a6317734.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549 


FORM 10-Q/A
(AMENDMENT NO. 1)
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the quarterly period ended April 30, 2010 Commission File Number 000-50421
 

CONN'S, INC.
(Exact name of registrant as specified in its charter)

 
A Delaware Corporation 06-1672840
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
                                                                                         
3295 College Street
Beaumont, Texas 77701
(409) 832-1696
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
 
NONE
(Former name, former address and former
fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer [   ]  Accelerated filer [ x ]  Non-accelerated filer [   ]  smaller reporting company [   ]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [   ]  No [ x ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of May 24, 2010:
 
 
Class   Outstanding 
Common stock, $.01 par value per share    22,480,848 
 
 

 
 
 

 
 
EXPLANATORY NOTE
 
We are filing this amendment to our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2010, originally filed on May 27, 2010, to correct an error in Exhibits 32.1 and 99.6. As originally filed, the CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, provided in Exhibit 32.1, erroneously referred to the period ended October 31, 2009, instead of the correct period ended April 30, 2010, and the SUBCERTIFICATION OF CHAIRMAN OF THE BOARD, PRESIDENTS, TREASURER AND SECRETARY IN SUPPORT OF 18 U.S.C. SECTION 1350 CERTIFICATION, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, provided in Exhibit 99.6, also erroneously referred to the period ended October 31, 2009, instead of the correct period ended April 30, 2010.  These two periods are being corrected by this Amendment.

Additionally, in Part II, Item 1, Legal Proceedings, we are adding information regarding our litigation with the Texas Attorney General, including the fact that on June 8, 2010, the judge in the Texas State District Court of Harris County, Texas, signed an Order confirming the terms and conditions of the Rule 11 Settlement Agreement between us and the Texas Attorney General, fully and finally resolving the litigation filed against us by the Texas Attorney General.
 
This amendment to the original Form 10-Q amends and restates only the information stated above.  We have not updated any disclosures in this amendment to speak as of a later date than the original filing.  All information contained in this amendment and the original Form 10-Q is subject to updating and supplementing as provided in the periodic reports filed subsequent to the original filing date with the Securities and Exchange Commission.
 
 

 
 
TABLE OF CONTENTS  
     
     
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36

 
 
 

 
 
Part I. FINANCIAL INFORMATION
           
Item 1. Financial Statements
           
             
Conn's, Inc.
 
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except share data)
 
   
Assets
 
January 31,
2010
   
April 30,
2010
 
   
(As adjusted
see Note 1)
   
(unaudited)
 
Cash and cash equivalents
  $ 12,247     $ 5,708  
(includes balances of VIE of $104 and $107, respectively)
               
Other accounts receivable, net of allowance of $50 and $52, respectively
    23,254       30,291  
Customer accounts receivable, net of allowance of $19,204 and $18,087 respectively
    368,304       353,551  
(includes balances of VIE of $279,948 and $262,403, respectively)
               
Inventories
    63,499       88,901  
Deferred income taxes
    15,237       14,826  
Federal income taxes recoverable
    8,148       -  
Prepaid expenses and other assets
    8,050       6,628  
Total current assets
    498,739       499,905  
Long-term portion of customer accounts receivable, net of
               
allowance of $16,598 and $15,454, respectively
    318,341       302,070  
(includes balances of VIE of $241,971 and $224,193, respectively)
               
Property and equipment
               
Land
    7,682       7,490  
Buildings
    10,480       10,378  
Equipment and fixtures
    23,797       23,826  
Transportation equipment
    1,795       1,684  
Leasehold improvements
    91,299       91,320  
Subtotal
    135,053       134,698  
Less accumulated depreciation
    (75,350 )     (78,335 )
Total property and equipment, net
    59,703       56,363  
Non-current deferred income tax asset
    5,485       6,404  
Other assets, net (includes balances of VIE of $7,106 and $7,886, respectively)
    10,198       12,287  
Total assets
  $ 892,466     $ 877,029  
                 
Liabilities and Stockholders' Equity
               
                 
Current liabilities
               
Current portion of long-term debt
  $ 64,055     $ 100,162  
(includes balances of VIE of $63,900 and $100,000, respectively)
               
Accounts payable
    39,944       55,238  
Accrued compensation and related expenses
    5,697       5,049  
Accrued expenses
    31,685       24,181  
Income taxes payable
    2,640       7,941  
Deferred revenues and allowances
    14,596       13,353  
Total current liabilities
    158,617       205,924  
Long-term debt
    388,249       319,611  
(includes balances of VIE of $282,500 and $220,000, respectively)
               
Other long-term liabilities
    5,195       4,995  
Fair value of interest rate swaps
    337       251  
Deferred gains on sales of property
    905       874  
Stockholders' equity
               
Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding)
    -       -  
Common stock ($0.01 par value, 40,000,000 shares authorized;
               
24,194,555 and 24,204,053 shares issued at January 31, 2010 and April 30, 2010, respectively)
    242       242  
Additional paid-in capital
    106,226       106,835  
Accumulated other comprehensive loss
    (218 )     (163 )
Retained earnings
    269,984       275,531  
Treasury stock, at cost, 1,723,205 shares
    (37,071 )     (37,071 )
Total stockholders' equity
    339,163       345,374  
Total liabilities and stockholders' equity
  $ 892,466     $ 877,029  
 
 
See notes to consolidated financial statements.
 

 
1

 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
(in thousands, except earnings per share)
 
             
   
Three Months Ended
April 30,
 
   
2009
   
2010
 
Revenues
 
(As adjusted
see Note 1)
       
Product sales
  $ 184,817     $ 150,365  
Repair service agreement commissions, net
    9,790       7,917  
Service revenues
    5,544       4,757  
Total net sales
    200,151       163,039  
Finance charges and other
    39,700       34,480  
Total revenues
    239,851       197,519  
                 
Cost and expenses
               
Cost of goods sold, including warehousing
               
and occupancy costs
    145,870       114,157  
Cost of parts sold, including warehousing
               
and occupancy costs
    2,587       2,372  
Selling, general and administrative expense
    62,738       60,743  
Provision for bad debts
    5,644       6,274  
Total cost and expenses
    216,839       183,546  
Operating income
    23,012       13,973  
Interest expense, net
    5,004       4,785  
Other (income) expense, net
    (8 )     171  
Income before income taxes
    18,016       9,017  
Provision for income taxes
    6,660       3,470  
Net income
  $ 11,356     $ 5,547  
                 
Earnings per share
               
Basic
  $ 0.51     $ 0.25  
Diluted
  $ 0.50     $ 0.25  
Average common shares outstanding
               
Basic
    22,447       22,475  
Diluted
    22,689       22,477  

 
See notes to consolidated financial statements.
 

 
2

 
 
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
Three Months Ended April 30, 2009
 
(unaudited)
 
(in thousands, except descriptive shares)
 
                                           
                     
Other
                   
               
Additional
   
Compre-
                   
   
Common Stock
   
Paid-in
   
hensive
   
Retained
   
Treasury
       
   
Shares
   
Amount
   
Capital
   
Loss
   
Earnings
   
Stock
   
Total
 
                                           
Balance January 31, 2010
    24,194     $ 242     $ 106,226     $ (218 )   $ 269,984     $ (37,071 )   $ 339,163  
(As adjusted, see Note 1)
                                                       
                                                         
Issuance of shares of common
                                                       
stock under Employee
                                                       
Stock Purchase Plan
    10       -       48                               48  
Stock-based compensation
                    561                               561  
Net income
                                    5,547               5,547  
                                                         
Adjustment of fair value of
                                                       
interest rate swaps
                                                       
net of tax of $31
                            55                       55  
Other comprehensive income
                            55                       55  
Total comprehensive income
                                                    5,602  
Balance April 30, 2010
    24,204     $ 242     $ 106,835     $ (163 )   $ 275,531     $ (37,071 )   $ 345,374  
 
 
See notes to consolidated financial statements.
 

 
3

 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (in thousands)
 
   
   
Three Months Ended
April 30,
 
   
2009
   
2010
 
   
(As adjusted
       
Cash flows from operating activities
 
see Note 1)
       
Net income
  $ 11,356     $ 5,547  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    3,291       3,352  
Amortization, net
    110       766  
Provision for bad debts
    5,644       6,274  
Stock-based compensation
    630       561  
Discounts and accretion on promotional credit
    (804 )     (766 )
Provision for deferred income taxes
    (946 )     (192 )
(Gains) losses on sales of property and equipment
    (8 )     171  
Changes in operating assets and liabilities:
               
Customer accounts receivable
    12,731       25,521  
Other accounts receivable
    13,812       (7,037 )
Inventory
    4,992       (25,402 )
Prepaid expenses and other assets
    178       1,392  
Accounts payable
    (1,003 )     15,294  
Accrued expenses
    (4,155 )     (8,152 )
Income taxes payable
    3,309       13,132  
Deferred revenue and allowances
    (405 )     (1,242 )
Net cash provided by operating activities
    48,732       29,219  
Cash flows from investing activities
               
Purchases of property and equipment
    (3,800 )     (390 )
Proceeds from sales of property
    19       204  
Net cash used in investing activities
    (3,781 )     (186 )
Cash flows from financing activities
               
Proceeds from stock issued under employee benefit plans
    59       48  
Borrowings under lines of credit
    82,933       61,013  
Payments on lines of credit
    (132,633 )     (93,511 )
Increase in deferred financing costs
    (154 )     (3,089 )
Payment of promissory notes
    (1 )     (33 )
Net cash used in financing activities
    (49,796 )     (35,572 )
Net change in cash
    (4,845 )     (6,539 )
Cash and cash equivalents
               
Beginning of the year
    11,909       12,247  
End of period
  $ 7,064     $ 5,708  
 
 
See notes to consolidated financial statements.
 

 
4

 
  
Conn’s , Inc.  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
April 30, 2010

1.  Summary of Significant Accounting Policies
 
Basis of Presentation. The accompanying unaudited, condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. All such adjustments are of a normal recurring nature, except as otherwise described herein.  Operating results for the three month period ended April 30, 2010, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2011.  The financial statements should be read in conjunction with the Company’s (as defined below) audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K/A filed on April 12, 2010.

The Company’s balance sheet at January 31, 2010, has been derived from the audited financial statements at that date, revised for the retrospective application of the new accounting principles discussed below, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for a complete financial presentation.  Please see the Company’s Form 10-K/A for the fiscal year ended January 31, 2010, 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.

Business Activities.  The Company, through its retail stores, provides products and services to its customer base in seven primary market areas, including southern Louisiana, southeast Texas, Houston, South Texas, San Antonio/Austin, Dallas/Fort Worth and Oklahoma. Products and services offered through retail sales outlets include home appliances, consumer electronics, home office equipment, lawn and garden products, mattresses, furniture, repair service agreements, installment and revolving credit account programs, and various credit insurance products. These activities are supported through an extensive service, warehouse and distribution system. For the reasons discussed below, the aggregation of operating segments represent one reportable segment. Accordingly, the accompanying consolidated financial statements reflect the operating results of the Company’s single reportable segment. The Company’s retail stores bear the “Conn’s” name, and deliver the same products and services to a common customer group. The Company’s customers generally are individuals rather than commercial accounts. All of the retail stores follow the same procedures and methods in managing their operations. The Company’s management evaluates performance and allocates resources based on the operating results of the retail stores and considers the credit programs, service contracts and distribution system to be an integral part of the Company’s retail operations.

Adoption of New Accounting Principles.  The Company enters into securitization transactions to transfer eligible retail installment and revolving customer receivables and retains servicing responsibilities and subordinated interests. Additionally, the Company transfers the eligible customer receivables to a bankruptcy-remote variable interest entity (VIE). In June 2009, the FASB issued revised authoritative guidance to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about:

-  
 a transfer of financial assets;
-  
 the effects of a transfer on its financial position, financial performance, and cash flows; and
-  
 a transferor’s continuing involvement, if any, in transferred financial assets;
and,
-  
 Improvements in financial reporting by companies involved with variable interest entities to provide more relevant and reliable information to users of financial statements by requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:
a)  
The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance, and
b)  
The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
 
 
5

 
 
After the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance.  If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. The new FASB-issued authoritative guidance was effective for the Company beginning February 1, 2010.
 
The Company determined that it qualifies as the primary beneficiary of its VIE based on the following considerations:
 
-  
 The Company directs the activities that generate the customer receivables that are transferred to the VIE,
-  
 The Company directs the servicing activities related the collection of the customer receivables transferred to the VIE,
-  
 The Company absorbs all losses incurred by the VIE to the extent of its residual interest in the customer receivables held by the VIE before any other investors incur losses, and
-  
 The Company has the rights to receive all benefits generated by the VIE after paying the contractual amounts due to the other investors.
 
As a result, the Company’s adoption of the provisions of the new guidance, effective February 1, 2010, resulted in the Company’s VIE, which is engaged in customer receivable financing and securitization, being consolidated in the Company’s balance sheet and the Company’s statements of operations, stockholders’ equity and cash flows. Previously, the operations of the VIE were reported off-balance sheet. The Company has elected to apply the provisions of this new guidance by retrospectively restating prior period financial statements to give effect to the consolidation of the VIE, presenting the balances at their carrying value as if they had always been carried on its balance sheet. The retrospective application impacted the comparative prior period financial statements as follows:

-  
 For the three months ended April 30, 2009, Income before income taxes was reduced by approximately $0.3 million.
-  
 For the three months ended April 30, 2009, Net income was reduced by approximately $0.2 million.
-  
 For the three months ended April 30, 2009, Basic earnings per share was unchanged.
-  
 For the three months ended April 30, 2009, Diluted earnings per share was reduced by $0.01.
-  
 For the three months ended April 30, 2009, Cash flows from operating activities was increased by approximately $46.5 million.
-  
 For the three months ended April 30, 2009, Cash flows from financing activities was reduced by approximately $46.5 million.
-  
 As of January 31, 2010, Working capital increased approximately $25.4 million;
-  
 As of January 31, 2010, Customer accounts receivable, net, were increased approximately $488.5 million, Net deferred tax assets were increased approximately $3.0 million and Other assets were increased approximately $7.1 million;
-  
 As of January 31, 2010, Interests in the securitized assets of its VIE of approximately $157.7 million was eliminated;
-  
 As of January 31, 2010, current and long-term debt were increased approximately $63.9 million and $282.5 million, respectively; and
-  
 As of January 31, 2010, Retained earnings was decreased approximately $5.2 million.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and all of its wholly-owned subsidiaries (the Company), including the Company’s VIE. The liabilities of the VIE and the assets specifically collateralizing those obligations are not available for the general use of the Company and have been parenthetically presented on the face of the Company’s balance sheet. All material intercompany transactions and balances have been eliminated in consolidation.
 
 
 
6

 

Fair Value of Financial Instruments.    The fair value of cash and cash equivalents, receivables and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of the Company’s long-term debt approximates its carrying amount based on the fact that the agreements were recently amended and the cost of the borrowings was revised to reflect current market conditions. The estimated fair value of the VIE’s $150 million 2006 Series A notes medium term notes was approximately $141 million and $139 million as of April 30, 2010 and January 31, 2010, respectively, based on its estimate of the rates available at these dates, for instruments with similar terms and maturities. The Company’s interest rate swaps are presented on the balance sheet at fair value.

Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

Earnings Per Share. The Company calculates basic earnings per share by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of any stock options granted, as calculated under the treasury-stock method. The weighted average number of anti-dilutive stock options not included in calculating diluted EPS was 1.5 million and 2.7 million for the three months ended April 30, 2009 and 2010, respectively. The following table sets forth the shares outstanding for the earnings per share calculations:

The following table sets forth the shares outstanding for the earnings per share calculations:

   
Three Months Ended
 
   
April 30,
 
   
2009
   
2010
 
             
Common stock outstanding, net of treasury stock, beginning of period
    22,444,240       22,471,350  
Weighted average common stock issued to employee stock purchase plan
    2,719       3,308  
Shares used in computing basic earnings per share
    22,446,959       22,474,658  
Dilutive effect of stock options, net of assumed repurchase of treasury stock
    242,204       2,787  
Shares used in computing diluted earnings per share
    22,689,163       22,477,445  
 
Customer Accounts Receivable.  Customer accounts receivable reported in the consolidated balance sheet includes receivables transferred to the Company’s VIE and those receivables not transferred to the VIE. The Company records the amount of principal and accrued interest on Customer receivables that is expected to be collected within the next twelve months, based on contractual terms, in current assets on its consolidated balance sheet.  Those amounts expected to be collected after 12 months, based on contractual terms, are included in long-term assets. Typically, customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Additionally, the Company offers reage programs to customers with past due balances that have experienced a financial hardship; if they meet the conditions of the Company’s reage policy. Reaging a customer’s account can result in updating an account from a delinquent status to a current status. Generally, an account that is delinquent more than 120 days and for which no payment has been received in the past seven months will be charged-off against the allowance for doubtful accounts and interest accrued subsequent to the last payment will be reversed. The Company has a secured interest in the merchandise financed by these receivables and therefore has the opportunity to recover a portion of the charged-off amount.
 
Interest Income on Customer Accounts Receivable.  Interest income is accrued using the Rule of 78’s method for installment contracts and the simple interest method for revolving charge accounts, and is reflected in Finance charges and other. Typically, interest income is accrued until the contract or account is paid off or charged-off and we provide an allowance for estimated uncollectible interest. Interest income is recognized on interest-free promotion credit programs based on the Company’s historical experience related to customers that fail to satisfy the requirements of the interest-free programs. Additionally, for sales on deferred interest and “same as cash” programs that exceed one year in duration, the Company discounts the sales to their fair value, resulting in a reduction in sales and customer receivables, and amortizes the discount amount to Finance charges and other over the term of the program. The amount of customer receivables carried on the Company’s consolidated balance sheet that were past due 90 days or more and still accruing interest was $54.8 million and $44.7 million at January 31, 2010, and April 30, 2010, respectively.
 
 
 
7

 
 
Allowance for Doubtful Accounts.  The Company records an allowance for doubtful accounts, including estimated uncollectible interest, for its Customer and Other accounts receivable, based on its historical net loss experience and expectations for future losses.  The net charge-off data used in computing the loss rate is reduced by the amount of post-charge-off recoveries received, including cash payments, amounts realized from the repossession of the products financed and, at times, payments under credit insurance policies. Additionally, the Company separately evaluates the Primary and Secondary portfolios when estimating the allowance for doubtful accounts. The balance in the allowance for doubtful accounts and uncollectible interest for customer receivables was $35.8 million and $33.5 million, at January 31, 2010, and April 30, 2010, respectively. Additionally, as a result of the Company’s practice of reaging customer accounts, if the account is not ultimately collected, the timing and amount of the charge-off is impacted. If these accounts had been charged-off sooner the historical net loss rates might have been higher.
 
Inventories.    Inventories consist of finished goods or parts and are valued at the lower of cost (moving weighted average method) or market.
 
Other Assets.     The Company has certain deferred financing costs for transactions that have not yet been completed and has not begun amortization of those costs. These costs are included in Other assets, net, on the balance sheet and will be amortized upon completion of the related financing transaction or expensed in the event the Company fails to complete such a transaction.  The Company also has certain restricted cash balances included in Other assets.  The restricted cash balances represent collateral for note holders of the Company’s VIE, and the amount is expected to decrease as the respective notes are repaid. However, the required balance could increase dependent on certain net portfolio yield requirements. The balance of this restricted cash account was $6.0 million at January 31, 2010, and April 30, 2010.
 
Comprehensive Income.
 
Comprehensive income for the three months ended April 30, 2009 is as follows:

       
Net income
  $ 11,356  
Adjustment of fair value of interest rate swaps, net of tax of $44
    (81 )
Total comprehensive income
  $ 11,275  
 
Subsequent Events. Subsequent events have been evaluated through the date of issuance. No material subsequent events have occurred since April 30, 2010 that required recognition or disclosure in the Company’s current period financial statements
 
Reclassifications. Certain reclassifications have been made in the prior year’s financial statements to conform to the current year’s presentation, by reclassifying the balance of construction-in-progress of approximately $0.9 million from Property and equipment – Buildings to Property and equipment – Leasehold improvements, on the consolidated balance sheet.
 
2.      Supplemental Disclosure of Finance Charges and Other Revenue
 
The following is a summary of the classification of the amounts included as Finance charges and other for the three months ended April 30, 2009 and 2010 (in thousands):

   
Three Months ended
 
   
April 30,
 
   
2009
   
2010
 
             
Interest income and fees on customer receivables
  $ 34,956     $ 30,393  
Insurance commissions
    4,630       3,837  
Other
    114       250  
Finance charges and other
  $ 39,700     $ 34,480  

 
 
8

 
 
3.      Supplemental Disclosure of Customer Receivables

The following tables present quantitative information about the receivables portfolios managed by the Company (in thousands):

   
Total Outstanding Balance
 
   
of Customer Receivables
   
60 Days Past Due (1)
   
Reaged (1)
 
   
January 31,
   
April 30,
   
January 31,
   
April 30,
   
January 31,
   
April 30,
 
   
2010
   
2010
   
2010
   
2010
   
2010
   
2010
 
Primary portfolio:
                                   
Installment
  $ 555,573     $ 532,869     $ 46,758     $ 38,577     $ 93,219     $ 87,196  
Revolving
    41,787       36,193       2,017       1,884       1,819       1,762  
Subtotal
    597,360       569,062       48,775       40,461       95,038       88,958  
Secondary portfolio:
                                               
Installment
    138,681       131,430       24,616       19,471       49,135       45,051  
Total receivables managed
    736,041       700,492     $ 73,391     $ 59,932     $ 144,173     $ 134,009  
Allowance for uncollectible accounts
    (35,802 )     (33,541 )                                
Allowances for promotional credit programs
    (13,594 )     (11,330 )                                
Current portion of customer accounts
                                               
receivable, net
    368,304       353,551                                  
Long-term customer accounts
                                               
receivable, net
  $ 318,341     $ 302,070                                  
                                                 
                                                 
Receivables transferred to the VIE
  $ 521,919     $ 486,596     $ 59,840     $ 47,540     $ 122,521     $ 110,082  
Receivables not transferred to the VIE
    214,122       213,896       13,551       12,392       21,652       23,927  
Total receivables managed
  $ 736,041     $ 700,492     $ 73,391     $ 59,932     $ 144,173     $ 134,009  
                                                 
(1) Amounts are based on end of period balances and accounts could be represented in both the past due and reaged columns shown above.
 
 
 
               
Net Credit
 
   
Average Balances
   
Charge-offs (2)
 
   
Three Months Ended
   
Three Months Ended
 
   
April 30,
   
April 30,
 
   
2009
   
2010
   
2009
   
2010
 
Primary portfolio:
                       
Installment
  $ 547,980     $ 542,675              
Revolving
    35,291       38,839              
Subtotal
    583,271       581,514     $ 3,916     $ 6,153  
Secondary portfolio:
                               
Installment
    159,270       134,324       1,689       2,092  
Total receivables managed
  $ 742,541     $ 715,838     $ 5,605     $ 8,245  
                                 
Receivables transferred to
                               
the VIE
    615,761       503,280       5,249       6,077  
Receivables not transferred to
                               
the VIE
    126,780       212,558       356       2,168  
Total receivables managed
  $ 742,541     $ 715,838     $ 5,605     $ 8,245  
                                 
(2) Amounts represent total credit charge-offs, net of recoveries, on total customer receivables.
 

 
 
9

 

4.  Debt and Letters of Credit

The Company’s borrowing facilities consist of an asset-based revolving credit facility, a $10 million unsecured revolving line of credit, its VIE’s 2002 Series A variable funding note and its VIE’s 2006 Series A medium term notes. Debt consisted of the following at the periods ended (in thousands):

   
January 31,
   
April 30,
 
   
2010
   
2010
 
             
             
Asset-based revolving credit facility
  $ 105,498     $ 99,400  
2002 Series A Variable Funding Note
    196,400       170,000  
2006 Series A Notes
    150,000       150,000  
Unsecured revolving line of credit for $10 million maturing in September 2010
    -       -  
Other long-term debt
    406       373  
Total debt
    452,304       419,773  
Less current portion of debt
    64,055       100,162  
Long-term debt
  $ 388,249     $ 319,611  
 
The Company’s $210 million asset-based revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory and matures in August 2011. The credit facility bears interest at LIBOR plus a spread ranging from 325 basis points to 375 basis points, based on a fixed charge coverage ratio. In addition to the fixed charge coverage ratio, the revolving credit facility includes a total liabilities to tangible net worth requirement, a minimum customer receivables cash recovery percentage requirement, a net capital expenditures limit and combined portfolio performance covenants. The Company was in compliance with the covenants, as amended, at April 30, 2010. Additionally, the agreement contains cross-default provisions, such that, any default under another credit facility of the Company or its VIE would result in a default under this agreement, and any default under this agreement would result in a default under those agreements. The asset-based revolving credit facility is secured by the assets of the Company not otherwise encumbered.

The 2002 Series A program functions as a revolving credit facility to fund the transfer of eligible customer receivables to the VIE. When the outstanding balance of the facility approaches a predetermined amount, the VIE (Issuer) is required to seek financing to pay down the outstanding balance in the 2002 Series A variable funding note. The amount paid down on the facility then becomes available to fund the transfer of new customer receivables or to meet required principal payments on other series as they become due. The new financing could be in the form of additional notes, bonds or other instruments as the market and transaction documents might allow. Given the current state of the financial markets, especially with respect to asset-backed securitization financing, the Company has been unable to issue medium-term notes or increase the availability under the existing variable funding note program. The 2002 Series A program consists of $170 million that is renewable annually, at the Company’s option, until August 2011 and bears interest at commercial paper rates plus a spread of 250 basis points. The total commitment under the 2002 Series A program was reduced during the quarter from $200 million at January 31, 2010. Additionally, in connection with recent amendments to the 2002 Series A facility, the VIE agreed to reduce the total available commitment to $130 million in April 2011.

 The 2006 Series A program, which was consummated in August 2006, is non-amortizing for the first four years and officially matures in April 2017. However, it is expected that the scheduled $7.5 million principal payments, which begin in September 2010, will retire the bonds prior to that date. The VIE’s borrowing agreements contain certain covenants requiring the maintenance of various financial ratios and customer receivables performance standards. The Issuer was in compliance with the requirements of the agreements, as amended, as of April 30, 2010. The VIE’s debt is secured by the Customer accounts receivable that are transferred to it, which are included in Customer accounts receivable and Long-term portion of customer accounts receivable on the consolidated balance sheet. The investors and the securitization trustee have no recourse to the Company’s other assets for failure of the individual customers of the Company and the VIE to pay when due. Additionally, the Company has no recourse to the VIE’s assets to satisfy its obligations. The Company’s retained interests in the customer receivables collateralizing the securitization program and the related cash flows are subordinate to the investors’ interests, and would not be paid if the Issuer is unable to repay the amounts due under the 2002 Series A and 2006 Series A programs. The ultimate realization of the retained interest is subject to credit, prepayment, and interest rate risks on the transferred financial assets.
 
 
 
10

 

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

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

As of April 30, 2010, the Company had approximately $55.4 million under its asset-based revolving credit facility, net of standby letters of credit issued, and $10.0 million under its unsecured bank line of credit immediately available for general corporate purposes.  The Company also had $33.5 million that may become available under its asset-based revolving credit facility as it grows the balance of eligible customer receivables and its total eligible inventory balances.

The Company’s asset–based revolving credit facility provides it the ability to utilize letters of credit to secure its obligations as the servicer under its VIE’s asset-backed securitization program, deductibles under the Company’s property and casualty insurance programs and international product purchases, among other acceptable uses. At April 30, 2010, the Company had outstanding letters of credit of $21.7 million under this facility. The maximum potential amount of future payments under these letter of credit facilities is considered to be the aggregate face amount of each letter of credit commitment, which totals $21.7 million as of April 30, 2010.

The Company held interest rate swaps with notional amounts totaling $25.0 million as of April 30, 2010, with terms extending through July 2011 for the purpose of hedging against variable interest rate risk related to the variability of cash flows in the interest payments on a portion of its variable-rate debt, based on changes in the benchmark one-month LIBOR interest rate. Changes in the cash flows of the interest rate swaps are expected to exactly offset the changes in cash flows (changes in base interest rate payments) attributable to fluctuations in the LIBOR interest rate.  For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. At April 30, 2010, the estimated net amount of loss that is expected to be reclassified into earnings within the next twelve months is $0.2 million.
 

 
11

 

For information on the location and amounts of derivative fair values in the statement of operation, see the tables presented below (in thousands):

 
Fair Values of Derivative Instruments
 
 
Liability Derivatives
 
 
January 31, 2010
   
April 30, 2010
 
 
Balance
       
Balance
     
 
Sheet
 
Fair
   
Sheet
 
Fair
 
 
Location
 
Value
   
Location
 
Value
 
Derivatives designated as
                 
hedging instruments under
                 
Interest rate contracts
Other liabilities
  $ 337    
Other liabilities
  $ 251  
                       
Total derivatives designated
                     
as hedging instruments
    $ 337         $ 251  
 
 

                           
Amount of
                           
Gain or (Loss)
               
Amount of
     
Recognized in
               
Gain or (Loss)
 
Location of
 
Income on
   
Amount of
     
Reclassified
 
Gain or (Loss)
 
Derivative
   
Gain or (Loss)
 
Location of
 
from
 
Recognized in
 
(Ineffective
   
Recognized
 
Gain or (Loss)
 
Accumulated
 
Income on
 
Portion
   
in OCI on
 
Reclassified
 
OCI into
 
Derivative
 
and Amount
   
Derivative
 
from
 
Income
 
(Ineffective
 
Excluded from
   
(Effective
 
Accumulated
 
(Effective
 
Portion
 
Effectiveness
Derivatives in
 
Portion)
 
OCI into
 
Portion)
 
and Amount
 
Testing)
Cash Flow
 
Three Months Ended
 
Income
 
Three Months Ended
 
Excluded from
 
Three Months Ended
Hedging
 
April 30,
 
April 30,
 
(Effective
 
April 30,
 
April 30,
 
Effectiveness
 
April 30,
 
April 30,
Relationships
 
2009
 
2010
 
Portion)
 
2009
 
2010
 
Testing)
 
2009
 
2010
Interest Rate
         
Interest income/
         
Interest income/
       
Contracts
 
    (81)
 
    55
 
(expense)
 
    (17)
 
    (98)
 
(expense)
 
    -
 
    -
                                 
Total
 
    (81)
 
    55
     
    (17)
 
    (98)
     
    -
 
    -
  
 
5.  Contingencies

Legal Proceedings.  The Company is involved in routine litigation and claims incidental to its business from time to time, and, as required, has accrued its estimate of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in the Company’s assumptions or the effectiveness of its strategies related to these proceedings. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact the Company’s estimate of reserves for litigation.

Repair Service Agreement Obligations. The Company sells repair service agreements that extend the period of covered warranty service on the products the Company sells. For certain of the repair service agreements sold, the Company is the obligor for payment of qualifying claims. The Company is responsible for administering the program, including setting the pricing of the agreements sold and paying the claims. The typical term for these agreements is between 12 and 36 months. The pricing is set based on historical claims experience and expectations about future claims.
 
 
 
12

 

While the Company is unable to estimate maximum potential claim exposure, it has a history of overall profitability upon the ultimate resolution of agreements sold. The revenues related to the agreements sold are deferred at the time of sale and recorded in revenues in the statement of operations over the life of the agreements. The agreements can be canceled at any time and any deferred revenue associated with canceled agreements is reversed at the time of cancellation. The amounts of repair service agreement revenue deferred at January 31, 2010, and April 30, 2010, are $7.3 million and $7.3 million, respectively, and are included in Deferred revenue and allowances in the accompanying consolidated balance sheets. The following table presents a reconciliation of the beginning and ending balances of the deferred revenue on the Company’s repair service agreements and the amount of claims paid under those agreements (in thousands):

Reconciliation of deferred revenues on repair service agreements
           
   
Three Months Ended
 
   
April 30,
 
   
2009
   
2010
 
             
Balance in deferred revenues at beginning of period
  $ 7,213     $ 7,268  
Revenues earned during the period
    (1,733 )     (1,787 )
Revenues deferred on sales of new agreements
    1,833       1,801  
Balance in deferred revenues at end of period
  $ 7,313     $ 7,282  
                 
Total claims incurred during the period, excludes selling expenses
  $ 716     $ 886  
 
 
 
13

 
 
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:

 
our ability to obtain capital for required capital expenditures and costs related to the opening of new stores or to update, relocate or expand existing stores;
 
 
our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving line of credit and proceeds from securitizations, and proceeds from accessing debt or equity markets;
 
 
our ability to renew or replace our existing borrowing facilities on or before the maturity dates of the facilities;
 
 
the cost or terms of any amended, renewed or replacement credit facilities;
 
 
our ability to obtain additional funding for the purpose of funding the customer receivables generated by us, including limitations on our ability to obtain financing through the commercial paper-based funding sources in our securitization program;
 
 
our inability to maintain compliance with debt covenant requirements, including taking the actions necessary to maintain compliance with the covenants, such as obtaining amendments to the borrowing facilities that modify the covenant requirements, which could result in higher borrowing costs;
 
 
reduced availability under our asset-based revolving credit facility as a result of borrowing base requirements and the impact on the borrowing base calculation of changes in the performance or eligibility of the customer receivables financed by that facility;
 
 
increases in the retained portion of our customer receivables portfolio under our asset-backed securitization program as a result of changes in performance or types of customer receivables transferred, or as a result of a change in the mix of funding sources available to the securitization program, requiring higher collateral levels, or limitations on our ability to obtain financing through commercial paper-based funding sources;
 
 
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 existing markets;
 
 
our ability to open and profitably operate new stores in existing, adjacent and new geographic markets;
 
 
our intention to update or expand existing stores;
 
 
our ability to introduce additional product categories;
 
 
the ability of the financial institutions providing lending facilities to us to fund their commitments;
 
 
the effect of any downgrades by rating agencies of our lenders on borrowing costs;

 
 
14

 
 
 
the effect on our borrowing cost of changes in laws and regulations affecting the providers of debt financing;
 
 
the effect of rising interest rates or borrowing spreads that could increase our cost of borrowing or reduce securitization income;
 
 
the effect of rising interest rates or other economic conditions on mortgage borrowers that could impair our customers' ability to make payments on outstanding credit accounts;
 
 
our inability to make customer financing programs available that allow consumers to purchase products at levels that can support our growth;
 
 
the potential for deterioration in the delinquency status of the transferred or owned credit portfolios or higher than historical net charge-offs in the portfolios could adversely impact earnings;
 
 
technological and market developments, growth trends and projected sales in the home appliance and consumer electronics industry, including, with respect to digital products like Blu-ray players, HDTV, LED and 3-D televisions, GPS devices, home networking devices and other new products, and our ability to capitalize on such growth;
 
 
the potential for price erosion or lower unit sales points that could result in declines in revenues;
 
 
 
the effect of changes in oil and gas prices that could adversely affect our customers' shopping decisions and patterns, as well as the cost of our delivery and service operations and our cost of products, if vendors pass on their additional fuel costs through increased pricing for products;
 
 
the ability to attract and retain qualified personnel;
 
 
 
both the short-term and long-term impact of adverse weather conditions (e.g. hurricanes) that could result in volatility in our revenues and increased expenses and casualty losses;
 
 
changes in laws and regulations and/or interest, premium and commission rates allowed by regulators on our credit, credit insurance and repair service agreements as allowed by those laws and regulations;
 
 
our relationships with key suppliers and their ability to provide products at competitive prices and support sales of their products through their rebate and discount programs;
 
 
the adequacy of our distribution and information systems and management experience to support our expansion plans;
 
 
the accuracy of our expectations regarding competition and our competitive advantages;
 
 
changes in our stock price or the number of shares we have outstanding;
 
 
the potential for market share erosion that could result in reduced revenues;
 
 
the accuracy of our expectations regarding the similarity or dissimilarity of our existing markets as compared to new markets we enter;
 
 
the use of third parties to complete certain of our distribution, delivery and home repair services;
 
 
general economic conditions in the regions in which we operate; and
 
 
the outcome of litigation or government investigations affecting our business.
 

 
15

 
 
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/A filed with the Securities Exchange Commission on April 12, 2010.  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.

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
 
We intend for the following discussion and analysis to provide you with a better 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 with 76 retail locations in Texas, Louisiana and Oklahoma, that sells home appliances, including refrigerators, freezers, washers, dryers, dishwashers and ranges, a variety of consumer electronics, including LCD, LED, 3-D, plasma and DLP televisions, camcorders, digital cameras, Blu-ray and DVD players, video game equipment, MP3 players and home theater products, lawn and garden products, mattresses and furniture. We also sell home office equipment, including computers and computer accessories and continue to introduce additional product categories for the home and consumer entertainment, such as GPS devices, to help increase same store sales and to respond to our customers' product needs. We require our sales associates to be knowledgeable of all of our products.

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 61% of our retail sales through our internal credit programs. In addition to interest-bearing installment and revolving charge contracts, at times, we offer promotional credit programs to certain customers that provide for “same as cash” or deferred interest interest-free periods of varying terms, generally three, six, 12, 18, 24 and 36 months, and require monthly payments beginning in the month after the sale.  In turn, we finance substantially all of our customer receivables from these credit programs with cash flow from operations and through an asset-based revolving credit facility and an asset-backed securitization facility. In addition to our own credit programs, we use third-party financing programs to provide a portion of the non-interest bearing financing for purchases made by our customers.


 
16

 

The following tables present, for comparison purposes, information about our credit portfolios.

   
Primary Portfolio (1)
 
   
Three Months Ended
 
   
1/31/2009
   
4/30/2009
   
1/31/2010
   
4/30/2010
 
                         
Total outstanding balance (period end)
  $ 589,922     $ 579,455     $ 597,360     $ 569,062  
Average outstanding customer balance
  $ 1,403     $ 1,405     $ 1,339     $ 1,341  
Number of active accounts (period end)
    420,585       412,387       446,203       424,383  
Account balances over 60 days past due (period end)
  $ 35,153     $ 33,003     $ 48,775     $ 40,461  
Percent of balances over 60 days past due to
                               
total outstanding balance (period end)
    6.0 %     5.7 %     8.2 %     7.1 %
Total account balances reaged (period end)
    90,560       88,400       95,038       88,959  
Percent of reaged balances to
                               
total outstanding balance (period end)
    15.4 %     15.3 %     15.9 %     15.6 %
Account balances reaged more than six months (period end)
  $ 36,452     $ 34,716     $ 35,448     $ 34,299  
Weighted average credit score of outstanding balances
    603       600       600       596  
Total applications processed (2)
    257,840       203,559       206,422       169,289  
Percent of retail sales financed
    48.9 %     43.8 %     54.7 %     52.8 %
Weighted average origination credit score of sales financed
    636       634       631       626  
Total applications approved
    49.9 %     45.9 %     52.7 %     50.5 %
Average down payment
    5.5 %     7.6 %     4.5 %     4.1 %
Average total outstanding balance
  $ 579,539     $ 583,271     $ 601,763     $ 581,514  
Bad debt charge-offs (net of recoveries)
  $ 4,280     $ 3,916     $ 6,516     $ 6,153  
Percent of bad debt charge-offs (net of
                               
recoveries) to average outstanding balance
    3.0 %     2.7 %     4.3 %     4.2 %
Estimated percent of reage balances collected (3)
    89.5 %     90.4 %     82.8 %     83.5 %

 
 
17

 
 
   
Secondary Portfolio (1)
 
   
Three Months Ended
 
   
1/31/2009
   
4/30/2009
   
1/31/2010
   
4/30/2010
 
                         
Total outstanding balance (period end)
  $ 163,591     $ 155,097     $ 138,681     $ 131,430  
Average outstanding customer balance
  $ 1,394     $ 1,385     $ 1,319     $ 1,309  
Number of active accounts (period end)
    117,372       112,011       105,109       100,412  
Account balances over 60 days past due (period end)
  $ 19,988     $ 17,908     $ 24,616     $ 19,471  
Percent of balances over 60 days past due to
                               
total outstanding balance (period end)
    12.2 %     11.5 %     17.8 %     14.8 %
Total account balances reaged (period end)
  $ 50,602     $ 49,850     $ 49,135     $ 45,051  
Percent of reaged balances to
                               
total outstanding balance (period end)
    30.9 %     32.1 %     35.4 %     34.3 %
Account balances reaged more than six months (period end)
  $ 19,860     $ 20,185     $ 21,920     $ 20,931  
Weighted average credit score of outstanding balances
    521       524       526       528  
Total applications processed (2)
    114,133       96,443       89,615       75,345  
Percent of retail sales financed
    9.4 %     8.5 %     6.0 %     6.4 %
Weighted average origination credit score of sales financed
    540       559       555       556  
Total applications approved
    23.2 %     16.5 %     19.3 %     21.4 %
Average down payment
    20.1 %     22.9 %     21.2 %     17.5 %
Average total outstanding balance
  $ 163,320     $ 159,270     $ 141,125     $ 134,324  
Bad debt charge-offs (net of recoveries)
  $ 2,043     $ 1,689     $ 2,325     $ 2,092  
Percent of bad debt charge-offs (net of
                               
recoveries) to average outstanding balance
    5.0 %     4.2 %     6.6 %     6.2 %
Estimated percent of reage balances collected (3)
    90.3 %     91.9 %     86.2 %     87.1 %
 

 
18

 
 
   
Combined Portfolio (1)
 
   
Three Months Ended
 
   
1/31/2009
   
4/30/2009
   
1/31/2010
   
4/30/2010
 
                         
Total outstanding balance (period end)
  $ 753,513     $ 734,552     $ 736,041     $ 700,492  
Average outstanding customer balance
  $ 1,401     $ 1,401     $ 1,335     $ 1,335  
Number of active accounts (period end)
    537,957       524,398       551,312       524,795  
Account balances over 60 days past due (period end)
  $ 55,141     $ 50,911     $ 73,391     $ 59,932  
Percent of balances over 60 days past due to
                               
total outstanding balance (period end)
    7.3 %     6.9 %     10.0 %     8.6 %
Total account balances reaged (period end)
  $ 141,162     $ 138,250     $ 144,173     $ 134,010  
Percent of reaged balances to
                               
total outstanding balance (period end)
    18.7 %     18.8 %     19.6 %     19.1 %
Account balances reaged more than six months (period end)
  $ 56,312     $ 54,901     $ 57,368     $ 55,230  
Weighted average credit score of outstanding balances
    585       584       586       583  
Total applications processed (2)
    371,973       300,002       296,037       244,634  
Percent of retail sales financed
    58.3 %     52.3 %     60.7 %     59.2 %
Weighted average origination credit score of sales financed
    620       623       621       616  
Total applications approved
    41.7 %     36.4 %     42.6 %     41.5 %
Average down payment
    7.4 %     9.3 %     6.2 %     5.9 %
Average total outstanding balance
  $ 742,859     $ 742,541     $ 742,888     $ 715,838  
Bad debt charge-offs (net of recoveries)
  $ 6,323     $ 5,605     $ 8,841     $ 8,245  
Percent of bad debt charge-offs (net of
                               
recoveries) to average outstanding balance
    3.4 %     3.0 %     4.8 %     4.6 %
Estimated percent of reage balances collected (3)
    89.8 %     91.0 %     84.0 %     84.7 %
 

___________________________
(1)
 
The Portfolios consist of owned and transferred receivables.
(2)
 
Unapproved and not declined credit applications in the primary portfolio are referred to the secondary portfolio.
(3)
 
Is calculated as 1 minus the percent of actual bad debt charge-offs (net of recoveries) of reage balances as a percent of average reage balances. The reage bad debt charge-offs are included as a component of Percent of bad debt charge-offs (net of recoveries) to average outstanding balance.
 
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 repair service 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 repair service agreements, under which we are the primary obligor, to protect the customers after the original manufacturer’s warranty or repair service agreement has expired.

Our business is moderately seasonal, with a greater share of our revenues, pretax and net income realized during the quarter ending January 31, due primarily to the holiday selling season.

Executive Overview
 
This narrative is intended to provide an executive level overview of our operations for the three months ended April 30, 2010.  A detailed explanation of the changes in our operations for this period as compared to the prior year period is included under Results of Operations. Some of the more specific items impacting our operating and pretax income were:
 
For the three months ended April 30, 2010, compared to the same period last year, Total net sales decreased 18.6% and Finance charges and other decreased 13.1%. Total revenues decreased 17.7% while same store sales decreased 19.7% for the quarter ended April 30, 2010. The sales decline was primarily driven by:
 

 
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more challenging economic conditions in Texas compared to the same quarter in the prior year, as evidenced by the unemployment rate rising from 6.8% in February 2009, to 8.3% in April 2010, and
 
 
management's emphasis on improving retail gross margin while maintaining price competitiveness.
 
Finance charges and other decreased 13.1% for the three months ended April 30, 2010, when compared to the same period last year, primarily due to a decrease in interest income and fees as the average interest income and fee yield earned on the portfolio fell from 18.8% for the three months April 30, 2009, to 17.0%, for the three months ended April 30, 2010, and the average balance of customer accounts receivable outstanding fell 3.6%. The interest income and fee yield fell as a result of the higher level of charge-offs experienced and the reduced amount of new credit accounts originated in the three months ended April 30, 2010, as compared to the same quarter in the prior fiscal year.
 
Deferred interest and "same as cash" plans under our consumer credit programs continue to be an important part of our sales promotion plans and are utilized to provide a wide variety of financing to enable us to appeal to a broader customer base. For the three months ended April 30, 2010, $25.6 million, or 17.0%, of our product sales were financed by our deferred interest and "same as cash" plans. For the comparable period in the prior year, product sales financed by our deferred interest and "same as cash" sales were $27.2 million, or 14.7%. Our promotional credit programs (same as cash and deferred interest programs), which require monthly payments, are reserved for our highest credit quality customers, thereby reducing the overall risk in the portfolio, and are typically used to finance sales of our highest margin products. We expect to continue to offer promotional credit in the future, including the use of third-party consumer credit programs, which financed $0.7 million and $13.5 million, of our product and repair service agreement sales during the three months ended April 30, 2009 and 2010, respectively.
 
Our total gross margin (Total revenues less Cost of goods sold) increased from 38.1% to 41.0% for the three months ended April 30, 2010, when compared to the same period in the prior year. The increase resulted primarily from:
 
 
an increase in retail gross margins (includes gross profit from product sales and repair service agreement commissions) from 25.0% for the three months ended April 30, 2009, to 27.9% for the three months ended April 30, 2010, respectively, which improved the total gross margin by 230 basis points. The increase was driven largely by a 300 basis point increase in product gross margins to 24.1% for the three months ended April 30, 2010, as we focused on improving pricing discipline on the sales floor while maintaining price competitiveness in the marketplace, and
 
 
a change in the revenue mix in the quarter ended April 30, 2010, such that higher gross margin finance charge and other revenues contributed a larger percentage of total revenues, resulted in an increase in the total gross margin of approximately 60 basis points.
 
During the three months ended April 30, 2010, Selling, general and administrative (SG&A) expense was reduced by $2.0 million, though it increased as a percent of revenues to 30.8% from 26.2% in the prior year period, due to the deleveraging effect of the decline in total revenues. The $2.0 million reduction in SG&A expense was driven primarily by lower compensation and related expense and reduced advertising expense, partially offset by increased amortization expense due to the amendments completed to our credit facilities, higher charges related to the increased use of third-party finance providers and increased use of contract delivery and installation services. The prior year period also included a $0.5 million charge to increase our litigation reserves.
 
 
The Provision for bad debts increased to $6.3 million for the three months ended April 30, 2010, from $5.6 million for the same quarter in the prior year period. While our total net charge-offs of customer and non-customer accounts receivable increased by $2.7 million compared to the first quarter of the prior fiscal year, we are experiencing an improvement in our credit portfolio performance (specifically, the trends in the delinquency rate, payment rate, net charge-off rate and percent of the portfolio reaged) since the fourth quarter of fiscal 2010. If this trend continues and conditions in the Texas economy improve, our net charge-off experience could continue to improve. As such, our allowance for bad debts declined approximately $2.2 million during the three months ended April 30, 2010, after absorbing the higher net charge-offs incurred in the current year quarter.
 
 
 
20

 
 
Net interest expense decreased in the current year period, due primarily to reduced outstanding debt balances.
 
The provision for income taxes for the three months ended April 30, 2010, was impacted primarily by the change in pre-tax income.

Operational Changes and Resulting Outlook
 
While we are continuing to assess the availability of capital for new store locations and growth of the credit portfolio, we do not currently have any new store openings planned.

During the fiscal year ended January 31, 2010, we adjusted our underwriting guidelines and reduced the volume of credit accounts we originated in our Secondary Portfolio. As a result of the changes in our underwriting guidelines and what appears to be the beginning of improving economic conditions in our markets, we have seen improved credit portfolio performance, evidenced by:

 
a 140 basis point reduction in the 60+ day delinquency percentage from 10.0% at January 31, 2010, to 8.6% at April 30, 2010, as compared to a 40 basis point reduction in the same percentage from 7.3% at January 31, 2009, to 6.9% at April 30, 2009,
 
a 50 basis point, or $10 million, reduction in the percent and balance, respectively, of the credit portfolio that has been reaged, to 19.1%, or $134.0 million, as of April 30, 2010, as compared to January 31, 2010, and
 
the payment rate percentage, the amount collected on credit accounts during a month as a percentage of the portfolio balance at the beginning of the month, increased in February, March and April of the current year as compared to the same months in the prior year.
 
If the improved credit portfolio performance and economic conditions continue, the amount of customer receivable net charge-offs could decline from the elevated levels experienced in the latter part of fiscal 2010 and the first quarter this fiscal year. However, our current expectation may be revised if these improvements are not realized.

While we benefited from our operations being concentrated in the Texas, Louisiana and Oklahoma region in the earlier months of 2009, recent weakness in the health of the national and state economies have and will present significant challenges to our operations in the coming quarters. Specifically, future sales volumes, gross profit margins and credit portfolio performance could be negatively impacted, and thus impact our overall profitability. Additionally, declines in our future operating performance could impact compliance with our credit facility covenants, which we recently renegotiated to avoid potentially triggering the default provisions of the credit facilities. As a result, while we will strive to maintain our market share, improve credit portfolio performance and reduce expenses, we will also work to maintain our access to the liquidity necessary to maintain our operations through these challenging times.

The consumer electronics industry depends on new products to drive same store sales increases. Typically, these new products, such as high-definition and 3-D televisions, Blu-ray and DVD players, digital cameras, MP3 players and GPS devices are introduced at relatively high price points that are then gradually reduced as the product becomes 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 drive 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 volume 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.


 
21

 

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, 2010.
 
Customer Accounts Receivable. Customer accounts receivable reported in our consolidated balance sheet include receivables transferred to our VIE and those receivables not transferred to our VIE. We include the amount of principal and accrued interest on those receivables that are expected to be collected within the next twelve months, based on contractual terms, in current assets on our consolidated balance sheet. Those amounts expected to be collected after 12 months, based on contractual terms, are included in long-term assets. Typically, a receivable is considered delinquent if a payment has not been received on the scheduled due date. Additionally, we offer reage programs to customers with past due balances that have experienced a financial hardship, if they meet the conditions of our reage policy. Reaging a customer’s account can result in updating it from a delinquent status to a current status. Generally, an account that is delinquent more than 120 days and for which no payment has been received in the past seven months will be charged-off against the allowance for doubtful accounts and interest accrued subsequent to the last payment will be reversed. We have a secured interest in the merchandise financed by these receivables and therefore have the opportunity to recover a portion of any charged-off amount.

Interest Income on Customer Accounts Receivable. Interest income is accrued using the Rule of 78’s method for installment contracts and the simple interest method for revolving charge accounts, and is reflected in Finance charges and other. Typically, interest income is accrued until the contract or account is paid off or charged-off and we provide an allowance for estimated uncollectible interest. Interest income is recognized on our interest-free promotional accounts based on our historical experience related to customers who fail to satisfy the requirements of the interest-free programs. Additionally, for sales on deferred interest and “same as cash” programs that exceed one year in duration, we discount the sales to their fair value, resulting in a reduction in sales and receivables, and amortize the discount amount in to Finance charges and other over the term of the program.

Allowance for Doubtful Accounts. We record an allowance for doubtful accounts, including estimated uncollectible interest, for our Customer accounts receivable, based on our historical net loss experience and expectations for future losses. The net charge-off data used in computing the loss rate is reduced by the amount of post-charge-off recoveries received, including cash payments, amounts realized from the repossession of the products financed and, at times, payments received under credit insurance policies. Additionally, we separately evaluate the Primary and Secondary portfolios when estimating the allowance for doubtful accounts. The balance in the allowance for doubtful accounts and uncollectible interest for customer receivables was $35.8 million and $33.5 million at January 31, 2010, and April 30, 2010, respectively. Additionally, as a result of our practice of reaging customer accounts, if the account is not ultimately collected, the timing and amount of the charge-off is impacted. If these accounts had been charged-off sooner the net loss rates might have been higher. Reaged customer receivable balances represented 19.1% of the total portfolio balance at April 30, 2010. If the loss rate used to calculate the allowance for doubtful accounts were increased by 10% at April 30, 2010, we would have increased our Provision for bad debts by approximately $3.4 million.

Revenue Recognition.  Revenues from the sale of retail products are recognized at the time the customer takes possession of the product. 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.
 
 
 
22

 

We sell repair service 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 repair service 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 repair service agreement. These repair service 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 have terms ranging from 12 to 36 months. These agreements are separate units of accounting and are valued based on the agreed upon retail selling price. The amount of repair service agreement revenue deferred at January 31, 2010, and April 30, 2010, was $7.3 million and $7.3 million, respectively, and is included in Deferred revenues and allowances in the accompanying consolidated balance sheets.

Vendor Allowances.  We receive funds from vendors for price protection, product rebates (earned upon purchase or sale of product), marketing, training and promotion programs which are recorded on the accrual basis as a reduction to the related product cost, cost of goods sold, compensation expense 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 product sales, the allowances, credits or payments are recorded as a reduction of cost of goods sold; if the programs are directly related to promotion, marketing or compensation expense paid related to the product, the allowances, credits, or payments are recorded as a reduction of the applicable expense in the period in which the expense is incurred.
 
Accounting for Leases.  We analyze each lease, at its inception and any subsequent renewal, to determine whether it should be accounted for as an operating lease or a capital lease. Additionally, monthly lease expense for each operating lease is calculated as the average of all payments required under the minimum lease term, including rent escalations. Generally, the minimum lease term begins with the date we take possession of the property and ends on the last day of the minimum lease term, and includes all rent holidays, but excludes renewal terms that are at our option. Any tenant improvement allowances received are deferred and amortized into income as a reduction of lease expense on a straight line basis over the minimum lease term. The amortization of leasehold improvements is computed on a straight line basis over the shorter of the remaining lease term or the estimated useful life of the improvements. For transactions that qualify for treatment as a sale-leaseback, any gain or loss is deferred and amortized as rent expense on a straight-line basis over the minimum lease term.  Any deferred gain would be included in Deferred gain on sale of property and any deferred loss would be included in Other assets on the consolidated balance sheets.

 
 
23

 

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,
 
   
2009
   
2010
 
Revenues:
           
Product sales
    77.0 %     76.1 %
Repair service agreement commissions (net)
    4.1       4.0  
Service revenues
    2.3       2.4  
Total net sales
    83.4       82.5  
Finance charges and other
    16.6       17.5  
Total revenues
    100.0       100.0  
Costs and expenses:
               
Cost of goods sold, including warehousing and occupancy cost
    60.8       57.8  
Cost of parts sold, including warehousing and occupancy cost
    1.1       1.2  
Selling, general and administrative expense
    26.2       30.8  
Provision for bad debts
    2.4       3.2  
Total costs and expenses
    90.5       93.0  
Operating income
    9.5       7.0  
Interest expense, net
    2.1       2.4  
Other (income) / expense, net
    0.0       0.1  
Income before income taxes
    7.4       4.5  
Provision for income taxes
    2.8       1.8  
Net income
    4.6 %     2.7 %
 
Same store sales growth is calculated by comparing the reported sales for all stores that were open during the entirety of a period and the entirety of the same period in the prior fiscal year. Sales from closed stores, if any, are 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.
 
The presentation of gross margins may not be comparable to some other retailers since we include the cost of our in-home delivery and installation 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.
 

 
24

 

Three Months Ended April 30, 2010 Compared to Three Months Ended April 30, 2009

               
Change
 
(Dollars in Millions)
 
2010
   
2009
    $       %  
Net sales
  $ 163.0     $ 200.2       (37.2 )     (18.6 )
Finance charges and other
    34.5       39.7       (5.2 )     (13.1 )
Revenues
  $ 197.5     $ 239.9       (42.4 )     (17.7 )
 
The $37.2 million decrease in net sales consists of the following:

 
a $38.2 million same store sales decrease of 19.7%;
   
 
a $1.4 million net increase generated by four retail locations that were not open for the three months in each period. Two new locations were opened subsequent to February 1, 2009 and two of our clearance centers were closed subsequent to February 1, 2009;
   
 
a $0.4 million increase resulted from a decrease in discounts on extended-term non-interest bearing credit sales (those with terms longer than 12 months); and
   
 
a $0.8 million decrease in service revenues.
  
The components of the $37.2 million decrease in net sales were a $34.5 million decrease in Product sales and a $2.7 million decrease in repair service agreement commissions and service revenues. The $34.5 million decrease in product sales resulted from the following:
 
 
approximately $6.6 million decrease attributable to decreases in total unit sales, due primarily to decreased unit sales in consumer electronics and appliances, partially offset by increases in track and furniture and mattresses, and
   
 
approximately $27.9 million decrease attributable to an overall decrease in the average unit price. The decrease was due primarily to a decrease in price points in the electronics and track categories, partially offset by an increase in appliances.
 

 
25

 
 
The following table presents net sales by product category in each period, including repair service agreement commissions and service revenues, expressed both in dollar amounts (in thousands) and as a percent of total net sales.  Classification of sales has been adjusted from previous presentations to ensure comparability between the categories.

   
Three Months Ended April 30,
             
   
2010
   
2009
   
Percent