a6036523.htm
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 July 31, 2009
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 August 25, 2009:
 
Class
 
Outstanding
Common stock, $.01 par value per share
 
22,457,486
 
 
 

 
 
TABLE OF CONTENTS
 
 
Page No.
     
1
     
 
1
     
   
 
2
     
   
 
3
     
   
 
4
     
 
5
     
 
 
19
     
41
     
41
     
 
     
41
     
42
     
42
     
43
     
43
     
43
     
     
 
44
 
 
 
 

 
 
           
           
 
CONSOLIDATED BALANCE SHEETS
 
(in thousands, except share data)
 
Assets
 
January 31,
2009
   
July 31,
2009
 
Current assets
       
(unaudited)
 
Cash and cash equivalents
  $ 11,798     $ 4,852  
Other accounts receivable, net of allowance of $60 and $64, respectively
    32,878       22,763  
Customer accounts receivable, net of allowance of $2,338 and $4,432 respectively
    61,125       115,696  
Interests in securitized assets
    176,543       164,090  
Inventories
    95,971       100,867  
Deferred income taxes
    13,354       14,333  
Prepaid expenses and other assets
    5,933       10,618  
Total current assets
    397,602       433,219  
Long-term portion of customer accounts receivable, net of
               
allowance of $1,575 and $2,819, respectively
    41,172       73,573  
Property and equipment
               
Land
    7,682       7,682  
Buildings
    12,011       13,005  
Equipment and fixtures
    21,670       22,336  
Transportation equipment
    2,646       2,725  
Leasehold improvements
    83,361       88,347  
Subtotal
    127,370       134,095  
Less accumulated depreciation
    (64,819 )     (71,275 )
Total property and equipment, net
    62,551       62,820  
Goodwill, net
    9,617       9,617  
Non-current deferred income tax asset     2,035       3,597  
Other assets, net
    3,652       3,545  
Total assets
  $ 516,629     $ 586,371  
Liabilities and Stockholders' Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 5     $ 60  
Accounts payable
    57,809       47,708  
Accrued compensation and related expenses
    11,473       7,551  
Accrued expenses
    23,703       25,024  
Income taxes payable
    4,334       2,665  
Deferred revenues and allowances
    21,207       20,070  
Total current liabilities
    118,531       103,078  
Long-term debt
    62,912       130,235  
Fair value of interest rate swaps     -       231  
Deferred gains on sales of property
    1,036       968  
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;
               
24,167,445 and 24,180,692 shares issued at January 31, 2009 and July 31, 2009, respectively)
    242       242  
Additional paid-in capital
    103,553       104,942  
Accumulated other comprehensive income (loss)
    -       (150 )
Retained earnings
    267,426       283,896  
Treasury stock, at cost, 1,723,205 and 1,723,205 shares, respectively
    (37,071 )     (37,071 )
Total stockholders' equity
    334,150       351,859  
Total liabilities and stockholders' equity
  $ 516,629     $ 586,371  
 
See notes to consolidated financial statements.
 
 
1

 
 
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
(unaudited)
 
(in thousands, except earnings per share)
 
                         
   
Three Months Ended
July 31,
   
Six Months Ended
July 31,
 
                         
   
2008
   
2009
   
2008
   
2009
 
                         
                         
Revenues
                       
Product sales
  $ 175,240     $ 175,389     $ 355,151     $ 360,206  
Service maintenance agreement commissions, net
    9,911       8,858       19,881       18,648  
Service revenues
    5,488       6,052       10,680       11,596  
                                 
Total net sales
    190,639       190,299       385,712       390,450  
                                 
Finance charges and other
    29,105       29,821       55,657       59,606  
Net (decrease) increase in fair value
    (1,212 )     91       (4,279 )     1,481  
                                 
Total finance charges and other
    27,893       29,912       51,378       61,087  
                                 
Total revenues
    218,532       220,211       437,090       451,537  
                                 
Cost and expenses
                               
Cost of goods sold, including warehousing
                               
and occupancy costs
    136,787       140,761       275,845       286,631  
Cost of parts sold, including warehousing
                               
and occupancy costs
    2,264       2,797       4,594       5,384  
Selling, general and administrative expense
    62,900       64,867       123,268       127,492  
Provision for bad debts
    333       2,746       592       4,141  
                                 
Total cost and expenses
    202,284       211,171       404,299       423,648  
                                 
Operating income
    16,248       9,040       32,791       27,889  
Interest (income) expense, net
    (85 )     942       (100 )     1,528  
Other (income) expense, net
    128       (13 )     106       (21 )
                                 
Income before income taxes
    16,205       8,111       32,785       26,382  
                                 
Provision for income taxes
    5,993       3,162       11,977       9,912  
                                 
Net income
  $ 10,212     $ 4,949     $ 20,808     $ 16,470  
                                 
Earnings per share
                               
Basic
  $ 0.46     $ 0.22     $ 0.93     $ 0.73  
Diluted
  $ 0.45     $ 0.22     $ 0.92     $ 0.73  
Average common shares outstanding
                               
Basic
    22,407       22,454       22,395       22,450  
Diluted
    22,620       22,660       22,591       22,675  
 
See notes to consolidated financial statements.
 
 
2

 
 
 
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
Six Months Ended July 31, 2009
 
(unaudited)
 
(in thousands, except descriptive shares)
 
                                           
                     
Other
                   
               
Additional
   
Compre-
                   
   
Common Stock
   
Paid-in
   
hensive
   
Retained
   
Treasury
       
   
Shares
   
Amount
   
Capital
   
Income
   
Earnings
   
Stock
   
Total
 
                                           
Balance January 31, 2009
    24,167     $ 242     $ 103,553     $ -     $ 267,426     $ (37,071 )   $ 334,150  
                                                         
                                                         
Issuance of shares of common
                                                       
stock under Employee
                                                       
Stock Purchase Plan
    13               117                               117  
                                                         
Stock-based compensation
                    1,272                               1,272  
                                                         
Net income                                     16,470               16,470  
                                                         
Adjustment of fair value of
                                                       
interest rate swaps
                                                       
net of tax of $81
                            (150 )                     (150
 
                                                       
Total comprehensive income                                                     16,320  
                                                         
Balance July 31, 2009
    24,180     $ 242     $ 104,942     $ (150 )   $ 283,896     $ (37,071 )   $ 351,859  
 
See notes to consolidated financial statements.
 
 
3

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(unaudited) (in thousands)
 
   
Six Months Ended
July 31,
 
   
2008
   
2009
 
             
Cash flows from operating activities
           
Net income
  $ 20,808     $ 16,470  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation
    6,286       6,660  
Amortization / (Accretion), net
    (481 )     525  
Provision for bad debts
    592       4,141  
Stock-based compensation
    1,721       1,272  
Discounts on promotional credit
    2,900       1,485  
(Gains) losses on interest in securitized assets
    (15,408 )     (1,358 )
(Increase) decrease in fair value of securitized assets
    4,279       1,481  
Provision for deferred income taxes
    (3,904 )     (1,585 )
(Gains) losses on sales of property and equipment
    106       (9 )
Changes in operating assets and liabilities:
               
Customer accounts receivable
    (2,907 )     (92,166 )
Other accounts receivable
    5,910       10,128  
Interest in securitized assets
    11,631       11,388  
Inventory
    (14,909 )     (4,896 )
Prepaid expenses and other assets
    (3,889 )     999  
Accounts payable
    26,525       (10,101 )
Accrued expenses
    3,932       (2,601 )
Income taxes payable
    (218 )     (8,229 )
Deferred revenue and allowances
    3,214       (747 )
Net cash provided by (used in) operating activities
    46,188       (67,143 )
Cash flows from investing activities
               
Purchases of property and equipment
    (10,825 )     (6,763 )
Proceeds from sales of property
    57       22  
Net cash used in investing activities
    (10,768 )     (6,741 )
Cash flows from financing activities
               
Proceeds from stock issued under employee benefit plans
    391       117  
Borrowings under lines of credit
    600       198,361  
Payments on lines of credit
    (600     (131,159
Increase in deferred financing costs
    -       (378 )
Payment of promissory notes
    (60 )     (3 )
Net cash provided by financing activities
    331       66,938  
Net change in cash
    35,751       (6,946 )
Cash and cash equivalents
               
Beginning of the year
    11,015       11,798  
End of period
  $ 46,766     $ 4,852  
                 
Supplemental disclosure of non-cash activity
               
Cash interest received from interests in securitized assets
  $ 14,917     $ 23,002  
Cash proceeds from new securitizations
    217,213       81,156  
Cash flows from servicing fees
    12,860       12,621  
Purchases of property and equipment financed by notes payable
    -       179  

See notes to consolidated financial statements.
 
 
4

 
 
Conn’s , Inc.  
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
July 31, 2009

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.  Operating results for the three and six month period ended July 31, 2009, are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2010.  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 March 26, 2009.

The Company’s balance sheet at January 31, 2009, 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, 2009, 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 all of its wholly-owned subsidiaries (the Company).  All material intercompany transactions and balances have been eliminated in consolidation.

The Company enters into securitization transactions to sell eligible retail installment and revolving customer receivables and retains servicing responsibilities and subordinated interests. 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, as amended by SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, because the Company has relinquished control of the receivables. Additionally, the Company has transferred the 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. The Company's retained interest in the transferred receivables is valued under the requirements of SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities, and SFAS No. 157, Fair Value Measurements. The Company elected the fair value option because it believes that the fair value option provides a more easily understood presentation for financial statement users. The fair value option simplifies the treatment of changes in the fair value of the asset, by reflecting all changes in the fair value of its Interests in securitized assets in current earnings, in Finance charges and other.

Fair Value of Financial Instruments.    The fair value of cash and cash equivalents, receivables retained on our balance sheet, and notes and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of the Company’s interests in securitized receivables is determined by estimating the present value of future expected cash flows using management’s best estimates of the key assumptions, including credit losses, forward yield curves and discount rates commensurate with the risks involved. See Note 2. The fair value of the Company’s long-term debt is determined by estimating the present value of future cash flows as if the debt were being carried at the interest rate the Company would currently incur if it were to complete a similar transaction.  The fair value of the Company’s long-term debt as of July 31, 2009 was approximately $125.3 million, based on the assumption that the interest spread would be approximately 200 basis points higher than the current spread in the revolving facility.  The carrying amount of the long-term debt as of July 31, 2009 was approximately $130.2 million.
 
 
5

 

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. See the discussion under Note 2 regarding the changes in the inputs used in the Company’s valuation of its Interests in securitized assets.

Goodwill. The Company performs an assessment annually testing for the impairment of goodwill, or at any other time when impairment indicators exist. The Company performed its annual assessment in the fourth quarter of fiscal 2009 and determined that no impairment existed. While the current market conditions have caused the Company’s market capitalization to fall below its book value, the Company does not believe any indicators of impairment have occurred since the assessment was performed.

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, as calculated under the treasury-stock method. The weighted average number of anti-dilutive stock options not included in calculating diluted EPS was 1.1 million for the three and six months ended July 31, 2008 and 1.5 million for the three and six months ended July 31, 2009.

The following table sets forth the shares outstanding for the earnings per share calculations:
 
   
Three Months Ended
 
   
July 31,
 
   
2008
   
2009
 
             
Common stock outstanding, net of treasury stock, beginning of period
    22,401,836       22,452,045  
Weighted average common stock issued in stock option exercises
    3,696       -  
Weighted average common stock issued to employee stock purchase plan
    1,587       1,893  
Shares used in computing basic earnings per share
    22,407,119       22,453,938  
Dilutive effect of stock options, net of assumed repurchase of treasury stock
    213,300       206,360  
Shares used in computing diluted earnings per share
    22,620,419       22,660,298  
                 
                 
   
Six Months Ended
 
   
July 31,
 
   
2008
   
2009
 
                 
Common stock outstanding, net of treasury stock, beginning of period
    22,374,966       22,444,240  
Weighted average common stock issued in stock option exercises
    16,170       -  
Weighted average common stock issued to employee stock purchase plan
    3,755       6,247  
Shares used in computing basic earnings per share
    22,394,891       22,450,487  
Dilutive effect of stock options, net of assumed repurchase of treasury stock
    195,665       224,085  
Shares used in computing diluted earnings per share
    22,590,556       22,674,572  

 
Adoption of New Accounting Pronouncements. On February 1, 2009, the Company was required to adopt SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity's derivative instruments and hedging activities and their effects on the entity's financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. FAS 161 only impacts disclosure requirements and therefore will not have an impact on the Company’s financial position, financial performance or cash flows. The required disclosures have been included in Note 5 to the financial statements.
 
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board ("APB") Opinion No. 28-1 (collectively, "FSP FAS 107-1"), Interim Disclosures about Fair Value of Financial Instruments. FSP FAS 107-1 amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require an entity to provide disclosures about fair value of financial instruments in interim financial information. The FSP FAS 107-1 also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures about the fair value of financial instruments in summarized financial information at interim reporting periods. Under FSP FAS 107-1, the Company will be required to include disclosures about the fair value of its financial instruments whenever it issues financial information for interim reporting periods. In addition, the Company will be required to disclose in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The Company adopted the provisions of FSP FAS 107-1 which became effective for periods ending after June 15, 2009.
 
 
6

 
 
In May 2009, the FASB issued SFAS No. 165, Subsequent Events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the provisions of SFAS No. 165, which became effective for interim and annual reporting periods ending after June 15, 2009. Subsequent events have been evaluated through the date and time the financial statements were issued on August 27, 2009. No material subsequent events have occurred since July 31, 2009 that required recognition or disclosure in the Company’s current period financial statements.
 
Recently Issued Accounting Pronouncements.
 
In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (“SAS 166”). SFAS 166 revises SFAS No. 140 to improve the relevance, representational faithfulness, 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. After the effective date, the concept of a qualifying special-purpose entity will no longer be 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. SFAS 166 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS 166 will have on its consolidated financial statements as it relates to its qualifying special purpose entity.
 
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 amends certain requirements of FASB Interpretation No. 46(R) to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This Statement amends Interpretation 46(R) to require 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
 
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.
 
SFAS 167 is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of SFAS 167 will have on its consolidated financial statements, specifically as it relates to its qualifying special purpose entity.
 
In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“FAS 168”). The standard establishes the FASB Accounting Standards Codification™ (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP, and is intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. The Codification is effective for interim and annual periods ending after September 15, 2009, and as of the effective date, all existing accounting standard documents will be superseded. The Codification is effective for the Company for the third quarter of the fiscal year ended January 31, 2010, and accordingly, the Company’s Quarterly Report on Form 10-Q for the quarter ending October 31, 2009, and all subsequent public filings will reference the Codification as the sole source of authoritative literature.
 
 
7

 

2.  Fair Value of Interests in Securitized Assets

The Company estimates the fair value of its Interests in securitized assets using a discounted cash flow model with most of the inputs used being unobservable inputs. The primary unobservable inputs, which are derived principally from the Company’s historical experience, with input from its investment bankers and financial advisors, include the estimated portfolio yield, credit loss rate, discount rate and payment rate and reflect the Company’s judgments about the assumptions market participants would use in determining fair value. In determining the cost of borrowings, the Company uses current actual borrowing rates, and adjusts them, as appropriate, using interest rate futures data from market sources to project interest rates over time. Changes in the inputs over time, including varying credit portfolio performance, market interest rate changes, market participant risk premiums required, or a shift in the mix of funding sources, could result in significant volatility in the fair value of the Interest in securitized assets, and thus the earnings of the Company.

For the three and six months ended July 31, 2009, Finance charges and other included a non-cash increase in the fair value our Interests in securitized assets of $0.1 million and $1.5 million, respectively, reflecting primarily a lower risk premium included in the discount rate inputs during the six months ended July 31, 2009. Based on a review of the changes in market risk premiums during the six months ended July 31, 2009, and discussions with its investment bankers and financial advisors, the Company estimated that a market participant would require a risk premium that was approximately 200 basis points less than was utilized at April 30, 2009, and 450 basis points less than was utilized at January 31, 2009. As a result, the Company decreased the weighted average discount rate input from 30.0% at January 31, 2009 to 27.4% at April 30, 2009, and to 25.5% at July 31, 2009, after reflecting a 2 basis point decrease in the risk-free interest rate included in the discount rate input at April 30, 2009, and a further 1 basis point decrease at July 31, 2009. These changes, partially offset by changes in the funding mix inputs utilized and other input changes which decreased the fair value, resulted in an increase in fair value for the six month period ended July 31, 2009 (see reconciliation of the balance of interests in securitized assets below). The changes in fair value resulted in an increase in Income before taxes of $0.1 million and $1.5 million, an increase in net income of $0.1 million and $1.0 million for the three and six months ended July 31, 2009, respectively, and an increase in basic and diluted earnings per share of $0.04 for the six months ended July 31, 2009.

If a market participant were to require a return on investment that is 10% higher than estimated in the Company’s calculation, the fair value of its interest in securitized assets would be decreased by $3.8 million as of July 31, 2009. The Company will continue to monitor financial market conditions and, each quarter, as it reassesses the inputs used, may adjust its inputs up or down, including the risk premiums it estimates a market participant would use. As the financial markets and general economic conditions fluctuate, the Company will likely be required to record additional non-cash gains and losses in future periods.
 
 
8

 
 
The following is a reconciliation of the beginning and ending balances of the Interests in securitized assets and the beginning and ending balances of the servicing liability for the three months ended July 31, 2008 and 2009 (in thousands):
 
   
Three Months Ended
 
   
July 31,
 
   
2008
   
2009
 
Reconciliation of Interests in Securitized Assets:
           
             
Balance of Interests in securitized assets at beginning of period
  $ 168,900     $ 170,602  
                 
Amounts recorded in Finance charges and other:
               
Gains associated with changes in portfolio balances
    15       416  
Changes in fair value due to assumption changes:
               
Fair value increase (decrease) due to changing portfolio yield
    (119 )     (469 )
Fair value increase (decrease) due to lower (higher) projected interest rates
    (1,036 )     (324 )
Fair value increase (decrease) due to changes in funding mix
    198       (2,200 )
Fair value increase (decrease) due to change in risk-free interest rate
               
component of discount rate
    (686 )     12  
Fair value increase (decrease) due to change in risk premium included
               
in discount rate
    -       2,830  
Other changes
    491       (227 )
Net change in fair value due to assumption changes
    (1,152 )     (378 )
                 
Net Gains (Losses) included in Finance charges and other (a)
    (1,137 )     38  
                 
Change in balance of subordinated security and equity interest due to
               
transfers of receivables
    9,885       (6,550 )
                 
Balance of Interests in securitized assets at end of period
  $ 177,648     $ 164,090  
                 
Reconciliation of Servicing Liability:
               
                 
Balance of servicing liability at beginning of period
  $ 1,204     $ 1,038  
                 
Amounts recorded in Finance charges and other:
               
Increase (decrease) associated with change in portfolio balances
    52       (78 )
Increase (decrease) due to change in discount rate
    (1 )     13  
Other changes
    24       12  
Net change included in Finance charges and other (b)
    75       (53 )
                 
Balance of servicing liability at end of period
  $ 1,279     $ 985  
                 
Net increase (decrease) in fair value included
               
in Finance charges and other (a) - (b)
  $ (1,212 )   $ 91  
 
 
9

 
 
The following is a reconciliation of the beginning and ending balances of the Interests in securitized assets and the beginning and ending balances of the servicing liability for the six months ended July 31, 2008 and 2009 (in thousands):
 
   
Six Months Ended
 
   
July 31,
 
   
2008
   
2009
 
Reconciliation of Interests in Securitized Assets:
           
             
Balance of Interests in securitized assets at beginning of period
  $ 178,150     $ 176,543  
                 
Amounts recorded in Finance charges and other:
               
Gains associated with changes in portfolio balances
    167       681  
Changes in fair value due to assumption changes:
               
Fair value increase (decrease) due to changing portfolio yield
    (816 )     (476 )
Fair value increase (decrease) due to lower (higher) projectedinterest rates
    (123 )     133  
Fair value increase (decrease) due to changes in funding mix
    1,253       (4,886 )
Fair value increase (decrease) due to change in risk-free interest rate
               
component of discount rate
    (238 )     23  
Fair value increase (decrease) due to change in risk premium included
               
in discount rate
    (5,128 )     6,497  
Other changes
    688       (663 )
Net change in fair value due to assumption changes
    (4,364 )     628  
                 
Net Gains (Losses) included in Finance charges and other (a)
    (4,197 )     1,309  
                 
Change in balance of subordinated security and equity interest due to
               
transfers of receivables
    3,695       (13,762 )
                 
Balance of Interests in securitized assets at end of period
  $ 177,648     $ 164,090  
                 
Reconciliation of Servicing Liability:
               
                 
Balance of servicing liability at beginning of period
  $ 1,197     $ 1,157  
                 
Amounts recorded in Finance charges and other:
               
Increase (decrease) associated with change in portfolio balances
    86       (179 )
Increase (decrease) due to change in discount rate
    (20 )     30  
Other changes
    16       (23 )
Net change included in Finance charges and other (b)
    82       (172 )
                 
Balance of servicing liability at end of period
  $ 1,279     $ 985  
                 
Net increase (decrease) in fair value included
               
in Finance charges and other (a) - (b)
  $ (4,279 )   $ 1,481  

 
10

 
 
3.      Supplemental Disclosure of Revenue
 
The following is a summary of the classification of the amounts included as Finance charges and other for the three and six months ended July 31, 2008 and 2009 (in thousands):
 
   
Three Months ended
   
Six Months ended
 
   
July 31,
   
July 31,
 
   
2008
   
2009
   
2008
   
2009
 
                         
Securitization income:
                       
Servicing fees received
  $ 6,406     $ 5,994     $ 12,860     $ 12,621  
Gains (losses) on sale of receivables, net
    8,578       (1,189 )     15,408       (1,358 )
Change in fair value of securitized assets
    (1,212 )     91       (4,279 )     1,481  
Interest earned on retained interests
    7,710       10,968       14,832       23,002  
Total securitization income
    21,482       15,864       38,821       35,746  
Insurance commissions
    5,735       5,031       10,940       9,701  
Interest income from receivables not sold and other
    676       9,017       1,617       15,640  
Finance charges and other
  $ 27,893     $ 29,912     $ 51,378     $ 61,087  
 
 
4.      Interests in Securitized Receivables

The Company has an agreement to sell customer receivables.  As part of this agreement, the Company sells eligible retail installment contracts and revolving receivable accounts to a QSPE that pledges the transferred accounts to a trustee for the benefit of investors. The following table summarizes the availability of funding under the Company’s securitization program at July 31, 2009 (in thousands):
 
   
Capacity
   
Utilized
   
Available
 
2002 Series A
  $ 300,000     $ 210,000     $ 90,000  
2006 Series A – Class A
    90,000       90,000       -  
2006 Series A – Class B
    43,333       43,333       -  
2006 Series A – Class C
    16,667       16,667       -  
Total
  $ 450,000     $ 360,000     $ 90,000  

The 2002 Series A program functions as a credit facility to fund the initial transfer of eligible receivables. When the facility approaches a predetermined amount, the QSPE (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 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. The 2002 Series A program is divided into two tranches: a $100 million 364-day tranche with a maturity date in August 2009, and a $200 million tranche that is renewable annually, at our option, until September 2012. The $10 million balance that was outstanding at July 31, 2009 on the $100 million 364-day tranche was paid in full during August 2009, and the facility expired and was not renewed. 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 principal payments, which begin in September 2010, will retire the bonds prior to that date.

The agreement contains certain covenants requiring the maintenance of various financial ratios and receivables performance standards. As part of the securitization program, the Company and Issuer arranged for the issuance of a stand-by letter of credit in the amount of $20.0 million to provide assurance to the trustee on behalf of the bondholders that funds collected monthly by the Company, as servicer, will be remitted as required under the base indenture and other related documents. The letter of credit expires in August 2010, and the maximum potential amount of future payments is the face amount of the letter of credit. The letter of credit is callable, at the option of the trustee, if the Company, as servicer, fails to make the required monthly payments of the cash collected to the trustee.
 
 
11

 

Through its retail sales activities, the Company generates customer retail installment contracts and revolving receivable accounts. The Company enters into securitization transactions to sell eligible accounts to the QSPE. In these securitizations, the Company retains servicing responsibilities and subordinated interests. The Company receives annual servicing fees and other benefits approximating 4.0% of the outstanding balance and rights to future cash flows arising after the investors in the securities issued by or on behalf of the QSPE have received from the trustee all contractually required principal and interest amounts. The Company records a servicing liability related to the servicing obligations (See Note 2). 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 QSPE to pay when due. The Company’s retained interests 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. Their value is subject to credit, prepayment, and interest rate risks on the transferred financial assets.

The fair values of the Company’s interest in securitized assets were as follows (in thousands):
 
   
January 31,
   
July 31,
 
   
2009
   
2009
 
Interest-only strip
  $ 31,958     $ 26,176  
Subordinated securities
    144,585       137,914  
Total fair value of interests in securitized assets
  $ 176,543     $ 164,090  


The table below summarizes valuation assumptions used for each period presented:

   
January 31,
 
April 30,
 
July 31,
   
2009
 
2009
 
2009
Net interest spread
           
Primary installment
 
14.5%
 
14.7%
 
14.6%
Primary revolving
 
14.5%
 
14.7%
 
14.6%
Secondary installment
 
14.1%
 
13.9%
 
12.9%
Expected losses
           
Primary installment
 
3.4%
 
3.5%
 
3.5%
Primary revolving
 
3.4%
 
3.5%
 
3.5%
Secondary installment
 
5.5%
 
5.3%
 
5.4%
Projected expense
           
Primary installment
 
3.9%
 
4.0%
 
4.0%
Primary revolving
 
3.9%
 
4.0%
 
4.0%
Secondary installment
 
3.9%
 
4.0%
 
4.0%
Discount rates
           
Primary installment
 
29.2%
 
26.7%
 
24.8%
Primary revolving
 
29.2%
 
26.7%
 
24.8%
Secondary installment
 
33.2%
 
30.7%
 
28.8%
 
 
12

 
 
At July 31, 2009, key economic assumptions and the sensitivity of the current fair value of the interests in securitized assets to immediate 10% and 20% adverse changes in those assumptions are as follows (dollars in thousands):
 
     
Primary
     
Primary
     
Secondary
 
     
Portfolio
     
Portfolio
     
Portfolio
 
     
Installment
     
Revolving
     
Installment
 
Fair value of interest in securitized assets
  $ 122,921     $ 8,824     $ 32,345  
                         
Expected weighted average life    
1.3 years
     
1.1 years
     
1.7 years
 
                         
Net interest spread assumption
    14.6 %     14.6 %     12.9 %
Impact on fair value of 10% adverse change
  $ 3,979     $ 286     $ 1,256  
Impact on fair value of 20% adverse change
  $ 7,840     $ 563     $ 2,471  
Expected losses assumptions
    3.5 %     3.5 %     5.4 %
Impact on fair value of 10% adverse change
  $ 951     $ 68     $ 532  
Impact on fair value of 20% adverse change
  $ 1,894     $ 136     $ 1,057  
Projected expense assumption
    4.0 %     4.0 %     4.0 %
Impact on fair value of 10% adverse change
  $ 1,077     $ 77     $ 409  
Impact on fair value of 20% adverse change
  $ 2,153     $ 155     $ 818  
Discount rate assumption
    24.8 %     24.8 %     28.8 %
Impact on fair value of 10% adverse change
  $ 2,654     $ 190     $ 965  
Impact on fair value of 20% adverse change
  $ 5,184     $ 372     $ 1,875  
 
 
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of the variation in a particular assumption on the fair value of the interest-only strip is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (i.e. increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract the sensitivities.
 
 
13

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

   
Total Principal Amount of
   
Principal Amount Over
   
Principal Amount
 
   
Receivables
   
60 Days Past Due (1)
   
Reaged (1)
 
   
January 31,
   
July 31,
   
January 31,
   
July 31,
   
January 31,
   
July 31,
 
   
2009
   
2009
   
2009
   
2009
   
2009
   
2009
 
Primary portfolio:
                                   
Installment
  $ 551,838     $ 561,879     $ 33,126     $ 35,809     $ 88,224     $ 88,092  
Revolving
    38,084       31,225       2,027       1,872       2,401       2,074  
Subtotal
    589,922       593,104       35,153       37,681       90,625       90,166  
Secondary portfolio:
                                               
Installment
    163,591       152,774       19,988       19,361       50,537       50,621  
Total receivables managed
    753,513       745,878       55,141       57,042       141,162       140,787  
Less receivables sold
    645,715       545,885       52,214       51,182       131,893       127,670  
Receivables not sold
    107,798       199,993     $ 2,927     $ 5,860     $ 9,269     $ 13,117  
Allowance for uncollectible accounts
    (3,913 )     (7,251 )                                
Allowances for promotional credit programs
    (1,588 )     (3,473 )                                
Current portion of customer accounts
                                               
receivable, net
    61,125       115,696                                  
Long-term customer accounts
                                               
receivable, net
  $ 41,172     $ 73,573                                  
 
(1) Amounts are based on end of period balances and accounts could be represented in both the past due and reaged columns shown above.

 
   
Average Balances
   
Net Credit Charge-offs (2)
   
Average Balances
   
Net Credit Charge-offs (2)
 
   
Three Months Ended
   
Three Months Ended
   
Six Months Ended
   
Six Months Ended
 
   
July 31,
   
July 31,
   
July 31,
   
July 31,
 
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
   
2008
   
2009
 
Primary portfolio:
                                               
Installment
  $ 480,369     $ 556,386                 $ 473,629     $ 552,956              
Revolving
    43,158       31,467                   45,220       33,479              
Subtotal
    523,527       587,853     $ 3,422     $ 4,485       518,849       586,435     $ 7,010     $ 8,401  
Secondary portfolio:
                                                               
Installment
    158,900       154,225       1,333       1,915       153,613       156,983       3,081       3,604  
Total receivables managed
    682,427       742,078       4,755       6,400       672,462       743,418       10,091       12,005  
Less receivables sold
    673,854       569,494       4,544       5,843       663,727       593,048       9,725       11,092  
Receivables not sold
  $ 8,573     $ 172,584     $ 211     $ 557     $ 8,735     $ 150,370     $ 366     $ 913  
 
(2) Amounts represent total credit charge-offs, net of recoveries, on total receivables.
 
 
14

 
 
5.  Debt and Letters of Credit

On August 14, 2008, the Company entered into a $210 million asset-based revolving credit facility that provides funding based on a borrowing base calculation that includes accounts receivable and inventory. The facility matures in August 2011 and bears interest at LIBOR plus a spread ranging from 225 basis points to 275 basis points, based on a fixed charge coverage ratio. In addition to the fixed charge coverage ratio, the revolving credit facility includes a leverage ratio requirement, a minimum receivables cash recovery percentage requirement, a net capital expenditures limit and combined portfolio performance covenants.

Debt consisted of the following at the period ends (in thousands):
 
   
January 31,
   
July 31,
 
   
2009
   
2009
 
             
             
Revolving credit facility for $210 million maturing in August 2011
  $ 62,900     $ 130,102  
Unsecured revolving line of credit for $10 million maturing in September 2009
    -       -  
Other long-term debt
    17       193  
Total debt
    62,917       130,295  
Less current portion of debt
    5       60  
Long-term debt
  $ 62,912     $ 130,235  


The Company’s revolving credit facility provides it the ability to utilize letters of credit to secure its obligations as the servicer under its QSPE’s asset-backed securitization program, deductibles under the Company’s property and casualty insurance programs and international product purchases, among other acceptable uses. At July 31, 2009, 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 July 31, 2009.  As of July 31, 2009, the Company had approximately $38.3 million under its 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 $19.9 million that may become available under its revolving credit facility as it grows the balance of eligible customer receivables it retains and its total eligible inventory balances.

The Company held interest rate swaps with notional amounts totaling $40.0 million as of July 31, 2009, 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.
 
 
15

 
 
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, 2009
 
July 31, 2009
 
 
Balance
     
Balance
     
 
Sheet
 
Fair
 
Sheet
 
Fair
 
 
Location
 
Value
 
Location
 
Value
 
Derivatives designated as
               
hedging instruments under
               
Statement 133
               
Interest rate contracts
Other liabilities
  $ -  
Other liabilities
  $ 231  
                     
Total derivatives designated
                   
as hedging instruments
                   
under Statement 133
    $ -       $ 231  

 
                               
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
 
Derivatives in
 
(Effective
 
Accumulated
 
(Effective
 
Portion
 
Effectiveness
 
Statement
 
Portion)
 
OCI into
 
Portion)
 
and Amount
 
Testing)
 
133 Cash Flow
 
Three Months Ended
 
Income
 
Three Months Ended
 
Excluded from
 
Three Months Ended
 
Hedging
 
July 31,
   
July 31,
 
(Effective
 
July 31,
   
July 31,
 
Effectiveness
 
July 31,
   
July 31,
 
Relationships
 
2008
   
2009
 
Portion)
 
2008
   
2009
 
Testing)
 
2008
   
2009
 
Interest Rate
           
Interest income/
           
Interest income/
           
Contracts
  $ -     $ (69 )
(expense)
  $ -     $ (75
(expense)
  $ -     $ -  
                                                     
Total
  $ -     $ (69 )     $ -     $ (75     $ -     $ -  
 
 
16

 
 
                               
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
 
Derivatives in
 
(Effective
 
Accumulated
 
(Effective
 
Portion
 
Effectiveness
 
Statement
 
Portion)
 
OCI into
 
Portion)
 
and Amount
 
Testing)
 
133 Cash Flow
 
Six Months Ended
 
Income
 
Six Months Ended
 
Excluded from
 
Six Months Ended
 
Hedging
 
July 31,
   
July 31,
 
(Effective
 
July 31,
   
July 31,
 
Effectiveness
 
July 31,
   
July 31,
 
Relationships
 
2008
   
2009
 
Portion)
 
2008
   
2009
 
Testing)
 
2008
   
2009
 
Interest Rate
           
Interest income/
           
Interest income/
           
Contracts
  $ -     $ (150 )
(expense)
  $ -     $ (92
(expense)
  $ -     $ -  
                                                     
Total
  $ -     $ (150 )     $ -     $ (92     $ -     $ -  
 
 
6.  Contingencies

Legal Proceedings.  On May 28, 2009, the Texas Attorney General filed suit against the Company in the Texas state District Court of Harris County, Texas, alleging that they engaged in unlawful and deceptive practices in violation of the Texas Deceptive Trade Practices-Consumer Protection Act.  The Attorney General alleges, among other things, that the Company failed to honor product maintenance and replacement agreements, misled customers about the nature of product maintenance and replacement arrangements sold, and engaged in false advertising with respect to product maintenance and replacement agreements.  The Attorney General sought injunctive relief, civil penalties of up to $20,000 per violation, as well as $250,000 if the conduct financially harmed persons aged 65 or older, restoration of any losses suffered by certain identifiable persons, attorneys’ fees and costs, the disgorgement of all sums taken from consumers, and pre-judgment and post-judgment interest, as provided by law.  While the Company cannot predict at this time what the possible outcome would be of any resolution or court proceeding, the Company is currently reviewing these claims and plans to cooperate with the Texas Attorney General to resolve any potential issues.  An adverse outcome could have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

The Company is also 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. Currently, the Company does not expect the outcome of any of this routine litigation to have a material affect on its financial condition, results of operations or cash flows. 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. The Company sells service maintenance agreements that extend the period of covered warranty service on the products the Company sells. For certain of the service maintenance 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. 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 amounts of service maintenance agreement revenue deferred at January 31, 2009, and July 31, 2009, are $4.5 million and $4.3 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 service maintenance agreements and the amount of claims paid under those agreements (in thousands):
 
 
17

 

Reconciliation of deferred revenues on service maintenance agreements
 
Six Months Ended
 
   
July 31,
 
   
2008
   
2009
 
             
Balance in deferred revenues at beginning of period
  $ 4,369     $ 4,478  
Revenues earned during the period
    (2,814 )     (2,942 )
Revenues deferred on sales of new agreements
    3,096       2,770  
Balance in deferred revenues at end of period
  $ 4,651     $ 4,306  
                 
Total claims incurred during the period, excludes selling expenses
  $ 1,037     $ 1,421  
 
 
 
 
 
18

 
 
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:
 
 
·
the success of our growth strategy and plans regarding opening new stores and entering adjacent and new markets, including our plans to continue expanding in existing markets;
 
 
·
our ability to open and profitably operate new stores in existing, adjacent and new geographic markets;
 
 
·
our intention to update, relocate or expand existing stores;
 
 
·
our ability to introduce additional product categories;
 
 
·
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 and our QSPE’s ability to obtain additional funding for the purpose of funding the receivables generated by us, including limitations on the ability of our QSPE to obtain financing through its commercial paper-based funding sources and its ability to obtain a credit rating from  a recognized statistical rating organization to allow it to issue new securities;
 
 
·
the ability of the financial institutions providing lending facilities to the Company or the QSPE to fund their commitments;
 
 
·
the effect of any downgrades by rating agencies of our or our QSPE’s lenders on borrowing costs;
 
 
·
the effect on our or our QSPE’s borrowing cost of changes in laws and regulations affecting the providers of debt financing;
 
 
·
the effect on our or our QSPE’s ability to meet debt covenant requirements;
 
 
·
the cost of any renewed or replacement credit facilities;
 
 
·
the effect of rising interest rates that could increase our cost of borrowing or reduce securitization income;
 
 
·
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 on mortgage borrowers that could impair our customers’ ability to make payments on outstanding credit accounts;
 
 
19

 
 
 
·
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 sold or owned credit portfol