash used in investing activities |
(6,009 | ) | (13,344 | ) | (10,103 | ) | ||||||
Cash flows from financing activities |
||||||||||||
Net proceeds from stock issued under employee benefit
plans, including tax benefit |
3,188 | 802 | 228 | |||||||||
Excess tax benefits from stock-based compensation |
303 | 50 | | |||||||||
Purchase of treasury stock |
(33,274 | ) | | | ||||||||
Borrowings under lines of credit |
150,000 | 300,800 | 270,838 | |||||||||
Payments on lines of credit |
(120,000 | ) | (263,400 | ) | (324,340 | ) | ||||||
Increase in debt issuance costs |
(306 | ) | (3,453 | ) | (440 | ) | ||||||
Payment of promissory notes |
(104 | ) | (102 | ) | (84 | ) | ||||||
Net cash provided by (used in) financing activities |
(193 | ) | 34,697 | (53,798 | ) | |||||||
Net change in cash |
(45,573 | ) | 885 | 338 | ||||||||
Cash and cash equivalents |
||||||||||||
Beginning of the year |
56,597 | 11,024 | 11,909 | |||||||||
End of the year |
$ | 11,024 | $ | 11,909 | $ | 12,247 | ||||||
Supplemental disclosure of cash flow information |
||||||||||||
Cash interest paid |
$ | 25,560 | $ | 23,753 | $ | 20,449 | ||||||
Cash income taxes paid, net of refunds |
22,935 | 24,950 | 18,163 | |||||||||
Supplemental disclosure of non-cash activity |
||||||||||||
Purchases of property and equipment with debt financing |
23 | | 473 | |||||||||
Sales of property and equipment financed by notes receivable |
| 1,400 | |
See notes to consolidated financial statements.
- 5 -
CONNS ,INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2010
1. Summary of Significant Accounting Policies
Principles of Consolidation. The consolidated financial statements include the accounts of
Conns, Inc. and all of its wholly-owned subsidiaries (the Company), including the Companys VIE,
as defined below. The liabilities of the VIE and the assets specifically collateralizing those
obligations are not available for the general use of the Company and have been parenthetically
presented on the face of the Companys balance sheet. Conns, Inc. is a holding company with no
independent assets or operations other than its investments in its subsidiaries. All material
intercompany transactions and balances have been eliminated in consolidation
Business Activities. The Company, through its retail stores, provides products and services to
its customer base in seven primary market areas, including southern Louisiana, southeast Texas,
Houston, South Texas, San Antonio/Austin, Dallas/Fort Worth and Oklahoma. Products and services
offered through retail sales outlets include home appliances, consumer electronics, home office
equipment, lawn and garden products, mattresses, furniture, repair service agreements, installment
and revolving credit account programs, and various credit insurance products. These activities are
supported through an extensive service, warehouse and distribution system. For the reasons
discussed below, the Company has aggregated its results into two operating segments: credit and
retail. The Companys retail stores bear the Conns name, and deliver the same products and
services to a common customer group. The Companys customers generally are individuals rather than
commercial accounts. All of the retail stores follow the same procedures and methods in managing
their operations. The Companys management evaluates performance and allocates resources based on
the operating results of its retail and credit segments. With the adoption of the new accounting
principles discussed in Note 2, which requires the consolidation of the Companys variable interest
entity engaged in receivables securitizations, it began separately evaluating the performance of
its retail and credit operations. As a result, the Company believes it is appropriate to disclose
separate financial information of its retail and credit segments. The separate financial
information is disclosed in Note 14 Segment Reporting.
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.
Vendor Programs. The Company receives funds from vendors for price protection, product
rebates (earned upon purchase or sale of product), marketing, training and promotional programs
which are recorded on the accrual basis, as a reduction of the related product cost or advertising
expense, according to the nature of the program. The Company accrues rebates based on the
satisfaction of terms of the program and sales of qualifying products even though funds may not be
received until the end of a quarter or year. If the programs are related to product purchases, the
allowances, credits, or payments are recorded as a reduction of product cost; if the programs are
related to product sales, the allowances, credits or payments are recorded as a reduction of cost
of goods sold; if the programs are directly related to marketing or promotion of the product, the
allowances, credits, or payments are recorded as a reduction of advertising expense in the period
in which the expense is incurred. Vendor rebates earned and recorded as a reduction of product cost
and cost of goods sold totaled $29.5 million, $39.8 million and $46.2 million for the years ended
January 31, 2008, 2009 and 2010, respectively. The increase in the current year is due to increased
use of instant rebates by vendors to drive sales. Over the past three years the Company has
received funds from approximately 50 vendors, with the terms of the programs ranging between one
month and one year.
- 6 -
Earnings Per Share. The Company calculates basic earnings per share by dividing net income by
the weighted average number of common shares outstanding. Diluted earnings per share include the
dilutive effects of any stock options granted, which is calculated using the treasury-stock method.
The following table sets forth the shares outstanding for the earnings per share calculations
(shares in thousands):
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Common stock outstanding, beginning of period |
23,642 | 22,375 | 22,444 | |||||||||
Weighted average common stock issued in stock
option exercises |
111 | 29 | | |||||||||
Weighted average common stock issued to employee
stock purchase plan |
5 | 9 | 12 | |||||||||
Less: Weighted average treasury shares purchased |
(565 | ) | | | ||||||||
Shares used in computing basic earnings per share |
23,193 | 22,413 | 22,456 | |||||||||
Dilutive effect of stock options, net of assumed
repurchase of treasury stock |
480 | 164 | 154 | |||||||||
Shares used in computing diluted earnings per share |
23,673 | 22,577 | 22,610 | |||||||||
During the periods presented, options with an exercise price in excess of the average
market price of the Companys common stock are excluded from the calculation of the dilutive effect
of stock options for diluted earnings per share calculations. The weighted average number of
options not included in the calculation of the dilutive effect of stock options was 0.4 million,
1.2 million, and 1.5 million for each of the years ended January 31, 2008, 2009, and 2010
respectively.
Cash and Cash Equivalents. The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents. Credit card deposits in-transit of
$5.3 million and $4.7 million, as of January 31, 2009 and 2010, respectively, are included in cash
and cash equivalents.
Inventories. Inventories consist of finished goods or parts and are valued at the lower of
cost (moving weighted average method) or market.
Property and Equipment. Property and equipment are recorded at cost. Costs associated with
major additions and betterments that increase the value or extend the lives of assets are
capitalized and depreciated. Normal repairs and maintenance that do not materially improve or
extend the lives of the respective assets are charged to operating expenses as incurred.
Depreciation, which includes amortization of capitalized leases, is computed on the straight-line
method over the estimated useful lives of the assets, or in the case of leasehold improvements,
over the shorter of the estimated useful lives or the remaining terms of the respective leases. The
estimated lives used to compute depreciation expense are summarized as follows:
Buildings |
30 years | |
Equipment and fixtures |
3 5 years | |
Transportation equipment |
3 years | |
Leasehold improvements |
5 15 years |
Property and equipment are evaluated for impairment at the retail store level. The
Company performs a periodic assessment of assets for impairment. Additionally, an impairment
evaluation is performed whenever events or changes in circumstances indicate that the carrying
amount of the assets might not be recoverable. The most likely condition that would necessitate an
assessment would be an adverse change in historical and estimated future results of a retail
stores performance. For property and equipment to be held and used, the Company recognizes an
impairment loss if its carrying amount is not recoverable through its undiscounted cash flows and
measures the impairment loss based on the difference between the carrying amount and fair value. No
impairment was recorded in the years ended January 31, 2008, 2009 or 2010.
All gains and losses on sale of assets are included in Other (income) expense in the consolidated
statements of operations.
(in thousands of dollars) | 2008 | 2009 | 2010 | |||||||||
Gain (loss) on sale of assets |
943 | $ | (117 | ) | 123 |
- 7 -
Customer Accounts Receivable. Customer accounts receivable reported in the consolidated
balance sheet includes receivables transferred to the Companys VIE and those receivables not
transferred to the VIE. The Company records the amount of principal and accrued interest on
Customer receivables that is expected to be collected within the next twelve months, based on
contractual terms, in current assets on its consolidated balance sheet. Those amounts expected to
be collected after twelve months, based on contractual terms, are included in long-term assets.
Typically, customer receivables are considered delinquent if a payment has not been received on the
scheduled due date. Additionally, the Company offers reage programs to customers with past due
balances that have experienced a financial hardship; if they meet the conditions of the Companys
reage policy. Reaging a customers account can result in updating an account from a delinquent
status to a current status. Generally, an account that is delinquent more than 120 days and for
which no payment has been received in the past seven months will be charged-off against the
allowance for doubtful accounts and interest accrued subsequent to the last payment will be
reversed. The Company has a secured interest in the merchandise financed by these receivables and
therefore has the opportunity to recover a portion of the charged-off amount.
Interest Income on Customer Accounts Receivable. Interest income is accrued using the Rule of
78s method for installment contracts and the simple interest method for revolving charge accounts,
and is reflected in Finance charges and other. Typically, interest income is accrued until the
contract or account is paid off or charged-off and we provide an allowance for estimated
uncollectible interest. Interest income is recognized on interest-free promotion credit programs
based on the Companys historical experience related to customers that fail to satisfy the
requirements of the interest-free programs. Additionally, for sales on deferred interest and same
as cash programs that exceed one year in duration, the Company discounts the sales to their fair
value, resulting in a reduction in sales and customer receivables, and amortizes the discount
amount to Finance charges and other over the term of the program. The amount of customer
receivables carried on the Companys consolidated balance sheet that were past due 90 days or more
and still accruing interest was $41.0 million and $54.8 million at January 31, 2009 and 2010,
respectively.
Allowance for Doubtful Accounts. The Company records an allowance for doubtful accounts,
including estimated uncollectible interest, for its Customer and Other accounts receivable, based
on its historical net loss experience and expectations for future losses. The net charge-off data
used in computing the loss rate is reduced by the amount of post-charge-off recoveries received,
including cash payments, amounts realized from the repossession of the products financed and, at
times, payments received under credit insurance policies. Additionally, the Company separately
evaluates the Primary and Secondary portfolios when estimating the allowance for doubtful accounts.
The balance in the allowance for doubtful accounts and uncollectible interest for customer
receivables was $26.9 million and $35.8 million, at January 31, 2009 and 2010, respectively.
Additionally, as a result of the Companys practice of reaging customer accounts, if the account is
not ultimately collected, the timing and amount of the charge-off is impacted. If these accounts
had been charged-off sooner the net loss rates might have been higher.
Goodwill. Goodwill represents the excess of consideration paid over the fair value of
tangible and identifiable intangible net assets acquired in connection with the acquisitions of
certain of the Companys insurance and finance operations. The Company performs an assessment
annually in the fourth quarter testing for the impairment of goodwill, or at any other time when
impairment indicators exist. As a result of the sustained decline in the Companys market
capitalization, the increasingly challenging economic environment during the current year third
quarter, and its impact on the Companys comparable store sales, credit portfolio performance and
operating results, the Company determined that an interim goodwill impairment test was necessary
during the current year third quarter.
A two-step method was utilized for determining goodwill impairment. The valuation of the
Company was performed utilizing the services of outside valuation consultants using both an income
approach utilizing discounted debt-free cash flows of the Company and comparable valuation
multiples. Upon completion of the impairment test, the Company concluded that the carrying value of
the Companys recorded goodwill was impaired. As a result, the Company recorded a goodwill
impairment charge of $9.6 million in the current year third quarter, reducing the balance of
goodwill on its balance sheet to zero.
Other Assets. The Company has certain deferred financing costs for transactions that have not
yet been completed and has not begun amortization of those costs. These costs are included in Other
assets, net, on the balance sheet and will be amortized upon completion of the related financing
- 8 -
transaction or expensed in the event the Company fails to complete such a transaction. The
Company also has certain restricted cash balances included in Other assets. The restricted cash
balances represent collateral for note holders of the Companys VIE, and the amount is expected to
decrease as the respective notes are repaid. However, the required balance could increase dependent
on certain net portfolio yield requirements. The balance of this restricted cash account was $6.0
million at both January 31, 2009 and 2010.
Income Taxes. The Company is subject to U.S. federal income tax as well as income tax in
multiple state jurisdictions. The Company follows the liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are measured using the tax
rates and laws that are expected be in effect when the differences are expected to reverse. To the
extent penalties and interest are incurred, the Company records these charges as a component of its
Provision for income taxes. Tax returns for the fiscal years subsequent to January 31, 2006, remain
open for examination by the Companys major taxing jurisdictions.
Sales Taxes. The Company records and reports all sales taxes collected on a net basis in the
financial statements.
Revenue Recognition. Revenues from the sale of retail products are recognized at the time the
customer takes possession of the product. Such revenues are recognized net of any adjustments for
sales incentive offers such as discounts, coupons, rebates or other free products or services and
discounts of promotional credit sales that extend beyond one year. The Company sells repair service
agreements and credit insurance contracts on behalf of unrelated third parties. For contracts where
third parties are the obligor on the contract, commissions are recognized in revenues at the time
of sale, and in the case of retrospective commissions, at the time that they are earned. The
Company records a receivable for earned but unremitted retrospective commissions and reserves for
future cancellations of repair service agreements and credit insurance contracts estimated based on
historical experience. When the Company sells repair service agreements in which it is deemed to be
the obligor on the contract at the time of sale, revenue is recognized ratably, on a straight-line
basis, over the term of the repair service agreement. These Company-obligor repair service
agreements are contracts which provide customers protection against product repair costs arising
after the expiration of the manufacturers warranty and any third-party obligor contracts. These
agreements typically have terms ranging from 12 months to 36 months. These agreements are separate
units of accounting and are valued based on the agreed upon retail selling price. The amounts of
repair service agreement revenue deferred at January 31, 2009 and 2010, were $7.2 million and $7.3
million, respectively, and are included in Deferred revenue and allowances in the accompanying
consolidated balance sheets. Under the contracts, the Company defers and amortizes its direct
selling expenses over the contract term and records the cost of the service work performed as
products are repaired.
The following table presents a reconciliation of the beginning and ending balances of the
deferred revenue on the Companys repair service agreements and the amount of claims paid under
those agreements (in thousands):
Reconciliation of deferred revenues on repair service agreements
Year Ended January 31, | ||||||||
2009 | 2010 | |||||||
Balance in deferred revenues at beginning of year |
$ | 6,373 | $ | 7,213 | ||||
Revenues earned during the year |
(6,482 | ) | (7,027 | ) | ||||
Revenues deferred on sales of new agreements |
7,322 | 7,082 | ||||||
Balance in deferred revenues at end of year |
$ | 7,213 | $ | 7,268 | ||||
Total claims incurred during the year, excludes selling expenses |
$ | 2,529 | $ | 3,402 | ||||
Sales on interest-free promotional credit programs are recognized at the time the
customer takes possession of the product, consistent with the above stated policy. Considering the
short-term nature of interest free programs for terms less than one year, sales are recorded at
full value and are not discounted. Sales financed by longer-term (18-, 24- and 36-month) interest
free programs are recorded at their net present value. The discount to net present value results in
a reduction in net sales, which totaled $7.2 million, $5.8 million and $4.8 million for the years
ended January 31, 2008, 2009 and 2010, respectively. Eligible receivables arising out of the
Companys interest-free programs are transferred to
- 9 -
the Companys VIE, net of the discount, with other qualifying customer receivables. Customer
receivables arising out of the interest-free programs that are retained by the Company are carried
on the consolidated balance sheet net of the discount, which is amortized into income over the life
of the receivable as an adjustment to Finance charges and other.
The Company classifies amounts billed to customers relating to shipping and handling as
revenues. Costs of $22.0 million, $20.8 million and $19.3 million associated with shipping and
handling revenues are included in Selling, general and administrative expense for the years ended
January 31, 2008, 2009 and 2010, respectively.
Fair Value of Financial Instruments. The fair value of cash and cash equivalents,
receivables, and accounts payable approximate their carrying amounts because of the short maturity
of these instruments. The fair value of the Companys asset-based revolving credit facility is
determined by estimating the present value of future cash flows as if the debt were being carried
at the interest rate the Company would currently incur if it were to complete a similar
transaction. The fair value of the Companys asset-based revolving credit facility as of January
31, 2010 was approximately $104.0 million, based on the assumption that the interest spread would
be approximately 100 basis points higher than the current spread in the revolving facility. The
carrying amount of the long-term debt as of January 31, 2010 was approximately $105.5 million. The
estimated fair value of the VIEs $196.4 million 2002 Series A variable funding note approximates
its carrying amount due to its short maturity and the variable nature of its interest rate. The
estimated fair value of the VIEs $150 million 2006 Series A medium term notes was approximately
$117 million and $139 million as of January 31, 2009 and 2010, respectively, based on its estimate
of the rates available at these dates for instruments with similar terms and maturities. The
Companys interest rate swaps are presented on the balance sheet at fair value.
Share-Based Compensation. For stock option grants after our IPO in November 2003, the Company
has used the Black-Scholes model to determine fair value. Share-based compensation expense is
recorded, net of estimated forfeitures, on a straight-line basis over the vesting period of the
applicable grant. Prior to the IPO, the value of the options issued was estimated using the minimum
valuation option-pricing model. Since the minimum valuation option-pricing model does not qualify
as a fair value pricing model, the Company followed the intrinsic value method of accounting for
share-based compensation to employees for these grants.
Self-insurance. The Company is self-insured for certain losses relating to group health,
workers compensation, automobile, general and product liability claims. The Company has stop loss
coverage to limit the exposure arising from these claims. Self-insurance losses for claims filed
and claims incurred, but not reported, are accrued based upon the Companys estimates of the
aggregate liability for claims incurred using development factors based on historical experience.
Expense Classifications. The Company records Cost of goods sold as the direct cost of
products sold, any related out-bound freight costs, and receiving costs, inspection costs, internal
transfer costs, and other costs associated with the operations of its distribution system.
Advertising costs are expensed as incurred. Advertising expense included in Selling, general and
administrative expense for the years ended January 31, 2008, 2009 and 2010, was:
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
(in thousands) | ||||||||||||
Gross advertising expense |
$ | 35,647 | $ | 36,289 | $ | 30,552 | ||||||
Less: |
||||||||||||
Vendor rebates |
(6,591 | ) | (6,440 | ) | (5,072 | ) | ||||||
Net advertising expense in
Selling, general and administrative expense |
$ | 29,056 | $ | 29,849 | $ | 25,480 | ||||||
In addition, the Company records as Cost of service parts sold the direct cost of parts
used in its service operation and the related inbound freight costs, purchasing and receiving
costs, inspection costs, internal transfer costs, and other costs associated with the parts
distribution operation.
The costs associated with the Companys merchandising function, including product purchasing,
advertising, sales commissions, and all store occupancy costs are included in Selling, general and
administrative expense.
Reclassifications. Certain reclassifications have been made in the prior years financial
statements to conform to the current years presentation. The Company reclassified approximately
$5.7
- 10 -
million from Deferred revenues and allowances in current liabilities to Other long-term
liabilities. This represents the amount of deferred revenues on tenant improvement allowances that
will be realized beyond twelve months.
2. Adoption of New Accounting Principles.
The Company enters into securitization transactions to
transfer eligible retail installment and revolving customer receivables and retains servicing
responsibilities and subordinated interests. Additionally, the Company transfers the eligible
customer receivables to a bankruptcy-remote variable interest entity (VIE). In June 2009, the FASB
issued revised authoritative guidance to improve the relevance and comparability of the information
that a reporting entity provides in its financial statements about:
| a transfer of financial assets; | ||
| the effects of a transfer on its financial position, financial performance, and cash flows; | ||
| transferors continuing involvement, if any, in transferred financial assets; and | ||
| Improvements in financial reporting by companies involved with variable interest entities to provide more relevant and reliable information to users of financial statements by requiring an enterprise to perform an analysis to determine whether the enterprises variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: |
a) | The power to direct the activities of a variable interest entity that most significantly impact the entitys economic performance, and | ||
b) | The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. |
After the effective date, the concept of a qualifying special-purpose entity is no longer
relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities (as
defined under previous accounting standards) should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable consolidation guidance.
If the evaluation on the effective date results in consolidation, the reporting entity should apply
the transition guidance provided in the pronouncement that requires consolidation. The new
FASB-issued authoritative guidance was effective for the Company beginning February 1, 2010.
The Company determined that it qualifies as the primary beneficiary of its VIE based on the
following considerations:
| The Company directs the activities that generate the customer receivables that are transferred to the VIE, | ||
| The Company directs the servicing activities related the collection of the customer receivables transferred to the VIE, | ||
| The Company absorbs all losses incurred by the VIE to the extent of its residual interest in the customer receivables held by the VIE before any other investors incur losses, and | ||
| The Company has the rights to receive all benefits generated by the VIE after paying the contractual amounts due to the other investors. |
As a result of the Companys adoption of the provisions of the new guidance, effective
February 1, 2010, the Companys VIE, which is engaged in customer receivable financing and
securitization, is being consolidated in the Companys balance sheet and the Companys statements
of operations, stockholders equity and cash flows. Previously, the operations of the VIE were
reported off-balance sheet. The Company has elected to apply the provisions of this new guidance by
retrospectively restating prior period financial statements to give effect to the consolidation of
the VIE, presenting the balances at their carrying value as if they had always been carried on its
balance sheet. The retrospective application impacted the comparative prior period financial
statements as follows:
- 11 -
| For the years ended January 31, 2008 and 2009, Income before income taxes was increased by approximately $3.0 million and $22.1 million, respectively, and for the year ended January 31, 2010, Income before income taxes was reduced by approximately $5.9 million. | ||
| For the years ended January 31, 2008 and 2009, Net income was increased by approximately $2.0 million and $14.3 million, respectively, and for the year ended January 31, 2010, Net income was reduced by approximately $3.8 million. | ||
| For the years ended January 31, 2008 and 2009, Basic earnings per share was increased by $0.09 and $0.64, respectively, and for the year ended January 31, 2010, Basic earnings per share was reduced by $0.17. | ||
| For the years ended January 31, 2008 and 2009, Diluted earnings per share was increased by $0.08 and $0.63, respectively, and for the year ended January 31, 2010, Diluted earnings per share was reduced by $0.17. | ||
| For the year ended January 31, 2008, Cash flows from operating activities was reduced by approximately $33.7 million, Cash flows from investing activities was increased by approximately $4.0 million and Cash flows from financing activities was increased by approximately $29.7 million. | ||
| For the year ended January 31, 2009, Cash flows from operating activities was increased by approximately $22.2 million, Cash flows from investing activities was increased by approximately $4.0 million and Cash flows from financing activities was reduced by approximately $26.2 million. | ||
| For the year ended January 31, 2010, Cash flows from operating activities was increased by approximately $96.1 million and Cash flows from financing activities was reduced by approximately $96.1 million. | ||
| As of January 31, 2009, the net of current assets and current liabilities decreased approximately $7.5 million and at January 31, 2010, the net current assets and current liabilities increased approximately $25.4 million; | ||
| As of January 31, 2009 and 2010, Customer accounts receivable, net, were increased approximately $609.4 million and $488.5 million, respectively. Net deferred tax assets were increased approximately $0.8 million and $3.0 million, respectively, and Other assets were increased approximately $7.5 million and $7.1 million, respectively; | ||
| As of January 31, 2009 and 2010, Interests in the securitized assets of its VIE of approximately $176.5 million and $157.7 million, respectively, was eliminated; | ||
| As of January 31, 2009 and 2010, current and long-term debt were increased approximately $92.5 million and $63.9 million and $350.0 million and $282.5 million, respectively; and | ||
| As of January 31, 2009 and 2010, Retained earnings was decreased approximately $1.4 million and $5.2 million, respectively. |
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and
the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162
(ASC 105-10-65/FAS 168). The standard establishes the FASB Accounting Standards Codification
(the Codification or ASC) as the single source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the preparation of financial
statements in conformity with GAAP, and is intended to simplify user access to all authoritative
GAAP by providing all the authoritative literature related to a particular topic in one place. The
Codification requires companies to change how they reference GAAP throughout the financial
statements. The Company adopted the Codification and has provided the pre-Codification reference
along with the related ASC references within this section to allow readers an opportunity to see
the impact of the Codification on its financial statements and disclosures.
On February 1, 2009, the Company was required to adopt SFAS 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133, (ASC 815-10-65/SFAS
161). This statement is intended to improve transparency in financial reporting by requiring
enhanced disclosures of an entitys derivative instruments and hedging activities and their effects
on the entitys financial position, financial performance, and cash flows. ASC 815-10-65/SFAS 161
applies to all
- 12 -
derivative instruments within the scope of SFAS 133, as well as related hedged items,
bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging
instruments. ASC 815-10-65/FAS 161 only impacts disclosure requirements and therefore did not have
an impact on the Companys financial position, financial performance or cash flows. The required
disclosures have been included in Note 4 to the consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB) Opinion
No. 28-1, Interim Disclosures about Fair Value of Financial Instruments, (ASC 825-10-65/FSP 107-1
and APB 28-1), which requires the Company to provide disclosures about fair value of financial
instruments in each interim and annual period that financial statements are prepared. The Company
adopted the provisions of ASC 825-10-65/FSP 107-1 and APB 28-1, which became effective for periods
ended after June 15, 2009.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (ASC 855-10/SFAS165), which
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available to be issued. The
Company adopted the provisions of ASC 855-10/SFAS No. 165, which became effective for interim and
annual reporting periods ended after June 15, 2009. Subsequent events have been evaluated and
material subsequent events that have occurred since January 31, 2010 are discussed in Note 13 to
the consolidated financial statements.
3. Supplemental Disclosure of Finance Charges and Other Revenue
The following is a summary of the classification of the amounts included as Finance charges
and other for the year ended January 31, 2008, 2009 and 2010 (in thousands):
2008 | 2009 | 2010 | ||||||||||
Interest income and fees on customer receivables |
$ | 117,186 | $ | 132,270 | $ | 135,828 | ||||||
Insurance commissions |
21,402 | 20,061 | 16,437 | |||||||||
Other |
950 | 2,161 | 532 | |||||||||
Finance charges and other |
$ | 139,538 | $ | 154,492 | $ | 152,797 | ||||||
4. Supplemental Disclosure of Customer Receivables
The following illustration presents quantitative information about the receivables portfolios
managed by the Company (in thousands):
Total Outstanding Balance | ||||||||||||||||||||||||
Customer Receivables | 60 Days Past Due (1) | Reaged (1) | ||||||||||||||||||||||
January 31, | January 31, | January 31, | ||||||||||||||||||||||
2009 | 2010 | 2009 | 2010 | 2009 | 2010 | |||||||||||||||||||
Primary portfolio: |
||||||||||||||||||||||||
Installment |
$ | 551,838 | $ | 555,573 | $ | 33,126 | $ | 46,758 | $ | 88,224 | $ | 93,219 | ||||||||||||
Revolving |
38,084 | 41,787 | 2,027 | 2,017 | 2,401 | 1,819 | ||||||||||||||||||
Subtotal |
589,922 | 597,360 | 35,153 | 48,775 | 90,625 | 95,038 | ||||||||||||||||||
Secondary portfolio: |
||||||||||||||||||||||||
Installment |
163,591 | 138,681 | 19,988 | 24,616 | 50,537 | 49,135 | ||||||||||||||||||
Total receivables managed |
753,513 | 736,041 | $ | 55,141 | $ | 73,391 | $ | 141,162 | $ | 144,173 | ||||||||||||||
Allowance for uncollectible accounts |
(26,921 | ) | (35,802 | ) | ||||||||||||||||||||
Allowances for promotional credit
programs |
(14,937 | ) | (13,594 | ) | ||||||||||||||||||||
Current portion of customer
accounts receivable, net |
321,907 | 368,304 | ||||||||||||||||||||||
Non-current customer accounts
receivable, net |
$ | 389,748 | $ | 318,341 | ||||||||||||||||||||
Receivables transferred to the VIE |
$ | 645,715 | $ | 521,919 | $ | 52,214 | $ | 59,840 | $ | 131,839 | $ | 122,521 | ||||||||||||
Receivables not transferred to the VIE |
107,798 | 214,122 | 2,927 | 13,551 | 9,269 | 21,652 | ||||||||||||||||||
Total receivables managed |
$ | 753,513 | $ | 736,041 | $ | 55,141 | $ | 73,391 | $ | 141,162 | $ | 144,173 | ||||||||||||
(1) | Amounts are based on end of period balances and accounts could be represented in both the past due and reaged columns shown above. |
- 13 -
Net Credit | ||||||||||||||||
Average Balances | Charge-offs | |||||||||||||||
January 31, | January 31, (2) | |||||||||||||||
2009 | 2010 | 2009 | 2010 | |||||||||||||
Primary portfolio: |
||||||||||||||||
Installment |
$ | 495,489 | $ | 557,033 | ||||||||||||
Revolving |
43,184 | 35,343 | ||||||||||||||
Subtotal |
538,673 | 592,376 | $ | 15,071 | $ | 20,777 | ||||||||||
Secondary portfolio: |
||||||||||||||||
Installment |
157,529 | 151,380 | 7,291 | 8,165 | ||||||||||||
Total receivables managed |
$ | 696,202 | $ | 743,756 | $ | 22,362 | $ | 28,942 | ||||||||
Receivables transferred to the VIE |
$ | 651,420 | $ | 559,028 | $ | 21,573 | $ | 25,335 | ||||||||
Receivables not transferred to the VIE |
44,782 | 184,728 | 789 | 3,607 | ||||||||||||
Total receivables managed |
$ | 696,202 | $ | 743,756 | $ | 22,362 | $ | 28,942 | ||||||||
(2) | Amounts represent total credit charge-offs, net of recoveries, on total customer receivables. |
5. Debt and Letters of Credit
The Companys borrowing facilities consist of a $210 million asset-based revolving credit
facility, a $10 million unsecured revolving line of credit, its VIEs 2002 Series A variable
funding note and its VIEs 2006 Series A medium term notes. Debt consisted of the following at the
periods ended (in thousands):
January 31, | ||||||||
2009 | 2010 | |||||||
Asset-based revolving credit facility |
$ | 62,900 | $ | 105,498 | ||||
2002 Series A Variable Funding Note |
292,500 | 196,400 | ||||||
2006 Series A Notes |
150,000 | 150,000 | ||||||
Unsecured revolving line of credit for $10 million maturing in September 2010 |
| | ||||||
Other long-term debt |
17 | 406 | ||||||
Total debt |
505,417 | 452,304 | ||||||
Less current portion of debt |
92,505 | 64,055 | ||||||
Amounts classified as long-term |
$ | 412,912 | $ | 388,249 | ||||
The Companys $210 million asset-based revolving credit facility provides funding based
on a borrowing base calculation that includes customer accounts receivable and inventory and
matures in August 2011. The credit facility bears interest at LIBOR plus a spread ranging from 325
basis points to 375 basis points, based on a fixed charge coverage ratio. In addition to the fixed
charge coverage ratio, the revolving credit facility includes a total liabilities to tangible net
worth requirement, a minimum customer receivables cash recovery percentage requirement, a net
capital expenditures limit and combined portfolio performance covenants. The Company was in
compliance with the covenants, as amended, at January 31, 2010. Additionally, the agreement
contains cross-default provisions, such that, any default under another credit facility of the
Company or its VIE would result in a default under this agreement, and any default under this
agreement would result in a default under those agreements. The asset-based revolving credit
facility restricts the amount of dividends the Company can pay and is secured by the assets of the
Company not otherwise encumbered.
The 2002 Series A program functions as a revolving credit facility to fund the transfer of
eligible customer receivables to the VIE. When the outstanding balance of the facility approaches a
predetermined amount, the VIE (Issuer) is required to seek financing to pay down the outstanding
balance in the 2002 Series A variable funding note. The amount paid down on the facility then
becomes available to fund the transfer of new customer receivables or to meet required principal
payments on other series as they become due. The new financing could be in the form of additional
notes, bonds or other instruments as the market and transaction documents might allow. Given the
current state of the financial markets, especially with respect to asset-backed securitization
financing, the Company has been unable to issue medium-term notes or increase the availability
under the existing variable funding note program. The 2002 Series A program consists of $200
million that is renewable annually, at the Companys option, until August 2011 and bears interest
at commercial paper rates plus a spread of 250 basis points. In connection with amendments,
discussed in Note 13, to the 2002 Series A facility, the VIE
- 14 -
agreed to reduce the total available commitment to $170 million in April 2010 and to $130
million in April 2011.
The 2006 Series A program, which was consummated in August 2006, is non-amortizing for the
first four years and officially matures in April 2017. However, it is expected that the scheduled
$7.5 million principal payments, which begin in September 2010, will retire the bonds prior to that
date. The VIEs borrowing agreements contain certain covenants requiring the maintenance of various
financial ratios and customer receivables performance standards. The Issuer was in compliance with
the requirements of the agreements, as amended, as of January 31, 2010. The VIEs debt is secured
by the Customer accounts receivable that are transferred to it, which are included in Customer
accounts receivable and Long-term portion of customer accounts receivable on the consolidated
balance sheet. The investors and the securitization trustee have no recourse to the Companys other
assets for failure of the individual customers of the Company and the VIE to pay when due.
Additionally, the Company has no recourse to the VIEs assets to satisfy its obligations. The
Companys retained interests in the customer receivables collateralizing the securitization program
and the related cash flows are subordinate to the investors interests, and would not be paid if
the Issuer is unable to repay the amounts due under the 2002 Series A and 2006 Series A programs.
The ultimate realization of the retained interest is subject to credit, prepayment, and interest
rate risks on the transferred financial assets.
As of January 31, 2010, the Company had approximately $34.1 million under its asset-based
revolving credit facility, net of standby letters of credit issued, and $10.0 million under its
unsecured bank line of credit immediately available for general corporate purposes. The Company
also had $46.7 million that may become available under its asset-based revolving credit facility as
it grows the balance of eligible customer receivables and its total eligible inventory balances.
The Companys assetbased revolving credit facility provides it the ability to utilize letters
of credit to secure its obligations as the servicer under its VIEs asset-backed securitization
program, deductibles under the Companys property and casualty insurance programs and international
product purchases, among other acceptable uses. At January 31, 2010, the Company had outstanding
letters of credit of $23.7 million under this facility. The maximum potential amount of future
payments under these letter of credit facilities is considered to be the aggregate face amount of
each letter of credit commitment, which totals $23.7 million as of January 31, 2010.
Interest expense incurred on notes payable and long-term debt totaled $25.9, $24.1 and $20.7
million for the years ended January 31, 2008, 2009 and 2010, respectively. The Company capitalized
borrowing costs of $0.3 million, $0.2 million and $0.1 million during the years ended January 31,
2008, 2009 and 2010, respectively. Aggregate maturities of long-term debt as of January 31 in the
year indicated are as follows (in thousands):
2011 |
$ | 64,055 | ||
2012 |
365,665 | |||
2013 |
22,584 | |||
Total |
$ | 452,304 | ||
See Note 13 for additional information related to the Companys and the VIEs long-term
debt.
The Company held interest rate swaps with notional amounts totaling $40.0 million as of
January 31, 2010, with terms extending through July 2011 for the purpose of hedging against
variable interest rate risk related to the variability of cash flows in the interest payments on a
portion of its variable-rate debt, based on changes in the benchmark one-month LIBOR interest rate.
Changes in the cash flows of the interest rate swaps are expected to exactly offset the changes in
cash flows (changes in base interest rate payments) attributable to fluctuations in the LIBOR
interest rate. For derivative instruments that are designated and qualify as a cash flow hedge,
the effective portion of the gain or loss on the derivative is reported as a component of other
comprehensive income (loss) and reclassified into earnings in the same period or periods during
which the hedged transaction affects earnings. Gains and losses on the derivative representing
either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are
recognized in current earnings.
- 15 -
For information on the location and amounts of derivative fair values in the financial
statements, see the tables presented below (in thousands):
Fair Values of Derivative Instruments | ||||||||||||||||
Liability Derivatives | ||||||||||||||||
January 31, 2009 | January 31, 2010 | |||||||||||||||
Balance | Balance | |||||||||||||||
Sheet | Fair | Sheet | Fair | |||||||||||||
Location | Value | Location | Value | |||||||||||||
Derivatives designated as
hedging instruments under |
||||||||||||||||
Interest rate contracts |
Other liabilities | $ | | Other liabilities | $ | 337 | ||||||||||
Total derivatives
designated as hedging
instruments |
$ | | $ | 337 | ||||||||||||
Location of | ||||||||||||||||||||||||||||||||
Gain or | Amount of | |||||||||||||||||||||||||||||||
(Loss) | Gain or (Loss) | |||||||||||||||||||||||||||||||
Amount of | Recognized | Recognized in | ||||||||||||||||||||||||||||||
Location of | Gain or (Loss) | in | Income on | |||||||||||||||||||||||||||||
Amount of | Gain or | Reclassified | Income on | Derivative | ||||||||||||||||||||||||||||
Gain or (Loss) | (Loss) | from | Derivative | (Ineffective | ||||||||||||||||||||||||||||
Recognized | Reclassified | Accumulated | (Ineffective | Portion | ||||||||||||||||||||||||||||
in OCI on | from | OCI into | Portion | and Amount | ||||||||||||||||||||||||||||
Derivative | Accumulated | Income | and Amount | Excluded from | ||||||||||||||||||||||||||||
Derivatives in | (Effective | OCI into | (Effective | Excluded | Effectiveness | |||||||||||||||||||||||||||
Cash Flow | Portion) | Income | Portion) | from | Testing) | |||||||||||||||||||||||||||
Hedging | Year Ended January 31, | (Effective | Year Ended January 31 | Effectiveness | Year Ended January 31 | |||||||||||||||||||||||||||
Relationships | 2009 | 2010 | Portion) | 2009 | 2010 | Testing) | 2009 | 2010 | ||||||||||||||||||||||||
Interest Rate |
Interest income/ | Interest income/ | ||||||||||||||||||||||||||||||
Contracts |
$ | | $ | (218 | ) | (expense) | $ | | $ | (308 | ) | (expense) | $ | | $ | | ||||||||||||||||
Total |
$ | | $ | (218 | ) | $ | | $ | (308 | ) | $ | | $ | | ||||||||||||||||||
6. Income Taxes
Deferred income taxes reflect the net effects of temporary timing differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Companys net deferred tax assets result
primarily from differences between financial and tax methods of accounting for income recognition
on service contracts and residual interests, capitalization of costs in inventory, amortization of
goodwill, deductions for depreciation and doubtful accounts (in
thousands).
January 31, | ||||||||
2009 | 2010 | |||||||
Deferred Tax Assets |
||||||||
Allowance for doubtful accounts and warranty and
insurance cancellations |
$ | 10,311 | $ | 12,849 | ||||
Deferred revenue |
2,059 | 2,031 | ||||||
Stock-based compensation |
1,654 | 2,098 | ||||||
Property and equipment |
1,153 | | ||||||
Inventories |
802 | 559 | ||||||
Goodwill |
| 946 | ||||||
Straight-line rent accrual |
1,960 | 2,209 | ||||||
Margin tax |
837 | 939 | ||||||
Accrued reserves and other |
925 | 2,146 | ||||||
Total deferred tax assets |
19,701 | 23,777 | ||||||
Deferred Tax Liabilities |
||||||||
Sales tax receivable |
(1,241 | ) | (1,416 | ) | ||||
Property and equipment |
| (670 | ) | |||||
Goodwill |
(1,598 | ) | | |||||
- 16 -
January 31, | ||||||||
2009 | 2010 | |||||||
Other |
(634 | ) | (969 | ) | ||||
Total deferred tax liabilities |
(3,473 | ) | (3,055 | ) | ||||
Net Deferred Tax Asset |
$ | 16,228 | $ | 20,722 | ||||
During fiscal year 2010, as a result of the goodwill impairment charge taken during the
third quarter, the Company recorded an increase in current tax expense and a decrease in deferred
tax expense of $2.5 million.
The significant components of income taxes were as follows (in thousands):
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 22,279 | $ | 26,042 | $ | 6,376 | ||||||
State |
(33 | ) | 1,636 | 1,217 | ||||||||
Total current |
22,246 | 27,678 | 7,593 | |||||||||
Deferred: |
||||||||||||
Federal |
300 | (4,015 | ) | (3,441 | ) | |||||||
State |
29 | (39 | ) | (41 | ) | |||||||
Total deferred |
329 | (4,054 | ) | (3,482 | ) | |||||||
Total tax provision |
$ | $22,575 | $ | 23,624 | $ | 4,111 | ||||||
A reconciliation of the statutory tax rate and the effective tax rate for each of the
periods presented in the statements of operations is as follows:
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
U.S. Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local income taxes, net of federal benefit |
0.0 | 1.8 | 10.2 | |||||||||
Non-deductible entertainment,
non-deductible stock-based compensation,
non-deductible goodwill impairment, tax-free interest
income and other |
0.1 | 0.3 | 6.0 | |||||||||
Effective tax rate |
35.1 | % | 37.1 | % | 51.2 | % | ||||||
Income taxes were impacted during the years ended January 31, 2009 and 2010, by the
replacement of the existing franchise tax in Texas with a taxed based on margin. Taxable margin is
generally defined as total federal tax revenues minus the greater of (a) cost of goods sold or (b)
compensation. The tax rate to be paid by retailer and wholesalers is 0.5% on taxable margin. The
increase in the effective rate on permanent differences and other shown above is a function of
those line items increasing in absolute dollars in the year ended January 31, 2010, while the
Companys pre-tax income declined. During the fourth quarter of the fiscal year ended January 31,
2010, the Company recorded a tax benefit related to litigation costs that had been accrued in prior
quarters of the fiscal year ended January 31, 2010. The resulting impact was approximately a $1.6
million benefit to the provision for income taxes.
7. Leases
The Company leases certain of its facilities and operating equipment from outside parties and
from a stockholder/officer. The real estate leases generally have initial lease periods of from 5
to 15 years with renewal options at the discretion of the Company; the equipment leases generally
provide for initial lease terms of three to seven years and provide for a purchase right by the
Company at the end of the lease term at the fair market value of the equipment.
The following is a schedule of future minimum base rental payments required under the
operating leases that have initial non-cancelable lease terms in excess of one year (in thousands):
Third | Related | |||||||||||
Year Ended January 31, | Party | Party | Total | |||||||||
2011 |
$ | 23,431 | 207 | $ | 23,638 | |||||||
2012 |
23,097 | | 23,097 |
- 17 -
Third | Related | |||||||||||
Year Ended January 31, | Party | Party | Total | |||||||||
2013 |
20,138 | | 20,138 | |||||||||
2014 |
18,666 | | 18,666 | |||||||||
2015 |
16,443 | | 16,443 | |||||||||
Thereafter |
55,648 | | 55,648 | |||||||||
Total |
$ | 157,423 | $ | 207 | $ | 157,630 | ||||||
Total lease expense was approximately $19.3 million, $22.6 million and $23.9 million for
the years ended January 31, 2008, 2009 and 2010, respectively, including approximately $0.2
million, $0.2 million and $0.2 million paid to related parties, respectively.
Certain of our leases are subject to scheduled minimum rent increases or escalation
provisions, the cost of which is recognized on a straight-line basis over the minimum lease term.
Tenant improvement allowances, when granted by the lessor, are deferred and amortized as
contra-lease expense over the term of the lease.
8. Share-Based Compensation
The Company has an Incentive Stock Option Plan and a Non-Employee Director Stock Option Plan
to provide for grants of stock options to various officers, employees and directors, as applicable,
at prices equal to the market value on the date of the grant. The options vest over one to five
year periods (depending on the grant) and expire ten years after the date of grant. The shares
available under the Incentive Stock Option Plan are 3,859,767 and the shares available under the
Non-Employee Director Stock Option Plan are 600,000. On June 2, 2009, the Company issued seven
non-employee directors 70,000 total options to acquire the Companys stock at $16.93 per share. At
January 31, 2010, the Company had 120,000 options available for grant under the Non-Employee
Director Stock Option Plan.
The Companys Employee Stock Purchase Plan is available to a majority of the employees of the
Company and its subsidiaries, subject to minimum employment conditions and maximum compensation
limitations. At the end of each calendar quarter, employee contributions are used to acquire shares
of common stock at 85% of the lower of the fair market value of the common stock on the first or
last day of the calendar quarter. During the years ended January 31, 2008, 2009 and 2010, the
Company issued 13,316, 21,774 and 27,110 shares of common stock, respectively, to employees
participating in the plan, leaving 1,174,005 shares remaining reserved for future issuance under
the plan as of January 31, 2010.
A summary of the Companys Incentive Stock Option Plan activity during the year ended January
31, 2010 is presented below (shares in thousands):
Weighted | ||||||||||||||||
Weighted | Average | |||||||||||||||
Average | Remaining | Aggregate | ||||||||||||||
Exercise | Contractual | Intrinsic | ||||||||||||||
Shares | Price | Life (in years) | Value | |||||||||||||
Outstanding, beginning of year |
1,984 | $ | 16.02 | |||||||||||||
Granted |
453 | $ | 6.38 | |||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(74 | ) | (13.49 | ) | ||||||||||||
Outstanding, end of year |
2,363 | 14.26 | 6.6 | $ | 0.00 | |||||||||||
Exercisable, end of year |
1,331 | 17.10 | 4.8 | $ | 0.00 | |||||||||||
During the years ended January 31, 2008, 2009 and 2010, the Company recognized total
compensation cost for share-based compensation of approximately $2.7 million, $3.2 million and $2.4
million, respectively, and recognized tax benefits related to that compensation cost of
approximately $0.5 million, $0.7 million, and $0.4 million, respectively.
The assumptions used in stock pricing model and valuation information for the years ended
January 31, 2008, 2009 and 2010 are as follows:
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Weighted average risk free interest rate |
3.6 | % | 2.5 | % | 2.8 | % | ||||||
Weighted average expected lives in years |
6.4 | 6.4 | 6.5 | |||||||||
Weighted average volatility |
45.0 | % | 50.0 | % | 59.4 | % |
- 18 -
Year Ended January 31, | ||||||||||||
2008 | 2009 | 2010 | ||||||||||
Expected dividends |
| | | |||||||||
Weighted average grant date fair value of options granted
during the period |
$ | 9.94 | $ | 3.33 | $ | 3.77 | ||||||
Weighted average fair value of options vested during the
period (1) |
$ | 8.17 | $ | 9.13 | $ | 7.59 | ||||||
Total fair value of options vesting during the period (1) |
$ | 2.3 | million | $ | 2.4 | million | $ | 2.2 | million | |||
Intrinsic value of options exercised during the period |
$ | 3.1 | million | $ | 0.2 | million | $ | 0.0 | million |
(1) | Does not include pre-IPO options that were valued using the minimum value option-pricing method. |
The Company used a shortcut method to compute the weighted average expected life for
the stock options granted in the years ended January 31, 2009 and 2010. The shortcut method is an
average based on the vesting period and the contractual term. The Company uses the shortcut method
due to the lack of adequate historical experience or other comparable information. The weighted
average volatility for the years ended January 31, 2009 and 2010 was calculated using the Companys
historical volatility. As of January 31, 2010, the total compensation cost related to non-vested
awards not yet recognized totaled $5.7 million and is expected to be recognized over a weighted
average period of 3.3 years.
9. Significant Vendors
As shown in the table below, a significant portion of the Companys merchandise purchases for
years ended January 31, 2008, 2009 and 2010 were made from six vendors:
Year Ended January 31, | ||||||||||||
Vendor | 2008 | 2009 | 2010 | |||||||||
A |
13.0 | % | 19.3 | % | 12.6 | % | ||||||
B |
13.1 | 11.5 | 10.7 | |||||||||
C |
7.5 | 9.9 | 10.2 | |||||||||
D |
5.9 | 9.6 | 9.3 | |||||||||
E |
9.1 | 6.6 | 8.9 | |||||||||
F |
5.8 | 6.4 | 6.6 | |||||||||
Totals |
54.4 | % | 63.3 | % | 58.3 | % | ||||||
10. Related Party Refinancing Transactions
The Company leases one of its stores from Thomas J. Frank, Jr. Mr. Frank served as the
Companys Chief Executive Officer and Chairman of the Board until June, 2009. The terms of the
lease were entered into prior to becoming a publicly held company. The lease provides for base
monthly rental payments of $17,235 plus escrows for taxes, insurance and common area maintenance
expenses of increasing monthly amounts based on expenditures by the management company operating
the shopping center of which this store is a part through January 31, 2011. We also have an option
to renew the lease for two additional five-year terms. Mr. Frank received total payments under this
lease of $206,820 in fiscal 2008, 2009 and 2010, respectively. Based on market lease rates for
comparable retail space in the area, we believe that the terms of this lease are no less favorable
to us than we could have obtained in an arms length transaction at the date of the lease
commencement.
The Company engaged the services of Direct Marketing Solutions, Inc. (DMS), for a substantial
portion of its direct mail advertising. DMS, Inc. is partially owned (less than 50%) by SF Holding
Corp., members of the Stephens family, Jon E. M. Jacoby, and Douglas H. Martin. SF Holding Corp.
and the members of the Stephens family are significant shareholders of the Company, and Messrs.
Jacoby and Martin are members of the Companys Board of Directors. The fees the Company paid to DMS
during the fiscal years ended 2008, 2009 and 2010, amounted to approximately $2.5 million, $4.0
million and $2.4 million, respectively.
11. Benefit Plans
The Company has established a defined contribution 401(k) plan for eligible employees who are
at least 21 years old and have completed at least one-year of service. Employees may contribute up
to 20% of their eligible pretax compensation to the plan. Historically, the Company has matched
100% of the first 3% of the employees contributions and 50% of the next 2% of the employees
contributions.
- 19 -
Effective November 1, 2009, the Company changed its matching contribution to match only 100%
of the first 3% of employees contributions. At its option, the Company may make supplemental
contributions to the Plan, but has not made such contributions in the past three years. The
matching contributions made by the Company totaled $2.1, $1.8 and $1.3 million during the years
ended January 31, 2008, 2009 and 2010, respectively.
12. Contingencies
Legal Proceedings. On November 24, 2009, the Company settled litigation filed against it on
May 28, 2009, by the Texas Attorney General in the Texas State District Court of Harris County,
Texas, alleging that the Company engaged in unlawful and deceptive practices in violation of the
Texas Deceptive Trade Practices-Consumer Protection Act. Under the terms of the settlement with the
Texas Attorney General, it did not admit and continues to deny any wrongdoing. As part of the
settlement agreement, the Company made two cash payments, one in the amount of $2.5 million on
December 17, 2009 and a second payment in the amount of $2.0 million made on February 18, 2010,
both to the Texas Attorney General for distribution to consumers as restitution for claims the
customers have. The Company also paid $250,000 to the Texas Attorney General in attorneys fees,
and agreed to and did donate $100,000 to the University of Houston Law Center for use in its
consumer protection programs. This settlement caps the Companys financial exposure under this
litigation, in connection with the all of the allegations contained in the suit. These costs are
included in Selling, general and administrative costs in the statement of operations for the year
ended January 31, 2010.
The Company is also involved in routine litigation and claims incidental to its business from
time to time, and, as required, has accrued its estimate of the probable costs for the resolution
of these matters. These estimates have been developed in consultation with counsel and are based
upon an analysis of potential results, assuming a combination of litigation and settlement
strategies. It is possible, however, that future results of operations for any particular period
could be materially affected by changes in the Companys assumptions or the effectiveness of its
strategies related to these proceedings. However, the results of these proceedings cannot be
predicted with certainty, and changes in facts and circumstances could impact the Companys
estimate of reserves for litigation. As of January 31, 2010, the Company has recorded approximately
$2.0 million in litigation reserves, inclusive of the Attorney General settlement, that reflect its
best estimate of what it expects will be required to settle outstanding litigation.
Insurance. Because of its inventory, vehicle fleet and general operations, the Company has
purchased insurance covering a broad variety of potential risks. The Company purchases insurance
policies covering general liability, workers compensation, real property, inventory and employment
practices liability, among others. Additionally, the Company has umbrella policies with an
aggregate limit of $50.0 million. The Company has retained a portion of the risk under these
policies and its group health insurance program. See additional discussion under Note 1. The
Company has a $1.7 million letter of credit outstanding supporting its obligations under the
property and casualty portion of its insurance program.
Repair Service Agreement Obligations. The Company sells repair service agreements under which
it is the obligor for payment of qualifying claims. The Company is responsible for administering
the program, including setting the pricing of the agreements sold and paying the claims. The
pricing is set based on historical claims experience and expectations about future claims. While
the Company is unable to estimate maximum potential claim exposure, it has a history of overall
profitability upon the ultimate resolution of agreements sold. The revenues related to the
agreements sold are deferred at the time of sales and recorded in revenues in the statement of
operations over the life of the agreements. The amounts deferred are reflected on the face of the
consolidated balance sheet in Deferred revenues and allowances, see also Note 1 for additional
discussion.
13. Subsequent Events
As a result of the declines in our profitability beginning in the quarter ended October 31,
2009, due to the slowdown in the economic conditions in the Companys markets, it determined that
there was a reasonable likelihood that it would trigger the default provisions of its credit
facilities. Based on that expectation, the Company began working with its and its VIEs lenders to
amend the covenants in the credit facilities. The Company completed the necessary amendments in
February and March, 2010. The Company and its VIE amended the covenants, among other terms, in
their credit facilities. The revised covenant calculations include both the operating results and
assets and liabilities of the Company and the
- 20 -
Companys VIE, effective January 31, 2010, for all financial covenant calculations. The
completed agreements resulted in the following changes:
| Fixed charge coverage ratio requirement reduced to 1.1 to 1.0 for the twelve month periods ended January 31, 2010, and April 30, 2010, before returning to a requirement of 1.3 to 1.0 beginning with the quarter ending July 31, 2010, |
| The leverage ratio was replaced with a maximum total liabilities to tangible net worth requirement, beginning as of January 31, 2010, with a required maximum of 2.00 to 1.00 at January 31, 2010, declining to 1.75 to 1.00 as of July 31, 2010 and then to 1.50 to 1.00 as of April 30, 2011 and each fiscal quarter thereafter, |
| The interest rate on our revolving credit facility increased by 100 basis points to LIBOR plus a spread ranging from 325 basis points to 375 basis points, |
| We will be required to pay a fee, as servicer of the VIEs receivables, equal to the following rates multiplied times the total available borrowing commitment under the VIEs revolving credit facility on the dates shown: |
o | 50 basis points on May 1, 2010, | ||
o | 100 basis points on August 1, 2010, | ||
o | 110 basis points on November 1, 2010, | ||
o | 115 basis points on February 1, 2011, | ||
o | 115 basis point on May 1, 2011, and | ||
o | 123 basis points on August 1, 2011, |
| The total available commitments under the VIEs revolving credit facility will be reduced from the current level of $200 million to $170 million in April 2010 and then to $130 million in April 2011, |
| The Company will use the proceeds from any capital raising activity to further reduce the commitments and debt outstanding under the VIEs debt facilities, |
| The maturity date on the VIEs revolving credit facility was reduced from September 2012 to August 2011, and |
| The Company may be required to complete certain additional tasks as servicer of the VIEs receivables, so long as commitments remain outstanding under the VIEs revolving credit facility. |
The Company expects, based on current facts and circumstances, that it will be in compliance
with the above covenants through fiscal 2011.
14. Segment Reporting
Financial information by segment is presented in the following tables for fiscal years ended
January 31, 2010, 2009 and 2008 (in thousands):
Year Ended January 31, 2010 | ||||||||||||
Retail | Credit | Total | ||||||||||
Revenues |
||||||||||||
Product sales |
$ | 667,401 | $ | | $ | 667,401 | ||||||
Repair service agreement
commissions (net) (a) |
44,119 | (10,847 | ) | 33,272 | ||||||||
Service revenues |
22,115 | | 22,115 | |||||||||
Total net sales |
733,635 | (10,847 | ) | 722,788 | ||||||||
Finance charges and other |
532 | 152,265 | 152,797 | |||||||||
- 21 -
Year Ended January 31, 2010 | ||||||||||||
Retail | Credit | Total | ||||||||||
Total revenues |
734,167 | 141,418 | 875,585 | |||||||||
Cost and expenses |
||||||||||||
Costs of goods and parts sold, including
warehousing and occupancy costs |
544,700 | | 544,700 | |||||||||
Selling, general and administrative expense (b) |
180,911 | 61,019 | 241,930 | |||||||||
Depreciation and amortization |
12,288 | 1,724 | 14,012 | |||||||||
Goodwill impairment |
| 9,617 | 9,617 | |||||||||
Provision for bad debts |
97 | 36,746 | 36,843 | |||||||||
Total cost and expenses |
737,996 | 109,106 | 847,102 | |||||||||
Operating income (loss) |
(3,829 | ) | 32,312 | 28,483 | ||||||||
Interest (income) expense, net |
| 20,571 | 20,571 | |||||||||
Other (income) expense, net |
(123 | ) | | (123 | ) | |||||||
Segment income (loss) before income taxes |
$ | (3,706 | ) | $ | 11,741 | $ | 8,035 | |||||
Total assets |
$ | 195,648 | $ | 696,818 | $ | 892,466 | ||||||
Property and equipment additions |
$ | 9,808 | $ | 447 | $ | 10,255 | ||||||
Year Ended January 31, 2009 | ||||||||||||
Retail | Credit | Total | ||||||||||
Revenues |
||||||||||||
Product sales |
$ | 743,729 | $ | | $ | 743,729 | ||||||
Repair service agreement
commissions (net) (a) |
50,778 | (10,579 | ) | 40,199 | ||||||||
Service revenues |
21,121 | 21,121 | ||||||||||
Total net sales |
815,628 | (10,579 | ) | 805,049 | ||||||||
Finance charges and other |
2,161 | 152,331 | 154,492 | |||||||||
Total revenues |
817,789 | 141,752 | 959,541 | |||||||||
Cost and expenses |
||||||||||||
Costs of goods and parts sold, including
warehousing and occupancy costs |
590,061 | | 590,061 | |||||||||
Selling, general and administrative expense (b) |
182,703 | 58,928 | 241,631 | |||||||||
Depreciation and amortization |
11,218 | 1,323 | 12,541 | |||||||||
Goodwill impairment |
| | | |||||||||
Provision for bad debts |
160 | 27,792 | 27,952 | |||||||||
Total cost and expenses |
784,142 | 88,043 | 872,185 | |||||||||
Operating income |
33,647 | 53,709 | 87,356 | |||||||||
Interest (income) expense, net |
| 23,597 | 23,597 | |||||||||
Other (income) expense, net |
117 | | 117 | |||||||||
Segment income before income taxes |
$ | 33,530 | $ | 30,112 | $ | 63,642 | ||||||
Total assets |
$ | 234,672 | $ | 722,894 | $ | 957,566 | ||||||
Property and equipment additions |
$ | 17,446 | $ | 151 | $ | 17,597 | ||||||
- 22 -
Year Ended January 31, 2008 | ||||||||||||
Retail | Credit | Total | ||||||||||
Revenues |
||||||||||||
Product sales |
$ | 671,571 | $ | | $ | 671,571 | ||||||
Repair service agreement
commissions (net) (a) |
44,735 | (8,311 | ) | 36,424 | ||||||||
Service revenues |
22,997 | | 22,997 | |||||||||
Total net sales |
739,303 | (8,311 | ) | 730,992 | ||||||||
Finance charges and other |
950 | 138,588 | 139,538 | |||||||||
Total revenues |
740,253 | 130,277 | 870,530 | |||||||||
Cost and expenses |
||||||||||||
Costs of goods and parts sold, including
warehousing and occupancy costs |
517,166 | | 517,166 | |||||||||
Selling, general and administrative expense (b) |
179,354 | 54,279 | 233,633 | |||||||||
Depreciation and amortization |
11,331 | 797 | 12,128 | |||||||||
Goodwill impairment |
| | | |||||||||
Provision for bad debts |
190 | 19,275 | 19,465 | |||||||||
Total cost and expenses |
708,041 | 74,351 | 782,392 | |||||||||
Operating income |
32,212 | 55,926 | 88,138 | |||||||||
Interest (income) expense, net |
| 24,839 | 24,839 | |||||||||
Other (income) expense, net |
(943 | ) | | (943 | ) | |||||||
Segment income before income taxes |
$ | 33,155 | $ | 31,087 | $ | 64,242 | ||||||
Total assets |
$ | 200,686 | $ | 634,813 | $ | 835,499 | ||||||
Property and equipment additions |
$ | 17,936 | $ | 1,019 | $ | 18,955 | ||||||
(a) | Retail repair service agreement commissions exclude repair service agreement cancellations that are the result of consumer credit account charge-offs. These amounts are reflected in repair service agreement commissions for the credit segment. | |
(b) | Selling, general and administrative expenses include the direct expenses of the retail and credit operations, allocated overhead expenses and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period. The amount of overhead allocated to each segment was approximately $7.2 million, $9.4 million and $9.0 million for the fiscal years ended January 31, 2010, 2009 and 2008, respectively. The amount of reimbursement made to the retail segment by the credit segment was approximately $18.6 million, $17.4 million and $15.2 million for the fiscal years ended January 31, 2010, 2009 and 2008, respectively. |
- 23 -