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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C.  20549 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2015

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from _____ to _____

Commission File Number: 1-34956
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 No.)

4055 Technology Forest Blvd, Suite 210, The Woodlands, Texas, 77381
(address of principal executive offices)

(936) 230-5899
(Registrants telephone number, including area code)

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 ý  No o

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 ý   No o

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 the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o 
Non-accelerated filer o 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 26, 2015
Class
 
Outstanding
Common stock, $0.01 par value per share
 
36,410,407



CONN'S, INC. AND SUBSIDIARIES

FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 30, 2015

TABLE OF CONTENTS

 
 
 
 
Page No.
PART I.
 
FINANCIAL INFORMATION
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 
 
This Quarterly Report on Form 10-Q may include our trademarks such as "Conn’s," "Conn’s HomePlus," "YES Money,"
"YE$ Money," and our logos, which are protected under applicable intellectual property laws and are the property of Conn’s, Inc.  This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners.  Solely for convenience, trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

Unless the context otherwise indicates, references to "Conn’s," the "Company," "we," "us," and "our" refer to the consolidated business operations of Conn’s, Inc. and its wholly-owned subsidiaries.




PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share data)
 
April 30,
2015
 
January 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,959

 
$
12,223

Customer accounts receivable, net of allowances
653,141

 
643,094

Other accounts receivable
65,445

 
67,703

Inventories
129,389

 
159,068

Deferred income taxes
23,331

 
20,040

Income taxes recoverable

 
11,058

Prepaid expenses and other current assets
11,613

 
12,529

Total current assets
887,878

 
925,715

Long-term portion of customer accounts receivable, net of allowances
558,762

 
558,257

Property and equipment, net
122,189

 
120,218

Deferred income taxes
34,864

 
33,505

Other assets
8,979

 
9,627

Total assets
$
1,612,672

 
$
1,647,322

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Current portion of debt
$
400

 
$
395

Accounts payable
89,976

 
85,355

Accrued compensation and related expenses
10,365

 
12,151

Accrued expenses
23,972

 
27,479

Income taxes payable
5,651

 
3,450

Deferred revenues and other credits
15,833

 
16,179

Total current liabilities
146,197

 
145,009

Deferred rent
54,721

 
52,792

Long-term debt
719,710

 
774,015

Other long-term liabilities
22,067

 
21,836

Total liabilities
942,695

 
993,652

Commitments and contingencies
 

 
 

Stockholders’ equity:
 

 
 

Preferred stock ($0.01 par value, 1,000 shares authorized; none issued or outstanding)

 

Common stock ($0.01 par value, 100,000 shares authorized; 36,410 and 36,352 shares issued, respectively)
364

 
364

Additional paid-in capital
232,025

 
231,395

Retained earnings
437,588

 
421,911

Total stockholders’ equity
669,977

 
653,670

Total liabilities and stockholders' equity
$
1,612,672

 
$
1,647,322


See notes to condensed consolidated financial statements.

1


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended 
 April 30,
 
2015
 
2014
Revenues:
 
 
 
Product sales
$
271,626

 
$
254,220

Repair service agreement commissions
23,796

 
20,254

Service revenues
3,057

 
3,155

Total net sales
298,479

 
277,629

Finance charges and other revenues
66,597

 
57,819

Total revenues
365,076

 
335,448

Costs and expenses:
 
 
 
Cost of goods sold, including warehousing and occupancy costs
173,472

 
160,782

Cost of service parts sold, including warehousing and occupancy costs
1,312

 
1,419

Delivery, transportation and handling costs
12,349

 
12,163

Selling, general and administrative expenses
95,675

 
88,041

Provision for bad debts
47,543

 
22,258

Charges and credits
619

 
1,754

Total costs and expenses
330,970

 
286,417

Operating income
34,106

 
49,031

Interest expense
9,428

 
4,724

Income before income taxes
24,678

 
44,307

Provision for income taxes
9,001

 
15,838

Net income
$
15,677

 
$
28,469

Earnings per share:
 
 
 
Basic
$
0.43

 
$
0.79

Diluted
$
0.43

 
$
0.77

Weighted average common shares outstanding:
 
 
 
Basic
36,365

 
36,134

Diluted
36,880

 
36,925


See notes to condensed consolidated financial statements.

2


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
 
Three Months Ended 
 April 30,
 
2015
 
2014
Net income
$
15,677

 
$
28,469

Change in fair value of hedges

 
58

Impact of provision for income taxes on comprehensive income

 
(20
)
Comprehensive income
$
15,677

 
$
28,507


See notes to condensed consolidated financial statements.

3


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Three Months Ended 
 April 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
15,677

 
$
28,469

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
5,608

 
5,037

Provision for bad debts and uncollectible interest
55,961

 
27,189

Stock-based compensation expense
872

 
1,090

Excess tax benefits from stock-based compensation
(100
)
 
(106
)
Charges, net of credits, for store and facility closures and relocations
425

 
1,754

Deferred income taxes
(4,651
)
 
(3,422
)
Gain on sale of property and equipment
(187
)
 
(4
)
Tenant improvement allowances received from landlords
1,391

 
1,304

Change in operating assets and liabilities:
 

 
 

Customer accounts receivable
(66,513
)
 
(61,224
)
Other accounts receivable
3,311

 
(1,191
)
Inventories
29,679

 
(17,333
)
Other assets
340

 
(1,127
)
Accounts payable
7,450

 
35,219

Accrued expenses
(5,874
)
 
(3,241
)
Income taxes
13,258

 
16,672

Deferred revenues and other credits
(46
)
 
(463
)
     Deferred rent
(250
)
 
2,055

Net cash provided by operating activities
56,351

 
30,678

Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(9,602
)
 
(14,272
)
Proceeds from sale of property
35

 
4

Net cash used in investing activities
(9,567
)
 
(14,268
)
Cash flows from financing activities:
 

 
 

Borrowings from revolving credit facility
63,041

 
53,146

Payments on revolving credit facility
(117,400
)
 
(71,350
)
Proceeds from stock issued under employee benefit plans
342

 
486

Excess tax benefits from stock-based compensation
100

 
106

Other
(131
)
 
(332
)
Net cash used in financing activities
(54,048
)
 
(17,944
)
Net change in cash and cash equivalents
(7,264
)
 
(1,534
)
Cash and cash equivalents, beginning of period
12,223

 
5,727

Cash and cash equivalents, end of period
$
4,959

 
$
4,193

See notes to condensed consolidated financial statements.

4


CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Policies
 
Business. Conn’s is a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for its core credit constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, underserved population of credit constrained consumers who typically have limited banking options.

In October 2014, we announced that our Board of Directors authorized management to explore a full range of strategic alternatives to enhance value for stockholders, including, but not limited to, a sale of the Company, separating its retail and credit businesses or slowing store openings and returning capital to investors. The Company and its advisors have conducted a thorough review of strategic alternatives, including alternatives not identified in the October announcement. In March 2015, after appropriate diligence and consideration, the Board of Directors authorized management to actively pursue the sale of all or a portion of the loan portfolio, or other refinancing of our loan portfolio. BofA Merrill Lynch and Stephens Inc. have been retained as our financial advisors to assist with this process, which is currently ongoing as we are engaged in discussions with interested parties. There is no assurance that we will complete a sale of all or a portion of the loan portfolio, and no timetable has been set for completion of this process. The Board of Directors may also determine that a refinancing transaction or no transaction is in the best interests of stockholders. As a result, we have determined that the loan portfolio does not meet the criteria for treatment as an asset held for sale, which would require recording at the lower of cost, net of allowances, or fair value. Because the fair value will be based on the expected return on the loan portfolio over its expected life whereas a significant portion of our allowances are based on expected charge-offs over the next twelve months, the fair value of the loan portfolio could be less than the amount currently recorded. However, certain conditions and variables may result in the fair value of the loan portfolio being greater than the amount currently recorded, including the current loan portfolio at a weighted average contractual annual percentage rate of 21.4% and buyers having the potential to use higher leverage on the portfolio at a lower cost of capital than us. We have not made an adjustment to the customer accounts receivable balance in anticipation of any gain or loss that may occur should a sale of the receivables be completed.

We operate two reportable segments: retail and credit. Our retail stores bear the "Conn’s" or "Conn’s HomePlus" name and deliver the same products and services to a common customer group. All of the retail stores follow the same procedures and methods in managing their operations. Our retail business and credit business are operated independently from each other. The credit segment is dedicated to providing short- and medium-term financing for our retail customers. The retail segment is not involved in credit approval decisions. Our management evaluates performance and allocates resources based on the operating results of the retail and credit segments.

Basis of Presentation. The accompanying unaudited, condensed consolidated financial statements of Conn’s, Inc. and its wholly-owned subsidiaries have been prepared by management 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, we 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 presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature, except as otherwise described herein. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 31, 2015 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, filed with the United States Securities and Exchange Commission (the "SEC") on April 1, 2015.

Accounting Policies. The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries. Conn’s, Inc., a Delaware corporation, 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.

Fiscal Year. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.

5

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the potential dilutive effects of any stock options and restricted stock units granted, to the extent not anti-dilutive, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations:
 
Three Months Ended 
 April 30,
(in thousands)
2015
 
2014
Weighted average common shares outstanding - Basic
36,365

 
36,134

Assumed exercise of stock options
427

 
621

Unvested restricted stock units
88

 
170

Weighted average common shares outstanding - Diluted
36,880

 
36,925


For the three months ended April 30, 2015 and 2014, the weighted average number of stock options and restricted stock units not included in the calculation due to their anti-dilutive effect was 357,000 and 40,000, respectively.

Customer accounts receivable and related allowance for doubtful accounts. Customer accounts receivable are originated at the time of sale and delivery of the various products and services. Based on contractual terms, we record the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months in current assets with the remaining balance in long-term assets on the consolidated balance sheet. Customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts and interest accrued subsequent to the last payment is reversed and charged against the allowance for uncollectible interest.
 
In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. The loan modifications are intended to maximize net cash flow after expenses and avoid the need to repossess collateral or exercise legal remedies available to us. We may extend the loan term, refinance or otherwise re-age an account. We consider accounts that have been re-aged in excess of three months or refinanced as Troubled Debt Restructurings ("TDR" or "Restructured Accounts").
 
We record an allowance for doubtful accounts, including estimated uncollectible interest, for our non-TDR customer accounts receivable that we expect to charge-off over the next twelve months based on our historical cash collection and net loss experience using a projection of monthly delinquency performance, cash collections and losses. In addition to pre-charge-off cash collections and charge-off information, estimates of post-charge-off recoveries, including cash payments, amounts realized from the repossession of the products financed and payments received under credit insurance policies are also considered. We determine allowances for those accounts that are TDR based on the discounted present value of cash flows expected to be collected over the life of those accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as an allowance for loss on those accounts.

Interest income on customer accounts receivableInterest income is accrued using the interest method for installment contracts and is reflected in finance charges and other. Typically, interest income is accrued until the contract or account is paid off or charged-off. We provide an allowance for estimated uncollectible interest. Interest income on installment contracts with our customers is calculated using the rule of 78s. In order to convert the interest income recognized to the interest method, we have recorded the excess earnings of rule of 78s over the interest method as deferred revenue on our balance sheets. This deferred interest will ultimately be brought into income as the accounts pay off or accounts amortize to the point that interest income under the interest method exceeds that which is being earned under rule of 78s. At April 30, 2015 and January 31, 2015, there was $11.4 million and $11.2 million, respectively, of deferred interest included in deferred revenues and other credits and other long-term liabilities.

We offer 12-month no-interest finance programs. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest program period (grace periods are provided), the account does not qualify for the no-interest provision and the terms of the account revert back to those of the executed installment contract resulting

6

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


in interest over the entire term. Interest income is recognized based on our historical experience related to customers that fail to satisfy the requirements of the programs.

In October 2014, we began offering 18- and 24-month equal-payment, no-interest finance programs to certain higher credit quality borrowers, which are discounted to their present value at origination, resulting in a reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract. If a customer is delinquent in making a scheduled monthly payment (grace periods are provided), the account begins accruing interest based on the contract rate from the date of the last payment made, which is a higher rate than the discount rate.

We recognize interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it always equals the present value of expected future cash flows.

We typically only place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the amount of the loan. Interest accrual is resumed on those accounts once a legally-mandated settlement arrangement is reached or other payment arrangements are made with the customer. At April 30, 2015 and January 31, 2015, customer receivables carried in non-accrual status were $15.4 million and $13.7 million, respectively. At April 30, 2015 and January 31, 2015, customer receivables that were past due 90 days or more and still accruing interest totaled $84.5 million and $97.1 million, respectively.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to subjectivity associated with the inputs to fair value measurements as follows:  
Level 1 – Quoted prices available in active markets for identical assets or liabilities
Level 2 – Pricing inputs not quoted in active markets but either directly or indirectly observable
Level 3 – Significant inputs to pricing that have little or no transparency with inputs requiring significant management judgment or estimation.

The fair value of cash and cash equivalents and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a Level 3 discounted cash flow analysis, approximates their carrying amount. The fair value of our revolving credit facility approximates carrying value based on the current borrowing rate for similar types of borrowing arrangements. At April 30, 2015, the fair value of our 7.25% senior notes, which was determined using Level 1 inputs, was $225.0 million as compared to the carrying value of $250.0 million, excluding the impact of the related discount.

Stockholders' Rights Plan. On October 6, 2014, we adopted a one-year stockholders' rights plan whereby the Board of Directors of the Company ("Board of Directors") declared a dividend of one right for each outstanding share of the Company's common stock to stockholders of record on October 16, 2014. Each right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company's Series A Junior Participating Preferred Stock at a price of $155.00 per right. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events. Subject to certain exceptions, the rights will separate from the shares of common stock and a distribution date will be deemed to occur on the earlier of (i) the tenth business day after a public announcement or filing that a person or group has become a beneficial owner of 10% or more of the Company's outstanding common stock after the adoption of the stockholders’ rights plan, or (ii) the tenth business day (or such later date as the Board of Directors may determine) after the commencement of, or announcement of an intention to commence, a tender or exchange offer that, if consummated, would result in a person or group becoming a beneficial owner of 10% or more of the Company's outstanding common stock. The rights will expire on October 5, 2015, unless exercised, redeemed or exchanged prior to that time. The Board of Directors may terminate the rights plan before the expiration date or extend the expiration date. The rights have no voting or dividend privileges and, unless and until they become exercisable, have no dilutive effect on the earnings of the Company.

Related Party Transactions. From time to time, we have engaged Stephens Inc. to act as our financial advisor. Stephens Inc. and its affiliates beneficially own shares of our common stock and one of our board of directors, Douglas H. Martin, is a Senior Managing Director of Stephens Inc. On March 31, 2015, we announced that we had engaged Stephens Inc., as a financial advisor to assist us with the process of pursuing a sale of all or a portion of the loan portfolio, or other refinancing of our loan portfolio. We have agreed to pay Stephens Inc. a success fee in the event we consummate one or more of these transactions. The disinterested members of our board of directors have determined that it is in the Company’s best interest to engage Stephens Inc. in such capacity to assist us in analyzing and advising us with respect to the opportunity. The engagement of Stephens Inc. as financial advisor was

7

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


approved by the independent members of our board of directors after full disclosure of the conflicts of interests of the related parties in the transaction. Douglas H. Martin did not participate in the approval process.

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Upon adoption of ASU 2014-09, entities are required to recognize revenue using the following comprehensive model: (1) identify contracts with customers, (2) identify the performance obligations in contracts, (3) determine transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue as each performance obligation is satisfied. ASU 2014-09 is effective for us beginning in the first quarter of fiscal year 2018 and will result in retrospective application, either in the form of recasting all prior periods presented or a cumulative adjustment to equity in the period of adoption. In April 2015, the FASB proposed a one-year deferral of the effective date, with early application permitted as of the original effective date. We are currently assessing the impact the new standard will have on our financial statements.

Reclassifications. Certain reclassifications have been made to prior year fiscal year amounts to conform to the presentation in the current fiscal year. On the consolidated statement of operations, delivery, transportation and handling costs is shown separately and was reclassified out of selling, general and administrative expenses. On the consolidated statements of cash flows, tenant improvement allowances received from landlords, changes in other accounts receivables and changes in deferred rents is shown separately and was reclassified out of changes in other assets and accrued expenses. These reclassifications did not impact consolidated operating income, net income, or net cash used in operating activities. 
  
2.     Charges and Credits

Charges and credits consisted of the following:
 
Three Months Ended 
 April 30,
(in thousands)
2015
 
2014
Store and facility closure and relocation costs
$
425

 
$
1,754

Legal and professional fees related to the exploration of strategic alternatives and
  securities-related litigation
194

 

 
$
619

 
$
1,754


3.     Finance Charges and Other Revenues
 
Finance charges and other revenues consisted of the following:
 
Three Months Ended 
 April 30,
(in thousands)
2015
 
2014
Interest income and fees
$
55,419

 
$
46,490

Insurance commissions
11,029

 
10,863

Other revenues
149

 
466

 
$
66,597

 
$
57,819


Interest income and fees and insurance commissions are derived from the credit segment operations, whereas other income is derived from the retail segment operations. For the three months ended April 30, 2015 and 2014, interest income and fees was reduced by provisions for uncollectible interest of $8.5 million and $5.4 million, respectively. For the three months ended April 30, 2015 and 2014, the amount included in interest income and fees related to TDR accounts was $3.2 million and $1.3 million, respectively.


8

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


4.   
Customer Accounts Receivable

Customer accounts receivable consisted of the following:
 
Total Outstanding Balance
 
Customer Accounts Receivable
 
60 Days Past Due (1)
 
Re-aged (1)
(in thousands)
April 30,
2015
 
January 31,
2015
 
April 30,
2015
 
January 31,
2015
 
April 30,
2015
 
January 31,
2015
Customer accounts receivable
$
1,286,652

 
$
1,277,135

 
$
96,211

 
$
112,365

 
$
82,470

 
$
94,304

Restructured accounts
95,590

 
88,672

 
19,685

 
20,722

 
95,590

 
88,672

Total customer portfolio balance
1,382,242

 
1,365,807

 
$
115,896

 
$
133,087

 
$
178,060

 
$
182,976

Allowance for uncollectible accounts
(153,389
)
 
(146,982
)
 
 
 
 
 
 
 
 
Allowance for short-term, no-interest programs
(16,950
)
 
(17,474
)
 
 
 
 
 
 
 
 
Total customer accounts receivable, net
1,211,903

 
1,201,351

 
 
 
 
 
 
 
 
Short-term portion of customer accounts receivable, net
(653,141
)
 
(643,094
)
 
 
 
 
 
 
 
 
Long-term portion of customer accounts receivable, net
$
558,762

 
$
558,257

 
 
 
 
 
 
 
 

(1)
Due to the fact that an account can become past due after having been re-aged, accounts could be represented as both past due and re-aged. As of April 30, 2015 and January 31, 2015, the amounts included within both past due and re-aged was $39.4 million and $44.9 million, respectively. As of April 30, 2015 and January 31, 2015, the total customer portfolio balance past due one day or greater was $322.8 million and $316.0 million, respectively. These amounts include the 60 days past due balances shown.

The following presents the activity in our balance in the allowance for doubtful accounts and uncollectible interest for customer receivables: 
 
Three Months Ended April 30, 2015
 
Three Months Ended April 30, 2014
(in thousands)
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
 
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
Allowance at beginning of period
$
118,786

 
$
28,196

 
$
146,982

 
$
54,448

 
$
17,353

 
$
71,801

Provision (1)
43,011

 
12,950

 
55,961

 
23,241

 
3,948

 
27,189

Principal charge-offs (2)
(35,725
)
 
(7,072
)
 
(42,797
)
 
(22,801
)
 
(4,440
)
 
(27,241
)
Interest charge-offs
(6,598
)
 
(1,306
)
 
(7,904
)
 
(4,033
)
 
(785
)
 
(4,818
)
Recoveries (2)
957

 
190

 
1,147

 
5,063

 
986

 
6,049

Allowance at end of period
$
120,431

 
$
32,958

 
$
153,389

 
$
55,918

 
$
17,062

 
$
72,980

Average total customer portfolio balance
$
1,274,281

 
$
92,985

 
$
1,367,266

 
$
1,033,443

 
$
48,013

 
$
1,081,456


(1)
Includes provision for uncollectible interest, which is included in finance charges and other revenues.
(2)
Charge-offs include the principal amount of losses (excluding accrued and unpaid interest), and recoveries include principal collections during the period shown of previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.


9

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


5.     Accrual for Store Closures
 
We have closed or relocated retail locations that did not perform at a level we expect for mature store locations. Certain of the closed or relocated stores had noncancelable lease agreements, resulting in the accrual of the present value of the remaining lease payments and estimated related occupancy obligations, net of estimated sublease income. Adjustments to these projections for changes in estimated marketing times and sublease rates, as well as other revisions, are made to the obligation as further information related to the actual terms and costs become available.

The following table presents detail of the activity in the accrual for store closures:
 
Three Months Ended 
 April 30,
(in thousands)
2015
 
2014
Balance at beginning of period
$
2,556

 
$
4,316

Accrual for additional closures
318

 
1,621

Adjustments
32

 
133

Cash payments, net of sublease income
(556
)
 
(1,787
)
Balance at end of period
2,350

 
4,283

Current portion, included in accrued expenses
(741
)
 
(2,079
)
Long-term portion, included in other long-term liabilities
$
1,609

 
$
2,204


6.     Debt
 
Debt consisted of the following:
(in thousands)
April 30,
2015
 
January 31,
2015
Revolving credit facility
$
473,753

 
$
528,112

Senior Notes
250,000

 
250,000

Other debt
836

 
933

Total debt
724,589

 
779,045

Less:
 
 
 
Discount on debt
(4,479
)
 
(4,635
)
Current portion of debt
(400
)
 
(395
)
Long-term debt
$
719,710

 
$
774,015


Senior Notes. On July 1, 2014, we issued $250.0 million in senior unsecured notes due July 2022 (the "Senior Notes"), bearing interest at 7.25%, pursuant to an indenture dated July 1, 2014 (the "Indenture"), among Conn’s, Inc., its subsidiary guarantors (the "Guarantors") and U.S. Bank National Association, as trustee. The Senior Notes were sold at par, and resulted in net proceeds of $243.4 million, after deducting the initial purchasers’ discounts and commissions and other offering expenses. The net proceeds were used to repay outstanding borrowings under our revolving credit facility. The effective interest rate of the Senior Notes after giving effect to offering fees and debt discount is 7.6%.

The Indenture restricts the Company's and certain of its subsidiaries' ability to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock; (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. During any time when the Senior Notes are rated investment grade by either of Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and no Default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended, and we will cease to be subject to such covenants during such period.

Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we default in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $25.0 million, as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.

10

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Guarantors. The only direct or indirect subsidiaries of Conn’s, Inc. that are not Guarantors are minor subsidiaries. There are no restrictions on the ability of any of the Guarantors to transfer funds to Conn’s, Inc. in the form of loans, advances or dividends, except as provided by applicable law.

On April 24, 2015, the SEC declared effective the Company’s registration statement on Form S-4 pursuant to which we exchanged the Senior Notes for an equivalent amount of 7.25% Senior Notes due July 2022 that are registered under the Securities Act of 1933, as amended (the “Exchange Notes”).  The exchange offer was completed on June 1, 2015, and all of the outstanding Senior Notes were tendered in exchange for the Exchange Notes. The terms of the Exchange Notes are substantially identical to the Senior Notes.
 
Revolving Credit Facility. Conn's, Inc. and certain of its subsidiaries (the "Borrowers") amended its asset-based revolving credit facility in connection with the issuance of the Senior Notes. The amendment provides for, among other things, the issuance of the Senior Notes and Indenture as well as related guarantees, upstream distributions from subsidiaries to Conn’s, Inc. (a holding company) for the payment of interest and principal on the Senior Notes and under certain circumstances optional and mandatory prepayment of the Senior Notes. The amendment also allows holders of the Senior Notes to receive payments even though they may be stockholders of the Company.

Our revolving credit facility with a syndicate of banks had capacity of $880.0 million as of April 30, 2015. The revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory. The amended and restated credit facility bears interest at LIBOR plus a spread ranging from 250 basis points to 325 basis points, based on a leverage ratio (defined as total liabilities to tangible net worth). As of April 30, 2015, the weighted average interest rate on borrowings outstanding under the revolving credit facility was 3.3%.

In addition to the leverage ratio, the revolving credit facility includes a fixed charge coverage requirement, a minimum customer receivables cash recovery percentage requirement and a net capital expenditures limit. The obligations under the revolving credit facility are secured by all assets of the Borrowers. The revolving credit facility restricts the amount of dividends we can pay. We were in compliance with our debt covenants at April 30, 2015.

As of April 30, 2015, we had immediately available borrowing capacity of $356.3 million under our revolving credit facility, net of standby letters of credit issued, for general corporate purposes. We also had $48.8 million that may become available under our revolving credit facility if we grow the balance of eligible customer receivables and inventory balances. We pay fees in the amount of 25 basis points for the additional commitment amount. Our revolving credit facility provides us the ability to utilize letters of credit to secure deductibles under our property and casualty insurance programs, among other acceptable uses. At April 30, 2015, we had outstanding letters of credit of $1.1 million under this facility.

7.     Contingencies
 
Securities Class Action Litigation. We and three of our current and former executive officers are defendants in a consolidated securities class action lawsuit pending in the Southern District of Texas, In re Conn’s Inc. Securities Litigation, Cause No. 14-CV-00548 (the “Consolidated Securities Action”). The plaintiffs in the Consolidated Securities Action allege that the defendants made false and misleading statements and/or failed to disclose material adverse facts about our business, operations, and prospects. They allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seek to certify a class of all persons and entities that purchased or otherwise acquired Conn’s common stock and/or call options, or sold/wrote Conn’s put options between April 3, 2013, and December 9, 2014. The complaint does not specify the amount of damages sought.

The defendants have filed a motion to dismiss all of these claims. Defendants filed this motion on December 15, 2014, and supplemented this motion in April 2015, after the plaintiffs filed an amended complaint that extended the class period from August 31, 2014, to December 9, 2014. Defendants’ motion (including the supplement to this motion) is fully briefed and pending with the Court.

The defendants intend to vigorously defend against all of these claims. It is not possible at this time to predict the timing or outcome of any this litigation.

Derivative Litigation. On December 1, 2014, an alleged shareholder filed, purportedly on behalf of the Company, a derivative shareholder lawsuit against us and certain of our current and former directors and executive officers in the United States District Court for the Southern District of Texas captioned Robert Hack, derivatively on behalf of Conn’s, Inc., v. Theodore M. Wright,

11

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Bob L. Martin, Jon E.M. Jacoby, Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson, Brian Taylor and Michael J. Poppe and Conn’s, Inc., Case No. 4:14-cv-03442 (the “Original Derivative Action”). The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading based on substantially similar factual allegations as those asserted in the Consolidated Securities Action. The plaintiff seeks unspecified damages against these persons and does not request any damages from us. The court has approved a stipulation among the parties to stay the action pending resolution of the motion to dismiss in the Consolidated Securities Action.

Another derivative action was filed on January 27, 2015, captioned, Richard A. Dohn v. Wright, et al., Cause No. 2015-04405, filed in the 281st District Court, Harris County, Texas. This action makes substantially similar allegations to the Original Derivative Action against the same defendants. The parties have entered into an agreed stay pending resolution of the motion to dismiss in the Consolidated Securities Action.

On February 25, 2015, a third derivative action was filed in the United States District Court for the Southern District of Texas, captioned 95250 Canada LTEE, derivatively on Behalf of Conn’s, Inc. v. Wright et al., Cause No. 4:15-cv-00521. This action makes substantially similar allegations to the Original Derivative Action. On March 30, 2015, the plaintiffs in this action and the Original Derivative Action filed a joint motion to consolidate these two derivative actions and continue the stay. That motion is currently pending.

None of the plaintiffs in any of the derivative actions made a demand on our Board of Directors prior to filing their respective lawsuits.  The defendants in the derivative actions intend to vigorously defend against these claims.     

Regulatory Matters. We are continuing to cooperate with the SEC’s voluntary request for information dated November 25, 2014, from the Fort Worth Regional Office of the SEC, which generally relates to our underwriting policies and bad debt provisions. The investigation is a non-public, fact-finding inquiry, and the request states that it should not be construed as an indication by the SEC or its staff that any violations of law have occurred.

In addition, we are involved in other routine litigation and claims incidental to our business from time to time which, individually or in the aggregate are not expected to have a material adverse effect on our financial position, results of operations or cash flows. As required, we accrue estimates 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. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation.


12

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.     Segment Reporting
 
Financial information by segment is presented in the following tables: 
 
Three Months Ended April 30, 2015

Three Months Ended April 30, 2014
(in thousands)
Retail

Credit

Total

Retail

Credit

Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
89,502

 
$

 
$
89,502

 
$
80,892

 
$

 
$
80,892

Home appliance
84,102

 

 
84,102

 
77,115

 

 
77,115

Consumer electronic
71,430

 

 
71,430

 
66,443

 

 
66,443

Home office
21,985

 

 
21,985

 
23,936

 

 
23,936

Other
4,607

 

 
4,607

 
5,834

 

 
5,834

Product sales
271,626

 

 
271,626

 
254,220

 

 
254,220

Repair service agreement commissions
23,796

 

 
23,796

 
20,254

 

 
20,254

Service revenues
3,057

 

 
3,057

 
3,155

 

 
3,155

Total net sales
298,479

 

 
298,479

 
277,629

 

 
277,629

Finance charges and other revenues
149

 
66,448

 
66,597

 
466

 
57,353

 
57,819

Total revenues
298,628

 
66,448

 
365,076

 
278,095

 
57,353

 
335,448

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
173,472

 

 
173,472

 
160,782

 

 
160,782

Cost of service parts sold, including warehousing and occupancy cost
1,312

 

 
1,312

 
1,419

 

 
1,419

Delivery, transportation and handling costs
12,349

 

 
12,349

 
12,163

 

 
12,163

Selling, general and administrative expenses (1)
68,227

 
27,448

 
95,675

 
64,167

 
23,874

 
88,041

Provision for bad debts
69

 
47,474

 
47,543

 
44

 
22,214

 
22,258

Charges and credits
619

 

 
619

 
1,754

 

 
1,754

Total costs and expense
256,048

 
74,922

 
330,970

 
240,329

 
46,088

 
286,417

Operating income (loss)
42,580

 
(8,474
)
 
34,106

 
37,766

 
11,265

 
49,031

Interest expense

 
9,428

 
9,428

 

 
4,724

 
4,724

Income (loss) before income taxes
$
42,580

 
$
(17,902
)
 
$
24,678

 
$
37,766

 
$
6,541

 
$
44,307


(1)
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 that 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 $3.5 million and $2.9 million for the three months ended April 30, 2015 and 2014, respectively. The amount of reimbursement made to the retail segment by the credit segment was $8.5 million and $6.7 million for the three months ended April 30, 2015 and 2014, respectively.


13


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 
Forward-Looking Statements
 
This report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements containing the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts. Although we believe that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, we can give no assurance that such statements will prove to be correct. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to execute a sale of our loan portfolio or another strategic transaction on favorable terms; our ability to continue existing customer financing programs or to offer new customer financing programs; changes in the delinquency status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores and the updating of existing stores; technological and market developments and sales trends for our major product offerings; our ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and our employees; and our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving credit facility, and proceeds from accessing debt or equity markets. Additional risks and uncertainties are detailed in our most recently filed Annual Report on Form 10-K and other filings that we make with the SEC. If one or more of these or other risks or uncertainties materialize (or the consequences of such a development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We disclaim any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Overview

We encourage you to read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying consolidated financial statements and related notes. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.

Executive Summary

Total revenues increased to $365.1 million for the three months ended April 30, 2015, compared to $335.4 million for the three months ended April 30, 2014. The increase in total revenue was primarily driven by new store openings partially offset by a decrease in same store sales of 4.3% and increase in credit revenue as a result of growth in the average balance of the customer receivable portfolio partially offset by a 100 basis point decrease in portfolio yield.

Retail gross margin for the three months ended April 30, 2015 was 41.3%, a decrease of 10 basis points over the 41.4% reported in the comparable quarter last year. The decrease in retail margin was driven by unleveraged warehousing costs.

Delivery, transportation and handling costs as a percentage of product sales and repair service agreement commissions (the same basis used for calculating retail margins) was 4.2%, a decrease of 20 basis points over 4.4% in the previous year. The decrease was primarily driven by efficiencies in delivery operations offset by higher costs as a result of the shift in product sales mix.

Selling, general and administrative expenses ("SG&A") for the three months ended April 30, 2015 was $95.7 million, an increase of $7.6 million, or 8.7%, over the same prior year period. The SG&A increase in the retail segment was primarily due to the opening of new stores resulting in higher sales-driven compensation and facility-related costs. The SG&A increase in the credit segment is the result of the addition of collections personnel to service the 25.2% increase in the customer receivable portfolio balance and anticipated near-term portfolio growth.

Provision for bad debts for the three months ended April 30, 2015 was $47.5 million, an increase of $25.3 million from the same prior year period. The year-over-year increase was impacted by the following:
A 26.4% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;

14


A 17.5% increase in the balances originated during the quarter compared to the prior year comparative period;
An increase of 40 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 8.4% at April 30, 2015 as compared to the prior year period. Delinquency increased year-over-year across product categories and years of origination and many of the credit quality levels and geographic regions;
Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously experienced, due to the increased proportion of new customers of the total customer portfolio balance and continued elevation of our delinquency rates; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $95.6 million, or 6.9% of the total portfolio balance, driving $9.0 million of the increase in provision for bad debts.

Net income for the three months ended April 30, 2015 was $15.7 million, or $0.43 per diluted share, which included charges and credits of $0.6 million, or $0.01 per diluted share on an after-tax basis, related to store closures and relocations and legal and professional fees related to our exploration of strategic alternatives and our securities-related litigation. Net income for the three months ended April 30, 2014 was $28.5 million, or $0.77 per diluted share, which included charges and credits of $1.8 million, or $0.03 per diluted share on an after-tax basis, related to store closures and relocations.

Recent Developments and Operational Changes

In October 2014, we announced that our Board of Directors authorized management to explore a full range of strategic alternatives to enhance value for stockholders, including, but not limited to, a sale of the Company, separating its retail and credit businesses or slowing store openings and returning capital to investors. The Company and its advisors have conducted a thorough review of strategic alternatives, including alternatives not identified in the October announcement. In March 2015, after appropriate diligence and consideration, the Board of Directors authorized management to actively pursue the sale of all or a portion of the loan portfolio, or other refinancing of our loan portfolio. BofA Merrill Lynch and Stephens Inc. have been retained as our financial advisors to assist with this process, which is currently ongoing as we are engaged in discussions with interested parties. There is no assurance that we will complete a sale of all or a portion of the loan portfolio, and no timetable has been set for completion of this process. The Board of Directors may also determine that a refinancing transaction or no transaction is in the best interests of stockholders. As a result, we have determined that the loan portfolio does not meet the criteria for treatment as an asset held for sale, which would require recording at the lower of cost, net of allowances, or fair value. Because the fair value will be based on the expected return on the loan portfolio over its expected life whereas a significant portion of our allowances are based on expected charge-offs over the next twelve months, the fair value of the loan portfolio could be less than the amount currently recorded. However, certain conditions and variables may result in the fair value of the loan portfolio being greater than the amount currently recorded, including the current loan portfolio at a weighted average contractual annual percentage rate of 21.4% and buyers having the potential to use higher leverage on the portfolio at a lower cost of capital than us. We have not made an adjustment to the customer accounts receivable balance in anticipation of any gain or loss that may occur should a sale of the receivables be completed.

Additionally, in April 2015, we hired a Chief Credit Officer who reports to the Chief Operating Officer. The Board of Directors continues to search for additional senior leadership.
 
Company Initiatives

We have continued to focus on initiatives that we believe should positively impact future results, including:  
During the three months ended April 30, 2015, we opened 3 new stores in North Carolina (1), Tennessee (1) and Texas (1). We plan to open between 15 and 18 stores during fiscal year 2016;
During fiscal year 2016, we will discontinue offering video game products, digital cameras, and certain tablets, which have lower gross margins and higher delinquency rates when compared to our other product offerings. During fiscal year 2015, net sales and product margin from the sale of these products were approximately $50.0 million and $5.0 million, respectively;
Expanding and enhancing our product offering of higher-margin furniture and mattresses;
Focusing on quality, branded products to improve operating performance;
Growing our appliance business by focused advertising, promotions and delivery options;
Offering 18-month and 24-month equal-payment, no-interest finance programs to certain higher credit quality borrowers, which we discount to present value, resulting in a reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract;
Reduced the use of 12-month, no-interest financing to improve interest income yield;
Continuing to review and modify our underwriting standards to improve the overall quality of our credit portfolio; and

15


Revising our re-aging policies, as appropriate, and focusing on further improvement of execution within our collection operations to reduce delinquency rates and future charge-offs.

Outlook

We believe the broad appeal of the Conn’s store to our geographically diverse core demographic, the historical unit economics and current retail real estate market conditions provide us ample room for continued expansion. We plan to open 15 to 18 new stores during fiscal year 2016. There are many markets in the United States with similar demographic characteristics as our current successful store base, which provides substantial opportunities for future growth. We plan to continue to improve our operating results by leveraging our existing infrastructure and seeking to continually optimize the efficiency of our marketing, merchandising, sourcing, distribution and credit operations. As we penetrate new markets, we expect to increase our purchase volumes, achieve distribution efficiencies and strengthen our relationships with our key vendors. We also expect our increased store base and higher net sales to further leverage our existing corporate and regional infrastructure.

Results of Operations
 
The following tables present certain financial and other information, on a consolidated and segment basis: 
Consolidated:
Three Months Ended 
 April 30,
(in thousands)
2015
 
2014
 
Change
Revenues:
 
 
 
 
 
Total net sales
$
298,479

 
$
277,629

 
$
20,850

Finance charges and other revenues
66,597

 
57,819

 
8,778

Total revenues
365,076

 
335,448

 
29,628

Costs and expenses: (1)
 
 
 
 
 

Cost of goods sold, including warehousing and occupancy costs
173,472

 
160,782

 
12,690

Cost of service parts sold, including warehousing and occupancy cost
1,312

 
1,419

 
(107
)
Delivery, transportation and handling costs (2)
12,349

 
12,163

 
186

Selling, general and administrative expenses
95,675

 
88,041

 
7,634

Provision for bad debts
47,543

 
22,258

 
25,285

Charges and credits
619

 
1,754

 
(1,135
)
Total costs and expenses
330,970

 
286,417

 
44,553

Operating income
34,106

 
49,031

 
(14,925
)
Interest expense
9,428

 
4,724

 
4,704

Income before income taxes
24,678

 
44,307

 
(19,629
)
Provision for income taxes
9,001

 
15,838

 
(6,837
)
Net income
$
15,677

 
$
28,469

 
$
(12,792
)


16


Retail Segment:
Three Months Ended 
 April 30,
(in thousands)
2015
 
2014
 
Change
Revenues:





Product sales
$
271,626

 
$
254,220

 
$
17,406

Repair service agreement commissions
23,796

 
20,254

 
3,542

Service revenues
3,057

 
3,155

 
(98
)
Total net sales
298,479

 
277,629

 
20,850

Other revenues
149

 
466

 
(317
)
Total revenues
298,628

 
278,095

 
20,533

Costs and expenses: (1)

 

 
 

 
 
Cost of goods sold, including warehousing and occupancy costs
173,472

 
160,782

 
12,690

Cost of service parts sold, including warehousing and occupancy cost
1,312

 
1,419

 
(107
)
Delivery, transportation and handling costs (2)

12,349

 
12,163

 
186

Selling, general and administrative expenses (3)
68,227

 
64,167

 
4,060

Provision for bad debts
69

 
44

 
25

Charges and credits
619

 
1,754

 
(1,135
)
Total costs and expenses
256,048

 
240,329

 
15,719

Operating income (loss)
$
42,580

 
$
37,766

 
$
4,814

Number of stores:
 
 
 
 
 
Beginning of period
90

 
79

 
 
Open
3

 
2

 
 
Closed
(2
)
 
(2
)
 
 
End of period
91

 
79

 
 

Credit Segment:
Three Months Ended 
 April 30,
(in thousands)
2015
 
2014
 
Change
Revenues -
 
 
 
 
 
  Finance charges and other revenues
$
66,448

 
$
57,353

 
$
9,095

Costs and expenses:
 

 
 

 
 

Selling, general and administrative expenses (3)
27,448

 
23,874

 
3,574

Provision for bad debts
47,474

 
22,214

 
25,260

Total cost and expenses
74,922

 
46,088

 
28,834

Operating income
(8,474
)
 
11,265

 
(19,739
)
Interest expense
9,428

 
4,724

 
4,704

Income (loss) before income taxes
$
(17,902
)
 
$
6,541

 
$
(24,443
)

(1)
The presentation of our costs and expenses may not be comparable to other retailers since we do not include the cost of delivery, transportation and handling costs as part of cost of goods. Similarly, we include the cost of merchandising our products, including amounts related to purchasing the product, in selling, general and administrative expense. Other retailers may include such costs as part of cost of goods.
(2)
Delivery, transportation and handling costs, previously included in selling, general and administrative expenses, are shown separately.
(3)
SG&A 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 that 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 $3.5 million and $2.9 million for the three months ended April 30, 2015 and 2014, respectively. The amount of reimbursement made to

17


the retail segment by the credit segment was $8.5 million and $6.7 million for the three months ended April 30, 2015 and 2014, respectively.

Three months ended April 30, 2015 compared to three months ended April 30, 2014

Revenues. The following table provides an analysis of retail net sales by product category in each period, including repair service agreement commissions and service revenues, expressed both in dollar amounts and as a percent of total net sales:
 
Three Months Ended April 30,
 
 
 
%
 
Same store
(dollars in thousands)
2015
 
% of Total
 
2014
 
% of Total
 
Change
 
Change
 
% change
Furniture and mattress
$
89,502

 
30.0
%
 
$
80,892

 
29.2
%
 
$
8,610

 
10.6
 %
 
(5.5
)%
Home appliance
84,102

 
28.2

 
77,115

 
27.8

 
6,987

 
9.1

 
0.8

Consumer electronic
71,430

 
23.9

 
66,443

 
23.9

 
4,987

 
7.5

 
(2.6
)
Home office
21,985

 
7.4

 
23,936

 
8.6

 
(1,951
)
 
(8.2
)
 
(15.5
)
Other
4,607

 
1.5

 
5,834

 
2.1

 
(1,227
)
 
(21.0
)
 
(28.1
)
Product sales
271,626

 
91.0

 
254,220

 
91.6

 
17,406

 
6.8

 
(5.0
)
Repair service agreement commissions
23,796

 
8.0

 
20,254

 
7.3

 
3,542

 
17.5

 
1.3

Service revenues
3,057

 
1.0

 
3,155

 
1.1

 
(98
)
 
(3.1
)
 
 

Total net sales
$
298,479

 
100.0
%
 
$
277,629

 
100.0
%
 
$
20,850

 
7.5
 %
 
(4.3
)%

The following provides a summary of items impacting our product categories during the quarter compared to the prior year period:
Furniture unit volume increased 12.4% offset by a 2.9% decrease in average selling price;
Mattress unit volume increased 17.3% and the average selling price was flat;
Home appliance unit volume increased 13.3% offset by a 3.7% decrease in average selling price. Refrigeration sales increased 10.0%, laundry sales increased 8.8%, and cooking sales increased by 8.5%;
Consumer electronic average selling price increased by 13.0% offset by a 4.7% decrease in unit volume. Television sales increased 8.7% as average unit selling price increased 12.0% offset by a 2.9% decrease in unit volume. On a same store basis, television sales decreased 1.3%;
Home office average selling price increased 10.2% offset by a 16.5% decrease in unit volume. Tablet sales decreased by 49.5%; and
The increase in repair service agreement commissions was driven by improved program performance resulting in higher retrospective commissions and increased retail sales.

The following table provides the change of the components of finance charges and other revenues:
 
Three Months Ended 
 April 30,
 
 
(in thousands)
2015
 
2014
 
Change
Interest income and fees
$
55,419

 
$
46,490

 
$
8,929

Insurance commissions
11,029

 
10,863

 
166

Other revenues
149

 
466

 
(317
)
Finance charges and other revenues
$
66,597

 
$
57,819

 
$
8,778


Interest income and fees of the credit segment increased over the prior year level primarily driven by a 26.4% increase in the average balance of the portfolio. Portfolio interest income and fee yield on an annualized basis declined 100 basis points year-over-year as a result of higher provision for uncollectible interest and introduction of 18- and 24-month equal-payment, no-interest finance programs beginning in October 2014 to certain higher credit quality borrowers, which we discount to present value upon origination, resulting in a reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract at a lower rate than the average yield on the rest of the portfolio.


18


The following table provides key portfolio performance information: 
 
Three Months Ended 
 April 30,
(dollars in thousands)
2015
 
2014
Interest income and fees
$
55,419

 
$
46,490

Net charge-offs
(41,650
)
 
(21,192
)
Interest expense
(9,428
)
 
(4,724
)
Net portfolio yield
$
4,341

 
$
20,574

Average portfolio balance
$
1,367,266

 
$
1,081,456

Interest income and fee yield % (annualized)
16.6
%
 
17.6
%
Net charge-off % (annualized)
12.2
%
 
7.8
%

Cost of Goods and Service Parts Sold and Gross Margin
 
Three Months Ended 
 April 30,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Cost of goods sold, including warehousing and occupancy costs
$
173,472

 
$
160,782

 
$
12,690

Product gross margin percentage
36.1
%
 
36.8
%
 
 

Cost of service parts sold, including warehousing and occupancy costs
$
1,312

 
$
1,419

 
$
(107
)
Service gross margin percentage
42.9
%
 
45.0
%
 
 


Product gross margin decreased 70 basis points for the three months ended April 30, 2015 from the same prior year period primarily due to unleveraged warehousing costs.

Delivery, Transportation and Handling Costs
 
Three Months Ended 
 April 30,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Delivery, transportation and handling costs
$
12,349

 
$
12,163

 
$
186

As a percent of retail product sales and repair service agreement commissions
4.2
%
 
4.4
%
 
 


The decrease in delivery, transportation and handling costs as a percentage of product sales and repair service agreement commissions in the retail segment was primarily driven by efficiencies in delivery operations partially offset by higher costs as a result of the shift in product sales mix.

Selling, General and Administrative Expenses
 
Three Months Ended 
 April 30,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Selling, general and administrative expenses:
 
 
 
 
 
Retail segment
$
68,227

 
$
64,167

 
$
4,060

Credit segment
27,448

 
23,874

 
3,574

Selling, general and administrative expenses - Consolidated
$
95,675

 
$
88,041

 
$
7,634

As a percent of total revenues
26.2
%
 
26.2
%
 
 


The SG&A increase in the retail segment was primarily due to the opening of new stores resulting in higher sales-driven compensation and facility-related costs. As a percent of segment revenues, SG&A for the retail segment in the current period decreased 30 basis points as compared to the prior year period primarily due to leveraging advertising expense.


19


The increase in SG&A for the credit segment was driven by the addition of collections personnel to service the 25.2% year-over-year increase in the customer portfolio balance and anticipated near-term portfolio growth. As a percent of average total customer portfolio balance (annualized), SG&A for the credit segment in the current period decreased 80 basis points as compared to the prior year period due to leverage achieved on a higher portfolio balance.

Provision for Bad Debts
 
Three Months Ended 
 April 30,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Provision for bad debts:
 
 
 
 
 
Retail segment
$
69

 
$
44

 
$
25

Credit segment
47,474

 
22,214

 
25,260

Provision for bad debts - Consolidated
$
47,543

 
$
22,258

 
$
25,285

Provision for bad debts - Credit segment, as a percent of average portfolio balance (annualized)
13.9
%
 
8.2
%
 
 


The year-over-year increase in provision for bad debts was impacted by the following:
A 26.4% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;
A 17.5% increase in the balances originated during the quarter compared to the prior year comparative period;
An increase of 40 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 8.4% at April 30, 2015 as compared to the prior year period. Delinquency increased year-over-year across product categories and years of origination and many of the credit quality levels and geographic regions;
Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously experienced, due to the increased proportion of new customers of the total customer portfolio balance and continued elevation of our delinquency rates; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $95.6 million, or 6.9% of the total portfolio balance, driving $9.0 million of the increase in provision for bad debts.

Charges and Credits
 
Three Months Ended 
 April 30,
 
 
(in thousands)
2015
 
2014
 
Change
Store and facility closure and relocation costs
$
425

 
$
1,754

 
$
(1,329
)
Legal and professional fees related to the exploration of strategic alternatives and securities-related litigation
194

 

 
194

 
$
619

 
$
1,754

 
$
(1,135
)

During the three months ended April 30, 2015 and 2014, we have closed and relocated under-performing retail locations and have recorded the related charges. In connection with prior closures, we adjust the related lease obligations as more information becomes available. In addition, during the three months ended April 30, 2015, we had costs associated with legal and professional fees related to the Company's exploration of strategic alternatives and our securities-related litigation.

Interest Expense

Net interest expense for the three months ended April 30, 2015 increased $4.7 million from the prior year comparative period primarily due to an increase in the average debt balance outstanding and an increase in the effective interest rate. The increase in the effective interest rate was primarily due to our issuance of the Senior Notes on July 1, 2014.


20


Provision for Income Taxes
 
Three Months Ended 
 April 30,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Provision for income taxes
$
9,001

 
$
15,838

 
$
(6,837
)
As a percent of income before income taxes
36.5
%
 
35.7
%
 
 


The increase in the income tax rate for the three months ended April 30, 2015 was impacted by a higher portion of the tax from state taxes based on margin.

Customer Receivable Portfolio

We provide in-house financing to individual consumers on a short-term basis (maximum initial contractual term is 32 months) for the purchase of durable products for the home. A significant portion of our customer credit portfolio is due from customers that are considered higher-risk, subprime borrowers. Our financing is executed using an installment contract, which requires a fixed monthly payment over a fixed term. We maintain a secured interest in the product financed. If a payment is delayed, missed or paid only in part, the account becomes delinquent. Our collection personnel attempt to contact a customer once their account becomes delinquent. Our loan contracts generally provide for interest at the maximum rate allowed by the respective regulations in the states in which we operate, which generally range between 18% and 21%. In states where regulations do not generally limit the interest rate charged, we currently charge between 26% and 28%.

We offer 12-month, no-interest finance programs. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest program period (grace periods are provided), the account does not qualify for the no-interest provision and the terms of the account revert back to those of the executed installment contract resulting in interest over the entire term. Interest income is recognized based on our historical experience related to customers that fail to satisfy the requirements of the programs.

In October 2014, we began offering 18- and 24-month equal-payment, no-interest finance programs to certain higher credit quality borrowers, which are discounted to their present value at origination, resulting in a reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract. If a customer is delinquent in making a scheduled monthly payment (grace periods are provided), the account begins accruing interest based on the contract rate from the date of the last payment made, which is a higher rate than the discount rate.

We regularly extend or "re-age" a portion of our delinquent customer accounts as a part of our normal collection procedures to protect our investment. Generally, extensions are granted to customers who have experienced a financial difficulty (such as the temporary loss of employment), which was subsequently resolved and the customer indicates a willingness and ability to resume making monthly payments. Re-ages are not granted to debtors who demonstrate a lack of intent or ability to service the obligation. These re-ages involve modifying the payment terms to defer a portion of the cash payments currently required of the debtor to help the debtor improve his or her financial condition and eventually be able to pay us. Our re-aging of customer accounts does not change the interest rate and typically does not reduce the contractual payments due from the customer. We may also charge the customer an extension fee, which approximates the interest owed for the time period the contract was past due. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account or making two consecutive payments. Under these options, as with extensions, the customer must resolve the reason for delinquency and show a willingness and ability to resume making contractual monthly payments.


21


The following tables present, for comparison purposes, information about our credit portfolio:
 
As of April 30,
(dollars in thousands, except average outstanding account balance)
2015
 
2014
Total customer portfolio balance
$
1,382,242

 
$
1,103,880

Weighted average credit score of outstanding balances
595

 
591

Number of active accounts
716,188

 
631,795

Weighted average months since origination of outstanding balance
8.5

 
8.3

Average outstanding customer balance
$
2,355

 
$
2,258

Percent of balances 60+ days past due to total customer portfolio balance (1)
8.4
%
 
8.0
%
Percent of re-aged balances to total customer portfolio balance (1)
12.9
%
 
11.6
%
Account balances re-aged more than six months
$
47,423

 
$
23,633

Percent of total allowance for bad debts to total outstanding customer portfolio balance
11.1
%
 
6.6
%
Percent of total customer portfolio balance represented by no-interest option receivables
34.8
%
 
37.0
%


Three Months Ended 
 April 30,
(dollars in thousands, except average income of credit customer)
2015
 
2014
Total applications processed
292,602

 
265,265

Weighted average origination credit score of sales financed
617

 
605

Percent of total applications approved and utilized
44.3
%
 
48.0
%
Average down payment
4.0
%
 
4.2
%
Average income of credit customer at origination
$
40,500

 
$
38,400

Average total customer portfolio balance
$
1,367,266

 
$
1,081,456

Interest income and fee yield (annualized)
16.6
%
 
17.6
%
Percent of bad debt charge-offs, net of recoveries, to average total customer portfolio balance (annualized)
12.2
%
 
7.8
%
Weighted average monthly payment rate (2)
5.5
%
 
5.8
%
Provision for bad debts as a percentage of average total customer portfolio balance (annualized)
13.9
%
 
8.2
%
Percent of retail sales paid for by:
 

 
 

In-house financing, including down payment received
85.4
%
 
77.5
%
Third party financing
2.6
%
 
11.1
%
Third party rent-to-own options
5.1
%
 
4.2
%

93.1
%
 
92.8
%
 
(1)
Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.
(2)
Average monthly gross cash payments as a percentage of average gross principal balances outstanding at the beginning of each month in the period.
Our customer portfolio balance and related allowance for uncollectible accounts are segregated between customer accounts receivable and restructured accounts. Customer accounts receivable include all accounts for which payment term has not been cumulatively extended over 90 days or refinanced. Restructured accounts includes all accounts for which payment term has been re-aged in excess of three months or refinanced.


22


Customer accounts receivable consisted of the following:
 
Total Outstanding Balance
 
Customer Accounts Receivable
 
60 Days Past Due (1)
 
Re-aged (1)
(in thousands)
April 30,
2015
 
January 31,
2015
 
April 30,
2015
 
January 31,
2015
 
April 30,
2015
 
January 31,
2015
Customer accounts receivable
$
1,286,652

 
$
1,277,135

 
$
96,211

 
$
112,365

 
$
82,470

 
$
94,304

Restructured accounts
95,590

 
88,672

 
19,685

 
20,722

 
95,590

 
88,672

Total customer portfolio balance
1,382,242

 
1,365,807

 
$
115,896

 
$
133,087

 
$
178,060

 
$
182,976

Allowance for uncollectible accounts
(153,389
)
 
(146,982
)
 
 
 
 
 
 
 
 
Allowance for short-term, no-interest programs
(16,950
)
 
(17,474
)
 
 
 
 
 
 
 
 
Total customer accounts receivable, net
1,211,903

 
1,201,351

 
 
 
 
 
 
 
 
Short-term portion of customer accounts receivable, net
(653,141
)
 
(643,094
)
 
 
 
 
 
 
 
 
Long-term portion of customer accounts receivable, net
$
558,762

 
$
558,257

 
 
 
 
 
 
 
 

(1)
Due to the fact that an account can become past due after having been re-aged, accounts could be represented as both past due and re-aged. As of April 30, 2015 and January 31, 2015, the amounts included within both past due and re-aged was $39.4 million and $44.9 million, respectively. As of April 30, 2015 and January 31, 2015, the total customer portfolio balance past due one day or greater was $322.8 million and $316.0 million, respectively. These amounts include the 60 days past due balances shown.

The following presents the activity in our balance in the allowance for doubtful accounts and uncollectible interest for customer receivables: 
 
Three Months Ended April 30, 2015
 
Three Months Ended April 30, 2014
(in thousands)
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
 
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
Allowance at beginning of period
$
118,786

 
$
28,196

 
$
146,982

 
$
54,448

 
$
17,353

 
$
71,801

Provision (1)
43,011

 
12,950

 
55,961

 
23,241

 
3,948

 
27,189

Principal charge-offs (2)
(35,725
)
 
(7,072
)
 
(42,797
)
 
(22,801
)
 
(4,440
)
 
(27,241
)
Interest charge-offs
(6,598
)
 
(1,306
)
 
(7,904
)
 
(4,033
)
 
(785
)
 
(4,818
)
Recoveries (2)
957

 
190

 
1,147

 
5,063

 
986

 
6,049

Allowance at end of period
$
120,431

 
$
32,958

 
$
153,389

 
$
55,918

 
$
17,062

 
$
72,980

Average total customer portfolio balance
$
1,274,281

 
$
92,985

 
$
1,367,266

 
$
1,033,443

 
$
48,013

 
$
1,081,456


(1)
Includes provision for uncollectible interest, which is included in finance charges and other revenues.
(2)
Charge-offs include the principal amount of losses (excluding accrued and unpaid interest), and recoveries include principal collections during the period shown of previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.

Our overall allowance for uncollectible accounts as a percentage of the total portfolio balance increased to 11.1% as of April 30, 2015 from 6.6% as of April 30, 2014. The year-over-year increase was impacted by the following:
A 26.4% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;
A 17.5% increase in the balances originated during the quarter compared to the prior year comparative period;
An increase of 40 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 8.4% at April 30, 2015 as compared to the prior year period. Delinquency increased year-over-year across product categories and years of origination and many of the credit quality levels and geographic regions;

23


Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously experienced, due to the increased proportion of new customers of the total customer portfolio balance and continued elevation of our delinquency rates;
The decision to pursue collection of past and future charged-off accounts internally rather than selling charged off accounts to a third-party. This change resulted in $0.8 million in additional provision recorded during the first quarter of fiscal 2016 as recoveries are expected to occur over an extended time period, which resulted in a reduction in expected cash recoveries over the next twelve months; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $95.6 million, or 6.9% of the total portfolio balance, driving $9.0 million of the increase in provision for bad debts.

For customer accounts receivable (excluding restructured accounts), the allowance for uncollectible accounts as a percentage of the outstanding portfolio balance rose from 5.3% as of April 30, 2014 to 9.4% as of April 30, 2015. The percentage of non-restructured accounts greater than 60 days past due increased 10 basis points over the prior year to 7.5% as of April 30, 2015. We expect delinquency levels and charge-offs to remain elevated over the short-term. The increase in delinquency and changes in expectations for customer performance and cash recoveries on charged-off accounts were reflected in our projection models, resulting in an increase in the level of losses we expected to realize over the next twelve months.

For restructured accounts, the allowance for uncollectible accounts as a percentage of the portfolio balance was 33.8% as of April 30, 2014 as compared to 34.5% as of April 30, 2015.

The percent of bad debt charge-offs (net of recoveries) to average portfolio balance was 7.8% for the three months ended April 30, 2014 compared to 12.2% for the three months ended April 30, 2015. The increase was primarily due to the higher level of delinquency experienced over the past twelve months.

As of April 30, 2015 and 2014, balances under no-interest programs were $480.5 million and $408.8 million, respectively. Amounts financed under these programs decreased to 34.8% of the total portfolio balance as of April 30, 2015 from 37.0% as of April 30, 2014 due to our discontinuation of the six-month program in August 2014 and reduced offering of the 12-month program offset by the addition of the 18- and 24-month programs in October 2014. If the proportion of accounts financed under no-interest programs increases, the overall yield recognized on the average customer receivable balance will decline. Conversely, a decline in the proportion of accounts financed under no-interest programs will generally result in an increase in the overall yield recognized. The allowance for no-interest programs represents the portion of the accrued interest reported within customer accounts receivable at the end of each period which is not expected to be realized due to customers satisfying the requirements of the interest-free programs and is based on historical experience. The allowance for no-interest credit programs climbed from 3.0% of the balance outstanding as of April 30, 2014 to 3.5% as of April 30, 2015.


24


Historical Static Loss Table

The following static loss analysis presents the cumulative percentage of balances charged off, based on the year the credit account was originated and the period the balance was charged off. The percentage computed below is calculated by dividing the cumulative net amount charged off since origination by the total balance of accounts originated during the applicable fiscal year. The net charge-off was determined by estimating, on a pro-rata basis, the amount of the recoveries received during a period that was allocable to the applicable origination period. As a result of our decision to pursue collections of past and future charged-off accounts internally rather than selling charged off accounts to a third-party, the recoveries received will happen later and the static loss rates will be higher than historical experience for the years prior to reaching terminal. For example, if our recoveries in the fourth quarter of fiscal 2015 and first quarter of fiscal 2016 were similar to the first three quarters of fiscal 2015, our static loss rates for each vintage year would be lower by 10 to 40 basis points.
 
 
April 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Balance
 
% of Balance

Cumulative Loss Rate as a % of Balance Originated (1)
Fiscal Year
 
Outstanding
 
Originated

Years from Origination
of Origination
 
(millions)
 
Outstanding


1

2

3

Terminal (2)
2006
 
 
 
 
 
0.3%
 
1.9%
 
3.6%
 
4.8%
 
5.8%
2007
 
 
 
 
 
0.2%
 
1.7%
 
3.5%
 
4.8%
 
5.7%
2008
 
 
 
 
 
0.2%
 
1.8%
 
3.6%
 
5.1%
 
5.9%
2009
 
 
 
 
 
0.2%
 
2.1%
 
4.6%
 
6.1%
 
6.6%
2010
 
 
 
 
 
0.2%
 
2.4%
 
4.6%
 
6.0%
 
6.0%
2011
 
$0.4
 
0.1%
 
0.4%
 
2.6%
 
5.2%
 
5.8%
 
6.0%
2012
 
$2.2
 
0.4%
 
0.2%
 
3.1%
 
5.5%
 
6.6%
 
6.7%
2013
 
$19.3
 
2.6%
 
0.4%
 
5.2%
 
8.3%
 
8.7%
 
 
2014
 
$211.5
 
19.7%
 
0.8%
 
8.2%
 
9.9%
 
 
 
 
2015
 
$821.3
 
62.3%
 
1.1%
 
2.6%
 
 
 
 
 
 

(1)
The loss rates for balances originated in fiscal years after fiscal year 2012 may not be comparable to those for balances originated in earlier years as changes made to our collections policies during fiscal 2012 resulted in accounts charging off earlier than in prior periods. The most recent percentages in years from origination 1 through 3 include loss data through April 30, 2015, and are not comparable to prior fiscal year accumulated net charge-off percentages in the same column.
(2)
The terminal loss percentage presented represents the point at which that pool of loans has reached its maximum loss rate.