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EX-21 - EXHIBIT 21 - CONNS INCa6408727ex21.htm
EX-31.2 - EXHIBIT 31.2 - CONNS INCa6408727ex31-2.htm
EX-12.1 - EXHIBIT 12.1 - CONNS INCa6408727ex12-1.htm
EX-31.1 - EXHIBIT 31.1 - CONNS INCa6408727ex31-1.htm
EX-10.23 - EXHIBIT 10.23 - CONNS INCa6408727ex10-23.htm
EX-10.22 - EXHIBIT 10.22 - CONNS INCa6408727ex10-22.htm
EX-10.12.10 - EXHIBIT 10.12.10 - CONNS INCa6408727ex10-1210.htm
EX-99.6 - EXHIBIT 99.6 - CONNS INCa6408727ex99-6.htm
EX-32.1 - EXHIBIT 32.1 - CONNS INCa6408727ex32-1.htm
EX-99.5 - EXHIBIT 99.5 - CONNS INCa6408727ex99-5.htm
EX-99.2 - EXHIBIT 99.2 - CONNS INCa6408727ex99-2.htm
EX-99.1 - EXHIBIT 99.1 - CONNS INCa6408727ex99-1.htm
EX-99.4 - EXHIBIT 99.4 - CONNS INCa6408727ex99-4.htm
EX-99.3 - EXHIBIT 99.3 - CONNS INCa6408727ex99-3.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549
 

 
FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 31, 2010
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 incorporation or organization)
(I.R.S. Employer Identification Number)
 
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)

NONE
(Former name, former address and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes [ x ]   No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes [   ]   No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [   ]
Accelerated filer [ x ]
Non-accelerated filer [   ]
smaller reporting company [   ]
 
 
(Do not check if a smaller reporting company)  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [   ]  No [ x ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 24, 2010:
 
Class
 
Outstanding
Common stock, $.01 par value per share
 
22,489,638
 
 
 

 

TABLE OF CONTENTS
 
 
Page No.
 
         
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    54  
           
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    54  
           
   
55
 

 
 

 
 
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
Assets
 
January 31,
2010
   
July 31,
2010
 
         
(unaudited)
 
Cash and cash equivalents
  $ 12,247     $ 8,466  
(includes balances of VIE of $104 and $104, respectively)
               
Other accounts receivable, net of allowance of $50 and $61, respectively
    23,254       28,753  
Customer accounts receivable, net of allowance of $19,204 and $18,479 respectively
               
(includes balances of VIE of $279,948 and $258,015, respectively)
    368,304       355,861  
Inventories
    63,499       99,106  
Deferred income taxes
    15,237       13,830  
Federal income taxes recoverable     8,148       -  
Prepaid expenses and other assets
    8,050       7,785  
      Total current assets
    498,739       513,801  
Long-term portion of customer accounts receivable, net of
               
allowance of $16,598 and $15,868, respectively     318,341       305,584  
(includes balances of VIE of $241,971 and $221,562, respectively)
               
Property and equipment
               
Land
    7,682       7,264  
Buildings
    10,480       10,314  
Equipment and fixtures
    23,797       24,640  
Transportation equipment
    1,795       1,684  
Leasehold improvements
    91,299       91,522  
Subtotal
    135,053       135,424  
Less accumulated depreciation
    (75,350 )     (81,354 )
Total property and equipment, net
    59,703       54,070  
 
    5,485       6,364  
Other assets, net (includes balances of VIE of $7,106 and $7,569, respectively) 
    10,198       12,518  
Total assets
  $ 892,466     $ 892,337  
Liabilities and Stockholders' Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 64,055     $ 122,664  
(includes balances of VIE of $63,900 and $122,500, respectively)
               
Accounts payable
    39,944       62,115  
Accrued compensation and related expenses
    5,697       5,245  
Accrued expenses
    31,685       26,726  
Income taxes payable
    2,640       1,612  
Deferred revenues and allowances
    14,596       13,210  
Total current liabilities
    158,617       231,572  
Long-term debt
    388,249       307,073  
(includes balances of VIE of $282,500 and $197,500, respectively)
               
Other long-term liabilities
    5,195       4,794  
Fair value of interest rate swaps
    337       240  
Deferred gains on sales of property
    905       961  
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;
               
24,194,555 and 24,212,843 shares issued at January 31, 2010 and July 31, 2010, respectively)     242       242  
Additional paid-in capital
    106,226       107,465  
Accumulated other comprehensive loss     (218     (155 )
Retained earnings
    269,984       277,216  
Treasury stock, at cost, 1,723,205 shares
    (37,071 )     (37,071 )
Total stockholders' equity
    339,163       347,697  
Total liabilities and stockholders' equity
  $ 892,466     $ 892,337  
                 
 
See notes to consolidated financial statements.

 
1

 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
(in thousands, except earnings per share)
 
                         
   
Three Months Ended
July 31,
   
Six Months Ended
July 31,
 
   
2009
   
2010
   
2009
   
2010
 
   
(As adjusted
         
(As adjusted
       
Revenues
 
see Note 1)
         
see Note 1)
       
Product sales
  $ 175,389     $ 166,378     $ 360,206     $ 316,743  
Repair service agreement commissions, net
    8,859       8,341       18,649       16,258  
Service revenues
    6,052       4,183       11,596       8,940  
                                 
Total net sales
    190,300       178,902       390,451       341,941  
                                 
Finance charges and other
    40,128       34,763       79,828       69,243  
                                 
Total revenues
    230,428       213,665       470,279       411,184  
                                 
Cost and expenses
                               
Cost of goods sold, including warehousing
                               
and occupancy costs
    140,761       130,276       286,631       244,433  
Cost of parts sold, including warehousing
                               
and occupancy costs
    2,797       2,120       5,384       4,492  
Selling, general and administrative expense
    64,979       63,478       127,717       124,221  
Provision for bad debts
    8,026       9,048       13,670       15,322  
                                 
Total cost and expenses
    216,563       204,922       433,402       388,468  
                                 
Operating income
    13,865       8,743       36,877       22,716  
Interest expense, net
    5,342       5,875       10,346       10,660  
Other (income) expense, net
    (13 )     12       (21 )     183  
                                 
Income before income taxes
    8,536       2,856       26,552       11,873  
                                 
Provision for income taxes
    3,312       1,171       9,972       4,641  
                                 
Net income
  $ 5,224     $ 1,685     $ 16,580     $ 7,232  
                                 
Earnings per share
                               
Basic
  $ 0.23     $ 0.07     $ 0.74     $ 0.32  
Diluted
  $ 0.23     $ 0.07     $ 0.73     $ 0.32  
Average common shares outstanding
                               
Basic
    22,454       22,484       22,450       22,479  
Diluted
    22,660       22,488       22,675       22,483  
                                 
 
See notes to consolidated financial statements.

 
2

 
 
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
Six Months Ended July 31, 2010
 
(unaudited)
 
(in thousands, except descriptive shares)
 
                                           
                     
Other
                   
               
Additional
   
Compre-
                   
   
Common Stock
   
Paid-in
   
hensive
   
Retained
   
Treasury
       
   
Shares
   
Amount
   
Capital
   
Loss
   
Earnings
   
Stock
   
Total
 
                                           
Balance January 31, 2010
    24,194     $ 242     $ 106,226     $ (218 )   $ 269,984     $ (37,071 )   $ 339,163  
                                                         
Issuance of shares of common
                                                       
stock under Employee
                                                       
Stock Purchase Plan
    19       -       93                               93  
                                                         
Stock-based compensation
                    1,146                               1,146  
                                                         
Net income                                     7,232               7,232  
                                                         
Adjustment of fair value of
                                                       
interest rate swaps
                                                       
net of tax of $34                             63                       63  
Other comprehensive income
                            63                       63  
Total comprehensive income
                                                    7,295  
                                                         
Balance July 31, 2010
    24,213     $ 242     $ 107,465     $ (155 )   $ 277,216     $ (37,071 )   $ 347,697  
                                                         
 
See notes to consolidated financial statements.

 
3

 

CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
 
   
Six Months Ended
July 31,
 
   
2009
   
2010
 
   
(As adjusted
       
Cash flows from operating activities
 
see Note 1)
       
Net income  
  $ 16,580     $ 7,232  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    6,660       6,625  
Amortization, net
    437       1,707  
Provision for bad debts  
    13,670       15,322  
Stock-based compensation
    1,272       1,146  
Discounts and accretion on promotional credit
    (1,396 )     (1,011 )
Provision for deferred income taxes  
    (1,522 )     840  
(Gains) losses on sales of property and equipment  
    (5 )     62  
Changes in operating assets and liabilities:
               
Customer accounts receivable
    (4,634 )     10,906  
Other accounts receivable
    10,044       (5,499 )
Inventory  
    (4,896 )     (35,607 )
Prepaid expenses and other assets   
    997       235  
Accounts payable  
    (2,551 )     22,171  
Accrued expenses  
    (10,306 )     (5,411 )
Income taxes payable  
    (8,231 )     6,804  
Deferred revenue and allowances
    (769 )     (1,586 )
Net cash provided by operating activities
    15,350       23,936  
Cash flows from investing activities
               
Purchases of property and equipment  
    (6,763 )     (1,650 )
Proceeds from sales of property  
    22       589  
Net cash used in investing activities
    (6,741 )     (1,061 )
Cash flows from financing activities
               
Proceeds from stock issued under employee benefit plans
    117       93  
Borrowings under lines of credit
    198,146       127,372  
Payments on lines of credit
    (213,444 )     (149,870 )
Increase in deferred financing costs  
    (378 )     (4,182 )
Payment of promissory notes  
    (3 )     (69 )
Net cash used in financing activities
    (15,562 )     (26,656 )
Net change in cash  
    (6,953 )     (3,781 )
Cash and cash equivalents
               
Beginning of the year  
    11,909       12,247  
End of period
  $ 4,956     $ 8,466  
                 

See notes to consolidated financial statements.
 
 
4

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
July 31, 2010

1.  Summary of Significant Accounting Policies
 
Basis of Presentation. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature, except as otherwise described herein.  Operating results for the three and six month periods ended July 31, 2010, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2011.  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 Current Report on Form 8-K filed on July 7, 2010.

The Company’s balance sheet at January 31, 2010, has been derived from the audited financial statements at that date, revised for the retrospective application of the new accounting principles discussed below, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete financial presentation.  Please see the Company’s Form 8-K filed on July 7, 2010 for a complete presentation of the audited financial statements for the fiscal year ended January 31, 2010, together with all required footnotes, and for a complete presentation and explanation of the components and presentations of the financial statements.

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 Company’s retail stores bear the “Conn’s” name, and deliver the same products and services to a common customer group. The Company’s customers generally are individuals rather than commercial accounts. All of the retail stores follow the same procedures and methods in managing their operations. The Company’s 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 below, which require the consolidation of the Company’s variable interest entity engaged in receivables securitizations, management began separately evaluating the performance of its retail and credit operations. As a result, management believes it is appropriate to disclose separate financial information of its retail and credit segments. The separate financial information is disclosed in footnote 6 – “Segment Reporting”.

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; and
 
-
a transferor’s continuing involvement, if any, in transferred financial assets;
   
and,
 
 
5

 
 
-
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 enterprise’s 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 entity’s 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 to 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, the Company’s adoption of the provisions of the new guidance, effective February 1, 2010, resulted in the Company’s VIE, which is engaged in customer receivable financing and securitization, being consolidated in the Company’s balance sheet and the Company’s 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:

 
-
For the three and six months ended July 31, 2009, Income before income taxes was increased by approximately $0.4 million and $0.2 million, respectively.
 
-
For the three and six months ended July 31, 2009, Net income was increased by approximately $0.3 million and $0.1 million, respectively.
 
-
For the three and six months ended July 31, 2009, Basic earnings per share was increased by $.01
 
-
For the three months ended July 31, 2009, Diluted earnings per share was increased by $.01. For the six months ended July 31, 2009, Diluted earnings per share was unchanged.
 
-
For the six months ended July 31, 2009, Cash flows from operating activities was increased by approximately $82.5 million.
 
-
For the six months ended July 31, 2009, Cash flows from financing activities was reduced by approximately $82.5 million.
 
Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and all of its wholly-owned subsidiaries (the Company), including the Company’s VIE. 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 Company’s balance sheet. All material intercompany transactions and balances have been eliminated in consolidation.
 
 
6

 
 
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 Company’s long-term debt and the VIE’s $170 million 2002 Series A variable funding note approximate their carrying amount based on the fact that the agreements were recently amended and the cost of the borrowings were revised to reflect current market conditions. The estimated fair value of the VIE’s $150 million 2006 Series A medium term notes was approximately $143 million and $139 million as of July 31, 2010 and January 31, 2010, respectively, based on its estimate of the rates available at these dates, for instruments with similar terms and maturities. The Company’s interest rate swaps are presented on the balance sheet at fair value.
 
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 (EPS). The Company calculates basic earnings per share by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of any stock options granted, as calculated under the treasury-stock method. The weighted average number of anti-dilutive stock options not included in calculating diluted EPS was 1.5 million and 2.7 million for the three months ended July 31, 2009 and 2010, respectively. The weighted average number of anti-dilutive stock options not included in calculating diluted EPS was 1.5 million and 2.7 million for the six months ended July 31, 2009 and 2010, respectively. The following table sets forth the shares outstanding for the earnings per share calculations:
 
The following table sets forth the shares outstanding for the earnings per share calculations:
 
   
Three Months Ended
 
   
July 31,
 
   
2009
   
2010
 
             
Common stock outstanding, net of treasury stock, beginning of period  
    22,452,045       22,480,848  
Weighted average common stock issued to employee stock purchase plan
    1,893       3,057  
Shares used in computing basic earnings per share
    22,453,938       22,483,905  
Dilutive effect of stock options, net of assumed repurchase of treasury stock
    206,360       3,679  
Shares used in computing diluted earnings per share
    22,660,298       22,487,584  
                 

   
Six Months Ended
 
   
July 31,
 
   
2009
   
2010
 
             
Common stock outstanding, net of treasury stock, beginning of period  
    22,444,240       22,471,350  
Weighted average common stock issued to employee stock purchase plan
    6,247       8,008  
Shares used in computing basic earnings per share
    22,450,487       22,479,358  
Dilutive effect of stock options, net of assumed repurchase of treasury stock
    224,085       3,241  
Shares used in computing diluted earnings per share
    22,674,572       22,482,599  
 
Customer Accounts Receivable.  Customer accounts receivable reported in the consolidated balance sheet includes receivables transferred to the Company’s 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 12 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 Company’s reage policy. Reaging a customer’s 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.
 
 
7

 
 
Interest Income on Customer Accounts Receivable.  Interest income is accrued using the Rule of 78’s 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 Company’s 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 accretes the discount amount to Finance charges and other over the term of the program. The amount of customer receivables carried on the Company’s consolidated balance sheet that were past due 90 days or more and still accruing interest was $54.8 million and $46.7 million at January 31, 2010, and July 31, 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 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 $35.8 million and $34.3 million, at January 31, 2010, and July 31, 2010, respectively. Additionally, as a result of the Company’s 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 historical net loss rates might have been higher.
 
Inventories.    Inventories consist of finished goods or parts and are valued at the lower of cost (moving weighted average method) or market.
 
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, which total approximately $1.5 million, are included in Other assets, net, on the balance sheet and will be amortized upon completion of the related financing 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 Company’s 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 January 31, 2010, and July 31, 2010.
 
Comprehensive Income.
 
Comprehensive income for the three and six months ended July 31, 2009, is as follows (in thousands):
 
   
Three
   
Six
 
   
Months
   
Months
 
   
ended
   
ended
 
             
Net income
  $ 5,224     $ 16,580  
Adjustment of fair value of interest rate swaps, net of tax of  $37 and $81
    (69 )     (150 )
Total comprehensive income
  $ 5,155     $ 16,430  
 
Subsequent Events. No material subsequent events have occurred since July 31, 2010, that required recognition or disclosure in the Company’s current period financial statements
 
Reclassifications. Certain reclassifications have been made in the prior year’s financial statements to conform to the current year’s presentation, by reclassifying the balance of construction-in-progress of approximately $0.9 million from Property and equipment – Buildings to Property and equipment – Leasehold improvements, on the consolidated balance sheet.
 
 
8

 
 
2.  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 three and six months ended July 31, 2009 and 2010 (in thousands):
 
   
Three Months ended
   
Six Months ended
 
   
July 31
   
July 31
 
   
2009
   
2010
   
2009
   
2010
 
                         
Interest income and fees on customer receivables
  $ 35,015     $ 30,236     $ 69,971     $ 60,629  
Insurance commissions
    4,981       4,311       9,611       8,148  
Other
    132       216       246       466  
Finance charges and other
  $ 40,128     $ 34,763     $ 79,828     $ 69,243  
                                 
3.  Supplemental Disclosure of Customer Receivables

The following tables present quantitative information about the receivables portfolios managed by the Company (in thousands):
 
   
Total Outstanding Balance
 
   
of Customer Receivables
   
60 Days Past Due (1)
   
Reaged (1)
 
   
January 31,
   
July 31,
   
January 31,
   
July 31,
   
January 31,
   
July 31,
 
   
2010
   
2010
   
2010
   
2010
   
2010
   
2010
 
Primary portfolio:
                                   
            Installment
  $ 555,573     $ 543,327     $ 46,758     $ 41,232     $ 93,219     $ 85,748  
            Revolving
    41,787       32,325       2,017       1,868       1,819       1,613  
Subtotal
    597,360       575,652       48,775       43,100       95,038       87,361  
Secondary portfolio:
                                               
            Installment
    138,681       130,687       24,616       20,544       49,135       42,465  
Total receivables managed
    736,041       706,339     $ 73,391     $ 63,644     $ 144,173     $ 129,826  
Allowance for uncollectible accounts
    (35,802 )     (34,346 )                                
Allowances for promotional credit programs
    (13,594 )     (10,548 )                                
Current portion of customer accounts
                                               
receivable, net
    368,304       355,861                                  
Long-term customer accounts
                                               
receivable, net
  $ 318,341     $ 305,584                                  
                                                 
Receivables transferred to the VIE
  $ 521,919     $ 479,576     $ 59,840     $ 48,542     $ 122,521     $ 103,267  
Receivables not transferred to the VIE
    214,122       226,763       13,551       15,102       21,652       26,559  
Total receivables managed
  $ 736,041     $ 706,339     $ 73,391     $ 63,644     $ 144,173     $ 129,826  
                                                 
(1)
Amounts are based on end of period balances and accounts could be represented in both the past due and reaged columns shown above.
 
 
9

 
 
               
Net Credit
               
Net Credit
 
   
Average Balances
   
Charge-offs (2)
   
Average Balances
   
Charge-offs (2)
 
   
Three Months Ended
   
Three Months Ended
   
Six Months Ended
   
Six Months Ended
 
   
July 31,
   
July 31,
   
July 31,
   
July 31,
 
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
   
2009
   
2010
 
Primary portfolio:
                                               
Installment
  $ 556,386     $ 537,333                 $ 552,956     $ 541,023              
Revolving
    31,467       34,306                   33,479       36,627              
Subtotal
    587,853       571,639     $ 4,485     $ 6,240       586,435       577,650     $ 8,401     $ 12,393  
Secondary portfolio:
                                                               
Installment
    154,225       130,958       1,915       2,008       156,983       132,814       3,604       4,100  
Total receivables managed
  $ 742,078     $ 702,597     $ 6,400     $ 8,248     $ 743,418     $ 710,464     $ 12,005     $ 16,493  
                                                                 
Receivables transferred to
                                                               
the VIE
  $ 569,494     $ 483,008     $ 5,843     $ 5,928     $ 593,048     $ 494,080     $ 11,092     $ 12,004  
Receivables not transferred to
                                                               
the VIE
    172,584       219,589       557       2,320       150,370       216,384       913       4,489  
Total receivables managed
  $ 742,078     $ 702,597     $ 6,400     $ 8,248     $ 743,418     $ 710,464     $ 12,005     $ 16,493  
                                                                 
(2)
Amounts represent total credit charge-offs, net of recoveries, on total customer receivables.
 
4.  Debt and Letters of Credit

The Company’s borrowing facilities consist of an asset-based revolving credit facility, a $10 million unsecured revolving line of credit, its VIE’s 2002 Series A variable funding note and its VIE’s 2006 Series A medium term notes. Debt consisted of the following at the periods ended (in thousands):
 
   
January 31,
   
July 31,
 
   
2010
   
2010
 
             
             
Asset-based revolving credit facility
  $ 105,498     $ 109,400  
2002 Series A Variable Funding Note
    196,400       170,000  
2006 Series A Notes
    150,000       150,000  
Unsecured revolving line of credit for $10 million maturing in September 2010
    -       -  
Other long-term debt
    406       337  
Total debt
    452,304       429,737  
Less current portion of debt
    64,055       122,664  
Long-term debt
  $ 388,249     $ 307,073  

The Company’s $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 July 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 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 a $170 million commitment that was renewed in August 2010, and is renewable annually, at the Company’s option, until August 2011 and bears interest at commercial paper rates plus a spread of 250 basis points. The total commitment under the 2002 Series A program was reduced from $200 million at January 31, 2010. Additionally, in connection with recent amendments to the 2002 Series A facility, the VIE agreed to reduce the total available commitment to $130 million in April 2011.

 
10

 
 
 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 monthly $7.5 million principal payments, which begin in September 2010, will retire the bonds prior to that date. The VIE’s 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 July 31, 2010. The VIE’s 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 Company’s 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 VIE’s assets to satisfy its obligations. The Company’s 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.

In March 2010, the Company and its VIE completed amendments to the various borrowing agreements that revised the covenant requirements as of January 31, 2010, and revised certain future covenant requirements. The revised covenant calculations include both the operating results and assets and liabilities of the Company and the VIE, effective January 31, 2010, for all financial covenant calculations.  In addition to the covenant changes, the Company, as servicer of the customer receivables, agreed to implement certain additional collection procedures if certain performance requirements were not maintained, and agreed to make fee payments to the 2002 Series A facility providers on the amount of the commitment available at specific future dates. The Company also agreed to use the proceeds from any capital raising activity it completes to further reduce the commitments and debt outstanding under the securitization program’s debt facilities. The fee payments will equal the following rates multiplied times the total available borrowing commitment under the 2002 Series A facility on the dates shown:

 
-
50 basis points on May 1, 2010,
 
-
100 basis points on August 1, 2010,
 
-
110 basis points on November 1, 2010,
 
-
115 basis points on February 1, 2011,
 
-
115 basis point on May 1, 2011, and
 
-
123 basis points on August 1, 2011.

In accordance with the schedule, the Company made a payment of approximately $0.9 million on May 1, 2010 and another payment of approximately $1.7 million on August 1, 2010.

As of July 31, 2010, the Company had approximately $57.1 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 $21.8 million that may become available under its asset-based revolving credit facility if it grows the balance of eligible customer receivables and its total eligible inventory balances.

The Company’s asset–based revolving credit facility provides it the ability to utilize letters of credit to secure its obligations as the servicer under its VIE’s asset-backed securitization program, deductibles under the Company’s property and casualty insurance programs and international product purchases, among other acceptable uses. At July 31, 2010, the Company had outstanding letters of credit of $21.7 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 $21.7 million as of July 31, 2010.

 
11

 
 
The Company held interest rate swaps with notional amounts totaling $25.0 million as of July 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. At July 31, 2010, the estimated net amount of loss that is expected to be reclassified into earnings within the next twelve months is $0.2 million.

For information on the location and amounts of derivative fair values in the statement of operation, see the tables presented below (in thousands):
 
 
Fair Values of Derivative Instruments
 
                 
 
Liability Derivatives
 
 
January 31, 2010
     
July 31, 2010
     
 
Balance
     
Balance
     
 
Sheet
 
Fair
 
Sheet
 
Fair
 
 
Location
 
Value
 
Location
 
Value
 
Derivatives designated as
               
hedging instruments under
               
Interest rate contracts
Other liabilities
  $ 337  
Other liabilities
  $ 240  
                     
Total derivatives designated
                   
as hedging instruments
    $ 337       $ 240  
                     
 
Derivatives in
 
 
Amount of
Gain or (Loss)
Recognized
in OCI on
Derivative
(Effective
Portion) 
 
Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
 
Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
 
Location of
Gain or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion
and Amount
 
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion
and Amount
Excluded from
Effectiveness
Testing)
 
Cash Flow  
Three Months Ended
 
Income
 
Three Months Ended
 
Excluded from
 
Three Months Ended
 
Hedging
 
July 31,
   
July 31,
  (Effective  
July 31,
   
July 31,
  Effectiveness  
July 31,
   
July 31,
 
Relationships
 
2009
   
2010
  Portion)  
2009
   
2010
  Testing)  
2009
   
2010
 
Interest Rate             Interest income/             Interest income/            
Contracts
  $ (69 )   $ (7 )
(expense)
  $ (75 )   $ (72 )
(expense)
  $ -     $ -  
                                                     
Total
  $ (69 )   $ (7 )     $ (75 )   $ (72 )     $ -     $ -  
 
 
12

 
 
 
Derivatives in
   
Amount of
Gain or (Loss)
Recognized
in OCI on
Derivative
(Effective
Portion) 
   
Location of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into 
   
Amount of
Gain or (Loss)
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
   
Location of
Gain or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion
and Amount
 
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion
and Amount
Excluded from
Effectiveness
Testing)
 
Cash Flow
 
Six Months Ended
 
Income
 
Six Months Ended
 
Excluded from
 
Six Months Ended
 
Hedging
 
July 31,
   
July 31,
 
(Effective
 
July 31,
   
July 31,
 
Effectiveness
 
July 31,
   
July 31,
 
Relationships  
2009
   
2010
  Portion)  
2009
   
2010
  Testing)  
2009
   
2010
 
Interest Rate
           
Interest income/
           
Interest income/
           
Contracts
  $ (150 )   $ (63 )
(expense)
  $ (92 )   $ (170 )
(expense)
  $ -     $ -  
                                                     
Total
  $ (150 )   $ (63 )     $ (92 )   $ (170 )     $ -     $ -  
 
5.  Contingencies
 
Legal Proceedings.  The Company is 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 Company’s 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 Company’s estimate of reserves for litigation.
 
Repair Service Agreement Obligations. The Company sells repair service agreements that extend the period of covered warranty service on the products the Company sells. For certain of the repair service agreements sold, the Company is the obligor for payment of qualifying claims. The Company is responsible for administering the program, including setting the pricing of the agreements sold and paying the claims. The typical term for these agreements is between 12 and 36 months. The pricing is set based on historical claims experience and expectations about future claims. While the Company is unable to estimate maximum potential claim exposure, it has a history of overall profitability upon the ultimate resolution of agreements sold. The revenues related to the agreements sold are deferred at the time of sale and recorded in revenues in the statement of operations over the life of the agreements. The agreements can be canceled at any time and any deferred revenue associated with canceled agreements is reversed at the time of cancellation. The amounts of repair service agreement revenue deferred at January 31, 2010, and July 31, 2010, were $7.3 million and $7.1 million, respectively, and are included in Deferred revenue and allowances in the accompanying consolidated balance sheets. The following table presents a reconciliation of the beginning and ending balances of the deferred revenue on the Company’s repair service agreements and the amount of claims paid under those agreements (in thousands):
 
 
13

 
 
Reconciliation of deferred revenues on repair service agreements
       
   
Six Months Ended
 
   
July 31,
 
   
2009
   
2010
 
             
Balance in deferred revenues at beginning of period
  $ 7,213     $ 7,268  
Revenues earned during the period
    (3,501 )     (3,583 )
Revenues deferred on sales of new agreements
    3,526       3,456  
Balance in deferred revenues at end of period
  $ 7,238     $ 7,141  
                 
Total claims incurred during the period, excludes selling expenses
  $ 1,638     $ 1,841  
 
6.  Segment Reporting
 
Financial information by segment is presented in the following tables for the three and six months ended July 31, 2010 and 2009 (in thousands):
 
   
Three Months Ended July 31,
 
   
2009
   
2010
 
   
Retail
   
Credit
   
Total
   
Retail
   
Credit
   
Total
 
Revenues
                                   
Product sales
  $ 175,389     $ -     $ 175,389     $ 166,378     $ -     $ 166,378  
Repair service agreement commissions (net) (a)
    11,433       (2,574 )     8,859       11,534       (3,193 )     8,341  
Service revenues
    6,052               6,052       4,183               4,183  
Total net sales
    192,874       (2,574 )     190,300       182,095       (3,193 )     178,902  
Finance charges and other
    131       39,997       40,128       216       34,547       34,763  
Total revenues
    193,005       37,423       230,428       182,311       31,354       213,665  
Cost and expenses
                                               
Cost of goods and parts sold, including
                                               
warehousing and occupancy costs
    143,558       -       143,558       132,396       -       132,396  
Selling, general and
                                               
administrative expense (b) (c)
    49,407       15,572       64,979       46,407       17,071       63,478  
Provision for bad debts
    7       8,019       8,026       207       8,841       9,048  
Total cost and expenses
    192,972       23,591       216,563       179,010       25,912       204,922  
Operating income
    33       13,832       13,865       3,301       5,442       8,743  
Interest expense, net
    -       5,342       5,342       -       5,875       5,875  
Other (income) expense, net
    (13 )     -       (13 )     12       -       12  
Segment income (loss)
                                               
before income taxes
  $ 46     $ 8,490     $ 8,536     $ 3,289     $ (433 )   $ 2,856  
                                                 
 
 
14

 
 
   
Six Months Ended July 31,
 
   
2009
   
2010
 
   
Retail
   
Credit
   
Total
   
Retail
   
Credit
   
Total
 
Revenues
                                   
Product sales
  $ 360,206     $ -     $ 360,206     $ 316,743     $ -     $ 316,743  
Repair service agreement commissions (net) (a)
    23,520       (4,871 )     18,649       22,458       (6,200 )     16,258  
Service revenues
    11,596