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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
April 30, 2005 000-50421
CONN'S, INC.
(Exact name of registrant as specified in its charter)
A Delaware Corporation 06-1672840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES __X__ NO _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of May 25, 2005:
Class Outstanding
- ------------------------------------------ ----------------------------
Common stock, $.01 par value per share 23,351,044
TABLE OF CONTENTS
-----------------
PART I. FINANCIAL INFORMATION Page No.
--------------------- --------
Item 1. Financial Statements............................................ 1
- -------
Consolidated Balance Sheets as of January 31, 2005 and April
30, 2005....................................................... 1
Consolidated Statements of Operations for the three months
ended April 30, 2004 and 2005.................................. 2
Consolidated Statement of Stockholders' Equity for the three
months ended April 30, 2005.................................... 3
Consolidated Statements of Cash Flows for the three months
ended April 30, 2004 and 2005.................................. 4
Notes to Consolidated Financial Statements...................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- and Results of Operations...................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 22
- -------
Item 4. Controls and Procedures......................................... 23
- -------
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings............................................... 23
- -------
Item 5. Other Information............................................... 23
- -------
Item 6. Exhibits........................................................ 23
- -------
SIGNATURE ................................................................ 24
i
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Conn's, Inc.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
January 31, April 30,
2005 2005
------------ ------------
Assets (unaudited)
Current assets
Cash and cash equivalents ......................... $ 7,027 $ 5,669
Accounts receivable, net .......................... 26,135 24,002
Interests in securitized assets ................... 105,159 106,174
Inventories ....................................... 62,346 69,394
Deferred income taxes ............................. 4,901 6,896
Prepaid expenses and other assets ................. 3,356 3,105
------------ ------------
Total current assets ........................... 208,924 215,240
Non-current deferred income tax asset ............... 1,523 1,893
Property and equipment
Land .............................................. 2,919 3,419
Buildings ......................................... 8,068 8,421
Equipment and fixtures ............................ 10,036 10,763
Transportation equipment .......................... 4,419 4,421
Leasehold improvements ............................ 56,926 58,542
------------ ------------
Subtotal ....................................... 82,368 85,566
Less accumulated depreciation ..................... (34,658) (37,245)
------------ ------------
Total property and equipment, net .............. 47,710 48,321
Goodwill, net ....................................... 9,617 9,617
Debt issuance costs and other assets, net ........... 229 179
------------ ------------
Total assets ................................. $ 268,003 $ 275,250
============ ============
Liabilities and Stockholders' Equity
Current liabilities
Notes payable ..................................... $ 5,500 $ -
Current portion of long-term debt ................. 29 25
Accounts payable .................................. 26,912 29,504
Accrued compensation and related expenses ......... 6,221 3,630
Accrued expenses .................................. 13,662 15,718
Income taxes payable .............................. - 6,584
Deferred income taxes ............................. 966 486
Deferred revenues and allowances .................. 7,383 7,460
Fair value of derivatives ......................... 177 -
------------ ------------
Total current liabilities ...................... 60,850 63,407
Long-term debt ...................................... 5,003 -
Non-current deferred income tax liability ........... 704 762
Deferred gain on sale of property ................... 644 602
Stockholders' equity
Preferred stock ($0.01 par value, 1,000,000 shares
authorized; none issued or outstanding) .......... - -
Common stock ($0.01 par value, 40,000,000 shares
authorized; 23,267,596 and 23,351,044 shares
issued and outstanding at January 31, 2005 and
April 30, 2005, respectively) .................... 233 233
Additional paid-in capital ........................ 84,257 85,012
Accumulated other comprehensive income ............ 7,516 6,636
Retained earnings ................................. 108,796 118,598
------------ ------------
Total stockholders' equity ..................... 200,802 210,479
------------ ------------
Total liabilities and stockholders' equity ... $ 268,003 $ 275,250
============ ============
See notes to consolidated financial statements.
1
Conn's, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
Three Months Ended
April 30,
--------------------------
2004 2005
------------ ------------
Revenues
Product sales .................................... $ 108,503 $ 127,275
Service maintenance agreement commissions, net ... 5,661 6,884
Service revenues ................................. 4,378 4,775
------------ ------------
Total net sales ............................... 118,542 138,934
Finance charges and other ........................ 16,336 19,229
------------ ------------
Total revenues ................................ 134,878 158,163
Cost and expenses
Cost of goods sold, including warehousing and
occupancy costs ................................. 84,774 100,917
Cost of parts sold, including warehousing and
occupancy costs ................................. 1,104 1,225
Selling, general and administrative expense ...... 34,862 39,482
Provision for bad debts .......................... 1,422 1,152
------------ ------------
Total cost and expenses ....................... 122,162 142,776
------------ ------------
Operating income ................................... 12,716 15,387
Interest expense ................................... 582 355
------------ ------------
Income before minority interest and income taxes ... 12,134 15,032
Minority interest in limited partnership ........... (115) -
------------ ------------
Income before income taxes ......................... 12,019 15,032
Provision for income taxes
Current .......................................... 4,683 7,543
Deferred ......................................... (437) (2,313)
------------ ------------
Total provision for income taxes .............. 4,246 5,230
------------ ------------
Net income ......................................... $ 7,773 $ 9,802
============ ============
Earnings per share
Basic ............................................ $ 0.34 $ 0.42
Diluted .......................................... $ 0.33 $ 0.41
Average common shares outstanding
Basic ............................................ 23,145 23,307
Diluted .......................................... 23,749 23,856
See notes to consolidated financial statements.
2
Conn's, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three Months Ended April 30, 2005
(unaudited)
(in thousands, except descriptive shares)
Accum.
Other
Common Stock Compre- Additional
------------------- hensive Paid-in Retained
Shares Amount Income Capital Earnings Total
--------- --------- ----------- ----------- ----------- -----------
Balance January 31, 2005 ........ 23,268 $ 233 $ 7,516 $ 84,257 $108,796 $200,802
Exercise of options to acquire
80,620 shares of common
stock .......................... 80 - - 715 - 715
Issuance of 2,829 shares of
common stock under
Employee Stock Purchase
Plan ........................... 3 - - 40 - 40
Net income ...................... - - - - 9,802 9,802
Reclassification adjustments
on derivative instruments
(net of tax of $86) ............ - - 160 - - 160
Adjustment of fair value of
securitized assets (net of
tax of $560), net of reclass-
ification adjustments of
$2,340 (net of tax of $1,266) .. - - (1,040) - - (1,040)
-----------
Total comprehensive income ...... 8,922
--------- --------- ----------- ----------- ----------- -----------
Balance April 30, 2005 .......... 23,351 $ 233 $ 6,636 $ 85,012 $118,598 $210,479
========= ========= =========== =========== =========== ===========
See notes to consolidated financial statements.
3
Conn's, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
Three Months Ended
April 30,
--------------------------
2004 2005
------------ ------------
Cash flows from operating activities
Net income ......................................... $ 7,773 $ 9,802
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ..................................... 1,880 2,645
Amortization ..................................... 123 (59)
Provision for bad debts .......................... 1,422 1,152
Discounts on promotional credit .................. 184 111
Accretion from interests in securitized assets ... (3,521) (3,606)
Provision for deferred income taxes .............. (437) (2,313)
Loss (Gain) from sale of property and equipment .. (1) 6
Loss (Gain) from derivatives ..................... (26) 69
Changes in operating assets and liabilities:
Accounts receivable .............................. (3,728) 1,894
Inventory ........................................ (3,357) (7,048)
Prepaid expenses and other assets ................ 693 251
Accounts payable ................................. 551 2,593
Accrued expenses ................................. (3,051) (536)
Income taxes payable ............................. 1,947 6,584
Deferred revenue and allowances .................. 89 111
------------ ------------
Net cash provided by operating activities ........... 541 11,656
------------ ------------
Cash flows from investing activities
Purchase of property and equipment ................. (4,346) (3,273)
Proceeds from sale of property ..................... 2 11
------------ ------------
Net cash used in investing activities ............... (4,344) (3,262)
------------ ------------
Cash flows from financing activities
Proceeds from stock issued under employee benefit
plans, including tax benefit ...................... 591 755
Net payments under lines of credit ................. (3) (10,500)
Payment of promissory notes ........................ (17) (7)
------------ ------------
Net cash provided by (used in) financing activities . 571 (9,752)
------------ ------------
Impact on cash of consolidation of SRDS ............. (49) -
------------ ------------
Net change in cash .................................. (3,281) (1,358)
Cash and cash equivalents
Beginning of the year .............................. 12,942 7,027
------------ ------------
End of period ...................................... $ 9,661 $ 5,669
============ ============
See notes to consolidated financial statements.
4
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
April 30, 2005
1. Significant Accounting Policies
Basis of Presentation. The accompanying unaudited, condensed, consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States for complete
financial statements. The accompanying financial statements reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented. All such adjustments
are of a normal recurring nature. Operating results for the three months ended
April 30, 2005 are not necessarily indicative of the results that may be
expected for the year ending January 31, 2006. The financial statements should
be read in conjunction with the Company's (as defined below) audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K filed on April 5, 2005.
The Company's balance sheet at January 31, 2005 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial presentation. Please see the
Company's Form 10-K for the fiscal year ended January 31, 2005 for a complete
presentation of the audited financial statements at that date, together with all
required footnotes, and for a complete presentation and explanation of the
components and presentations of the financial statements.
Principles of Consolidation. The consolidated financial statements include
the accounts of Conn's, Inc. and its subsidiaries, limited liability companies
and limited partnerships, all of which are wholly-owned (the "Company"). All
material intercompany transactions and balances have been eliminated in
consolidation. The consolidated financial statements additionally include the
financial statements of a single purpose entity meeting one or more of the
standards of Financial Accounting Standards Board ("FASB") Interpretation No.
46, Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin No. 51 ("FIN 46"), as described below.
The Company enters into securitization transactions to sell its retail
installment and revolving customer receivables. These securitization
transactions are accounted for as sales in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities, because the
Company has relinquished control of the receivables. Additionally, the Company
has transferred such receivables to a qualifying special purpose entity
("QSPE"). Accordingly, neither the transferred receivables nor the accounts of
the QSPE are included in the consolidated financial statements of the Company.
Application of FIN 46. In January 2003, the Financial Accounting Standards
Board issued Interpretation No. 46, Consolidation of Variable Interest Entities,
An Interpretation of Accounting Research Bulletin No. 51, or FIN 46. FIN 46
requires entities, generally, to be consolidated by a company when it has a
controlling financial interest through ownership, direct or indirect, of a
majority voting interest in an entity with which it conducts business. The
Company evaluated the effects of the issuance of FIN 46 on the accounting for
its leases with Specialized Realty Development Services, LP ("SRDS") and
determined that it was appropriate to consolidate the balance sheet of SRDS with
the Company as of January 31, 2004. As of January 31, 2005, the Company no
longer leased any of its facilities from SRDS and therefore FIN 46 no longer
applies and the Company no longer consolidates SRDS's balance sheet or statement
of operations. However, the operations of SRDS are consolidated with those of
the Company commencing on February 1, 2004 through the last effective date of
the Company's leases with SRDS of January 30, 2005. The effect of such
consolidation on the Company's Statement of Operations for the three months
ended April 30, 2004 was to reduce "Selling, general and administrative expense"
by $0.3 million, to increase "Interest expense" by $0.2 million and to reduce
"Income before income taxes" by $0.1 million for "Minority interest in limited
partnership". The Company had no exposure to losses incurred by SRDS.
5
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Earnings Per Share. In accordance with SFAS No. 128, Earnings per Share,
the Company calculates basic earnings per share by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
include the dilutive effects of any stock options granted calculated under the
treasury method. Because there were no options outstanding in the prior year
interim periods that were valued in excess of the grant price, there were no
such shares included in the diluted outstanding share total. The following table
sets forth the shares outstanding for the earnings per share calculations:
Three Months Ended
April 30,
--------------------------
2004 2005
------------ ------------
Common stock outstanding, beginning of period ....... 23,101,772 23,267,596
Weighted average common stock issued in stock
option exercises ................................... 43,615 38,893
Weighted average common stock issued to
employee stock purchase plan ....................... - 985
------------ ------------
Shares used in computing basic earnings per
share .............................................. 23,145,387 23,307,474
Dilutive effect of stock options, net of
assumed repurchase of treasury stock ............... 603,260 548,093
------------ ------------
Shares used in computing diluted earnings
per share .......................................... 23,748,647 23,855,567
============ ============
Goodwill. Goodwill represents the excess of purchase price over the fair
market value of net assets acquired. Effective February 1, 2002, the Company
adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets,
whereby goodwill is no longer amortized, but rather the Company assesses the
potential future impairment of goodwill on an annual basis, or at any other time
when impairment indicators exist. The Company concluded at January 31, 2005 and
April 30, 2005 that no impairment of goodwill existed.
Stock-Based Compensation. As permitted by SFAS No. 123, Accounting for
Stock-Based Compensation, the Company follows the intrinsic value method of
accounting for stock-based compensation issued to employees, as prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. Since all options outstanding at
April 30, 2005 were granted at or above fair value at the date of grant, no
compensation expense has been recognized under the Company's stock option plan
for any of the financial statements presented. Additionally, as the employee
stock purchase plan is a qualified plan, no compensation expense has been
recognized in the financial statements presented.
If compensation expense for the Company's stock option and employee stock
purchase plans had been recognized using the fair value method of accounting
under SFAS No. 123, net income available for common stockholders for the three
months ended April 30, 2004 and 2005 would have decreased by 2.8% and 3.3%,
respectively. For post-IPO stock option grants, the Company has used the
Black-Scholes model to determine fair value. Prior to the IPO, the fair value of
the options issued was estimated using the minimum valuation option-pricing
model. Fair value compensation expense for the employee stock purchase plan was
computed as the 15% discount from fair market value the employee receives when
purchasing the shares. The following table presents the impact to earnings per
share as if the Company had adopted the fair value recognition provisions of
SFAS No. 123 (dollars in thousands except per share data):
6
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Three Months Ended
April 30,
--------------------------
2004 2005
------------ ------------
Net income available for common stockholders as
reported ........................................... $ 7,773 $ 9,802
Stock-based compensation, net of tax, that would
have been reported under SFAS 123 .................. (221) (324)
------------ ------------
Pro forma net income ............................... $ 7,552 $ 9,478
============ ============
Earnings per share-as reported:
Basic ............................................ $ 0.34 $ 0.42
Diluted .......................................... $ 0.33 $ 0.41
Pro forma earnings per share:
Basic ............................................ $ 0.33 $ 0.41
Diluted .......................................... $ 0.32 $ 0.40
Application of APB 21 to Promotional Credit Programs that Exceed One Year
in Duration: In February 2004, the Company began offering promotional credit
payment plans on certain products that extend beyond one year. In accordance
with APB 21, Interest on Receivables and Payables, such sales are discounted to
their fair value resulting in a reduction in sales and receivables and the
amortization of the discount amount over the term of the deferred interest
payment plan. The difference between the gross sale and the discounted amount is
reflected as a reduction of Product sales in the consolidated statements of
operations and the amount of the discount being amortized in the current period
is recorded in Finance charges and other. For the three months ended April 30,
2004 and 2005, Product sales were reduced by $213,000 and $595,000,
respectively, and Finance charges and other was increased by $29,000 and
$484,000, respectively, to effect the adjustment to fair value and to reflect
the appropriate amortization of the discount.
Recent Accounting Pronouncements. In December 2004, SFAS No. 123R,
Share-Based Payment, was issued. The statement is a revision of SFAS No. 123 and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This
statement establishes standards for accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It also addresses
transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity instruments. The statement
focuses primarily on accounting for transactions in which an entity obtains
employee services in share-based payment transactions, and does not change the
previous accounting guidance for share-based payment transactions with parties
other than employees. This statement requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and record that cost
over the period during which the employee is required to provide service in
exchange for the award. Additionally, employee services received in exchange for
liability awards will be measured at fair value and re-measured at each
reporting date, with changes in the fair value recorded as compensation cost
over that period.
This statement applies to all awards granted after the required effective
date and to awards modified, repurchased or cancelled after that date. The
cumulative effect of initially applying this statement, if any, is recognized as
of the required effective date. As of the required effective date, all public
entities will apply this statement using a modified version of prospective
application, which requires recognition of compensation cost on or after the
required effective date for the portion of outstanding awards for which the
requisite service has not yet been rendered. For periods before the required
effective date, entities may elect to apply a modified version of retrospective
application under which financial statements for prior periods are adjusted on a
basis consistent with the pro forma disclosures required for those periods by
Statement No. 123. This statement was originally effective for public companies,
beginning with the first interim or annual period beginning after June 15, 2005.
However, in April 2005, the Securities and Exchange Commission changed the
required effective date for public companies to the first fiscal year beginning
after June 15, 2005. The Company is currently analyzing the impact this
statement will have on its consolidated results of operations and its financial
position.
7
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Reclassifications. Certain reclassifications have been made in the prior
year's financial statements to conform to current year's presentation.
2. Supplemental Disclosure of Revenue and Comprehensive Income
The following is a summary of the classification of the amounts included as
Finance charges and other for the three months ended April 30, 2004 and 2005 (in
thousands):
Three Months Ended
April 30,
--------------------------
2004 2005
------------ ------------
Securitization income ............................... $ 10,823 $ 13,038
Income from receivables not sold .................... 295 280
Insurance commissions ............................... 4,311 4,666
Other ............................................... 907 1,245
------------ ------------
Finance charges and other ........................... $ 16,336 $ 19,229
============ ============
The components of total comprehensive income for the three months ended
April 30, 2004 and 2005 are presented in the table below (in thousands):
Three Months Ended
April 30,
--------------------------
2004 2005
------------ ------------
Net income .......................................... $ 7,773 $ 9,802
Unrealized gain on derivative instruments ........... 278 246
Taxes on unrealized gain on derivatives ............. (98) (86)
Adjustment of fair value of securitized assets ...... 802 (1,600)
Taxes on adjustment of fair value ................... (283) 560
------------ ------------
Total comprehensive income .......................... $ 8,472 $ 8,922
============ ============
3. Supplemental Disclosure Regarding Managed Receivables
The following tables present quantitative information about the receivables
portfolios managed by the Company (in thousands):
Total Principal Amount of Principal Amount 60 Days
Receivables or More Past Due (1)
------------------------------- -------------------------------
January 31, April 30, January 31, April 30,
------------------------------- -------------------------------
2005 2005 2005 2005
--------------- --------------- --------------- ---------------
Primary portfolio:
Installment............................ $ 328,042 $ 335,849 $ 16,636 $ 12,934
Revolving.............................. 30,210 30,583 867 705
--------------- --------------- --------------- ---------------
Subtotal..................................... 358,252 366,432 17,503 13,639
Secondary portfolio:
Installment............................ 70,448 78,066 5,640 4,852
--------------- --------------- --------------- ---------------
Total receivables managed.................... 428,700 444,498 23,143 18,491
Less receivables sold........................ 419,172 435,113 21,540 17,230
--------------- --------------- --------------- ---------------
Receivables not sold......................... 9,528 9,385 $ 1,603 $ 1,261
=============== ===============
Non-customer receivables..................... 16,607 14,617
--------------- ---------------
Total accounts receivable, net......... $ 26,135 $ 24,002
=============== ===============
8
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
Average Balances Net Credit Losses
------------------------------- -------------------------------
Three Months Ended Three Months Ended
April 30, April 30, (2)
------------------------------- -------------------------------
2004 2005 2004 2005
--------------- --------------- --------------- ---------------
Primary portfolio:
Installment............................ $ 273,127 $ 331,285
Revolving.............................. 23,727 30,452
--------------- ---------------
Subtotal..................................... 296,854 361,737 $ 2,437 $ 2,655
Secondary portfolio:
Installment............................ 59,228 74,823 922 622
--------------- --------------- --------------- ---------------
Total receivables managed.................... 356,082 436,560 3,359 3,277
Less receivables sold........................ 346,632 427,129 3,022 3,087
--------------- --------------- --------------- ---------------
Receivables not sold......................... $ 9,450 $ 9,431 $ 337 $ 190
=============== =============== =============== ===============
___________
(1) Amounts are based on end of period balances.
(2) Amounts represent total loan loss provision, net of recoveries, on total
receivables.
4. Fair Value of Derivatives
The Company held interest rate swaps and collars with notional amounts
totaling $20.0 million as of April 30, 2004, which expired on April 15, 2005,
and were held for the purpose of hedging against variable interest rate risk,
primarily related to cash flows from the Company's interest-only strip as well
as variable rate debt.
In fiscal 2004, hedge accounting was discontinued for the $20.0 million of
swaps. In accordance with SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, at the time hedge accounting was discontinued, the
Company began to recognize changes in fair value of the swaps as a reduction to
interest expense and to amortize the amount of accumulated other comprehensive
loss related to those derivatives as interest expense over the period that the
forecasted transactions affected the consolidated statements of operations.
During the three months ended April 30, 2004 and 2005, the Company reclassified
$278,000 and $246,000, respectively, of losses previously recorded in
accumulated other comprehensive income into the consolidated statements of
operations and recorded $(305,000) and $(177,000), respectively, of interest
reductions in the consolidated statements of operations because of the change in
fair value of the swaps.
5. Letters of Credit
The Company utilizes unsecured letters of credit to secure a portion of the
QSPE's asset-backed securitization program, deductibles under the Company's
insurance programs and international product purchases. At January 31, 2005 and
April 30, 2005, the Company had outstanding unsecured letters of credit of $12.1
million and $11.8 million, respectively. These letters of credit were issued
under the three following facilities:
o The Company has a $5.0 million sublimit provided under its revolving
line of credit for stand-by and import letters of credit. At April 30,
2005, $1.7 million of letters of credit were outstanding and callable
at the option of the Company's insurance carrier if the Company does
not honor its requirement to fund deductible amounts as billed under
its insurance program.
o The Company has arranged for a $10.0 million stand-by letter of credit
to provide assurance to the trustee of the asset-backed securitization
program that funds collected by the Company would be remitted as
required under the base indenture and other related documents. The
letter of credit has a term of one year and expires in August 2005, at
which time the Company expects to renew such obligation.
o The Company obtained a $1.5 million commitment for trade letters of
credit to secure product purchases under an international arrangement.
At April 30, 2005, $148,000 of letters of credit were outstanding
under this commitment. The letter of credit has a term of one year and
expires in June 2005.
9
Conn's, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
The maximum potential amount of future payments under these letter of
credit facilities is considered to be the aggregate face amount of each letter
of credit commitment, which total $16.5 million as of April 30, 2005.
6. Contingencies
Legal Proceedings. The Company is involved in routine litigation incidental
to its business from time to time. Currently, the Company does not expect the
outcome of any of this routine litigation to have a material effect on its
financial condition or results of operations. However, the results of these
proceedings cannot be predicted with certainty, and changes in facts and
circumstances could impact the Company's estimate of reserves for litigation.
Service Maintenance Agreement Obligations. In November 2002, FASB
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirement for
Guarantees, Including Indirect Guarantees of Indebtedness of Other, was issued.
Among other things, this interpretation requires enhanced disclosures made by a
guarantor about its obligations under certain guarantees it has issued. The
Company sells service maintenance agreements under which it is the obligor for
payment of qualifying claims. The Company is responsible for administering the
program, including setting the pricing of the agreements sold and paying the
claims. The typical term for these agreements is between 12 and 36 months. The
pricing is set based on historical claims experience and expectations about
future claims. While the Company is unable to estimate maximum potential claim
exposure, it has a history of overall profitability upon the ultimate resolution
of agreements sold. The revenues related to the agreements sold are deferred at
the time of sales and recorded in revenues in the statement of operations over
the life of the agreements. The revenues deferred related to these agreements
totaled $3.9 million and $3.9 million, respectively, as of January 31, 2005 and
April 30, 2005, and are included on the face of the balance sheet in Deferred
revenues and allowances.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-Looking Statements
This report contains forward-looking statements. We sometimes use words
such as "believe," "may," "will," "estimate," "continue," "anticipate,"
"intend," "expect," "project" and similar expressions, as they relate to us, our
management and our industry, to identify forward-looking statements.
Forward-looking statements relate to our expectations, beliefs, plans,
strategies, prospects, future performance, anticipated trends and other future
events. We have based our forward-looking statements largely on our current
expectations and projections about future events and financial trends affecting
our business. Actual results may differ materially. Some of the risks,
uncertainties and assumptions about us that may cause actual results to differ
from these forward-looking statements include, but are not limited to:
o the success of our growth strategy and plans regarding opening new
stores and entering adjacent and new markets, including our plans to
continue expanding into the Dallas/Fort Worth Metroplex, and the South
Texas Rio Grande Valley;
o our ability to update or expand existing stores;
o our ability to estimate and obtain capital for required capital
expenditures and costs related to the opening of new stores or to
update or expand existing stores;
o our cash flows from operations, borrowings from our revolving line of
credit and proceeds from securitizations to fund our operations, debt
repayment and expansion;
o technological and market developments, growth trends and projected
sales in the home appliance and consumer electronics industry,
including digital products like HDTV, and other new products, and our
ability to capitalize on such growth;
o the potential for price erosion or lower unit sales points that could
result in declines in revenues;
o changes in laws and regulations and/or interest, premium and
commission rates allowed by regulators on our credit, credit insurance
and service maintenance agreements as allowed by those laws and
regulations;
o our relationships with key suppliers;
o the adequacy of our distribution and information systems and
management experience to support our expansion plans;
o the accuracy of our expectations regarding competition and our
competitive advantages;
o the accuracy of our expectations regarding the similarity or
dissimilarity of our existing markets as compared to new markets we
enter; and
o the outcome of litigation affecting our business.
Additional important factors that could cause our actual results to differ
materially from our expectations are discussed under "Risk Factors" in our Form
10-K filed with the Securities Exchange Commission on March 31, 2005. In light
of these risks, uncertainties and assumptions, the forward-looking events and
circumstances discussed in this report might not happen.
The forward-looking statements in this report reflect our views and
assumptions only as of the date of this report. We undertake no obligation to
update publicly or revise any forward-looking statements, whether as a result of
new information, future events or otherwise, except as required by law.
11
All forward-looking statements attributable to us, or to persons acting on
our behalf, are expressly qualified in their entirety by these cautionary
statements.
General
The following discussion and analysis is intended to provide you with a
more meaningful understanding of our financial condition and performance in the
indicated periods, including an analysis of those key factors that contributed
to our financial condition and performance and that are, or are expected to be,
the key drivers of our business.
We are a specialty retailer that sells major home appliances, including
refrigerators, freezers, washers, dryers and ranges, a variety of consumer
electronics, including projection, plasma and LCD televisions, camcorders, VCRs,
DVD players and home theater products, lawn and garden products and mattresses.
We also sell home office equipment, including computers and computer accessories
and continue to introduce additional product categories for the consumer and
home to help increase same store sales and to respond to our customers' product
needs. We require all our sales associates to be knowledgeable of all of our
products, but to specialize in certain specific product categories.
We currently operate 51 retail locations in Texas and Louisiana, and expect
to open six to eight additional stores during the current fiscal year. We plan
to acquire and operate an expanded distribution center in the Dallas/Fort Worth
market during the second or third quarter of this fiscal year, which will serve
that immediate market and permit us to explore markets within a 200+ mile radius
of such facility.
Unlike many of our competitors, we provide flexible in-house credit options
for our customers. In the last three years, we financed, on average,
approximately 56% of our retail sales through our internal credit programs. We
finance a large portion of our customer receivables through an asset-backed
securitization facility, and we derive servicing fee income and interest income
from these assets. As part of our asset-backed securitization facility, we have
created a qualifying special purpose entity, which we refer to as the QSPE or
the issuer, to purchase customer receivables from us and to issue asset-backed
and variable funding notes to third parties. We transfer receivables, consisting
of retail installment and revolving account receivables, extended to our
customers, to the issuer in exchange for cash and subordinated securities. To
finance its acquisition of these receivables, the issuer has issued notes to
third parties.
We also derive revenues from repair services on the products we sell and
from product delivery and installation services we provide to our customers.
Additionally, acting as an agent for unaffiliated companies, we sell credit
insurance and service maintenance agreements to protect our customers from
credit losses due to death, disability, involuntary unemployment and property
damage and product failure not covered by a manufacturers' warranty. We also
derive revenues from the sale of extended service maintenance agreements to
protect the customers after the original manufacturer's warranty or service
maintenance agreement has expired.
Our business is somewhat seasonal, with a greater portion of our revenues
realized during the quarter ending January 31, due to the holiday selling
season, the major collegiate bowl season and the National Football League
playoffs and Super Bowl. Additionally, we generally realize a greater portion of
our pretax and net income during the quarters ended January 31 and April 30, due
to the factors discussed above and the impact of our promotional efforts during
these periods.
Executive Overview
This narrative is intended to provide an executive level overview of our
operations for the three months ended April 30, 2005. A detailed explanation of
the changes in our operations for these periods as compared to the prior year is
included beginning on page 15. As explained in that section, our pretax income
for the quarter ended April 30, 2005 increased approximately 25.1%, primarily as
a result of higher revenues and gross margin dollars, lower selling, general and
administrative expenses as a percentage of revenues and lower interest expense.
Some of the more specific issues that impacted our operating and pretax income
are:
12
o Same store sales for the quarter grew 7.3% over the same period for the
prior year. We believe that we were able to achieve this favorable increase
by continuing our emphasis on sales of our primary product categories, with
the consumer electronics category being a key driver during the period, by
focusing specifically on our track sales, and by taking the opportunity to
promote furniture, bedding and lawn and garden products. It is our strategy
to continue this combination of emphasizing our primary product categories
and focusing on specialty product categories throughout the balance of
fiscal 2006.
o Our entry into the Dallas/Fort Worth market and the opening of our new
store in McAllen, Texas had a positive impact on our revenues.
Approximately $12.8 million of our product sales increase for the quarter
resulted from the opening of seven new stores in these markets, since
February 2004. Our plans provide for the opening of three additional stores
in the Dallas/Fort Worth market and at least one more in South Texas, along
with three or four more stores in other locations during the balance of
fiscal 2006.
o Part of our increase in same store sales during the quarter resulted from
the continuation of deferred interest and "same as cash" plans on certain
products that extend beyond one year. For the three months ended April 30,
2005, $6.7 million in gross product sales were financed by extended
deferred interest and "same as cash" plans. We expect to continue to offer
this type of extended term promotional credit in the future.
o Our gross margin for the quarter decreased from 36.3% to 35.4% for the
three months ended April 30, 2005 when compared to the same period in the
prior year, primarily as a result of changes in product mix and increased
selling discounts.
o Operating margin, on the other hand, increased from 9.4% to 9.7% for the
three months ended April 30, 2005 when compared to the same period in the
prior year due in part to our ability to reduce Selling, general and
administrative (SG&A) expenses as a percent of revenues. We decreased SG&A
expense as a percent of revenues from 25.8% to 25.0%, primarily from
decreases in payroll and payroll related expenses, net advertising expense
and delivery costs, as a percent of revenues. Partially offsetting these
reductions were higher occupancy costs and general insurance costs.
Additionally, our operating margin benefited from a decrease in the
Provision for bad debts as a percent of revenues from 1.1% to 0.7%.
Operational Changes and Resulting Outlook
We opened another new store in the Dallas/Fort Worth market in Euless,
Texas in late April, 2005. We continue to be satisfied with the results in this
market and continue to expand the number of stores (three are under construction
at this time) and plan to add additional distribution capability in the second
or third quarter. We opened a new store in McAllen, Texas in early September
2004 and it has performed above our expectations. We believe that this South
Texas market is substantially underserved and provides great potential for our
company; we are currently constructing another store in the market in Harlingen,
Texas, which should be open in late second quarter or early third quarter. We
have several other locations in Texas, Louisiana and neighboring states that we
believe are promising and are in various stages of development for opening
either in the current fiscal year or the next.
The consumer electronics industry depends on new products to drive
increased consumer interest. Typically, these new products, such as digital
televisions (e.g., plasma, LCD, and DLP) and DVD players, are introduced at
relatively high price points that are then gradually reduced as the product
becomes more mainstream. To sustain positive same store sales growth, unit sales
must increase at a rate greater than the decline in product prices. The
affordability of the product helps the unit sales growth. However, as a result
of relatively short product life cycles in the consumer electronics industry,
which limit the amount of time available for sales volumes to increase, combined
with rapid price erosion in the industry, retailers are challenged to maintain
overall gross margin levels and positive same store sales. This has historically
been our experience and we continue to adjust our marketing strategies to
address this challenge through the introduction of new product categories and
new products within our existing categories.
13
Application of Critical Accounting Policies
In applying the accounting policies that we use to prepare our consolidated
financial statements, we necessarily make accounting estimates that affect our
reported amounts of assets, liabilities, revenues and expenses. Some of these
accounting estimates require us to make assumptions about matters that are
highly uncertain at the time we make the accounting estimates. We base these
assumptions and the resulting estimates on authoritative pronouncements,
historical information and other factors that we believe to be reasonable under
the circumstances, and we evaluate these assumptions and estimates on an ongoing
basis. We could reasonably use different accounting estimates, and changes in
our accounting estimates could occur from period to period, with the result in
each case being a material change in the financial statement presentation of our
financial condition or results of operations. We refer to accounting estimates
of this type as "critical accounting estimates." We believe that the critical
accounting estimates discussed below are among those most important to an
understanding of our consolidated financial statements as of April 30, 2005.
Transfers of Financial Assets. We transfer customer receivables to the QSPE
that issues asset-backed securities to third party lenders using these accounts
as collateral, and we continue to service these accounts after the transfer. We
recognize the sale of these accounts when we relinquish control of the
transferred financial asset in accordance with SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
As we transfer the accounts, we record an asset representing the interest only
strip which is the difference between the interest earned on customer accounts
and the cost associated with financing and servicing the transferred accounts,
including a provision for bad debts associated with the transferred accounts
discounted to a market rate of interest. The gain or loss recognized on these
transactions is based on our best estimates of key assumptions, including
forecasted credit losses, payment rates, forward yield curves, costs of
servicing the accounts and appropriate discount rates. The use of different
estimates or assumptions could produce different financial results. For example,
if we had assumed a 10.0% reduction in net interest spread (which might be
caused by rising interest rates or reductions in rates charged on the accounts
transferred), our interest in securitized assets would have been reduced by $4.0
million as of April 30, 2005, which may have an adverse effect on earnings. We
recognize income from our interest in these transferred accounts as gains on the
transfer of the asset, interest income and servicing fees. This income is
recorded as Finance charges and other in our consolidated statements of
operations. If the assumption used for estimating credit losses were changed by
0.5% from 3.4% to 3.9%, the impact to recorded Finance charges and other would
have been a reduction in revenues and pretax income of $1.7 million.
Deferred Tax Assets. We have significant net deferred tax assets
(approximately $7.5 million as of April 30, 2005), which are subject to periodic
recoverability assessments. Realization of our net deferred tax assets may be
dependent upon whether we achieve projected future taxable income. Our estimates
regarding future profitability may change due to future market conditions, our
ability to continue to execute at historical levels and our ability to continue
our growth plans. These changes, if any, may require material adjustments to
these deferred tax asset balances. For example, if we had assumed that the
future tax rate at which these deferred items would reverse was 34.5% rather
than 35.1%, we would have reduced the net deferred tax asset account and net
income by approximately $129,000.
Intangible Assets. We have significant intangible assets related primarily
to goodwill and the costs of obtaining various loans and funding sources. The
determination of related estimated useful lives and whether or not these assets
are impaired involves significant judgments. We test for potential impairment of
goodwill annually based on judgments regarding ongoing profitability and cash
flow of the underlying assets. Our testing includes using judgments to estimate
the separate operations of our insurance agency and secondary credit portfolio,
including allocations for interest, overhead and taxes. Once these separate
operations have been determined, we apply a multiple of earnings based on
existing market conditions and estimated operating cash flow and compare the
resulting estimated entity values to the recorded goodwill. Changes in strategy
or market conditions could significantly impact these judgments and require
adjustments to recorded asset balances. For example, if we had reason to believe
that our recorded goodwill had become impaired due to decreases in the fair
market value of the underlying business, we would have to take a charge to
income for that portion of goodwill that we believe is impaired. Our goodwill
balance at April 30, 2005 was $9.6 million.
Property and Equipment. Our accounting policies regarding land, buildings,
equipment and leasehold improvements include judgments regarding the estimated
14
useful lives of such assets, the estimated residual values to which the assets
are depreciated, and the determination as to what constitutes increasing the
life of existing assets. These judgments and estimates may produce materially
different amounts of depreciation and amortization expense that would be
reported if different assumptions were used. These judgments may also impact the
need to recognize an impairment charge on the carrying amount of these assets as
the cash flows associated with the assets are realized. In addition, the actual
life of the asset and residual value may be different from the estimates used to
prepare financial statements in prior periods.
Revenue Recognition. Revenues from the sale of retail products are
recognized at the time the product is delivered to the customer. Such revenues
are recognized net of any adjustments for sales incentive offers such as
discounts, coupons, rebates, or other free products or services and discounts of
promotional credit sales that will extend beyond one year. We sell service
maintenance agreements and credit insurance contracts on behalf of unrelated
third parties. For contracts where the third parties are the obligors on the
contract, commissions are recognized in revenues at the time of sale, and in the
case of retrospective commissions, at the time that they are earned. Where we
sell service maintenance renewal agreements in which we are deemed to be the
obligor on the contract at the time of sale, revenue is recognized ratably, on a
straight-line basis, over the term of the service maintenance agreement. These
service maintenance agreements are renewal contracts that provide our customers
protection against product repair costs arising after the expiration of the
manufacturer's warranty and the third party obligor contracts. These agreements
typically range from 12 months to 36 months. These agreements are separate units
of accounting under Emerging Issues Task Force No. 00-21, Revenue Arrangements
with Multiple Deliverables. The amount of service maintenance agreement revenue
deferred at April 30, 2005 and January 31, 2005 was $3.9 million and $3.9
million, respectively, and is included in Deferred revenue in the accompanying
balance sheets.
Vendor Allowances. We receive funds from vendors for price protection,
product rebates, marketing and training and promotion programs which are
recorded on the accrual basis as a reduction to the related product cost or
advertising expense according to the nature of the program. We accrue rebates
based on the satisfaction of terms of the program and sales of qualifying
products even though funds may not be received until the end of a quarter or
year. If the programs are related to product purchases, the allowances, credits
or payments are recorded as a reduction of product cost; if the programs are
related to promotion or marketing of the product, the allowances, credits, or
payments are recorded as a reduction of advertising expense in the period in
which the expense is incurred.
15
Results of Operations
The following table sets forth certain statement of operations information
as a percentage of total revenues for the periods indicated:
Three Months Ended
April 30,
--------------------------
2004 2005
------------ ------------
Revenues:
Product sales ..................................... 80.5 % 80.5 %
Service maintenance agreement commissions, net .... 4.2 4.3
Service revenues .................................. 3.2 3.0
------------ ------------
Total net sales ................................. 87.9 87.8
Finance charges and other ......................... 12.1 12.2
------------ ------------
Total revenues ................................ 100.0 100.0
Costs and expenses:
Cost of goods sold, including warehousing and
occupancy cost ................................... 62.9 63.8
Cost of parts sold, including warehousing and
occupancy cost ................................... 0.8 0.8
Selling, general and administrative expense ....... 25.8 25.0
Provision for bad debts ........................... 1.1 0.7
------------ ------------
Total costs and expenses ...................... 90.6 90.3
------------ ------------
Operating income .................................. 9.4 9.7
Interest expense .................................. 0.4 0.2
------------ ------------
Income before minority interest and income taxes .. 9.0 9.5
Minority interest in limited partnership .......... 0.1 0.0
------------ ------------
Income before income taxes ........................ 8.9 9.5
Provision for income taxes ........................ 3.1 3.3
------------ ------------
Net income ........................................ 5.8 % 6.2 %
============ ============
The table above identifies several changes in our operations for the
current quarter, including changes in revenue and expense categories expressed
as a percentage of revenues. These changes are discussed in the Executive
Overview section on page 12 and in more detail in the discussion of operating
results beginning in the analysis below.
Same store sales growth is calculated by comparing the reported sales by
store for all stores that were open throughout a period to reported sales by
store for all stores that were open throughout the prior period. Sales from
closed stores have been removed from each period. Sales from relocated stores
have been included in each period because each store was relocated within the
same general geographic market. Sales from expanded stores have been included in
each period.
The presentation of gross margins may not be comparable to other retailers
since we include the cost of our in-home delivery service as part of selling,
general and administrative expense. Similarly, we include the cost related to
operating our purchasing function in Selling, general and administrative
expense. It is our understanding that other retailers may include such costs as
part of their cost of goods sold.
Three Months Ended April 30, 2005 Compared to Three Months Ended April 30, 2004
Revenues. Total revenues increased by $23.3 million, or 17.3%, from $134.9
million for the three months ended April 30, 2004 to $158.2 million for the
three months ended April 30, 2005. The increase was attributable to increases in
net sales of $20.4 million, or 17.2%, and $2.9 million, or 17.7%, in finance
charges and other revenue. Of the $20.4 million increase in net sales, $8.2
million resulted from a same store sales increase of 7.3%, $12.2 million was
generated by seven retail locations that were not open for three consecutive
months in each period, net of reductions related to the closing of one location,
$(381,000) resulted from an increase in discounts of promotional credit sales
and $396,000 resulted from a net increase in service revenues. Increased sales
of computers and other new product categories included in the track, consumer
16
electronics and furniture accounted for much of the increase in same store
sales. Of the $20.4 million increase in net sales, $18.8 million was
attributable to increases in product sales and $1.6 million was attributable to
net changes in service maintenance agreement commissions and service revenues.
Of the $18.8 million increase in product sales, approximately $11.2 million was
attributable to increases in unit sales and approximately $7.6 million was
attributable to increases in unit price points. Most of the volume impact was
due to increased track, lawn and garden, and appliance sales, while the price
point impact was driven primarily by consumers selecting higher priced products
as new technology prices fall and become more affordable, but still remain above
the price points of the older technology.
The following table presents the makeup of net sales by product category in
each quarter, including service maintenance agreement commissions and service
revenues, expressed both in dollar amounts and as a percent of total net sales.
Classification of sales has been adjusted from previous filings to break out the
track area as a separate category.
Three Months Ended April 30,
---------------------------------------------------------
2004 2005
---------------------------- ---------------------------- Percent
Category Amount Percent Amount Percent Increase
-------------- ------------ -------------- ------------ ------------
Major home appliances .................... $ 41,962 35.4 % $ 46,497 33.4 % 10.8 %
Consumer electronics ..................... 37,622 31.7 43,654 31.4 16.0 (1)
Track .................................... 18,041 15.2 23,153 16.7 28.3 (2)
Delivery ................................. 1,848 1.6 2,021 1.5 9.4
Lawn and garden .......................... 4,545 3.8 5,283 3.8 16.2 (1)
Bedding .................................. 2,269 1.9 2,907 2.1 28.1 (3)
Other .................................... 2,216 1.9 3,760 2.7 69.7 (4)
-------------- ------------ -------------- ------------ ------------
Total product sales ................... 108,503 91.5 127,275 91.6 17.3
Service maintenance agreement
commissions ............................. 5,661 4.8 6,884 5.0 21.6
Service revenues ......................... 4,378 3.7 4,775 3.4 9.1
-------------- ------------ -------------- ------------ ------------
Total net sales ....................... $ 118,542 100.0 % $ 138,934 100.0 % 17.2 %
============== ============ ============== ============ ============
___________________________________________
(1) These increases are consistent with overall increase in product sales and
improved unit prices.
(2) This increase is primarily due to the emphasis on track sales, driven by
the reformatting of our stores and focus on merchandising of these
products.
(3) This increase reflects the emphasis on this emerging product category and
the change in vendor relationships.
(4) This increase is primarily due to the increased emphasis on the sales of
furniture.
Revenue from Finance charges and other increased by approximately $2.9
million, or 17.7%, from $16.3 million for the three months ended April 30, 2004
to $19.2 million for the three months ended April 30, 2005. This increase in
revenue resulted primarily from increases in securitization income of $2.2
million, and increases in insurance commissions and other revenues of $693,000.
These increases are attributable to higher product sales and increases in our
retained interest in assets transferred to the QSPE, due primarily to increases
in the transferred balances.
Cost of Goods Sold. Cost of goods sold, including warehousing and occupancy
cost, increased by $16.1 million, or 19.0%, from $84.8 million for the three
months ended April 30, 2004 to $100.9 million for the three months ended April
30, 2005. This increase was generally consistent with the 17.3% increase in net
product sales during the three months ended April 30, 2005, although cost of
products sold increased from 78.1% of net product sales in the quarter ended
April 30, 2004 to 79.3% for the quarter ended April 30, 2005. We attribute this
product gross margin decrease to more aggressive price discounting that was used
to drive same store sales.
Cost of Parts Sold. Cost of parts sold, including warehousing and occupancy
cost, increased approximately $121,000, or 11.0%, for the three months ended
April 30, 2005 as compared to the three months ended April 30, 2004 due to
increases in parts sales.
17
Selling, General and Administrative Expense. While Selling, general and
administrative expense increased by $4.6 million, or 13.3%, from $34.9 million
for the three months ended April 30, 2004 to $39.5 million for the three months
ended April 30, 2005, it decreased as a percentage of total revenue from 25.8%
to 25.0%. The decrease in expense as a percentage of total revenues for this
category resulted primarily from decreased payroll and payroll related expenses,
net advertising expense and delivery costs, as a percent of revenues, that were
partially offset by higher occupancy costs and general insurance costs.
Provision for Bad Debts. The provision for bad debts on receivables
retained by the Company and not transferred to the QSPE and other non-credit
portfolio receivables decreased by $270,000, or 19.0%, during the three months
ended April 30, 2005 as compared to the three months ended April 30, 2004,
primarily as a result of changes in the loss history and provision adjustments.
See Note 3 to the financial statements for information regarding the performance
of the credit portfolio.
Interest Expense. Interest expense decreased by $227,000, or 39.0%, from
$582,000 for the three months ended April 30, 2004 to $355,000 for the three
months ended April 30, 2005. The net decrease in interest expense was
attributable to the following factors:
o expiration of $20.0 million in our interest rate hedges and the
discontinuation of hedge accounting for derivatives resulted in a net
decrease in interest expense of approximately $28,000; and
o the deconsolidation of SRDS (previously consolidated as a VIE
according to FIN 46) resulted in a decrease of interest expense of
$216,000, offset by an increase in interest expense of $17,000 due to
higher average outstanding balances and higher interest rates.
Minority Interest. As a result of FIN 46, for the quarter ended April 30,
2004, we eliminated the pretax operating profit contributed from the
consolidation of SRDS through the minority interest line item in our
consolidated statement of operations (see Note 1 of Notes to the Financial
Statements).
Provision for Income Taxes. The provision for income taxes increased by
$1.0 million, or 23.2%, from $4.2 million for the three months ended April 30,
2004 to $5.2 million for the three months ended April 30, 2005, consistent with
the increase in pretax income of 25.1% when considered along with a refund of
prior year's state income tax of $44,000.
Net Income. As a result of the above factors, Net income increased $2.0
million, or 26.1%, from $7.8 million for the three months ended April 30, 2004
to $9.8 million for the three months ended April 30, 2005.
18
Liquidity and Capital Resources
Current Activities
Historically we have financed our operations through a combination of cash
flow generated from operations, and external borrowings, including primarily
bank debt, extended terms provided by our vendors for inventory purchases,
acquisition of inventory under consignment arrangements and transfers of
receivables to our asset-backed securitization facilities. As of April 30, 2005,
we had $33.3 million under the revolving line of credit (based on qualifying
assets) and $8.0 million under our unsecured bank line of credit available to us
for general corporate purposes, $16.1 million under extended vendor terms for
purchases of inventory and $121.5 million in commitments available for the
transfer of receivables to our QSPE.
A summary of the significant financial covenants that govern our bank
credit facility compared to our actual compliance status at April 30, 2005, is
presented below:
Required
Minimum/
Actual Maximum
---------------- ----------------
Debt service coverage ratio must exceed
required minimum 3.40 to 1.00 2.00 to 1.00
Total adjusted leverage ratio must be lower
than required maximum 1.85 to 1.00 3.00 to 1.00
Consolidated net worth must exceed required
minimum $ 203,842,010 $ 117,647,518
Charge-off ratio must be lower than required
maximum 0.02 to 1.00 0.05 to 1.00
Extension ratio must be lower than required
maximum 0.02 to 1.00 0.04 to 1.00
Delinquency ratio must be lower than required
maximum 0.06 to 1.00 0.12 to 1.00
Note: All terms in the above table are defined by the bank credit facility
and may or may not agree directly to the financial statement captions in
this document.
We will continue to finance our operations and future growth through a
combination of cash flow generated from operations and external borrowings,
including primarily bank debt, extended vendor terms for purchases of inventory,
acquisition of inventory under consignment arrangements and the QSPE's
asset-backed securitization facilities. Based on our current operating plans, we
believe that cash generated from operations, available borrowings under our bank
credit facility and unsecured credit line, extended vendor terms for purchases
of inventory, acquisition of inventory under consignment arrangements and access
to the unfunded portion of the variable funding portion of the QSPE's
asset-backed securitization program will be sufficient to fund our operations,
store expansion and updating activities and capital programs through at least
January 31, 2006. However, there are several factors that could decrease cash
provided by operating activities, including:
o reduced demand for our products;
o more stringent vendor terms on our inventory purchases;
o loss of ability to acquire inventory on consignment;
o increases in product cost that we may not be able to pass on to our
customers;
o reductions in product pricing due to competitor promotional
activities;
o changes in inventory requirements based on longer delivery times of
the manufacturers or other requirements which would negatively impact
our delivery and distribution capabilities;
o increases in the retained portion of our receivables portfolio under
our current QSPE's asset-backed securitization program as a result of
changes in performance or types of receivables transferred
(promotional versus non-promotional);
o inability to expand our capacity for financing our receivables
portfolio under new or replacement QSPE asset-backed securitization
programs or a requirement that we retain a higher percentage of the
credit portfolio under such new programs;
19
o increases in program costs (interest and administrative fees relative
to our receivables portfolio associated with the funding of our
receivables); and
o increases in personnel costs required for us to stay competitive in
our markets.
During the three months ended April 30, 2005, net cash provided by
operating activities increased $11.2 million from $0.5 million provided in the
2004 period to $11.7 million provided in the 2005 period. The net increase in
cash provided from operations resulted primarily from increased net income, a
smaller increase in the retained interest in the asset backed securitization
program and timing of payments of income taxes and accounts payable, which were
partially offset by increased inventory levels. We expect to continue to
increase our use of promotional credit. We believe that the available balances
under our bank credit facility and asset-backed securitization program are
sufficient to fund the increase in receivables or any increase in credit
enhancement that we expect through the end of fiscal 2006.
As noted above, we offer promotional credit programs to certain customers
that provide for "same as cash" interest free periods of varying terms,
generally three, six, or 12 months; in fiscal year 2005 we increased these terms
to include 18 or 24 months that are eligible to be partially funded through our
asset-backed securitization program. In the second quarter of fiscal 2005, we
began offering deferred interest programs with 36-month terms. The three, six,
12, 18, 24 and 36 month "same as cash" promotional accounts and deferred
interest program accounts are eligible for securitization up to the limits
provided for in our securitization agreements. This limit is currently 30.0% of
eligible securitized receivables. The percentage of eligible securitized
receivables represented by promotional receivables was 14.9% and 24.1% as of
April 30, 2004 and 2005, respectively. This increase was the result of sales
with the use of promotional credit versus lower prices at retail. If we exceed
this 30.0% limit, we would be required to use some of our other capital
resources to carry the unfunded balances of the receivables for the promotional
period. The weighted average promotional period was 10.8 months and 12.6 months
for promotional receivables outstanding as of April 30, 2004 and 2005,
respectively. The weighted average remaining term on those same promotional
receivables was 7.0 months and 8.7 months, respectively. While overall these
promotional receivables have a much shorter weighted average term than
non-promotional receivables, we receive less income as a result of a reduced net
interest margin used in the calculation of the gain on the sale of receivables.
As a result, the existence of the interest free extended payment terms
negatively impacts the gains as compared to other receivables.
Net cash used by investing activities decreased by $1.0 million, from $4.3
million for the three months ended April 30, 2004 to $3.3 million for the three
months ended April 30, 2005. The decrease in cash used in investing activities
resulted primarily from a decrease in the purchase of property and equipment of
$1.0 million. The cash expended for property and equipment was used primarily
for construction of new stores and the reformatting of our stores to increase
focus on track operations. Based on current plans, we expect to increase
expenditures for property and equipment in the balance of fiscal 2006 as we open
additional stores.
Net cash from financing activities decreased by $10.4 million from $0.6
million for the three months ended April 30, 2004 to ($9.8) million for the
three months ended April 30, 2005. The increase in cash used by financing
activities resulted primarily from increases in payments on various debt
instruments of $10.5 million.
Off-Balance Sheet Financing Arrangements
Since we extend credit in connection with a large portion of our retail,
service maintenance and credit insurance sales, we have created a qualified
special purpose entity, which we refer to as the QSPE or the issuer, to purchase
customer receivables from us and to issue asset-backed and variable funding
notes to third parties to obtain cash for these purchases. We transfer
receivables, consisting of retail installment contracts and revolving accounts
extended to our customers, to the issuer in exchange for cash and unsecured
promissory notes. To finance its acquisition of these receivables, the issuer
has issued the notes and bonds described below to third parties. The unsecured
promissory notes issued to us are subordinate to these third party notes and
bonds.
At April 30, 2005, the issuer had issued two series of notes and bonds: a
Series A variable funding note in the amount of $250 million purchased by Three
Pillars Funding LLC and three classes of Series B bonds in the aggregate amount
of $200 million, of which $8.0 million was required to be placed in a restricted
cash account for the benefit of the bondholders. Private institutional
investors, primarily insurance companies, purchased the Series B bonds at a
weighted fixed rate of 5.1%.
20
We continue to service the transferred accounts for the QSPE, and we
receive a monthly servicing fee, so long as we act as servicer, in an amount
equal to .0025% multiplied by the average aggregate principal amount of
receivables serviced plus the amount of average aggregate defaulted receivables.
The issuer records revenues equal to the interest charged to the customer on the
receivables less losses, the cost of funds, the program administration fees paid
in connection with either Three Pillars Funding LLC or the Series B bond
holders, and the servicing fee.
The Series A variable funding note permits the issuer to borrow funds up to
$250 million to purchase receivables from us, thereby functioning as a "basket"
to accumulate receivables. When issuer borrowings under the Series A variable
funding note approach $250 million, the issuer intends to request an increase in
the Series A amount or issue a new series of bonds and use the proceeds to pay
down the then outstanding balance of the Series A variable funding note, so that
the basket will once again become available to accumulate new receivables. As of
April 30, 2005, borrowings under the Series A variable funding note were $128.5
million.
We are not directly liable to the lenders under the asset-backed
securitization facility. If the issuer is unable to repay the Series A note and
Series B bonds due to its inability to collect the transferred customer
accounts, the issuer could not pay the subordinated notes it has issued to us in
partial payment for transferred customer accounts, and the Series B bond holders
could claim the balance in its $8.0 million restricted cash account. We are also
contingently liable under a $10.0 million letter of credit that secures our
performance of our obligations or services under the servicing agreement as it
relates to the transferred assets that are part of the asset-backed
securitization facility.
The issuer is subject to certain affirmative and negative covenants
contained in the transaction documents governing the Series A variable funding
note and the Series B bonds, including covenants that restrict, subject to
specified exceptions: the incurrence of non-permitted indebtedness and other
obligations and the granting of additional liens; mergers, acquisitions,
investments and disposition of assets; and the use of proceeds of the program.
The issuer also makes representations and warranties relating to compliance with
certain laws, payment of taxes, maintenance of its separate legal entity,
preservation of its existence, protection of collateral and financial reporting.
In addition, the program requires the issuer to maintain a minimum net worth.
A summary of the significant financial covenants that govern the issuer's
asset-backed credit facility compared to actual compliance status at April 30,
2005, is presented below:
Required
Minimum/
Actual Maximum
---------------- ----------------
Issuer interest must exceed required minimum $41.0 million $38.6 million
Gross loss rate must be lower than required
maximum 3.2% 10.0%
Net portfolio yield must exceed required
minimum 10.5% 2.0%
Payment rate must exceed required minimum 6.9% 3.0%
Note: All terms in the above table are defined by the asset backed credit
facility and may or may not agree directly to the financial statement
captions in this document.
Events of default under the Series A variable funding note and the Series B
bonds, subject to grace periods and notice provisions in some circumstances,
include, among others: failure of the issuer to pay principal, interest or fees;
violation by the issuer of any of its covenants or agreements; inaccuracy of any
representation or warranty made by the issuer; certain servicer defaults;
failure of the trustee to have a valid and perfected first priority security
interest in the collateral; default under or acceleration of certain other
indebtedness; bankruptcy and insolvency events; failure to maintain certain loss
ratios and portfolio yield; change of control provisions and certain other
events pertaining to us. The issuer's obligations under the program are secured
by the receivables and proceeds.
21
Securitization Facilities
We finance most of our customers receivables through asset-backed
securitization facilities
---------------------------
Series A Note
---> $250 million
| Credit Rating: P1/A2
| Three Pillars Funding Corp.
Customer Receivables | ---------------------------
- ------------ ----------> ----------------- |
Retail Qualifying |
Sales Special Purpose <----|
Entity Entity |
("QSPE") |
- ------------ <---------- ------------------ |
| ---------------------------
1. Cash Proceeds | Series B Bonds
2. Subordinated Securities | $200 million
3. Right to Receive Cash Flows | Private Institutional
Equal to Interest Rate Spread ---> Investors
Class A: $120 mm (Aaa)
Class B: $57.8 mm (A2)
Class C: $22.2 mm (Baa2)
---------------------------
Both the bank credit facility and the asset-backed securitization program
are significant factors relative to our ongoing liquidity and our ability to
meet the cash needs associated with the growth of our business. Our inability to
use either of these programs because of a failure to comply with their covenants
would adversely affect our continued growth. Funding of current and future
receivables under the QSPE's asset-backed securitization program can be
adversely affected if we exceed certain predetermined levels of re-aged
receivables, size of the secondary portfolio, the amount of promotional
receivables, write-offs, bankruptcies or other ineligible receivable amounts. If
the funding under the QSPE's asset-backed securitization program was reduced or
terminated, we would have to draw down our bank credit facility more quickly
than we have estimated.
On October 29, 2004, through our QSPE, we entered a "First Supplemental
Indenture" amending the "Base Indenture" dated September 1, 2002 (as amended,
supplemented and otherwise modified through the date of the First Supplemental
Indenture). This amendment allows us to include certain retail installment
contracts and revolving charge agreement receivables, including cash option and
deferred interest receivables for terms up to thirty-six months in the eligible
asset base of its asset backed securitization financing arrangements, providing
partial funding of these receivables. These cash option and deferred interest
receivables are limited to 30% of all eligible receivables with deferred
interest receivables limited to 10% of all eligible receivables.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rates under our bank credit facility (as amended November 15,
2004) are variable and are determined, at our option, as the base rate, which is
the greater of prime rate or federal funds rate plus 0.50% plus the base rate
margin, which ranges from 0.00% to 0.75%, or LIBOR plus the LIBOR margin, which
ranges from 1.00% to 2.00%. Accordingly, changes in the prime rate, the federal
funds rate or LIBOR, which are affected by changes in interest rates generally,
will affect the interest rate on, and therefore our costs under, our bank credit
facility. We are also exposed to interest rate risk associated with our interest
only strip and the subordinated securities we receive from our sales of
receivables to the QSPE.
We held interest rate swaps and collars with notional amounts totaling
$20.0 million as of January 31, 2005, which expired on April, 15 2005. The swaps
and collars were held for the purpose of hedging against variable interest rate
risk, primarily related to cash flows from our interest-only strip as well as
our variable rate debt. There have been no material changes in our interest rate
risks since January 31, 2005.
22
Item 4. Controls and Procedures
An evaluation was performed under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, regarding the effectiveness of our disclosure controls and
procedures (as defined in 15d-15(e) of the Securities Exchange Act of 1934 (the
"Exchange Act") as of the end of the period covered by this quarterly report.
Based on that evaluation, our management, including our Chief Executive Officer
and our Chief Financial Officer, concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to our Company (including its consolidated subsidiaries) required to be
included in our periodic filings with the Securities and Exchange Commission.
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended April 30, 2005 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in routine litigation incidental to our business from time
to time. Currently, we do not expect the outcome of any of this routine
litigation to have a material effect on our financial condition or results of
operation. 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.
Item 5. Other Information
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors since we last provided
disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule
14A.
Item 6. Exhibits
The exhibits required to be furnished pursuant to Item 6 of Form 10-Q are
listed in the Exhibit Index filed herewith, which Exhibit Index is incorporated
herein by reference.
23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONN'S, INC.
By: /s/ David L. Rogers
---------------------------------
David L. Rogers
Chief Financial Officer
(Principal Financial Officer and
duly authorized to sign this
report on behalf of the
registrant)
Date: May 31, 2005
24
INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
2 Agreement and Plan of Merger dated January 15, 2003, by and among
Conn's, Inc., Conn Appliances, Inc. and Conn's Merger Sub, Inc.
(incorporated herein by reference to Exhibit 2 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on September 23, 2003).
3.1 Certificate of Incorporation of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.1 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
3.1.1 Certificate of Amendment to the Certificate of Incorporation of
Conn's, Inc. dated June 3, 2004 (incorporated herein by reference to
Exhibit 3.1.1 to Conn's, Inc. Form 10-Q for the quarterly period ended
April 30, 2004 (File No. 000-50421) as filed with the Commission on
June 7, 2004).
3.2 Bylaws of Conn's, Inc. (incorporated herein by reference to Exhibit
3.2 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
3.2.1 Amendment to the Bylaws of Conn's, Inc. (incorporated herein by
reference to Exhibit 3.2.1 to Conn's Form 10-Q for the quarterly
period ended April 30, 2004 (File No. 000-50421) as filed with the
Commission on June 7, 2004).
4.1 Specimen of certificate for shares of Conn's, Inc.'s common stock
(incorporated herein by reference to Exhibit 4.1 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on October 29, 2003).
10.1 Amended and Restated 2003 Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 10.1 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).t
10.1.1 Amendment to the Conn's, Inc. Amended and Restated 2003 Incentive
Stock Option Plan (incorporated herein by reference to Exhibit 10.1.1
to Conn's Form 10-Q for the quarterly period ended April 30, 2004
(File No. 000-50421) as filed with the Commission on June 7, 2004).t
10.1.2 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.1.2 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Commission on
April 5, 2005).t
10.2 2003 Non-Employee Director Stock Option Plan (incorporated herein by
reference to Exhibit 10.2 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046)as filed with the Securities and
Exchange Commission on September 23, 2003).t
10.2.1 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.2.1 to Conn's, Inc. Form 10-K for the annual period ended
January 31, 2005 (File No. 000-50421) as filed with the Commission on
April 5, 2005).t
10.3 Employee Stock Purchase Plan (incorporated herein by reference to
Exhibit 10.3 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).t
10.4 Conn's 401(k) Retirement Savings Plan (incorporated herein by
reference to Exhibit 10.4 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).t
25
10.5 Shopping Center Lease Agreement dated May 3, 2000, by and between
Beaumont Development Group, L.P., f/k/a Fiesta Mart, Inc., as Lessor,
and CAI, L.P., as Lessee, for the property located at 3295 College
Street, Suite A, Beaumont, Texas (incorporated herein by reference to
Exhibit 10.5 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
10.5.1 First Amendment to Shopping Center Lease Agreement dated September 11,
2001, by and among Beaumont Development Group, L.P., f/k/a Fiesta
Mart, Inc., as Lessor, and CAI, L.P., as Lessee, for the property
located at 3295 College Street, Suite A, Beaumont, Texas (incorporated
herein by reference to Exhibit 10.5.1 to Conn's, Inc. registration
statement on Form S-1 (file no. 333-109046) as filed with the
Securities and Exchange Commission on September 23, 2003).
10.6 Industrial Real Estate Lease dated June 16, 2000, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.6.1 First Renewal of Lease dated November 24, 2004, by and between
American National Insurance Company, as Lessor, and CAI, L.P., as
Lessee, for the property located at 8550-A Market Street, Houston,
Texas (incorporated herein by reference to Exhibit 10.6.1 to Conn's,
Inc. Form 10-K for the annual period ended January 31, 2005 (File No.
000-50421) as filed with the Commission on April 5, 2005).
10.7 Lease Agreement dated December 5, 2000, by and between Prologis
Development Services, Inc., f/k/a The Northwestern Mutual Life
Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.7.1 Lease Amendment No. 1 dated November 2, 2001, by and between Prologis
Development Services, Inc., f/k/a The Northwestern Mutual Life
Insurance Company, as Lessor, and CAI, L.P., as Lessee, for the
property located at 4810 Eisenhauer Road, Suite 240, San Antonio,
Texas (incorporated herein by reference to Exhibit 10.7.1 to Conn's,
Inc. registration statement on Form S-1 (file no. 333-109046) as filed
with the Securities and Exchange Commission on September 23, 2003).
10.8 Lease Agreement dated August 18, 2003, by and between Robert K.
Thomas, as Lessor, and CAI, L.P., as Lessee, for the property located
at 4610-12 McEwen Road, Dallas, Texas (incorporated herein by
reference to Exhibit 10.8 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.9 Credit Agreement dated April 24, 2003, by and among Conn Appliances,
Inc. and the Borrowers thereunder, the Lenders party thereto, JPMorgan
Chase Bank, as Administrative Agent, Bank of America, N.A., as
Syndication Agent, and SunTrust Bank, as Documentation Agent
(incorporated herein by reference to Exhibit 10.9 to Conn's, Inc.
registration statement on Form S-1 (file no. 333-109046) as filed with
the Securities and Exchange Commission on September 23, 2003).
10.9.1 First Amendment to Credit Agreement dated April 7, 2004 by and among
Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc.,
collectively the Borrowers, each of the Lenders which is or may from
time to time become a party thereto, and JPMorgan Chase Bank, as
Administrative Agent (incorporated herein by reference to Exhibit 99.1
to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421) as
filed with the Commission on April 23, 2004).
10.9.2 Second Amendment to Credit Agreement dated November 12, 2004 by and
among Conn Appliances, Inc. and CAI Credit Insurance Agency, Inc.,
collectively the Borrowers, each of the Lenders which is or may from
time to time become a party thereto, and JPMorgan Chase Bank, as
Administrative Agent (incorporated herein by reference to Exhibit 99.1
to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421) as
filed with the Commission on November 17, 2004).
26
10.9.3 Letter of Credit Agreement dated November 12, 2004 by and between Conn
Appliances, Inc. and CAI Credit Insurance Agency, Inc., the financial
institutions listed on the signature pages thereto, and JPMorgan Chase
Bank, as Administrative Agent (incorporated herein by reference to
Exhibit 99.2 to Conn's Inc. Current Report on Form 8-K (File No.
000-50421) as filed with the Commission on November 17, 2004).
10.10 Receivables Purchase Agreement dated September 1, 2002, by and among
Conn Funding II, L.P., as Purchaser, Conn Appliances, Inc. and CAI,
L.P., collectively as Originator and Seller, and Conn Funding I, L.P.,
as Initial Seller (incorporated herein by reference to Exhibit 10.10
to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.11 Base Indenture dated September 1, 2002, by and between Conn Funding
II, L.P., as Issuer, and Wells Fargo Bank Minnesota, National
Association, as Trustee (incorporated herein by reference to Exhibit
10.11 to Conn's, Inc. registration statement on Form S-1 (file no.
333-109046) as filed with the Securities and Exchange Commission on
September 23, 2003).
10.11.1 First Supplemental Indenture dated October 29, 2004 by and between
Conn Funding II, L.P., as Issuer, and Wells Fargo Bank, National
Association, as Trustee (incorporated herein by reference to Exhibit
99.1 to Conn's, Inc. Current Report on Form 8-K (File No. 000-50421)
as filed with the Commission on November 4, 2004).
10.12 Series 2002-A Supplement to Base Indenture dated September 1, 2002, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.12.1 Amendment to Series 2002-A Supplement dated March 28, 2003, by and
between Conn Funding II, L.P. as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Commission on April 5, 2005).
10.12.2 Amendment No. 2 to Series 2002-A Supplement dated July 1, 2004, by and
between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.12.2 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Commission on April 5, 2005).
10.13 Series 2002-B Supplement to Base Indenture dated September 1, 2002, by
and between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.13.1 Amendment to Series 2002-B Supplement dated March 28, 2003, by and
between Conn Funding II, L.P., as Issuer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.13.1 to Conn's, Inc. Form 10-K for the annual
period ended January 31, 2005 (File No. 000-50421) as filed with the
Commission on April 5, 2005).
10.14 Servicing Agreement dated September 1, 2002, by and among Conn Funding
II, L.P., as Issuer, CAI, L.P., as Servicer, and Wells Fargo Bank
Minnesota, National Association, as Trustee (incorporated herein by
reference to Exhibit 10.14 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on September 23, 2003).
10.15 Form of Executive Employment Agreement (incorporated herein by
reference to Exhibit 10.15 to Conn's, Inc. registration statement on
Form S-1 (file no. 333-109046) as filed with the Securities and
Exchange Commission on October 29, 2003).t
27
10.16 Form of Indemnification Agreement (incorporated herein by reference to
Exhibit 10.16 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).t
10.17 2006 Bonus Program (incorporated herein by reference to Form 8-K (file
no. 000-50421) filed with the Securities and Exchange Commission on
April 4, 2005).t
11.1 Statement re: computation of earnings per share is included under Note
1 to the financial statements.
21 Subsidiaries of Conn's, Inc. (incorporated herein by reference to
Exhibit 21 to Conn's, Inc. registration statement on Form S-1 (file
no. 333-109046) as filed with the Securities and Exchange Commission
on September 23, 2003).
31.1 Rule 13a-14(a)/15d-14(a) Certification (Chief Executive Officer)
(filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification (Chief Financial Officer)
(filed herewith).
32.1 Section 1350 Certification (Chief Executive Officer and Chief
Financial Officer) (furnished herewith).
99.1 Subcertification by Chief Operating Officer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer and Chief
Financial Officer) (filed herewith).
99.2 Subcertification by Secretary/Treasurer in support of Rule
13a-14(a)/15d-14(a) Certification (Chief Executive Officer and Chief
Financial Officer) (filed herewith).
99.3 Subcertification of Chief Operating Officer and Secretary/Treasurer in
support of Section 1350 Certifications (Chief Executive Officer and
Chief Financial Officer (furnished herewith).
t Management contract or compensatory plan or arrangement.
28