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EX-10.13 - EXHIBIT 10.13 - CONNS INCconns20151031ex1013standst.htm
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 October 31, 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 December 3, 2015
Class
 
Outstanding
Common stock, $0.01 par value per share
 
32,244,955



CONN'S, INC. AND SUBSIDIARIES

FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBER 31, 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., its consolidated VIE, and its wholly-owned subsidiaries.




PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands, except per share data)
 
October 31,
2015
 
January 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
109,071

 
$
12,223

Restricted cash (all held by the VIE)
97,924

 

Customer accounts receivable, net of allowances (includes VIE balance of $523,662 as of October 31, 2015)
706,934

 
643,094

Other accounts receivable
84,145

 
67,703

Inventories
238,153

 
159,068

Deferred income taxes
23,445

 
20,040

Income taxes recoverable

 
11,058

Prepaid expenses and other current assets
17,958

 
12,529

Total current assets
1,277,630

 
925,715

Long-term portion of customer accounts receivable, net of allowances (includes VIE balance of $440,840 as of October 31, 2015)
595,127

 
558,257

Property and equipment, net
139,163

 
120,218

Deferred income taxes
43,043

 
33,505

Deferred debt issuance costs and other assets
33,880

 
9,627

Total assets
$
2,088,843

 
$
1,647,322

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Current portion of debt
$
830

 
$
395

Accounts payable
139,429

 
85,355

Accrued compensation and related expenses
8,275

 
12,151

Accrued expenses
34,465

 
27,479

Income taxes payable
4,004

 
3,450

Deferred revenues and other credits
16,636

 
16,179

Total current liabilities
203,639

 
145,009

Deferred rent
69,412

 
52,792

Long-term debt (includes VIE balance of $933,651 as of October 31, 2015)
1,158,746

 
774,015

Other long-term liabilities
21,838

 
21,836

Total liabilities
1,453,635

 
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; 34,618 and 36,352 shares issued, respectively)
346

 
364

Additional paid-in capital
183,157

 
231,395

Retained earnings
451,705

 
421,911

Total stockholders’ equity
635,208

 
653,670

Total liabilities and stockholders' equity
$
2,088,843

 
$
1,647,322


See notes to condensed consolidated financial statements.

1


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share amounts)
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Product sales
$
293,122

 
$
278,139

 
$
858,487

 
$
796,525

Repair service agreement commissions
26,038

 
23,056

 
77,590

 
64,042

Service revenues
3,474

 
3,414

 
9,982

 
9,952

Total net sales
322,634

 
304,609

 
946,059

 
870,519

Finance charges and other revenues
72,599

 
65,449

 
210,300

 
187,951

Total revenues
395,233

 
370,058

 
1,156,359

 
1,058,470

Costs and expenses:
 

 
 

 
 
 
 
Cost of goods sold, including warehousing and occupancy costs
186,807

 
178,976

 
547,403

 
508,475

Cost of service parts sold, including warehousing and occupancy costs
1,463

 
1,525

 
4,325

 
4,815

Delivery, transportation and handling costs
14,631

 
13,216

 
40,767

 
38,543

Selling, general and administrative expenses
113,668

 
99,346

 
314,175

 
281,526

Provision for bad debts
58,208

 
72,019

 
157,397

 
133,862

Charges and credits
2,540

 
355

 
4,172

 
3,601

Total costs and expenses
377,317

 
365,437

 
1,068,239

 
970,822

Operating income
17,916

 
4,621

 
88,120

 
87,648

Interest expense
19,702

 
8,950

 
39,185

 
19,921

Loss on extinguishment of debt
1,367

 

 
1,367

 

Income (loss) before income taxes
(3,153
)
 
(4,329
)
 
47,568

 
67,727

Provision (benefit) for income taxes
(732
)
 
(1,265
)
 
17,774

 
24,672

Net income (loss)
$
(2,421
)
 
$
(3,064
)
 
$
29,794

 
$
43,055

Earnings (loss) per share:
 

 
 

 
 
 
 
Basic
$
(0.07
)
 
$
(0.08
)
 
$
0.82

 
$
1.19

Diluted
$
(0.07
)
 
$
(0.08
)
 
$
0.81

 
$
1.17

Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
35,704

 
36,265

 
36,175

 
36,203

Diluted
35,704

 
36,265

 
36,694

 
36,928


See notes to condensed consolidated financial statements.

2


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2015
 
2014
 
2015
 
2014
Net income (loss)
$
(2,421
)
 
$
(3,064
)
 
$
29,794

 
$
43,055

Change in fair value of hedges

 
39

 

 
155

Impact of provision for income taxes on comprehensive income

 
(14
)
 

 
(55
)
Comprehensive income (loss)
$
(2,421
)
 
$
(3,039
)
 
$
29,794

 
$
43,155


See notes to condensed consolidated financial statements.

3


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Nine Months Ended 
 October 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
29,794

 
$
43,055

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

 
 

Depreciation
16,400

 
13,294

Amortization of debt issuance costs
7,048

 
2,287

Loss from extinguishment of debt
1,367

 

Provision for bad debts and uncollectible interest
184,297

 
153,709

Stock-based compensation expense
2,961

 
3,258

Excess tax benefits from stock-based compensation
(479
)
 
(961
)
Charges, net of credits, for store and facility closures and relocations
637

 
3,105

Deferred income taxes
(12,944
)
 
(23,681
)
Gain on sale of property and equipment
(1,303
)
 
(345
)
Tenant improvement allowances received from landlords
12,866

 
14,621

Change in operating assets and liabilities:
 

 
 

Customer accounts receivable
(285,007
)
 
(274,669
)
Other accounts receivable
(10,260
)
 
(9,622
)
Inventories
(79,085
)
 
(48,073
)
Other assets
(551
)
 
(1,347
)
Accounts payable
58,790

 
9,239

Accrued expenses
687

 
(4,854
)
Income taxes
11,612

 
(10,798
)
Deferred revenues and other credits
(1,656
)
 
2,376

Deferred rent
(468
)
 
2,612

Net cash used in operating activities
(65,294
)
 
(126,794
)
Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(46,667
)
 
(53,116
)
Proceeds from sale of property
5,609

 
19,402

Net cash used in investing activities
(41,058
)
 
(33,714
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of asset-backed notes
1,118,000

 

Payments on asset-backed notes
(184,349
)
 

Changes in restricted cash balances
(97,924
)
 

Borrowings from revolving credit facility
277,081

 
357,456

Payments on revolving credit facility
(805,193
)
 
(441,950
)
Proceeds from issuance of senior notes, net of issuance costs

 
243,400

Repurchase of senior notes
(22,965
)
 

Payment of debt issuance costs and amendment fees
(31,871
)
 

Repurchase of common stock
(51,680
)
 

Proceeds from stock issued under employee benefit plans
2,034

 
975

Excess tax benefits from stock-based compensation
479

 
961

Other
(412
)
 
(301
)
Net cash provided by financing activities
203,200

 
160,541

Net change in cash and cash equivalents
96,848

 
33

Cash and cash equivalents, beginning of period
12,223

 
5,727

Cash and cash equivalents, end of period
$
109,071

 
$
5,760


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, under-served population of credit constrained consumers who typically have limited banking options.

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.

Variable Interest Entity. In September 2015, we securitized $1.4 billion of customer accounts receivables by transferring the receivables to a bankruptcy-remote variable-interest entity (the "VIE"). The VIE issued asset-backed notes at a face amount of $1.12 billion secured by the transferred portfolio balance, which resulted in net proceeds to us of approximately $1.08 billion, net of transaction costs and restricted cash held by the VIE. The net proceeds were used to pay down the entire balance on our revolving credit facility, to repurchase shares of the Company's common stock and Senior Notes, and for other general corporate purposes. We currently hold the residual equity of the VIE, which we are in the process of marketing. We may elect to retain all or a portion of the residual equity of the VIE if that is determined to be in our best economic interest. We also plan to execute periodic securitizations of future originated customer loans.

We retain the servicing of the securitized portfolio and have a variable interest in the VIE by holding the residual equity. We determined that we are the primary beneficiary of the VIE because (i) our servicing responsibilities for the securitized portfolio give us the power to direct the activities that most significantly impact the performance of the VIE and (ii) our variable interest in the VIE gives us the obligation to absorb losses and the right to receive residual returns that could potentially be significant. As a result, while holding all or a significant portion of the residual equity of the VIE, we will consolidate the VIE within our financial statements. If we sell all or a significant portion of the residual equity, we will assess if the transaction achieves sale treatment for accounting purposes, which may result in deconsolidation of the VIE. There is no assurance that we will complete a sale of all or a portion of the residual equity of the VIE, and there is no assurance we will achieve sale treatment. No timetable has been set for completion of this process. As a result, we have determined that the securitized 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. We have not made an adjustment to the customer accounts receivable balance as a result of the transaction or in anticipation of any gain or loss that may occur should a sale of the residual portion of the VIE be completed.

Refer to Note 6, Debt, and Note 8, Variable Interest Entity, for additional information.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries, including the VIE. Conn’s, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

5

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



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.

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.
 
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.

Supplemental Cash Flow Information. The following table provides additional cash flow information:
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
Non-cash investing and financing activities:
 
 
 
Capital lease asset additions and related obligations
$
2,187

 
$
304

Property and equipment purchases not yet paid
$
2,391

 
$

Supplemental cash flow data:
 
 
 
Cash interest paid
$
29,200

 
$
11,913

Cash income taxes paid, net
$
21,393

 
$
58,363


Restricted Cash. The restricted cash balance as of October 31, 2015 includes $83.5 million of cash we collected as servicer on the securitized receivables that was remitted to the VIE and $14.4 million of cash held by the VIE as additional collateral for the asset-backed notes.

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, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding used for the earnings per share calculations:
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
 
2015
 
2014
Weighted average common shares outstanding - Basic
35,704

 
36,265

 
36,175

 
36,203

Dilutive effect of stock options and restricted stock units

 

 
519

 
725

Weighted average common shares outstanding - Diluted
35,704

 
36,265

 
36,694

 
36,928


For the three months ended October 31, 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 867,000 and 744,000, respectively. For the nine months ended October 31, 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 173,000 and 92,000, respectively.

Customer accounts receivable and related allowance for doubtful accounts. Customer accounts receivable reported in the consolidated balance sheet includes total receivables managed, including those transferred to the VIE and those receivables not transferred to the VIE. 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.
 

6

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


In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. In our role as servicer, we may also make modifications to loans held by the VIE. 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 revenues. 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 October 31, 2015 and January 31, 2015, there was $10.1 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 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. We also offer 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 October 31, 2015 and January 31, 2015, customer receivables carried in non-accrual status were $23.6 million and $13.7 million, respectively. At October 31, 2015 and January 31, 2015, customer receivables that were past due 90 days or more and still accruing interest totaled $107.9 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.


7

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


The fair value of cash and cash equivalents, restricted cash, 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 using data from the recent securitization transaction, approximates their carrying amount. At October 31, 2015, the fair value of our Senior Notes, which was determined using Level 1 inputs, was $218.6 million as compared to the carrying value of $227.0 million, excluding the impact of the related discount. At October 31, 2015, the fair value of the VIE's Class A Notes and Class B Notes, which were determined using Level 2 inputs based on inactive trading activity, approximates their carrying value.

Repurchase Program. On September 9, 2015, we announced that the Board of Directors of the Company ("Board of Directors") authorized a repurchase program of up to an aggregate of $75.0 million of (i) shares of the Company's outstanding common stock; (ii) 7.250% Senior Notes Due 2022 (the "Senior Notes"); or (iii) a combination thereof. During the three months ended October 31, 2015, we purchased 1.9 million shares of common stock, using $51.6 million of the $75.0 million repurchase authorization. Additionally, we utilized $22.9 million of the repurchase authorization to acquire $23.0 million of face of value of our senior notes. As a result of the bond repurchases, we had a loss on extinguishment of approximately $0.5 million, primarily due to the write-off of related deferred costs.

On November 2, 2015, we announced that the the Board of Directors authorized an additional $100.0 million towards the repurchase program for purchase of shares of the Company's outstanding common stock, Senior Notes, or a combination thereof. Subsequent to October 31, 2015, we purchased 3.3 million additional shares of common stock, using $80.6 million of the $100.0 million repurchase authorization. Common stock repurchases may be made from time to time on the open market or through privately negotiated transactions, at management’s discretion, based on market and business conditions. We have no obligation to repurchase shares under the authorization, and the timing and value of the shares that are repurchased will be at the discretion of management and will depend on a number of factors, including the price of the Company's common stock. We may suspend or discontinue repurchases at any time without notice.

Stockholders' Rights Plan. On October 6, 2014, we adopted a stockholders' rights plan whereby the 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. On September 2, 2015, the Board of Directors approved the termination of the Company’s stockholder rights plan, and the rights plan was terminated, effective September 10, 2015.

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. The disinterested members of our Board of Directors determined that it was 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 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. During the three months ended October 31, 2015, we paid Stephens Inc. a success fee of $1.1 million as a result of the close of the securitization transaction.

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, 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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of Effective Date, which defers the effective date of ASU 2015-14 by one year and allows early adoption on a limited basis. ASU 2014-09 is now effective for us beginning in the first quarter of fiscal year 2019 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. We are currently assessing the impact the new standard will have on our financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which focuses on a reporting company’s consolidation evaluation to determine whether they should consolidate certain legal entities. ASU 2015-02 is effective for us beginning in the first quarter of fiscal year 2017 and allows early adoption, including adoption in an interim period. We early adopted ASU 2015-02 beginning with the quarter ended July 31, 2015, which did not have an impact to our financial statements.


8

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
 
2015
 
2014
Store and facility closure and relocation costs (credits)
$
212

 
$
(141
)
 
$
637

 
$
3,105

Legal and professional fees related to the exploration of strategic alternatives and securities-related litigation
999

 
496

 
2,206

 
496

Executive management transition costs
1,329

 

 
1,329

 

 
$
2,540

 
$
355

 
$
4,172

 
$
3,601


During the three months ended October 31, 2015, we had costs associated with legal and professional fees related to our exploration of strategic alternatives (including our securitization transaction), our securities-related litigation, and transition costs due to changes in the executive management team. During the three months ended October 31, 2014, we recorded a net credit related to store closures and relocations due to the revision of estimated lease termination and other costs, and had costs associated with legal and professional fees related to our exploration of strategic alternatives and our class action litigation.

3.     Finance Charges and Other Revenues
 
Finance charges and other revenues consisted of the following:
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
 
2015
 
2014
Interest income and fees
$
58,961

 
$
52,142

 
$
171,763

 
$
150,858

Insurance commissions
13,222

 
12,777

 
37,313

 
35,753

Other revenues
416

 
530

 
1,224

 
1,340

 
$
72,599

 
$
65,449

 
$
210,300

 
$
187,951


Interest income and fees and insurance commissions are derived from the credit segment operations, whereas other revenues is derived from the retail segment operations. For the three months ended October 31, 2015 and 2014, interest income and fees was reduced by provisions for uncollectible interest of $10.0 million and $7.8 million, respectively. For the nine months ended October 31, 2015 and 2014, interest income and fees was reduced by provisions for uncollectible interest of $27.4 million and $19.8 million, respectively. For the three months ended October 31, 2015 and 2014, the amount included in interest income and fees related to TDR accounts was $3.5 million and $1.8 million, respectively. For the nine months ended October 31, 2015 and 2014, the amount included in interest income and fees related to TDR accounts was $10.0 million and $4.9 million, respectively.


9

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)
October 31,
2015
 
January 31,
2015
 
October 31,
2015
 
January 31,
2015
 
October 31,
2015
 
January 31,
2015
Customer accounts receivable
$
1,391,795

 
$
1,277,135

 
$
122,040

 
$
112,365

 
$
100,937

 
$
94,304

Restructured accounts
109,879

 
88,672

 
30,882

 
20,722

 
109,879

 
88,672

Total customer portfolio balance
1,501,674

 
1,365,807

 
$
152,922

 
$
133,087

 
$
210,816

 
$
182,976

Allowance for uncollectible accounts
(180,533
)
 
(146,982
)
 
 
 
 
 
 
 
 
Allowance for short-term, no-interest programs
(19,080
)
 
(17,474
)
 
 
 
 
 
 
 
 
Total customer accounts receivable, net
1,302,061

 
1,201,351

 
 
 
 
 
 
 
 
Short-term portion of customer accounts receivable, net
(706,934
)
 
(643,094
)
 
 
 
 
 
 
 
 
Long-term portion of customer accounts receivable, net
$
595,127

 
$
558,257

 
 
 
 
 
 
 
 
Securitized receivables held by the VIE
$
1,142,259

 
$

 
$
152,136

 
$

 
$
204,670

 
$

Receivables not held by the VIE
359,415

 
1,365,807

 
786

 
133,087

 
6,146

 
182,976

Total customer portfolio balance
$
1,501,674

 
$
1,365,807

 
$
152,922

 
$
133,087

 
$
210,816

 
$
182,976


(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 October 31, 2015 and January 31, 2015, the amounts included within both past due and re-aged was $55.6 million and $44.9 million, respectively. As of October 31, 2015 and January 31, 2015, the total customer portfolio balance past due one day or greater was $357.8 million and $316.0 million, respectively. These amounts include the 60 days past due balances shown.

The following presents the activity in the allowance for doubtful accounts and uncollectible interest for customer receivables: 
 
Nine Months Ended October 31, 2015
 
Nine Months Ended October 31, 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)
146,587

 
37,710

 
184,297

 
131,806

 
21,903

 
153,709

Principal charge-offs (2)
(107,590
)
 
(22,779
)
 
(130,369
)
 
(77,058
)
 
(12,404
)
 
(89,462
)
Interest charge-offs
(19,613
)
 
(4,153
)
 
(23,766
)
 
(13,807
)
 
(2,223
)
 
(16,030
)
Recoveries (2)
2,797

 
592

 
3,389

 
10,896

 
1,754

 
12,650

Allowance at end of period
$
140,967

 
$
39,566

 
$
180,533

 
$
106,285

 
$
26,383

 
$
132,668

Average total customer portfolio balance
$
1,325,324

 
$
98,993

 
$
1,424,317

 
$
1,090,078

 
$
57,715

 
$
1,147,793


(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). Recoveries include principal collections of previously charged-off balances for both periods shown and proceeds received from selling charged off accounts to third parties during the nine months ended October 31, 2014 (we did not sell charged off accounts during the current fiscal year). Net charge-offs are calculated as the net of principal charge-offs and recoveries.


10

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:
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
Balance at beginning of period
$
2,556

 
$
4,316

Accrual for additional closures
318

 
2,595

Adjustments
(21
)
 
(216
)
Cash payments, net of sublease income
(876
)
 
(3,880
)
Balance at end of period
1,977

 
2,815

Current portion, included in accrued expenses
(473
)
 
(954
)
Long-term portion, included in other long-term liabilities
$
1,504

 
$
1,861


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

 
$
528,112

Senior Notes
227,000

 
250,000

Class A Notes
767,751

 

Class B Notes
165,900

 

Other debt
2,708

 
933

Total debt
1,163,359

 
779,045

Less:
 
 
 
Discount on debt
(3,783
)
 
(4,635
)
Current portion of debt
(830
)
 
(395
)
Long-term debt
$
1,158,746

 
$
774,015


Senior Notes. On July 1, 2014, we issued $250.0 million of unsecured Senior Notes bearing interest at 7.250%, 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 effective interest rate of the Senior Notes after giving effect to offering fees and debt discount is 7.8%.

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.


11

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


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.

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 7.250% 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.

During the three months ended October 31, 2015, we repurchased $23.0 million of face of value of the Senior Notes for $22.9 million. As a result of the bond repurchases, we had a loss on extinguishment of $0.5 million, primarily due to the write-off of related deferred costs.

In October 2015, the Company, the Guarantors and U.S. Bank National Association, as trustee, adopted, with the consent of the holders of a majority in the outstanding principal amount of the Senior Notes, the Second Supplemental Indenture (the "Supplemental Indenture"). Pursuant to the Supplemental Indenture, the Indenture was amended to extend, from May 1, 2014 to November 1, 2015, the beginning of the accounting period from which consolidated net income is calculated for purposes of determining the size of the "restricted payment basket" exception to the restricted payments limitation and to increase, from $75.0 million to $375.0 million, the dollar threshold exception to the restricted payments limitation. In November 2015, we paid approximately $3.8 million as an aggregate consent fee to the consenting holders of the Senior Notes. Such fee will be amortized over the remaining life of the Senior Notes.

Asset-backed Notes. In September 2015, the VIE issued asset-backed notes at a face amount of $1.12 billion secured by the transferred customer accounts receivables and restricted cash held by the VIE, which resulted in net proceeds to us of approximately $1.08 billion, net of transaction costs and restricted cash held by the VIE. The net proceeds were used to pay down the entire balance on our previous revolving credit facility, to repurchase shares of the Company's common stock and Senior Notes, and for other general corporate purposes. The asset-backed notes consist of the following securities:
Asset-backed Fixed Rate Notes, Class A, Series 2015-A ("Class A Notes") in aggregate principal amount of $952.1 million that bear interest at a fixed annual rate of 4.565% and mature on September 15, 2020. The effective interest rate of the Class A Notes after giving effect to offering fees is 7.5%.
Asset-backed Fixed Rate Notes, Class B, Series 2015-A ("Class B Notes") in aggregate principal amount of $165.9 million that bear interest at a fixed annual rate of 8.500% and mature on September 15, 2020. The effective interest rate of the Class B Notes after giving effect to offering fees is 13.3%.

The Class A Notes and Class B Notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act. If an event of default were to occur under the indenture that governs the Class A Notes and Class B Notes, the payment of the outstanding amounts will be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the Class A Notes and Class B Notes. The holders of the Class A Notes and Class B Notes have no recourse to assets outside of the VIE. Events of default include, but are not limited to, failure to make required payments on the notes or specified bankruptcy-related events.
 
Revolving Credit Facility. On October 30, 2015, Conn's, Inc. and certain of its subsidiaries (the "Borrowers") entered into the Third Amended and Restated Loan and Security Agreement with certain lenders, that provides for an $810.0 million asset-based revolving credit facility (the "revolving credit facility") under which availability is subject to a borrowing base. The amended revolving credit facility resulted in various changes, including:
Extended the maturity date from November 25, 2017 to October 30, 2018;
Increased the maximum total leverage ratio covenant (ratio of total liabilities less the sum of qualified cash and ABS qualified cash to tangible net worth) from 2.0x to 4.0x;
Added a new maximum "ABS excluded" leverage ratio covenant (ratio of total liabilities (excluding liabilities of the consolidated VIE and other permitted securitization transactions) less qualified cash to tangible net worth) of 2.0x;

12

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


Replaced the fixed charge coverage ratio covenant with a minimum interest coverage ratio covenant of 2.0x beginning with our fourth quarter of fiscal 2016;
Reduced the maximum accounts receivable advance rate from 80% to 75%;
Included a fourth quarter seasonal step-down in the cash recovery covenant from 4.5% to 4.25%;
Increased the maximum inventory component of the borrowing base from $100.0 million to $175.0 million;
Modified the conditions for repurchases of the Company’s common stock, including changes in the liquidity test and the elimination of the fixed charge coverage ratio test;
Included a new liquidity test for repurchases and redemptions of our debt; and
Modified our ability to effect future securitizations of our customer receivables portfolio, including removing the consent rights of the lenders and establishing set criteria for permitted securitizations.

In connection with entering into the amended revolving credit facility, we wrote-off $0.9 million of debt issuance costs related to the previous revolving credit facility for lenders that did not continue to participate. Also, we deferred $3.0 million of debt issuance costs, which will be amortized over the remaining term of the amended revolving credit facility along with the debt issuance costs remaining from the previous revolving credit facility.

Loans under the amended revolving credit facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 2.50% to 3.00% per annum (depending on quarterly average net availability under the borrowing base) or the alternate base rate plus a margin ranging from 1.50% to 2.00% per annum (depending on quarterly average net availability under the borrowing base). The alternate base rate is the greater of the prime rate announced by Bank of America, N.A., the federal funds rate plus 0.5%, or LIBOR for a 30-day interest period plus 1.0%. We also pay an unused fee on the portion of the commitments that are available for future borrowings or letters of credit at a rate ranging from 0.25% to 0.75% per annum, depending on the outstanding balance and letters of credit of the revolving credit facility.

The amended revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory, and provides for a $40.0 million sub-facility for letters of credit to support obligations incurred in the ordinary course of business. The obligations under the revolving credit facility are secured by substantially all assets of the Company, excluding the assets of the VIE. As of October 31, 2015, we had immediately available borrowing capacity of $269.5 million under our revolving credit facility, net of standby letters of credit issued of $1.1 million.

The revolving credit facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The revolving credit facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the revolving credit facility.

Debt covenants. We were in compliance with our debt covenants at October 31, 2015. A summary of the significant financial covenants that govern our revolving credit facility compared to our actual compliance status at October 31, 2015 is presented below: 
 
Actual
 
Required
Minimum/
Maximum
Leverage Ratio must not exceed maximum
1.96 to 1.00
 
4.00:1.00
ABS Excluded Leverage Ratio must not exceed maximum
0.65 to 1.00
 
2.00:1.00
Cash Recovery Percent must exceed stated amount
4.73%
 
4.50%
Capital Expenditures, net, must not exceed maximum
$27.7 million
 
$75.0 million

All capitalized terms in the above table are defined by the revolving credit facility, as amended, and may or may not agree directly to the financial statement captions in this document. The covenants are calculated quarterly, except for the Cash Recovery Percent, which is calculated monthly on a trailing three-month basis, and Capital Expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter. The revolving credit facility is a significant factor relative to our ongoing liquidity and our ability to meet the cash needs associated with the growth of our business. Our inability to use this facility because of a failure to comply with its covenants would adversely affect our business operations. 


13

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


7.     Contingencies
 
Securities Class Action Litigation. We and two of our current executive officers are defendants in a consolidated securities class action lawsuit pending in the Southern District of Texas (the "Court"), 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.

On June 30, 2015, the Court held a hearing on the defendants’ motion to dismiss plaintiffs’ complaint. At the hearing, the Court dismissed Brian Taylor, a former executive officer, and certain other aspects of the complaint. The Court ordered the plaintiffs to further amend their complaint in accordance with its ruling, and the plaintiffs filed their Fourth Consolidated Amended Complaint on July 21, 2015. The remaining defendants filed a motion to dismiss on August 28, 2015. The briefing on the defendant’s motion to dismiss 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 of 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, Bob L. Martin, Jon E.M. Jacoby, Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson, Brian Taylor, a former executive officer, 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 approved a stipulation among the parties to stay the action pending resolution of the motion to dismiss in the Consolidated Securities Action, and the parties have requested that the Court extend the stay pending resolution of the anticipated motion to dismiss.

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, which is still 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 investigation which generally relates to our underwriting policies and bad debt provisions.  The investigation is a non-public, fact-finding inquiry, and the SEC has stated that the investigation does not mean 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.


14

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


8.     Variable Interest Entity
 
In September 2015, we securitized $1.4 billion of customer accounts receivables by transferring the receivables to the VIE. The VIE issued asset-backed notes at a face amount of $1.12 billion secured by the transferred portfolio balance. Under the terms of the securitization transaction, the customer receivable principal and interest payment cash flows will go first to the servicer and the holders of the Class A Notes and Class B Notes, and then to the residual equity holder. We retain the servicing of the securitized portfolio and are receiving a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables, and we currently hold all of the residual equity. In addition, we will retain, rather than the VIE, all credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charge-offs of the securitized receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as we consolidate the VIE.

The following presents the assets and liabilities held by the VIE and that are included in our consolidated balance sheet: 
(in thousands)
October 31,
2015
 
January 31,
2015
Assets:
 
 
 
Customer accounts receivable:
 
 
 
Customer accounts receivable
$
1,037,645

 
$

Restructured accounts
104,614

 

Allowance for uncollectible accounts
(161,343
)
 

Allowance for short-term, no-interest programs
(16,414
)
 

Total customer accounts receivable, net
964,502

 

Restricted cash
97,924

 

Deferred debt issuance costs
23,109

 

Total assets
$
1,085,535

 
$

Liabilities:
 
 
 
Accrued interest
$
2,048

 
$

Due to Conn's, Inc., net
2,434

 

Deferred interest income
6,461

 

Long-term debt:
 
 
 
Class A Notes
767,751

 

Class B Notes
165,900

 

Total long-term debt
933,651

 

Total liabilities
$
944,594

 
$


The assets of the VIE serve as collateral for the obligations of the VIE. The holders of the Class A Notes and Class B Notes have no recourse to assets outside of the VIE.


15

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


9.     Segment Reporting
 
Financial information by segment is presented in the following tables: 
 
Three Months Ended October 31, 2015

Three Months Ended October 31, 2014
(in thousands)
Retail

Credit

Total

Retail

Credit

Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
105,735

 
$

 
$
105,735

 
$
86,820

 
$

 
$
86,820

Home appliance
86,434

 

 
86,434

 
82,811

 

 
82,811

Consumer electronic
70,263

 

 
70,263

 
73,722

 

 
73,722

Home office
26,108

 

 
26,108

 
28,380

 

 
28,380

Other
4,582

 

 
4,582

 
6,406

 

 
6,406

Product sales
293,122

 

 
293,122

 
278,139

 

 
278,139

Repair service agreement commissions
26,038

 

 
26,038

 
23,056

 

 
23,056

Service revenues
3,474

 

 
3,474

 
3,414

 

 
3,414

Total net sales
322,634

 

 
322,634

 
304,609

 

 
304,609

Finance charges and other revenues
416

 
72,183

 
72,599

 
531

 
64,918

 
65,449

Total revenues
323,050

 
72,183

 
395,233

 
305,140

 
64,918

 
370,058

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
186,807

 

 
186,807

 
178,976

 

 
178,976

Cost of service parts sold, including warehousing and occupancy costs
1,463

 

 
1,463

 
1,525

 

 
1,525

Delivery, transportation and handling costs
14,631

 

 
14,631

 
13,216

 

 
13,216

Selling, general and administrative expenses (1)
81,484

 
32,184

 
113,668

 
73,220

 
26,126

 
99,346

Provision for bad debts
120

 
58,088

 
58,208

 
54

 
71,965

 
72,019

Charges and credits
2,540

 

 
2,540

 
355

 

 
355

Total costs and expense
287,045

 
90,272

 
377,317

 
267,346

 
98,091

 
365,437

Operating income (loss)
36,005

 
(18,089
)
 
17,916

 
37,794

 
(33,173
)
 
4,621

Interest expense

 
19,702

 
19,702

 

 
8,950

 
8,950

Loss on extinguishment of debt

 
1,367

 
1,367

 

 

 

Income (loss) before income taxes
$
36,005

 
$
(39,158
)
 
$
(3,153
)
 
$
37,794

 
$
(42,123
)
 
$
(4,329
)


16

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


 
Nine Months Ended October 31, 2015
 
Nine Months Ended October 31, 2014
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
294,119

 
$

 
$
294,119

 
$
249,085

 
$

 
$
249,085

Home appliance
267,796

 

 
267,796

 
244,281

 

 
244,281

Consumer electronic
211,375

 

 
211,375

 
209,110

 

 
209,110

Home office
71,033

 

 
71,033

 
76,377

 

 
76,377

Other
14,164

 

 
14,164

 
17,672

 

 
17,672

Product sales
858,487

 

 
858,487

 
796,525

 

 
796,525

Repair service agreement commissions
77,590

 

 
77,590

 
64,042

 

 
64,042

Service revenues
9,982

 

 
9,982

 
9,952

 

 
9,952

Total net sales
946,059

 

 
946,059

 
870,519

 

 
870,519

Finance charges and other revenues
1,224

 
209,076

 
210,300

 
1,340

 
186,611

 
187,951

Total revenues
947,283

 
209,076

 
1,156,359

 
871,859

 
186,611

 
1,058,470

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
547,403

 

 
547,403

 
508,475

 

 
508,475

Cost of service parts sold, including warehousing and occupancy costs
4,325

 

 
4,325

 
4,815

 

 
4,815

Delivery, transportation and handling costs
40,767

 

 
40,767

 
38,543

 

 
38,543

Selling, general and administrative expenses (1)
226,394

 
87,781

 
314,175

 
206,559

 
74,967

 
281,526

Provision for bad debts
513

 
156,884

 
157,397

 
98

 
133,764

 
133,862

Charges and credits
4,172

 

 
4,172

 
3,601

 

 
3,601

Total costs and expense
823,574

 
244,665

 
1,068,239

 
762,091

 
208,731

 
970,822

Operating income (loss)
123,709

 
(35,589
)
 
88,120

 
109,768

 
(22,120
)
 
87,648

Interest expense

 
39,185

 
39,185

 

 
19,921

 
19,921

Loss on extinguishment of debt

 
1,367

 
1,367

 

 

 

Income (loss) before income taxes
$
123,709

 
$
(76,141
)
 
$
47,568

 
$
109,768

 
$
(42,041
)
 
$
67,727


(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 $3.7 million and $2.8 million for the three months ended October 31, 2015 and 2014, respectively, and $10.6 million and $8.7 million for the nine months ended October 31, 2015 and 2014, respectively. The amount of reimbursement made to the retail segment by the credit segment was $9.3 million and $7.7 million for the three months ended October 31, 2015 and 2014, respectively, and $26.7 million and $21.5 million for the nine months ended October 31, 2015 and 2014, respectively.


17


ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
 
Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 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. We can give no assurance that such statements will prove to be correct, and actual results may differ materially. A wide variety of potential risks, uncertainties, and other factors could materially affect the Company’s ability to achieve the results either expressed or implied by the Company’s forward-looking statements including, but not limited to: general economic conditions impacting the Company's customers or potential customers; the Company’s ability to execute periodic securitizations of future originated customer loans including the sale of any remaining residual equity on favorable terms; the Company's ability to continue existing customer financing programs or to offer new customer financing programs; changes in the delinquency status of the Company’s credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success of the Company’s planned opening of new stores; technological and market developments and sales trends for the Company’s major product offerings; the Company’s ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of the Company's customers and employees; the Company’s ability to fund its operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from the Company’s revolving credit facility, and proceeds from accessing debt or equity markets; the ability to continue the repurchase program; and other risks detailed in Part I, "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 and Part II, "Item 1A. Risk Factors" in this Quarterly Report. 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.

The Company makes available in the investor relations section of its website at ir.conns.com updated monthly reports to the holders of its asset-backed notes. This information reflects the performance of the securitized portfolio only, in contrast to the financial statements contained herein, which reflect the performance of all of the Company's outstanding receivables, including those originated subsequent to those included in the securitized portfolio. The website and the information contained on our website is not incorporated in this Quarterly Report on Form 10-Q or any other document filed with the SEC.

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 $395.2 million for the three months ended October 31, 2015, compared to $370.1 million for the three months ended October 31, 2014. The increase in total revenue was primarily driven by new store openings, partially offset by store closures, as well as an increase in credit revenue as a result of growth in the average balance of the customer receivable portfolio partially offset by a 110 basis point decrease in portfolio yield. Retail same store sales were flat for the third quarter of fiscal 2016. Excluding the impact of our strategic decision to exit video game products, digital cameras, and certain tablets, same store sales for the quarter increased 3.8%.

Retail gross margin for the three months ended October 31, 2015 was 41.5%, an increase of 90 basis points over the 40.6% reported in the comparable quarter last year. The increase in retail margin was driven by favorable shift in product mix and higher retrospective commissions on repair service agreements.

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 4.6%, an increase of 20 basis points over 4.4% in the previous year. The increase was primarily driven by higher costs as a result of the shift in product sales mix.


18


Selling, general and administrative expenses ("SG&A") for the three months ended October 31, 2015 was $113.7 million, an increase of $14.3 million, or 14.4%, 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 19.8% increase in the customer receivable portfolio balance and anticipated near-term portfolio growth.

Provision for bad debts for the three months ended October 31, 2015 was $58.2 million, a decrease of $13.8 million from the same prior year period. The provision for bad debts for the three months ended October 31, 2014, included an adjustment due to expectations for higher charge-offs occurring at a faster pace than previously anticipated and the decision to pursue collection of past and future charged-off accounts internally rather than selling charged-off accounts to a third party. Key factors in determining the provision for bad debts for the three months ended October 31, 2015 included the following:
A 21.6% increase in the average receivable portfolio balance resulting from new store openings over the past 12 months;
A 15.9% increase in the balances originated during the quarter compared to the prior year quarter;
An increase of 20 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 10.2% at October 31, 2015 as compared to the prior year period; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $109.9 million, or 7.3% of the total portfolio balance, driving $3.8 million of additional provision for bad debts.

Interest expense increased to $19.7 million for the three months ended October 31, 2015, compared to $9.0 million for the three months ended October 31, 2014, reflecting the increase in outstanding debt and an increase in our effective interest rate due to the issued asset-backed notes by our consolidated VIE.

Net loss for the three months ended October 31, 2015 was $2.4 million, or $0.07 loss per diluted share, which included net charges of $2.5 million, or $0.06 per diluted share on an after-tax basis, primarily from legal and professional fees related to the exploration of strategic alternatives and securities-related litigation and executive management transition costs, and loss on extinguishment of debt of $1.4 million, or $0.03 per diluted share on an after-tax basis. This compares to net loss for the three months ended October 31, 2014 of $3.1 million, or $0.08 loss per diluted share, which included net charges of $0.4 million, or $0.01 per diluted share on an after-tax basis, primarily related to legal and professional fees related to the exploration of strategic alternatives and securities-related litigation.

Recent Developments and Operational Changes

We continue to take actions to transform the capital structure of the business and to position us to execute our growth strategies while reducing risk and enhancing shareholder value. As previously announced, these actions include the securitization transaction, which allowed additional authorization to repurchase securities supported by amended debt instruments. Additional details are as follows:

Securitization Transaction
We securitized $1.4 billion of retail installment contract receivables, which resulted in net proceeds to the Company of approximately $1.08 billion.
During the third quarter of fiscal 2016, the securitized portfolio generated a $7.6 million return on capital for the residual equity interest.
We intend to execute periodic securitizations of future originated customer loans, including the possible sale of any remaining residual equity, and to retain origination and servicing of contracts.

Repurchase of Securities
On September 9, 2015, we announced that the Board of Directors authorized the repurchase of up to a total of $75.0 million of outstanding shares of its common stock and/or its Senior Notes. During the three months ended October 31, 2015, we purchased 1.9 million shares of common stock, using $51.6 million of the repurchase authorization. Additionally, we utilized $22.9 million of the repurchase authorization to acquire $23.0 million of face of value of our Senior Notes.
On November 2, 2015, we announced that the Board of Directors authorized an additional $100.0 million towards the repurchase program for the repurchase of outstanding shares of its common stock and/or its Senior Notes.
Subsequent to October 31, 2015, we purchased 3.3 million additional shares of common stock, using $80.6 million of the $100.0 million repurchase authorization, with no additional repurchases of Senior Notes.
The repurchase program underscores our confidence in our long-term growth prospects, consistent with our overall commitment to generate continued profitable growth and enhanced long-term shareholder value.

19



Amended Senior Notes
In October 2015, the Senior Notes were amended to extend, from May 1, 2014 to November 1, 2015, the beginning of the accounting period from which consolidated net income is calculated for purposes of determining the size of the "restricted payment basket" exception to the restricted payments limitation and to increase, from $75.0 million to $375.0 million, the dollar threshold exception to the restricted payments limitation.

Amended Revolving Credit Facility
In October 2015, the revolving credit facility was amended with certain lenders, that provides for an $810.0 million facility under which availability is subject to a borrowing base.
The amended revolving credit facility resulted in various changes, including the following:
Extended the maturity date from November 25, 2017 to October 30, 2018.
Increased total leverage ratio covenant from 2.0x to 4.0x.
Eliminated the fixed charge coverage ratio covenant and replaced it with an interest coverage ratio covenant.
Added a new minimum liquidity requirement for repurchases of the Company’s outstanding shares of common stock, notes and other debt prepayments, which, combined with the new total leverage ratio covenant, is expected to provide the Company greater flexibility for repurchases.

Company Initiatives

We have continued to focus on initiatives that we believe should positively impact future results, including:  
During the nine months ended October 31, 2015, we opened thirteen new stores in Arizona (1), Colorado (1), Georgia (1), Nevada (1), North Carolina (6), South Carolina (1), Tennessee (1) and Texas (1);
During fiscal year 2016, we have discontinued 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;
Continuing to review and modify our underwriting standards to improve the overall quality of our credit portfolio; and
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 approximately 2 new stores during the fourth quarter of fiscal year 2016 for a total of approximately 15 new stores for fiscal 2016 and 22 to 25 stores during fiscal 2017. 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.


20


Results of Operations
 
The following tables present certain financial and other information, on a consolidated and segment basis: 
Consolidated:
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Total net sales
$
322,634

 
$
304,609

 
$
18,025

 
$
946,059

 
$
870,519

 
$
75,540

Finance charges and other revenues
72,599

 
65,449

 
7,150

 
210,300

 
187,951

 
22,349

Total revenues
395,233

 
370,058

 
25,175

 
1,156,359

 
1,058,470

 
97,889

Costs and expenses: (1)
 

 
 

 
 

 
 
 
 
 
 

Cost of goods sold, including warehousing and occupancy costs
186,807

 
178,976

 
7,831

 
547,403

 
508,475

 
38,928

Cost of service parts sold, including warehousing and occupancy costs
1,463

 
1,525

 
(62
)
 
4,325

 
4,815

 
(490
)
Delivery, transportation and handling costs (2)
14,631

 
13,216

 
1,415

 
40,767

 
38,543

 
2,224

Selling, general and administrative expenses
113,668

 
99,346

 
14,322

 
314,175

 
281,526

 
32,649

Provision for bad debts
58,208

 
72,019

 
(13,811
)
 
157,397

 
133,862

 
23,535

Charges and credits
2,540

 
355

 
2,185

 
4,172

 
3,601

 
571

Total costs and expenses
377,317

 
365,437

 
11,880

 
1,068,239

 
970,822

 
97,417

Operating income
17,916

 
4,621

 
13,295

 
88,120

 
87,648

 
472

Interest expense
19,702

 
8,950

 
10,752

 
39,185

 
19,921

 
19,264

Loss on extinguishment of debt
1,367

 

 
1,367

 
1,367

 

 
1,367

Income (loss) before income taxes
(3,153
)
 
(4,329
)
 
1,176

 
47,568

 
67,727

 
(20,159
)
Provision (benefit) for income taxes
(732
)
 
(1,265
)
 
533

 
17,774

 
24,672

 
(6,898
)
Net income (loss)
$
(2,421
)
 
$
(3,064
)
 
$
643

 
$
29,794

 
$
43,055

 
$
(13,261
)


21


Retail Segment:
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenues:











Product sales
$
293,122

 
$
278,139

 
$
14,983

 
$
858,487

 
$
796,525

 
$
61,962

Repair service agreement commissions
26,038

 
23,056

 
2,982

 
77,590

 
64,042

 
13,548

Service revenues
3,474

 
3,414

 
60

 
9,982

 
9,952

 
30

Total net sales
322,634

 
304,609

 
18,025

 
946,059

 
870,519

 
75,540

Other revenues
416

 
531

 
(115
)
 
1,224

 
1,340

 
(116
)
Total revenues
323,050

 
305,140

 
17,910

 
947,283

 
871,859

 
75,424

Costs and expenses: (1)
 

 
 

 


 
 

 
 

 
 
Cost of goods sold, including warehousing and occupancy costs
186,807

 
178,976

 
7,831

 
547,403

 
508,475

 
38,928

Cost of service parts sold, including warehousing and occupancy costs
1,463

 
1,525

 
(62
)
 
4,325

 
4,815

 
(490
)
Delivery, transportation and handling costs (2)
14,631

 
13,216

 
1,415

 
40,767

 
38,543

 
2,224

Selling, general and administrative expenses (3)
81,484

 
73,220

 
8,264

 
226,394

 
206,559

 
19,835

Provision for bad debts
120

 
54

 
66

 
513

 
98

 
415

Charges and credits
2,540

 
355

 
2,185

 
4,172

 
3,601

 
571

Total costs and expenses
287,045

 
267,346

 
19,699

 
823,574

 
762,091

 
61,483

Operating income
$
36,005

 
$
37,794

 
$
(1,789
)
 
$
123,709

 
$
109,768

 
$
13,941

Number of stores:
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
95

 
86

 
 
 
90

 
79

 
 
Open
6

 
6

 
 
 
13

 
16

 
 
Closed

 
(3
)
 
 
 
(2
)
 
(6
)
 
 
End of period
101

 
89

 
 
 
101

 
89

 
 

Credit Segment:
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenues -
 
 
 
 
 
 
 
 
 
 
 
Finance charges and other revenues
$
72,183

 
$
64,918