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EX-32.1 - EXHIBIT 32.1 - CONNS INCconns4302016ex321.htm
EX-31.2 - EXHIBIT 31.2 - CONNS INCconns4302016ex312.htm
EX-31.1 - EXHIBIT 31.1 - CONNS INCconns4302016ex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C.  20549 
FORM 10-Q
(Mark One) 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended April 30, 2016
 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 001-34956
CONN'S, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
06-1672840
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
4055 Technology Forest Blvd, Suite 210, The Woodlands, TX
 
77381
(Address of principal executive offices)
 
(Zip Code)
 Registrant's telephone number, including area code:  (936) 230-5899
Not Applicable
(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
ý
 
Accelerated filer
o
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
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, 2016
Class
 
Outstanding
Common stock, $0.01 par value per share
 
30,698,177



CONN'S, INC. AND SUBSIDIARIES

FORM 10-Q
FOR THE FISCAL QUARTER ENDED APRIL 30, 2016

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 includes 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 Quarterly 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 VIEs, 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)
 
April 30,
2016
 
January 31,
2016
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
11,542

 
$
12,254

Restricted cash (all held by VIEs)
94,072

 
64,151

Customer accounts receivable, net of allowances (includes balances for VIEs of $601,481 and $390,150, respectively)
727,079

 
743,931

Other accounts receivable
84,558

 
95,404

Inventories
181,543

 
201,969

Income taxes recoverable
15,393

 
10,774

Prepaid expenses and other current assets
19,300

 
20,092

Total current assets
1,133,487

 
1,148,575

Long-term portion of customer accounts receivable, net of allowances (includes balances for VIEs of $416,766 and $331,254, respectively)
596,889

 
631,645

Long-term restricted cash (all held by VIEs)
25,002

 
14,425

Property and equipment, net
163,626

 
151,483

Deferred income taxes
69,264

 
70,219

Other assets
8,557

 
8,953

Total assets
$
1,996,825

 
$
2,025,300

Liabilities and Stockholders' Equity
 

 
 

Current liabilities:
 

 
 

Current maturities of capital lease obligations
$
769

 
$
799

Accounts payable
97,515

 
86,797

Accrued compensation and related expenses
7,568

 
9,337

Accrued expenses
36,332

 
30,037

Income taxes payable
2,999

 
2,823

Deferred revenues and other credits
17,298

 
16,332

Total current liabilities
162,481

 
146,125

Deferred rent
82,848

 
74,559

Long-term debt and capital lease obligations (includes balances of VIEs of $905,201 and $699,515, respectively)
1,203,361

 
1,248,879

Other long-term liabilities
17,920

 
17,456

Total liabilities
1,466,610

 
1,487,019

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; 30,695 and 30,630 shares issued, respectively)
307

 
306

Additional paid-in capital
86,891

 
85,209

Retained earnings
443,017

 
452,766

Total stockholders' equity
530,215

 
538,281

Total liabilities and stockholders' equity
$
1,996,825

 
$
2,025,300

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 
 April 30,
 
2016
 
2015
Revenues:
 
 
 
Product sales
$
286,490

 
$
271,626

Repair service agreement commissions
28,185

 
23,796

Service revenues
3,867

 
3,057

Total net sales
318,542

 
298,479

Finance charges and other revenues
70,571

 
66,597

Total revenues
389,113

 
365,076

Costs and expenses:
 
 
 
Cost of goods sold
204,466

 
187,133

Selling, general and administrative expenses
113,247

 
95,675

Provision for bad debts
58,218

 
47,543

Charges and credits
526

 
619

Total costs and expenses
376,457

 
330,970

Operating income
12,656

 
34,106

Interest expense
25,896

 
9,428

Income (loss) before income taxes
(13,240
)
 
24,678

Provision (benefit) for income taxes
(3,491
)
 
9,001

Net income (loss)
$
(9,749
)
 
$
15,677

Earnings (loss) per share:
 
 
 
Basic
$
(0.32
)
 
$
0.43

Diluted
$
(0.32
)
 
$
0.43

Weighted average common shares outstanding:
 
 
 
Basic
30,661

 
36,365

Diluted
30,661

 
36,880

See notes to condensed consolidated financial statements.

2


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Three Months Ended 
 April 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(9,749
)
 
$
15,677

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Depreciation
6,636

 
4,777

Amortization of debt issuance costs
7,730

 
831

Provision for bad debts and uncollectible interest
67,860

 
55,961

Stock-based compensation expense
1,297

 
872

Excess tax benefits from stock-based compensation
(1
)
 
(100
)
Charges, net of credits, for store and facility closures

 
425

Deferred income taxes
955

 
(4,651
)
Gain on sale of property and equipment
(178
)
 
(187
)
Tenant improvement allowances received from landlords
6,972

 
1,391

Change in operating assets and liabilities:
 

 
 

Customer accounts receivable
(16,253
)
 
(66,513
)
Other accounts receivable
11,745

 
3,311

Inventories
20,426

 
29,679

Other assets
864

 
340

Accounts payable
8,718

 
7,450

Accrued expenses
4,360

 
(5,874
)
Income taxes
(4,443
)
 
13,258

Deferred rent, revenues and other credits
1,714

 
(296
)
Net cash provided by operating activities
108,653

 
56,351

Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(16,996
)
 
(9,602
)
Proceeds from sale of property
696

 
35

Net cash used in investing activities
(16,300
)
 
(9,567
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of asset-backed notes
493,540

 

Payments on asset-backed notes
(289,639
)
 

Changes in restricted cash balances
(40,498
)
 

Borrowings from revolving credit facility
170,393

 
63,041

Payments on revolving credit facility
(421,735
)
 
(117,400
)
Payment of debt issuance costs and amendment fees
(5,289
)
 

Proceeds from stock issued under employee benefit plans
385

 
342

Excess tax benefits from stock-based compensation
1

 
100

Other
(223
)
 
(131
)
Net cash used in financing activities
(93,065
)
 
(54,048
)
Net change in cash and cash equivalents
(712
)
 
(7,264
)
Cash and cash equivalents, beginning of period
12,254

 
12,223

Cash and cash equivalents, end of period
$
11,542

 
$
4,959

Non-cash investing and financing activities:
 
 
 
Property and equipment purchases not yet paid
$
6,476

 
$
3,038

Supplemental cash flow data:
 
 
 
Cash interest paid
$
18,448

 
$
7,257

Cash income taxes paid, net
$
61

 
$
342

See notes to condensed consolidated financial statements.

3


CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 with all of our stores providing the same products and services to a common customer group. Our 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, including the VIEs (as defined below), 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. 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, 2016 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, 2016, filed with the United States Securities and Exchange Commission (the "SEC") on March 29, 2016.
Variable Interest Entities. In September 2015, we securitized $1.4 billion of customer accounts receivables by transferring the receivables to a bankruptcy-remote variable-interest entity (the "2015 VIE"). The 2015 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 2015 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.
In March 2016, we securitized $705.1 million of customer accounts receivables by transferring the receivables to a new bankruptcy-remote variable-interest entity (the "2016 VIE" or together with the 2015 VIE, the "VIEs"). The 2016 VIE issued two classes of asset-backed notes at a total face amount of $493.5 million secured by the transferred customer accounts receivables. This resulted in net proceeds to us of approximately $478.0 million, net of transaction costs and restricted cash held by the 2016 VIE. The net proceeds were used to pay down the entire balance on our revolving credit facility and for other general corporate purposes.
We currently hold the residual equity of the VIEs as well as a third class of asset-backed notes of the 2016 VIE, of which we may elect to retain all or a portion of these interests if that is determined to be in our best economic interest. In addition, we retain the servicing of the securitized portfolios. We determined that we have a variable interest in both VIEs and we are the primary beneficiary because (i) our servicing responsibilities for the securitized portfolios give us the power to direct the activities that most significantly impact the performance of the VIEs, and (ii) our variable interest in the VIEs 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 VIEs and the third class of asset-backed notes of the 2016 VIE, we will consolidate the VIEs within our financial statements. If we sell all or a significant portion of our interest, we will assess if the transaction achieves sale treatment for accounting purposes, which may result in deconsolidation of one or both of the VIEs. There is no assurance that we will complete a sale of all or a portion of our interest in the VIEs, and there is no assurance we will achieve sale treatment. As a result, we have determined that the securitized portfolios do 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 our interest in the VIEs be completed.

4

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


Principles of Consolidation. The consolidated financial statements include the accounts of Conn's, Inc. and its wholly-owned subsidiaries, including the VIEs. 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.
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, 2016
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. The allowance for doubtful accounts, allowances for no-interest option credit programs, and deferred interest are particularly sensitive given the size of our customer portfolio balance.
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-based awards, 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 
 April 30,
(in thousands)
2016
 
2015
Weighted average common shares outstanding - Basic
30,661

 
36,365

Dilutive effect of stock based awards

 
515

Weighted average common shares outstanding - Diluted
30,661

 
36,880

For the three months ended April 30, 2016 and 2015, the weighted average number of shares from stock based awards not included in the calculation due to their anti-dilutive effect was approximately 1.0 million and 0.4 million shares, respectively.
Restricted Cash. The restricted cash balance as of April 30, 2016 and January 31, 2016 includes $94.1 million and $64.2 million, respectively, of cash we collected as servicer on the securitized receivables that was remitted to the VIEs and $25.0 million and $14.4 million, respectively, of cash held by the VIEs as additional collateral for the asset-backed notes.
Customer accounts receivable. Customer accounts receivable reported in the consolidated balance sheet includes total receivables managed, including those transferred to the VIEs and those receivables not transferred to the VIEs. 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. In our role as servicer, we may also make modifications to loans held by the VIEs. 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 or "re-age" a portion of our customer accounts, which involve modifying the payment terms to defer a portion of the cash payments due. Our re-aging of customer accounts does not change the interest rate or the total amount due from the customer and typically does not reduce the monthly contractual payments. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account, which does not change the interest rate or the total amount due from the customer but does reduce the monthly contractual payments. We consider accounts that have been re-aged in excess of three months or refinanced as Troubled Debt Restructurings ("TDR" or "Restructured Accounts"). 
Allowance for doubtful accounts. We establish an allowance for doubtful accounts, including estimated uncollectible interest, to cover probable and estimable losses on our customer accounts receivable resulting from the failure of customers to make contractual payments. Our customer portfolio balance consists of a large number of relatively small, homogeneous accounts. None of our accounts are large enough to warrant individual evaluation for impairment.
We record an allowance for doubtful accounts 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

5

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


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 receivable. Interest 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 customer account is paid off or charged-off, and we provide an allowance for estimated uncollectible interest. Interest income on installment contracts with our customers is based on 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. Our calculation of interest income also includes an estimate of the benefit from future prepayments based on our historical experience. The deferred interest will ultimately be brought into income as the accounts pay off or charge-off. At April 30, 2016 and January 31, 2016, there were $5.8 million and $5.2 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 none of the interest earned is waived. Interest income is recognized based on our historical experience related to customers that fail to satisfy the requirements of the programs. We previously offered 18- and 24-month equal-payment, no-interest finance programs to certain higher credit quality borrowers, which were 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.
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, 2016 and January 31, 2016, customer receivables carried in non-accrual status were $21.9 million and $20.6 million, respectively. At April 30, 2016 and January 31, 2016, customer receivables that were past due 90 days or more and still accruing interest totaled $98.7 million and $115.1 million, respectively.
Income Taxes. For the three months ended April 30, 2016, we utilized the actual effective tax rate (discrete method) in determining income tax expense rather than the estimated annual effective tax rate, which we used for the three months ended April 30, 2015, as we determined that small changes in the estimated fiscal 2017 pre-tax income would result in significant changes to the estimated annual effective tax rate.
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, 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, 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, 2016, the fair value of our Senior Notes, which was determined using Level 1 inputs, was $186.7 million as compared to the carrying value of $227.0 million, excluding the impact of the related discount. At April 30, 2016, 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.

6

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


Reclassifications. Certain reclassifications have been made to prior fiscal year amounts to conform to the presentation in the current fiscal year. On the consolidated balance sheets, as of January 31, 2016, we reclassified cash held by the VIEs as additional collateral for the asset-backed notes out of current restricted cash and separately presented as long-term restricted cash. These reclassifications did not impact consolidated operating income or net income.
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 2015-14, Revenue from Contracts with Customers: Deferral of Effective Date, which defers the effective date of ASU 2014-09 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 2016, the FASB issued ASU 2016-02, Leases, which will change how lessees account for leases. For most leases, a liability will be recorded on the balance sheet based on the present value of future lease obligations with a corresponding right-of-use asset. Primarily for those leases currently classified by us as operating leases, we will recognize a single lease cost on a straight line basis based on the combined amortization of the lease obligation and the right-of-use asset. Other leases will be required to be accounted for as financing arrangements similar to how we currently account for capital leases. On transition, we will recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The standard is effective for us beginning in the first quarter of fiscal year 2020. We are currently assessing the impact the new standard will have on our financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which modifies the accounting for excess tax benefits and tax deficiencies associated with share-based payments, the accounting for forfeitures, and the classification of certain items on the statement of cash flows. ASU 2016-09 eliminates the requirement to recognize excess tax benefits in additional paid-in capital ("APIC"), and the requirement to evaluate tax deficiencies for APIC or income tax expense classification, and provides for these benefits or deficiencies to be recorded as an income tax expense or benefit in the income statement. With these changes, tax-related cash flows resulting from share-based payments will be classified as operating activities as opposed to financing, as currently presented. The standard is effective for us in the first quarter of fiscal year 2018, although early adoption is permitted. We are currently assessing the impact the new standard will have on our financial statements.
2.     Charges and Credits
Charges and credits consisted of the following:
 
Three Months Ended 
 April 30,
(in thousands)
2016
 
2015
Store and facility closure costs
$

 
$
425

Legal and professional fees related to the exploration of strategic alternatives and securities-related litigation
454

 
194

Executive management transition costs
72

 

 
$
526

 
$
619

During the three months ended April 30, 2016, we had costs associated with legal and professional fees related to our securities-related litigation and transition costs due to changes in the executive management team. During the three months ended April 30, 2015, we had costs associated with the closing of under-performing retail locations and with legal and professional fees related to our exploration of strategic alternatives and our securities-related litigation.

7

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


3.     Finance Charges and Other Revenues 
Finance charges and other revenues consisted of the following:
 
Three Months Ended 
 April 30,
(in thousands)
2016
 
2015
Interest income and fees
$
60,621

 
$
55,419

Insurance commissions
9,457

 
11,029

Other revenues
493

 
149

 
$
70,571

 
$
66,597

Interest income and fees and insurance commissions are derived from the credit segment operations, whereas other revenues are derived from the retail segment operations. For the three months ended April 30, 2016 and 2015, interest income and fees was reduced by provisions for uncollectible interest of $10.0 million and $8.5 million, respectively. For the three months ended April 30, 2016 and 2015, the amount included in interest income and fees related to TDR accounts was $4.1 million and $3.2 million, respectively.
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,
2016
 
January 31,
2016
 
April 30,
2016
 
January 31,
2016
 
April 30,
2016
 
January 31,
2016
Customer accounts receivable
$
1,413,942

 
$
1,470,205

 
$
106,027

 
$
127,400

 
$
104,493

 
$
112,221

Restructured accounts
123,546

 
117,651

 
26,591

 
30,323

 
123,546

 
117,651

Total customer portfolio balance
1,537,488

 
1,587,856

 
$
132,618

 
$
157,723

 
$
228,039

 
$
229,872

Allowance for uncollectible accounts
(195,129
)
 
(190,990
)
 
 
 
 
 
 
 
 
Allowances for no-interest option credit programs
(18,391
)
 
(21,290
)
 
 
 
 
 
 
 
 
Total customer accounts receivable, net
1,323,968

 
1,375,576

 
 
 
 
 
 
 
 
Short-term portion of customer accounts receivable, net
(727,079
)
 
(743,931
)
 
 
 
 
 
 
 
 
Long-term portion of customer accounts receivable, net
$
596,889

 
$
631,645

 
 
 
 
 
 
 
 
Securitized receivables held by the VIE
$
1,207,245

 
$
870,684

 
$
132,517

 
$
135,800

 
$
222,447

 
$
204,594

Receivables not held by the VIE
330,243

 
717,172

 
101

 
21,923

 
5,592

 
25,278

Total customer portfolio balance
$
1,537,488

 
$
1,587,856

 
$
132,618

 
$
157,723

 
$
228,039

 
$
229,872

(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, 2016 and January 31, 2016, the amounts included within both past due and re-aged was $48.0 million and $55.2 million, respectively. As of April 30, 2016 and January 31, 2016, the total customer portfolio balance past due one day or greater was $350.1 million and $387.3 million, respectively. These amounts include the 60 days past due balances shown.

8

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


The following presents the activity in the allowance for doubtful accounts and uncollectible interest for customer receivables: 
 
Three Months Ended April 30, 2016
 
Three Months Ended April 30, 2015
(in thousands)
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
 
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
Allowance at beginning of period
$
149,226

 
$
41,764

 
$
190,990

 
$
118,786

 
$
28,196

 
$
146,982

Provision (1)
52,924

 
14,937

 
67,861

 
43,011

 
12,950

 
55,961

Principal charge-offs (2)
(45,634
)
 
(10,097
)
 
(55,731
)
 
(35,725
)
 
(7,072
)
 
(42,797
)
Interest charge-offs
(8,129
)
 
(1,798
)
 
(9,927
)
 
(6,598
)
 
(1,306
)
 
(7,904
)
Recoveries (2)
1,585

 
351

 
1,936

 
957

 
190

 
1,147

Allowance at end of period
$
149,972

 
$
45,157

 
$
195,129

 
$
120,431

 
$
32,958

 
$
153,389

Average total customer portfolio balance
$
1,438,442

 
$
121,447

 
$
1,559,889

 
$
1,274,281

 
$
92,985

 
$
1,367,266

(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. Net charge-offs are calculated as the net of principal charge-offs and recoveries.
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)
2016
 
2015
Balance at beginning of period
$
1,866

 
$
2,556

Accrual for additional closures

 
318

Adjustments
(15
)
 
32

Cash payments, net of sublease income
(163
)
 
(556
)
Balance at end of period
1,688

 
2,350

Current portion, included in accrued expenses
(643
)
 
(741
)
Long-term portion, included in other long-term liabilities
$
1,045

 
$
1,609


9

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


6.     Debt and Capital Lease Obligations 
Debt and capital lease obligations consisted of the following:
(in thousands)
April 30,
2016
 
January 31,
2016
Revolving credit facility
$
77,865

 
$
329,207

Senior Notes
227,000

 
227,000

2015-A Class A Notes
344,688

 
551,383

2015-A Class B Notes
165,900

 
165,900

2016-A Class A Notes
340,086

 

2016-A Class B Notes
70,510

 

Capital lease obligations
2,264

 
2,488

Total debt and capital lease obligations
1,228,313

 
1,275,978

Less:
 
 
 
Unamortized discounts and debt issuance costs
(24,183
)
 
(26,300
)
Current maturities of capital lease obligations
(769
)
 
(799
)
Long-term debt and capital lease obligations
$
1,203,361

 
$
1,248,879

Senior Notes. We have outstanding unsecured Senior Notes due July 2022 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 ("restricted payments"); (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. Specifically, limitations for restricted payments are triggered only if one or more of the following occurred: (1) a default were to exist under the indenture, (2) if we could not satisfy a debt incurrence test, and (3) if the aggregate amount of restricted payments would exceed an amount tied to the consolidated net income. These limitations, however, are subject to two exceptions: (1) an exception that permits the payment of up to $375.0 million in restricted payments, and (2) an exception that permits restricted payments regardless of dollar amount so long as, after giving pro forma effect to the dividends and other restricted payments, we would have a leverage ratio, as defined under the Indenture, less than or equal to 2.50 to 1.00. Thus, as of April 30, 2016, $192.7 million would have been free from the dividend restriction. However, as a result of the revolving credit facility dividend restrictions, which are further described below, no amount was available for dividends. 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.
Asset-backed Notes. In September 2015, the 2015 VIE issued asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the 2015 VIE. The asset-backed notes consist of the following securities:
Asset-backed Fixed Rate Notes, Class A, Series 2015-A ("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 2015-A Class A Notes after giving effect to offering fees is 7.7%.
Asset-backed Fixed Rate Notes, Class B, Series 2015-A ("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 2015-A Class B Notes after giving effect to offering fees is 13.4%.
The 2015-A Class A Notes and 2015-A 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 notes, the payment of the outstanding amounts would be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to us as the holder of the residual equity would instead be directed entirely toward repayment of the 2015-A Class A Notes and 2015-A Class B Notes. The holders of the notes have no recourse to assets

10

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


outside of the 2015 VIE. Events of default include, but are not limited to, failure to make required payments on the notes or specified bankruptcy-related events.
In March 2016, the 2016 VIE issued asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the 2016 VIE. The asset-backed notes consist of the following securities:
Asset-backed Fixed Rate Notes, Class A, Series 2016-A ("2016-A Class A Notes") in aggregate principal amount of $423.0 million that bear interest at a fixed annual rate of 4.680% and mature on April 16, 2018. The effective interest rate of the 2016-A Class A Notes after giving effect to offering fees is 6.9%.
Asset-backed Fixed Rate Notes, Class B, Series 2016-A ("2016-A Class B Notes") in aggregate principal amount of $70.5 million that bear interest at a fixed annual rate of 8.960% and mature on August 15, 2018. The effective interest rate of the 2016-A Class B Notes after giving effect to offering fees is 9.5%.
The 2016-A Class A Notes and 2016-A 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 notes, the payment of the outstanding amounts would be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to us as the holder of a third class of asset-backed notes issued by the 2016 VIE ("2016-A Class C Notes") and the residual equity would instead be directed entirely toward repayment of the 2016-A Class A Notes and 2016-A Class B Notes. The holders of the notes have no recourse to assets outside of the 2016 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 a syndicate of banks 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 revolving credit facility matures on October 30, 2018.
On February 16, 2016, the Borrowers entered into a first amendment to the revolving credit facility, which resulted in various changes, including:
Excluding non-cash deferred amortization of debt related transaction costs from interest coverage ratio; and
Extending from 6 months to 18 months the time frame subsequent to the closing of a securitization transaction in which the Cash Recovery Percent covenant will be determined.
On May 18, 2016, the Borrowers entered into a second amendment to the revolving credit facility, which resulted in various changes, including:
Amending the minimum interest coverage ratio covenant to:
Eliminate the minimum interest coverage ratio covenant for the first quarter of fiscal 2017;
Reduce the minimum interest coverage ratio covenant to 1.0x for the second quarter of fiscal 2017 through the first quarter of fiscal 2018; and
Reduce the minimum interest coverage ratio covenant to 1.25x for the second quarter of fiscal 2018 through the third quarter of fiscal 2019.
Modifying the conditions for repurchases of the Company's common stock, including the addition of a requirement to achieve a minimum interest coverage ratio of 2.5x for two consecutive quarters; and
Reducing the borrowing base by $15.0 million beginning on May 31, 2016 through June 30, 2017, reducing the borrowing base by $10.0 million for any month beginning with July 31, 2017 that the interest coverage ratio is at least 1.25x, and no borrowing base reduction at any time the interest coverage ratio is at least 2.0x for two consecutive quarters.
As of April 30, 2016, loans under the revolving credit facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 2.5% to 3.0% per annum (depending on quarterly average net availability under the borrowing base) or the alternate base rate plus a margin ranging from 1.5% to 2.0% per annum (depending on quarterly average net availability under the borrowing base). Pursuant to the second amendment, the margins increased by 25 basis points subsequent to April 30, 2016. 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%. The weighted average interest rate on borrowings outstanding under the revolving credit facility was 4.9% for the three months ended April 30, 2016. 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 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

11

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


course of business. The obligations under the revolving credit facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As of April 30, 2016, we had immediately available borrowing capacity of $161.9 million under our revolving credit facility, net of standby letters of credit issued of $2.6 million. We also had $567.6 million that may become available under our revolving credit facility if we grow the balance of eligible customer receivables and our total eligible inventory balances.
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 restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may make dividends and distributions to the Company and other obligors under the revolving credit facility without restriction. As of April 30, 2016, under the revolving credit facility, as amended, no amount was available for dividends. 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, as amended, at April 30, 2016. A summary of the significant financial covenants that govern our revolving credit facility, as amended, compared to our actual compliance status at April 30, 2016 is presented below: 
 
Actual
 
Required
Minimum/
Maximum
Leverage Ratio must not exceed maximum
2.52:1.00
 
4.00:1.00
ABS Excluded Leverage Ratio must not exceed maximum
1.01:1.00
 
2.00:1.00
Cash Recovery Percent must exceed stated amount
5.47%
 
4.50%
Capital Expenditures, net, must not exceed maximum
$37.1 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 with the financial statement captions in this document. Compliance with the covenants is 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 provides for 18 months subsequent to the closing of a securitization transaction in which the Cash Recovery Percent will be determined based on the portfolio of contracts subject to the (i) securitization facilities; and (ii) a lien under the revolving credit facility.
7.     Contingencies
Securities Class Action Litigation. We and one of our current and one of our former executive officers are defendants in a consolidated securities class action lawsuit pending in the United States District Court for the Southern District of Texas (the "Court"), In re Conn's Inc. Securities Litigation, Cause No. 14-CV-00548 (the "Consolidated Securities Action"). The Consolidated Securities Action started as three separate purported securities class action lawsuits filed between March 5, 2014 and May 5, 2014 in the Court that were consolidated into the Consolidated Securities Action on June 3, 2014. 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 defendants' motion to dismiss was fully briefed and the Court held a hearing on defendants' motion over the course of two days, on March 25, 2016 and March 29, 2016. On May 6, 2016, the Court granted in part and denied in part defendants' motion to dismiss the plaintiffs' complaint. Thereafter, the defendants filed a motion requesting the Court's decision be certified for interlocutory appeal to the United States Fifth Circuit Court of Appeals. The Court has not yet ruled on that motion.
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, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
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 Court captioned Robert Hack, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Bob L. Martin,

12

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


Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director), Brian Taylor (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. Setting forth substantially similar claims against the same defendants, on February 25, 2015 an additional federal derivative action, captioned 95250 Canada LTEE, derivatively on Behalf of Conn's, Inc. v. Wright et al., Cause No. 4:15-cv-00521, was filed in the Court, which has been consolidated with the Original Derivative Action.
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 in the Original Derivative Action pending the Court's ruling on the defendants' motion for certification for interlocutory appeal.
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 Judicial District Court, Harris County, Texas. This action makes substantially similar allegations to the Original Derivative Action against the same defendants. The stay, which the parties agreed to put in place pending resolution of the motion to dismiss, is still in place.
On May 19, 2016, an alleged shareholder, filed, purportedly on behalf of the Company, a lawsuit against us and certain of our current and former directors and executive officers in the 55th Judicial District Court, Harris County, Texas captioned Robert J. Casey II, derivatively on behalf of Conn's, Inc., v. Theodore M. Wright (former executive officer and former director), Michael J. Poppe, Brian Taylor (former executive officer), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director) and William E. Saunders Jr., and Conn's, Inc., Cause No. 2016-33135. The complaint asserts claims for breach of fiduciary duties and unjust enrichment based on substantially similar factual allegations as those asserted in the Original Derivative Action. The complaint does not specify the amount of damages sought.
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 and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
Regulatory Matters. We are continuing to cooperate with the SEC's investigation, which began on or around November 2014, 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. 
8.     Variable Interest Entities
The VIEs have issued asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs. Under the terms of the securitization transactions, the customer receivable principal and interest payment cash flows will go first to the servicer and the holders of issued notes, and then to us as the holder of the 2016-A Class C Notes and residual equities. We retain the servicing of the securitized portfolios and are receiving a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, will retain 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 VIEs.

13

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


The following presents the assets and liabilities held by the VIEs and that are included in our consolidated balance sheet (for legal purposes, the assets and liabilities of the VIEs will remain distinct from Conn's, Inc.): 
(in thousands)
April 30,
2016
 
January 31,
2016
Assets:
 
 
 
Restricted cash
$
119,074

 
$
78,576

Due from Conn's, Inc.
4,094

 
3,405

Customer accounts receivable:
 
 
 
Customer accounts receivable
1,088,625

 
763,278

Restructured accounts
118,620

 
107,406

Allowance for uncollectible accounts
(172,297
)
 
(136,325
)
Allowances for no-interest option credit programs
(16,701
)
 
(12,955
)
Total customer accounts receivable, net
1,018,247

 
721,404

Total assets
$
1,141,415

 
$
803,385

Liabilities:
 
 
 
Accrued interest
$
2,170

 
$
1,636

Due to Conn's, Inc.
3,372

 

Deferred interest income
4,706

 
3,042

Long-term debt:
 
 
 
2015-A Class A Notes
344,688

 
551,383

2015-A Class B Notes
165,900

 
165,900

2016-A Class A Notes
340,086

 

2016-A Class B Notes
70,510

 

 
921,184

 
717,283

Less unamortized discounts and debt issuance costs
(15,983
)
 
(17,768
)
Total long-term debt
905,201

 
699,515

Total liabilities
$
915,449

 
$
704,193

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

14

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 April 30, 2016
 
Three Months Ended April 30, 2015
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
105,306

 
$

 
$
105,306

 
$
89,502

 
$

 
$
89,502

Home appliance
87,904

 

 
87,904

 
84,102

 

 
84,102

Consumer electronic
65,865

 

 
65,865

 
71,430

 

 
71,430

Home office
22,473

 

 
22,473

 
21,985

 

 
21,985

Other
4,942

 

 
4,942

 
4,607

 

 
4,607

Product sales
286,490

 

 
286,490

 
271,626

 

 
271,626

Repair service agreement commissions
28,185

 

 
28,185

 
23,796

 

 
23,796

Service revenues
3,867

 

 
3,867

 
3,057

 

 
3,057

Total net sales
318,542

 

 
318,542

 
298,479

 

 
298,479

Finance charges and other revenues
494

 
70,077

 
70,571

 
149

 
66,448

 
66,597

Total revenues
319,036

 
70,077

 
389,113

 
298,628

 
66,448

 
365,076

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold
204,466

 

 
204,466

 
187,133

 

 
187,133

Selling, general and administrative expenses (1)
79,983

 
33,264

 
113,247

 
68,227

 
27,448

 
95,675

Provision for bad debts
398

 
57,820

 
58,218

 
69

 
47,474

 
47,543

Charges and credits
526

 

 
526

 
619

 

 
619

Total costs and expense
285,373

 
91,084

 
376,457

 
256,048

 
74,922

 
330,970

Operating income (loss)
33,663

 
(21,007
)
 
12,656

 
42,580

 
(8,474
)
 
34,106

Interest expense

 
25,896

 
25,896

 

 
9,428

 
9,428

Income (loss) before income taxes
$
33,663

 
$
(46,903
)
 
$
(13,240
)
 
$
42,580

 
$
(17,902
)
 
$
24,678

(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. For the three months ended April 30, 2016 and 2015, the amount of overhead allocated to each segment was $5.7 million and $3.5 million, respectively. For the three months ended April 30, 2016 and 2015, the amount of reimbursement made to the retail segment by the credit segment were $9.7 million and $8.5 million, respectively.

15

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


10.
Guarantor Financial Information 
Conn's, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. The Senior Notes, which were issued by Conn's, Inc., are fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Guarantors. The direct or indirect subsidiaries of Conn's, Inc. that are not Guarantors are the VIE and minor subsidiaries. Prior to transferring the securitized customer receivables to the 2015 VIE in September 2015, the only direct or indirect subsidiaries of Conn's, Inc. that were not Guarantors were minor subsidiaries. There are no restrictions under the Indenture 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. The following financial information presents the condensed consolidated balance sheet, statement of operations, and statement of cash flows for Conn's, Inc. (the issuer of the Senior Notes), the Guarantor Subsidiaries, and the Non-guarantor Subsidiaries, together with certain eliminations.
Condensed Consolidated Balance Sheet as of April 30, 2016.
(in thousands)
Conn's, Inc.
 
Guarantor Subsidiaries
 
Non-guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
11,542

 
$

 
$

 
$
11,542

Restricted cash

 

 
94,072

 

 
94,072

Customer accounts receivable, net of allowance

 
125,598

 
601,481

 

 
727,079

Other accounts receivable

 
84,558

 

 

 
84,558

Inventories

 
181,543

 

 

 
181,543

Other current assets
15,393

 
19,300

 
4,094

 
(4,094
)
 
34,693

Total current assets
15,393

 
422,541

 
699,647

 
(4,094
)
 
1,133,487

Investment in and advances to subsidiaries
667,147

 
225,244

 

 
(892,391
)
 

Long-term portion of customer accounts receivable, net of allowance

 
180,123

 
416,766

 

 
596,889

Long-term restricted cash

 

 
25,002

 

 
25,002

Property and equipment, net

 
163,626

 

 

 
163,626

Deferred income taxes
69,264

 

 

 

 
69,264

Other assets

 
8,557

 

 

 
8,557

Total assets
$
751,804

 
$
1,000,091

 
$
1,141,415

 
$
(896,485
)
 
$
1,996,825

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of capital lease obligations
$

 
$
769

 
$

 
$

 
$
769

Accounts payable

 
97,515

 

 

 
97,515

Accrued expenses
2,789

 
38,941

 
5,542

 
(3,372
)
 
43,900

Other current liabilities

 
17,717

 
2,580

 

 
20,297

Total current liabilities
2,789

 
154,942

 
8,122

 
(3,372
)
 
162,481

Deferred rent

 
82,848

 

 

 
82,848

Long-term debt and capital lease obligations
218,800

 
79,360

 
905,201

 

 
1,203,361

Other long-term liabilities

 
15,794

 
2,126

 

 
17,920

Total liabilities
221,589

 
332,944

 
915,449

 
(3,372
)
 
1,466,610

Stockholders' equity:
 

 
 

 
 

 
 

 
 

Common stock
307

 

 

 

 
307

Additional paid-in capital
86,891

 
177,509

 
250,384

 
(427,893
)
 
86,891

Retained earnings
443,017

 
489,638

 
(24,418
)
 
(465,220
)
 
443,017

Total stockholders' equity
530,215

 
667,147

 
225,966

 
(893,113
)
 
530,215

Total liabilities and stockholders' equity
$
751,804

 
$
1,000,091

 
$
1,141,415

 
$
(896,485
)
 
$
1,996,825


16

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


Condensed Consolidated Balance Sheet as of January 31, 2016.
(in thousands)
Conn's, Inc.
 
Guarantor Subsidiaries
 
Non-guarantor Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
12,254

 
$

 
$

 
$
12,254

Restricted cash

 

 
64,151

 

 
64,151

Customer accounts receivable, net of allowance

 
353,781

 
390,150

 

 
743,931

Other accounts receivable

 
95,404

 

 

 
95,404

Inventories

 
201,969

 

 

 
201,969

Other current assets
10,774

 
20,092

 
3,405

 
(3,405
)
 
30,866

Total current assets
10,774

 
683,500

 
457,706

 
(3,405
)
 
1,148,575

Investment in and advances to subsidiaries
676,492

 
95,787

 

 
(772,279
)
 

Long-term portion of customer accounts receivable, net of allowance

 
300,391

 
331,254

 

 
631,645

Long-term restricted cash

 

 
14,425

 

 
14,425

Property and equipment, net

 
151,483

 

 

 
151,483

Deferred income taxes
70,219

 

 

 

 
70,219

Other assets

 
8,953

 

 

 
8,953

Total assets
$
757,485

 
$
1,240,114

 
$
803,385

 
$
(775,684
)
 
$
2,025,300

Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current maturities of capital lease obligations
$

 
$
799

 
$

 
$

 
$
799

Accounts payable

 
86,797

 

 

 
86,797

Accrued expenses
736

 
37,002

 
1,636

 

 
39,374

Other current liabilities

 
17,510

 
1,645

 

 
19,155

Total current liabilities
736

 
142,108

 
3,281

 

 
146,125

Deferred rent

 
74,559

 

 

 
74,559

Long-term debt and capital lease obligations
218,468

 
330,896

 
699,515

 

 
1,248,879

Other long-term liabilities

 
16,059

 
1,397

 

 
17,456

Total liabilities
219,204

 
563,622

 
704,193

 

 
1,487,019

Stockholders' equity:
 

 
 

 
 

 
 

 
 

Common stock
306

 

 

 

 
306

Additional paid-in capital
85,209

 
179,995

 
112,200

 
(292,195
)
 
85,209

Retained earnings
452,766

 
496,497

 
(13,008
)
 
(483,489
)
 
452,766

Total stockholders' equity
538,281

 
676,492

 
99,192

 
(775,684
)
 
538,281

Total liabilities and stockholders' equity
$
757,485

 
$
1,240,114

 
$
803,385

 
$
(775,684
)
 
$
2,025,300


17

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


Condensed Consolidated Statement of Operations for the three months ended April 30, 2016.
(in thousands)
Conn's, Inc.
 
Guarantor Subsidiaries
 
Non-guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues:
 
 
 
 
 
 
 
 
 
Total net sales
$

 
$
318,542

 
$

 
$

 
$
318,542

Finance charges and other revenues

 
30,172

 
40,399

 

 
70,571

Servicing fee revenue

 
17,135

 

 
(17,135
)
 

Total revenues

 
365,849

 
40,399

 
(17,135
)
 
389,113

Costs and expenses:
 

 
 

 
 

 
 

 
 

Cost of goods sold

 
204,466

 

 

 
204,466

Selling, general and administrative expenses

 
113,247

 
17,135

 
(17,135
)
 
113,247

Provision for bad debts

 
35,582

 
22,636

 

 
58,218

Charges and credits

 
526

 

 

 
526

Total costs and expenses

 
353,821

 
39,771

 
(17,135
)
 
376,457

Operating income

 
12,028

 
628

 

 
12,656

Loss (income) from consolidated subsidiaries
6,859

 
11,410

 

 
(18,269
)
 

Interest expense
4,446

 
3,268

 
18,182

 

 
25,896

Income (loss) before income taxes
(11,305
)
 
(2,650
)
 
(17,554
)
 
18,269

 
(13,240
)
Provision (benefit) for income taxes
(1,556
)
 
4,209

 
(6,144
)
 

 
(3,491
)
Net income (loss)
$
(9,749
)
 
$
(6,859
)
 
$
(11,410
)
 
$
18,269

 
$
(9,749
)

18

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


Condensed Consolidated Statement of Cash Flows for the three months ended April 30, 2016.
(in thousands)
Conn's, Inc.
 
Guarantor Subsidiaries
 
Non-guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
$
(9,555
)
 
$
(201,353
)
 
$
319,561

 
$

 
$
108,653

Cash flows from investing activities:
 

 
 

 
 

 
 

 
 

Purchase of customer accounts receivables

 

 
(478,080
)
 
478,080

 

Sale of customer accounts receivables

 
478,080

 

 
(478,080
)
 

Purchase of property and equipment

 
(16,996
)
 

 

 
(16,996
)
Proceeds from sales of property

 
696

 

 

 
696

Net change in intercompany
9,169

 

 

 
(9,169
)
 

Net cash provided by (used in) investing activities
9,169

 
461,780

 
(478,080
)
 
(9,169
)
 
(16,300
)
Cash flows from financing activities:
 

 
 

 
 

 
 

 
 

Proceeds from issuance of asset-backed notes

 

 
493,540

 

 
493,540

Payments on asset-backed notes

 

 
(289,639
)
 

 
(289,639
)
Changes in restricted cash balances

 

 
(40,498
)
 

 
(40,498
)
Borrowings from revolving credit facility

 
170,393

 

 

 
170,393

Payments on revolving credit facility

 
(421,735
)
 

 

 
(421,735
)
Repurchase of senior notes

 

 

 

 

Payment of debt issuance costs and amendment fees

 
(405
)
 
(4,884
)
 

 
(5,289
)
Repurchase of common stock

 

 

 

 

Proceeds from stock issued under employee benefit plans
385

 

 

 

 
385

Net change in intercompany

 
(9,169
)
 

 
9,169

 

Other
1

 
(223
)
 

 

 
(222
)
Net cash provided by (used in) financing activities
386

 
(261,139
)
 
158,519

 
9,169

 
(93,065
)
Net change in cash and cash equivalents

 
(712
)
 

 

 
(712
)
Cash and cash equivalents, beginning of period

 
12,254

 

 

 
12,254

Cash and cash equivalents, end of period
$

 
$
11,542

 
$

 
$

 
$
11,542


19


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 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 periodic securitizations of future originated customer loans including the sale of any remaining residual equity 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; 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 employees; our ability to fund its 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; 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, 2016 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.
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 $389.1 million for the three months ended April 30, 2016, compared to $365.1 million for the three months ended April 30, 2015. The increase in retail revenue was primarily driven by new store growth, partially offset by a decrease in same store sales of 3.4%. Excluding the impact of our April 2015 decision to exit video game products, digital cameras, and certain tablets, same store sales for the quarter decreased 1.3%. Slower sales growth was also impacted by underwriting changes made in the fourth quarter of fiscal 2016 and in the first quarter of fiscal 2017. The increase in credit revenue was a result of growth in the average balance of the customer receivable portfolio, partially offset by an 80 basis point decrease in portfolio yield.
Retail gross margin for the three months ended April 30, 2016 was 35.8%, a decrease of 150 basis points versus the 37.3% reported in the comparable quarter last year. The decrease in retail gross margin was driven by the impact softer sales have on our fixed warehouse and delivery costs, more aggressive promotions and pricing, particularly with appliances, higher shrink, and the impact of slower sales on vendor rebate expectations. Retail gross margin was favorably impacted by higher retrospective commissions on repair service agreements.
Selling, general and administrative expenses ("SG&A") for the three months ended April 30, 2016 was $113.2 million, an increase of $17.6 million, or 18.4%, over the same prior year period. The SG&A increase in the retail segment was primarily due to higher new store occupancy, advertising and compensation. The increase in SG&A for the credit segment was driven by the addition of collections personnel to service the 14.1% year-over-year increase in the average customer portfolio balance. Total SG&A was also impacted by investments we are making in IT, credit and personnel to improve long-term performance.

20


Provision for bad debts for the three months ended April 30, 2016 was $58.2 million, an increase of $10.7 million from the same prior year period. The increase was impacted by the following:
The recognition of expected losses from higher-growth periods, including customer receivables originated during fiscal years 2014 through the first half of 2016. We continue to believe that portfolio performance has stabilized, and that the fiscal 2014 and 2015 originations will be the peak loss years. Both of these pools of originations are highly seasoned and we expect the ultimate net static pool loss rates to be in the high-13% to low-14% range, as previously communicated;
A 14.1% increase in the average receivable portfolio balance resulting from new store openings over the past 12 months; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $123.5 million, or 8.0% of the total portfolio balance, driving $1.5 million of additional provision for bad debts.
Interest expense increased to $25.9 million for the three months ended April 30, 2016, compared to $9.4 million for the three months ended April 30, 2015, reflecting the increase in outstanding debt and an increase in our effective interest rate due to the asset-backed notes issued by our consolidated VIEs.
Net loss for the three months ended April 30, 2016 was $9.7 million, or $0.32 loss per diluted share, which included net pre-tax charges of $0.5 million, or $0.01 per diluted share, primarily from legal and professional fees related to securities-related litigation. This compares to net income for the three months ended April 30, 2015 of $15.7 million, or $0.43 earnings per diluted share, which included net pre-tax charges of $0.6 million, or $0.01 per diluted share, primarily related to legal and professional fees related to the exploration of strategic alternatives and securities-related litigation.
Company Initiatives
We are positioning ourselves to execute long-term growth strategies and reduce risk while enhancing shareholder value. As a result, fiscal 2017 will be a transitional year as we work on improving the performance of our credit operation while moderating our retail growth plan. Actions include:
In addition to the underwriting adjustments we made in the fourth quarter of fiscal 2016, in the first quarter of fiscal 2017 we further refined our underwriting strategy to reduce credit risk, specifically related to new customers, while identifying opportunities to increase originations to certain existing customers;
Completing implementation of an updated underwriting strategy and continuing to review and modify our underwriting analysis and standards to improve the overall quality of our credit portfolio by quickly adapting to changes in consumer behavior, the regulatory environment, and portfolio performance;
During the first quarter of fiscal 2017, we made changes to our no-interest programs to improve returns on capital and that will increase the yield on our portfolio over the next few quarters, including reducing the availability of short-term no-interest programs to higher risk customers and moving all long-term no-interest programs to a third-party;
Focusing on further improvement of execution within our collection operations to reduce delinquency rates and future charge-offs;
Focusing on quality, branded products to improve operating performance;
Reducing warehouse and delivery costs;
Expanding and enhancing our product offering of higher-margin furniture and mattresses; and
During the first quarter of fiscal 2017, we opened five new stores in Louisiana (2), Nevada (1), South Carolina (1) and Tennessee (1), and we plan to open approximately 10 to 12 new stores during fiscal 2017, compared to 15 stores in fiscal 2016.
Outlook
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 substantial opportunity to expand towards a national retail platform. There are many markets in the United States with similar demographic characteristics to our current successful store base. 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 and existing 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.

21


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)
2016
 
2015
 
Change
Revenues:
 
 
 
 
 
Total net sales
$
318,542

 
$
298,479

 
$
20,063

Finance charges and other revenues
70,571

 
66,597

 
3,974

Total revenues
389,113

 
365,076

 
24,037

Costs and expenses: